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What’s Behind H&R Block’s Free Tax Service

By Ben Steverman

What Happened to H&R Block’s Advertising Promotion of Previous Years, the “Instant Money” Refund?

The 2011 tax season is under way and the airwaves are full of a deal that sounds too good to be true: For another month, Americans can visit their local H&R Block (HRB) office and file their taxes for no charge.

How and why would the nation’s largest tax filer give its service away for free? In a nutshell: 1) H&R Block is being forced to scramble harder this tax season to compete with other filing services. 2) It’s unable to offer a service that brought in customers in years past. 3) The “free taxes” offer isn’t for everyone.

Here are the details:

What’s the Catch?

The promotion only covers those filing the 1040EZ federal form, which is about 16 percent of H&R Block customers. The 1040EZ form covers only the very simplest tax issues. It can’t be used by anyone who has dependents, makes more than $100,000 per year, is age 65 or older, claims adjustment to income like alimony or tuition deductions, or itemizes deductions. Thus, homeowners who deduct mortgage interest or people with large charitable contributions can’t use the 1040EZ.

Even those customers who can use a 1040EZ will have to pay H&R Block extra to file any state income tax returns. Just seven states—Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming—have no income tax.

The offer began on Jan. 14, when H&R Block’s local offices started filing 2010 returns, and ends on Feb. 15. From Feb. 15 to Apr. 18 (the tax filing deadline is different this year because of a holiday on Apr. 15 in the District of Columbia), customers will be charged to file a 1040EZ at an H&R Block office. That’s an important consideration for taxpayers who may still be waiting for key end-of-the-year paperwork.

What Does H&R Block Get Out of the Promotion?

The free returns aren’t a charity project, even if many of H&R Block’s early filers tend to be poorer people who want their tax refunds as soon as possible. “It’s not about giving away business for free,” says Amy McAnarney, H&R Block’s senior vice-president for tax operations. One goal is to increase foot traffic at H&R Block offices. ” ‘Free’ can be a very powerful word,” she says. Until they arrive for their appointment, many of these new customers might not realize they actually need more complex tax forms—and thus will wind up paying for them.

Another goal is to attract younger taxpayers—those who can still use the 1040EZ—and win their loyalty in future years. The company estimates 55 percent of EZ filers will need to file a more complex form within two years.

Why This Year?

H&R Block’s retail operation has been losing customers, with retail returns falling 6.1 percent last year. Morningstar (MORN) senior equity analyst Vishnu Lekraj says in-office tax preparation services continue to lose market share to tax software and websites, which can be much cheaper. “The taxpayer is becoming more and more comfortable doing their own taxes,” he says.

Many software or online tax tools have already offered 1040EZ filings for free, including those from H&R Block and Intuit’s (INTU) TurboTax. Last year, McAnarney says, H&R Block tried offering free 1040EZ returns in offices in three cities—Miami, New Orleans, and Atlanta—”and it was received very well.”

Offering free returns is also part of the company’s effort to bounce back from some rough years, analysts say. A rise in unemployment has hurt business for all tax preparers, with industrywide IRS filings dropping 1.7 percent last year, the largest decline since 1971.

Those “refund anticipation loans” have come under fire by the federal government and consumer groups for high fees and finance charges. Compass Point equity analyst Mike Turner estimates RALs cost H&R Block’s 2010 customers about $67 each, which works out to an annualized interest rate of 54 percent on an average $3,000 refund. The pitch by H&R Block and other services has been that RALs let customers—generally those who lack bank accounts—get their refunds immediately, rather than waiting eight weeks or more to get a check from the IRS.

After regulators started cracking down, H&R Block’s lender, HSBC (HBC), announced it wouldn’t fund the company’s Instant Money program this year. As a result, H&R Block can’t offer RALs, while competitors like Jackson Hewitt (JTX) still can do so, at least this year. Regulators seem serious about ending RALs entirely, Morningstar’s Lekraj says, adding: “They just feel consumers at the end of the day are getting taken advantage of.” Compass Point’s Turner estimates H&R Block could lose 10 percent to 15 percent of its RAL users. H&R Block will offer alternatives, including a prepaid debit card and a refund anticipation check that can take eight days to clear. But the free tax service is designed to pick up some of the promotional slack.

Won’t This Eat into H&R Block’s Revenue?

H&R Block is confident that many of those new customers who enter offices looking for a free return will end up paying anyway—for more complex federal returns, for state returns, or for other services. Last year the average tax return at an H&R Block retail office cost $189, and executives don’t expect that to decline in 2011. “Our ability to monetize this program means a minimal impact on our net average charge,” H&R Block Retail Tax President Phil Mazzini told analysts on Dec. 7.

The high U.S. jobless rate, the cancellation of the Instant Money program, and the free filing promotion all make it difficult to predict how well the company will do this tax season, analysts say. “Everything is really up in the air in my opinion,” Morningstar’s Lekraj says.

Compass Point’s Turner expects H&R Block will stop losing business to the bad economy, but says it will continue losing customers to do-it-yourself, computerized tax filing options. “I would expect their total filers to be down slightly year over year,” he says.

Management is offering no guidance to investors. Analysts surveyed by Bloomberg estimate revenues will fall 1.4 percent, to $3.7 billion, in the 2011 fiscal year ending in April, following a 4.5 percent decline last year. Net income is estimated to fall 2.1 percent, to $469 million, after a 1.3 percent drop in 2010.

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Credit Cards And Their Contribution To The Present Financial Crisis

The history of consumer credit can be traced back to the early 19th century. The average working man in the United States had the first taste of consumer credit when companies like Sears, Roebuck & Co and others lent money to consumers.

The initial credit cards were issued by the companies that sold the goods and were called merchant or retail cards. When Visa and MasterCard were established in the mid 1960s, banks joined in and started issuing the all purpose credit cards. The consumer could use the card to pay for any purpose…vacations, college fees, buying goods, etc. Over the years, the use of credit cards has become more popular. In fact today it is impossible to do a few things like renting a car or making an online purchase with a credit card.

Everyday Americans are bombarded with credit card offers through mail, flyers, email, etc. Everywhere you look, you will find a credit card offer. Gone are the days when only the privileged few could have a credit card. Today, just about anyone can have a credit card. Even those with bad credit can get a credit card these days.

For the average American, life without credit cards is unimaginable. Gone are the days when groceries were purchased with cash. Today everything is purchased on credit using credit cards.

As it became easier for everyone to get a credit card, credit card purchases increased and soon overtook cash purchases. It was a disaster waiting to happen. The reckless use of credit card has resulted in the many Americans facing financial ruin because they could not keep their credit card spending under control. There are many who borrowed from one credit card to pay another resulting in a debt pile up. Credit card debts have forced many Americans to file for bankruptcy.

Nothing is free in life. It’s the same with credit cards. Credit cards have changed our lives forever but uncontrolled use of the credit card can lead to financial ruin. To prevent financial ruin, you must take some hard decisions – reducing or eliminating the use of credit cards. Use the credit card wisely and you can enjoy the advantages of having a credit card. Use it recklessly and you might find yourself filing for bankruptcy.