Tax Dodge

On April 3, Henry Bloch dug a golden spade into the soggy lawn at the Nelson-Atkins Museum of Art.

Of all the VIPs breaking ground for the Nelson’s expansion, Bloch was the most important: The ice-cuby building will be named the Henry W. and Marion H. Bloch Gallery of Art. At least $12 million for the new gallery had come from Bloch; his foundation; his company, H&R Block; and H&R Block’s foundation.

Though dark clouds hung low that Monday, Bloch had many reasons to smile. It was, after all, the last two weeks of tax season — a time of year he owns.

H&R Block files one in eight U.S. tax returns. In the first two and a half months of this year, the company’s revenue from logging those 1040s already totaled $1.3 billion. And the company had just, for the first time ever, made money in the off season.

In cities other than H&R Block’s hometown, however, the company isn’t looking so good. Just last week, the New York City Department of Consumer Affairs fined H&R Block $1.1 million for a couple thousand cases in which it dispensed high-interest loans disguised as “rapid refunds.” Jane S. Hoffman, the city’s commissioner of consumer affairs, told The New York Times H&R Block’s program was “a rapid rip-off.”

And at the end of February, a federal judge in Virginia ruled that H&R Block had acted “maliciously, willfully and in bad faith” in a deceptive rapid-refund ad campaign there.

H&R Block had run ads urging taxpayers to “Spend more quality time with your refund.” In doing so, Judge Raymond A. Jackson wrote, H&R Block had purposefully ignored IRS regulations and targeted “lower- to moderate-income consumers” — people for whom “rapid processing of tax returns can mean the difference between making or missing a rent or credit card payment.” In fact, the rapid refunds weren’t federal tax refunds — they were loans.

Even though H&R Block charged no fees or interest in the Virginia campaign, clients who signed up for the fast money risked having to deal with banks instead of the IRS. Jackson noted that many of them might have had “past problems with loans, bankruptcies and credit reports.”

The case against H&R Block had been brought by a smaller competitor, Liberty Tax Service, whose attorney, Carl Khalil, says H&R Block’s defense was “amazingly shallow.”

Of H&R Block’s 80,000 employees, Khalil says, “they called only one employee to the witness stand. They seemed as though they were afraid to have any of their employees in the courtroom for fear of what they might testify to.”

In fact, Victoria Hall, an H&R Block vice president, turned out to be one of the best witnesses against her company.

In court transcripts, Hall testifies that H&R Block made an internal decision to follow strict advertising standards — standards specifying that the company “may not directly or indirectly” represent a refund-anticipation loan as an actual refund. But elsewhere in the transcripts, when Khalil shows her H&R Block’s coupons, posters and newspaper ads and asks whether each meets the company’s own standards, she repeatedly has to admit, “No, it does not.”

At that point, Jackson begins badgering Hall to explain the difference between a refund and a refund-anticipation loan, forcing Hall to stammer things like, “It depends on what you mean by ‘a refund.'”

In his ruling, Jackson pointed out that H&R Block had “litigated several substantially similar lawsuits across the country. When they have consented to one state’s court order, they have simply taken their advertisements to a new jurisdiction and continued to run similarly offending advertisements.”

He ordered H&R Block to pay Liberty more than half a million dollars.

But that’s change in a beggar’s cup compared with the $25 million that Chicago-based federal judge James Zagel approved in September in a long-running class action suit against our hometown tax preparers. The New York Times reports that H&R Block charged rates as high as 500 percent for refund advances, owned parts of the lending companies it worked with, “secretly collected fees from its banking partners on each loan” — and that one of those banking partners referred to low-income “rapid refund” clients as “one step above pond scum.”

For those kinds of details on how “the carefully constructed image of H&R Block as America’s trusted tax preparer was marred,” you have to read a newspaper less inclined to local puffballing than The Kansas City Star. Reporter David Cay Johnston’s work in The New York Times is a good primer.

H&R Block spokesman Neil Getzlow says the company is appealing the Virginia case. “We feel the lawsuit is about a test product in one market that our customers liked but our competition didn’t.” Regarding the $25 million class-action suit, he says, “It’s settled, and we can concentrate all of our energies on providing the best tax service to our clients now, which is one of the reasons we settled.” Getzlow dismisses critics who cite 500 percent loan rates, saying, “A number of our customers — quite honestly, they want their money right away, and they see this product as providing good value. Just to compare: If you’re going to wire $2,000 from Kansas City to New York, the fee is about $130 — that’s the equivalent of a 2,300 APR rate. But people do it because it’s a service they want.” When it comes to the difference between a refund and a loan, he says, “We’re disappointed that any product confusion might exist.”

Henry Bloch retired in September, allowing him to devote even more support to Kansas City’s arts community. It’s hard to think of a more noble endeavor. The problem is, it’s also troubling to think about which dramatic glass windowpanes in the Nelson’s new addition might have been financed by a low-income person desperate for her tax refund — someone “one step above pond scum.”