Spitzer Takes on Tax Preparer

BOSTON H&R Block is promising a vigorous defense against claims it sold “money-losing” retirement accounts to hundreds of thousands of clients. The charge was leveled at the company in a lawsuit filed by New York Attorney General Eliot Spitzer.

In the lawsuit, Spitzer said Block’s Express IRA product was “virtually guaranteed to lose money because of a combination of hidden fees and low interest rates.”

H&R Block’s $100 million ad account is currently in review.

In a statement issued yesterday, Block CEO Mark A. Ernst said, “We believe in the Express IRA product and are proud of the opportunities it presents for our clients. At a time when the country’s personal savings rate has declined to minus 0.7 percent, we’ve helped 596,000 of our clients begin saving for their future, and more than 40 percent of them had never saved before.” He added the company would do all it could “to defend the Express IRA product and ensure it remains available to our many clients who rely on it as a helpful savings option.”

Spitzer is seeking $250 million in fines plus refunds from Block, the nation’s largest preparer of tax returns. According to the lawsuit, 80 percent of the clients who open an Express IRA account fund it with their tax refund. The minimum investment is $300, and many customers contribute the minimum. The money is then deposited into federally insured bank accounts that, on average, paid 1 percent or less in 2002, 2003 and 2004 and 1.5 percent in 2005. Spitzer claims these low-yielding bank accounts are inappropriate instruments for a long-term investment like an IRA.

Furthermore, he charges that in smaller accounts the interest earned was not sufficient to offset the myriad fees charged by Block.

Those fees include: a $15 set-up fee; a $10 annual maintenance fee (waived on accounts over $1,000 or that agree to monthly deposits); an annual $15 re-contribution fee for each year a customer deposits a tax refund; and a $25 account termination fee (which at one point was $75).

The suit charges that of all the accounts opened in 2002—the first year the product was on the market—43 percent had total contributions of $300 or less. “More than 99 percent of the individuals who opened a $300 account in 2002 have lost money.”

The suit comes at a particularly difficult time for Kansas City, Mo.-based Block. Not only is it a month before tax day, but the company is also in the midst of trying to recreate itself as a full-service provider of financial services. Yesterday, the same day Spitzer filed his suit, the company received approval to operate a federal savings bank, which will let it sell more products and services to its tax-return clients.