IRS Action Hits Tax Preparers

H&R Block and Jackson Hewitt shares plunged after regulators said they could restrict refund loans.
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Shares of tax preparers

Jackson Hewitt Tax Service



H&R Block

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plunged Thursday after regulators said they are considering restricting profitable refund anticipation loans.

The Internal Revenue Service, along with the Treasury Department, is soliciting public comments on a proposal that would restrict the marketing of refund anticipation loans (RALs) and similar products, such as refund anticipation checks and audit insurance. The proposal comes in conjunction with the IRS's final regulations issued Thursday regarding updated disclosure and privacy laws for taxpayers on personal information held by tax preparers.

Shares of Jackson Hewitt, based in Parsippany, N.J., nosedived 23.1% to a new 52-week low of $24.13, while H&R Block of Kansas City, Mo., fell 4.6% to $17.75, after touching a 52-week low intraday on Thursday.

The regulators are considering a proposal that tax return preparers be prohibited from disclosing taxpayer return information to lenders for the purpose of selling RALs -- short-term cash advances given to customers based on projected tax refunds -- and similar products over concerns that it "may provide preparers with a financial incentive to take improper tax return positions in order to inappropriately inflate refund claims," according to a notice.

"In general, RAL amounts are capped by the amount of the refund claimed on a tax return," the notice said. "Therefore a preparer who inappropriately inflates the amount of a refund is able, directly or indirectly through arrangement with RAL provider, to collect a higher fee."

H&R Block said in a statement on Thursday it looks forward to working with the IRS to develop "best practices" for refund anticipation loans.

"H&R Block's tax professionals are not compensated on the sale of ancillary products, so there is no incentive for them, other than serving taxpayers' best interests," the statement said. "In addition, RALs are currently regulated by 10 federal laws and IRS rules. The typical RAL at H&R Block costs about 2% of the principal, or less than the cost of a credit card advance, bank overdraft, or in many cases, using an ATM."

A Jackson Hewitt spokeswoman did not return a call seeking comment regarding the refund loans.

The proposal comes as Congress passed legislation in December regarding changes to the Alternative Minimum Tax bill, originally implemented to ensure that higher income taxpayers did not escape paying taxes. But since the AMT has not been adjusted for inflation, many middle income taxpayers have fallen subject to the tax. If left unchanged approximately 25 million taxpayers would owe additional taxes for 2007, up from 4 million last year, according to Jackson Hewitt.

H&R Block said last month that while the action "keeps 21 million additional taxpayers from having to pay the Alternative Minimum Tax this year ... millions of refunds are likely to be delayed while the IRS reprograms its computers to account for the AMT patch."

Separately Jackson Hewitt said Thursday it hired Daniel P. O'Brien as its new CFO and Treasurer. O'Brien most recently served as the CFO of Hawaiian Telcom Communications, a telecommunications provider that offers local and long distance service, high-speed Internet, wireless services, and print directory and Internet directory services.