Shares of H&R Block fell on Friday after the tax preparation and software provider admitted it had miscalculated its own state income taxes, understating its liabilities by $32 million as of April 30, 2005.

The Kansas City, Missouri-based maker of TaxCut software said Thursday it would need to restate its fiscal year 2004 and 2005 results, as well as its previously reported results for fiscal 2006.

The restated results will reduce Block’s fiscal year 2005 earnings by $0.02 per share and $0.02 per share in fiscal 2004.

The company made the admission when reporting its third quarter 2006 financial results. The company’s revenue rose to $1.2 billion from $1 billion, and the company saw net earnings of $28.8 million, or $0.09 per diluted share.

Those results were down from the third quarter of fiscal 2005, when Block had net earnings of $92.3 million, or $0.28 per share. Block attributed the decline to an after-tax charge of $31.7 million, or $0.10 per share, from a legal settlement and legal costs.

In the third quarter of fiscal 2005, the company had also benefited from a $10.1-million after-tax legal recovery that represented $0.03 per share.

Block now expects to earn $1.65 to $1.85 per share in fiscal 2006, down from its previous range of $1.90 to $2.15 per share. Analysts had been predicting $1.86 per share.

Shares of Block fell $2.10 to $23.09 in recent trading.

Black Eye for Block

Observers see this as a potentially big problem for Block.

“Clearly it’s a public relations nightmare for them,” said Laurence K. Zuckerman, CPA, a Long Island, New York, tax practitioner who holds a master's degree in taxation. “Realistically, preparing corporate returns is an inherently more difficult and complicated task than preparing tax returns for individuals en masse.”

However, the financial impact on Block may not be immediate.

“While likely embarrassing for the nation’s leading tax preparation company, the restatement is fairly immaterial,” wrote analyst Alexander Paris Jr. of Barrington Research Associates in a research note.

Besides the problems that Block had with its own tax prep needs, the company also experienced difficulties with the technology in its offices last month that hit its bottom line early in tax season.

“Technology problems across the H&R Block network in early January impacted our ability to serve clients in those crucial early weeks,” said Block Chairman Mark A. Ernst.

He said the problems had been corrected, but they impacted the company’s ability to serve 250,000 clients at that time of year.

Mr. Ernst said he was pleased with sales of the company’s TaxCut software and online tax prep products. Block has implemented an integrated TaxCut marketing and brand-building campaign this year and has revamped the software’s look and feel.

However, after the snafu in Block’s in-house tax preparation efforts, the best-selling tax prep software package, Intuit’s TurboTax, may see increased sales from customers who may decide not to buy Block’s TaxCut this year.

H&R Block’s tax prep service competition, including chains such as Jackson Hewitt Tax Service, could also see increased business.