On January 31, 2010, Jackson Hewitt Tax Service filed a lawsuit against H&R Block (Jackson Hewitt Inc. v. H&R Block Tax Services LLC) to stop a new advertising campaign. The complaint is that H&R Block’s "Second Look" marketing campaign is deceiving customers and diverting business away from Jackson Hewitt. They claim that H&R Block has been disparaging Jackson Hewitt’s reputation and goodwill in the marketplace. The lawsuit also claims that H&R Block misleads customers about refund anticipation loans (RALs). The lawsuit is Jackson Hewitt Inc v. H&R Block Tax Services LLC, U.S. District Court, Southern District of New York, No. 11-00641.

H&R Block’s ad campaign claims it found errors in 2 out of 3 returns prepared by other commercial tax preparers when the returns were reviewed by Block. The reviews in question are H&R Block’s "Second Look Review" service. For $29, Block will review returns prepared by other companies, to see if anyone missed anything. Jackson Hewitt in the complaint states: "H&R Block’s 2 out of 3 claim necessarily implies the false claim that two out of three Jackson Hewitt customers who are entitled to refunds have been short-changed due to Jackson Hewitt errors or incompetence."

Interestingly, the Block TV ad campaign never mentions Jackson Hewitt in the script- it refers to "other commercial preparers." However, there is a "fine print" disclaimer on the ad which refers to Block’s review of Jackson Hewitt prepared returns. The complaint alleges that Block has run print advertisements that say, "We found errors in 2 out of 3 Jackson Hewitt Tax Returns."

H&R Block is about five times bigger than Jackson Hewitt, which is the second largest commercial tax preparer. Jackson Hewitt said it prepared 2.53 million U.S. tax returns in 2010. H&R Block prepared 20.1 million U.S. returns in its 2010 fiscal year. H&R Block is based in Kansas City, Missouri, and Jackson Hewitt in Parsippany, New Jersey.

Speculation is that the H&R Block ad campaign is in response to their being prevented from giving out RALs. This highly profitable short term loan offered by many commercial tax return preparers has been criticized by many because of high fees and interest rates.

Taxpayers who get RALs often pay charges for the application, e-filing and a range of other costs, in addition to the bank’s finance charge. This can all add up to the equivalent of an interest rate in excess of 100% and sometimes multiples of that, according to the National Consumer Law Center. The Center reported that a $3,300 RAL carries a rate of about 72% when fees and charges are added up.

In December 2010, federal banking regulators Office of the Comptroller of the Currency informed HSBC Holdings Plc., H&R Block’s principal lender, that it must stop offering RALs.

The FDIC, which governs the bank funding Jackson Hewitt’s RALs, hasn’t made the same determination. This looks like a windfall for Jackson Hewitt whose RAL program is still going strong. Despite the government’s and financial advisors’ criticism of RALs, the public apparently still likes them. Hewitt was positioned to pick up lots of business from Block since Hewitt could offer RALs and Block couldn’t.

Block, in an attempt to aggressively market its services, began a new ad campaign. The campaign focuses on the Second Look Service. Taxpayers are urged to bring in their 2007, 2008 and 2009 returns. These returns can be amended if errors are found, and Block claims 2 out of 3 reviews result in refunds.

Jackson Hewitt’s complaint says: "H&R Block’s failure to offer a program comparable to Jackson Hewitt’s RALs has proven to be a significant disappointment to H&R Block’s prospective 2011 customers, with the result that H&R Block saw itself facing significant competitive disadvantage in competing with Jackson Hewitt as the peak tax return season approached. . . H&R Block’s response was to launch a massive promotional campaign based on false and misleading statements, designed to ‘trash’ both Jackson Hewitt and its RAL service."

Since they can’t offer RALs, H&R Block has some alternative products available for this filing season, including the Emerald card – you receive your refund on a prepaid MasterCard, and a Refund Anticipation Check (RAC) – Block gets your refund, deducts its fee and possibly your tax preparation fees and gives you either a check or a direct deposit. These are not loans. Block claims you get your refund in 8 to 15 days if you use one of these products.

This year the IRS says it expects more than 70% of returns to be filed electronically. Taxpayers can expect to get refunds in 7 to 10 days after filing. Let’s see – which is better 7 to 10 days or 8 to 15 days. Be careful out there.