This Year's Spin

It's that time of the year for H&R Block's (HRB) annual letter(s) to independent tax preparers. A friendly letter inviting those who are looking to sell their practice, to consider HRB. They will be happy to talk to you about buying it. This is the second letter I have received since the end of tax season. The tone of this letter was a little different from others I have received. (Besides recruting new businesses to buy, the letter may also be aimed at investors and those who advise them.)  This letter included a slick paper reprint of a Reuters article about JP Morgan/Chase getting out of the refund loan business.

Chase has long been a popular, stable and respected RAL bank and its decision has left many of its clients looking for a new bank. But unlike SBBT last year, they have plenty of notice to check the other banks. And despite what the Reuters article says, Republic is not the only option open to independents. River City Bank, SBBT(they say they have approval) and Refund Advantage also provide RAL programs. But that has not stopped HRB from spinning the situation. From their letter; "Approximately 20 million taxpayers seek refund settlement products each year. We expect to grow our business in this client segment because we will have products that meet consumer demand and are not available to all our competitors."

The spin:

• "Seek refund settlement products" this includes not just Refund Loan but the other programs which do not advance money but allow the preparer's preparation charges to be deducted from the refund(RAC). Even SBBT offered these last year as did EFS (e-Collect).
• There is the implication that only Republic Bank (in the Reuters reprint) will be available to independents in 2011. Not so, right now there are at least 5 doing some form of "refund settlement" product. (RAL or RAC).
• Growth for HRB because they can offer RALs because of their deal with HSBC. This tax season, most Jackson Hewett offices could not offer RALs because of SBBT's lack of approval. Despite that their major competitor was out of the business, HRB early season returns were down about 6%. The early season is when you do your RAL business. With a major competitor out, HRB should have seen a rise in early season business not a decrease. They still have a good chunk of the RAL market but their numbers show it's falling.

The cold hard truth is there are still 6 months before 2010 tax returns can be e-filed. A lot can happen in that time to upset HRB's dreams of a RAL almost monopoly. It won't take a bank failing to get approval for their program. All it takes is the suppression of one little letter; the debt indicator.

The debt indicator is currently part of the acknowledgment we receive when an e-filed return is accepted by the IRS. It can be one of 4 letters; N, I, F or B. "N" means that a quick look at the taxpayer's file shows no claim against the refund. The others show a debt and who to the taxpayer needs to contact for more information. When there is a RAL application, the bank gets a copy of the debt indicator. If a debt is showing, no loan (although no debt doesn't automatically mean the RAL is approved.) It's the way the RAl banks minimize their risk. Without the debt indicator, the banks may stop approving or become very conservative. In the mid-1990s, the IRS stopped releasing the debt indicator a couple of weeks into the season and approval rates dived. Even with fewer approvals, the rumor was that HSBC (at that time just Household) lost $25 million. 

Right now we have the debt indicator but what about in six months. Congress still has lots of time cut it by sticking it into a bill. They did that a couple of times when working a preparer licensing. (Or, they could ban RALs completely.) The IRS could decide to stop releasing the debt indicator. No debt indicator may not end RALs but it would limit the taxpayers who received them and maybe make the banks think about if they want the risk.

So HRB, continue your spin. Please put all your advertising on your ablitlty to offer these programs. You're going to have more competion for the RAL market than you are acknowledging. Hopefully, it gets someone who was selling anyway more retirement money. And maybe your stock price will go up too. I just hope the shareholders know to sell before your contract with HSBC ends or the debt indicator goes. The problem with spinning is that when you stop it's hard to stand.