H&R Block reports a 4.2 percent decline in tax returns handled

A slow start to the tax season has hit H&R Block especially hard this year, and the tax preparer doesn’t expect to catch up all the way, the Kansas City-based company said Wednesday.

Bill Cobb, Block’s chief executive officer, said he was disappointed in the 4.2 percent drop in the number of returns the company handled through the end of February compared with a year ago.

All tax filings so far are down only 0.6 percent, according to Internal Revenue Service numbers released Wednesday morning.

“It will be difficult to fully recover that number of clients,” Cobb said during a conference call with analysts. “I don’t think we’ll be able to do that.”

Cobb said he is happier with H&R Block’s numbers financially. The company is succeeding in its strategy of earning more revenue per customer, partly through price increases but also by providing additional services.

H&R Block expects to have a stronger second half to the tax season, which runs until the April 15 tax filing deadline. Many of the customers it had expected to see already will come in eventually, the company said.

Cobb told analysts that the company won’t have a full understanding of the impact on the tax season until April 15.

Notably, taxpayers who bought health care through the Affordable Care Act on state or federal exchanges last year have been slower to file taxes this year than expected. For example, Block had expected 25 percent of its customers to have Affordable Care Act tax issues this year, but the rate so far has been lower than that.

Part of the problem is that many of the exchanges sent taxpayers incorrect information and they have to wait for corrections before they can file their taxes. This is the first year taxpayers who bought health care on exchanges with the help of government subsidies have to reconcile those benefits on their tax forms.

The complexity of doing that also has delayed their arrival at Block offices, the company said.

Cobb said the company still expects to see those customers but was wrong in expecting them to be mostly early filers. Block also said the delayed season reflects headlines about tax fraud.

The IRS said Wednesday that more than 58.5 million tax returns had come in by the end of February, which is down from nearly 58.9 million a year ago. It said more than 47.5 million of filers have received refunds, with the average totaling $3,048, up from $3,034 at the same point last year.

H&R Block’s 4.2 percent decline in returns prepared reflects a sharper drop at its company-owned and franchise stores. These handled 7.14 million returns through February, 8.7 percent fewer than a year ago.

Digital returns, through H&R Block’s online and software products, increased 6.7 percent to 3.75 million returns handled through the end of February.

The company also released its third-quarter financial report, which covers results during November, December and January. Revenue climbed to $509 million, compared with $200 million a year ago. Higher revenue trimmed the net loss the company reported to $36.9 million, or 13 cents a share, compared with $214.7 million, or 78 cents a share, a year ago.

H&R Block typically does most of its business in its fourth quarter, which began Feb. 1 and runs through the end of April.

Most of the increase in revenue came from an earlier opening of electronic filing this year. A year ago, e-filing had been delayed until Jan. 30. Block doesn’t count revenue it earns to prepare taxes until the returns are filed.

H&R Block’s tax season had been poised for a bump up with its half-off promotion in February and its appeal to disgruntled TurboTax customers of rival software maker Intuit.

Many repeat users of TurboTax’s popular software products were unhappy when they discovered that changes to this year’s versions required them to upgrade to a more expensive version to handle the same tax forms as last year.

TurboTax’s general manager said “we messed up” in an open letter to customers. The company promised to undo those changes for next year and to give a free upgrade to return users of its Deluxe version this year. It also offered $25 to TurboTax customers who already had paid for an upgrade.

Intuit had said previously that the changes affected only 3 percent of its TurboTax customers.

TurboTax also got some unwelcome attention when the company suspended processing state tax returns for about 24 hours in early February over concerns about an increase in fraudulent filings.

In 2013, tax season mistakes and apologies were coming out of H&R Block.

The company ran into electronic filing problems with customers who had claimed an education tax credit. A Block mistake in transmitting Form 8863 for e-filers delayed many customers’ tax refunds.

Cobb ended up apologizing, and the company sent those customers $25 prepaid debit cards for their trouble.

This story was originally published March 4, 2015 at 3:13 PM with the headline "H&R Block reports a 4.2 percent decline in tax returns handled."