- The Washington Times - Wednesday, March 15, 2006

NEW YORK (AP) — The state of New York filed a $250 million fraud suit yesterday against H&R; Block Inc., charging that the nation’s largest tax preparation service steered more than 500,000 customers into a money-losing retirement account plan.

H&R; Block defended the plan and said it would fight to see that it remains available to clients “who rely on it as a helpful savings option.”

But the company’s shares sank more than 6 percent on news of the lawsuit filed by Attorney General Eliot Spitzer with the tax preparation season in full swing.

It was the latest in a series of problems faced by the firm.

Several states, including California, have sued H&R; Block about its “refund anticipation loans,” which are high-interest, short-term loans given to taxpayers and repaid out of their tax refunds. The company recently agreed to pay $62.5 million to settle many related suits.

In February, the company revealed that it had to restate earnings back two years and the first two quarters of this year after discovering that it had erred in determining its own taxes.

The latest lawsuit says H&R; Block advised clients to buy an “unsuitable, fraudulently marketed, poorly performing, fee-ridden ‘retirement vehicle’ called the Express IRA” that actually shrinks over time.

The suit said the amount of money placed in a consumer’s retirement account decreased because the only investment option was a money market account with an interest rate so low that it does not cover the fees.

Those charges included a $15 setup fee, a $15 “recontribution” fee and a $10 annual maintenance fee, Mr. Spitzer said.

Customers “paid more in fees than they got back in interest,” said Mr. Spitzer, a Democrat leading a field of candidates for governor. “They were not told this would happen. This is a violation of state law.”

H&R; Block said it will “fight vigorously to defend the Express IRA product and ensure it remains available to our many clients who rely on it as a helpful savings option.”

“Make no mistake — we believe in the Express IRA product and are proud of the opportunities it presents for our clients,” said Chairman and Chief Executive Officer Mark A. Ernst.

Mr. Spitzer said H&R; Block opened more than a half-million Express IRA accounts in the past four years. He said 85 percent of customers who opened the accounts paid H&R; Block more in fees than they earned in interest.

More than 150,000 customers closed their accounts, incurring additional undisclosed fees and almost $6 million in tax penalties, Mr. Spitzer said.

But Mr. Spitzer said he suspected the “real reason they set up these accounts was that once their clients had these accounts, they would continue to come back to H&R; Block to have their taxes done.” He said the company considered the IRA accounts “bait.”

Sarah Ludwig, director of the Neighborhood Economic Development Advocacy Project, said at a press conference that the Express IRA was part of an array of “deceptively marketed, high-cost junk products” aimed at low-income, working-class families.

A recent study by her nonprofit group said New Yorkers lost an estimated $92 million in tax refunds and earned income tax credits by taking refund anticipation loans.

The state’s lawsuit asks that the company be required to stop engaging in any fraudulent practices, be forced to disgorge profits, and pay damages and restitution caused by its purported scheme and pay no less than $250 million in civil penalties.

The investigation by the attorney general’s office was started last year after it received information from an H&R; Block tax preparer.

H&R; Block shares fell $1.37, or 6.2 percent, to close at $20.63 on the New York Stock Exchange, after sinking to a new 52-week low of $19.80 earlier in the session.

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