H&R Block has filed suit against its refund anticipation loan provider, HSBC, seeking to require the bank to provide the funding for RALs and refund anticipation checks next tax season.

The suit, which was filed Oct. 15, said that without a court order, “Block will not be able to offer these products … for the 2011 tax season because there is no comparable alternative source of the products at this late date,” according to the Kansas City Star.

HSBC told Block it could not provide funding for the RALs and refund anticipation checks because the IRS has decided to stop providing a debt indicator next tax season that would say whether a taxpayer has liens outstanding, and that would make the loans too risky to provide. HSBC has been in the process of withdrawing from the RAL business since 2007 and Block is its only remaining customer. 

Block claims that instant RALs and refund checks don’t need a debt indicator from the IRS. It filed suit against HSBC seeking to require the bank to perform its contractual obligations under a 2005 agreement between the two companies.

“The lawsuit is a real blockbuster,” said a tax software industry insider who asked not to be identified. “Last year H&R Block did 6 million bank products, 3 to 4 million of them RALs, which was more than anyone else in the industry. If they are unable to do RALs this year it will have a major effect on the market. RALs are very much up in the air this year because of the IRS refusing to provide a debt indicator. The injunctive relief should be decided within the next week or two.”

Last tax season, Block’s main competitor, Jackson Hewitt, lost its main RAL partner when Santa Barbara Bank & Trust was ordered by banking regulators to exit the RAL market. That left Jackson Hewitt scrambling to find another banking partner to make up the difference.

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