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

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What Happened to H&R Block's Advertising Promotion of Previous Years, the "Instant Money" Refund?

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.

Steverman is a reporter for Bloomberg News .