New York's Attorney General filed a $250 million fraud suit against H&R Block Inc., accusing the tax prep giant of steering hundreds of thousands of clients to investment retirement accounts with costs higher than what they would earn back.

Attorney General Eliot Spitzer said the Express IRA accounts were "virtually guaranteed to lose money" because of hidden setup, maintenance and re-contribution fees, as well as low interest rates. The lawsuit, filed in state Supreme Court in Manhattan, says Block sold IRAs to 500,000 clients, including 30,000 New Yorkers.

Block denied all of the suit's claims.

Spitzer's office began its investigation last year after receiving information from an H&R Block tax preparer. According to the lawsuit, 85 percent of the customers who opened the accounts paid the company more in fees than they earned in interest. In a statement, Spitzer added that the more than 150,000 Block customers who closed their accounts incurred additional undisclosed fees and nearly $6 million in tax penalties.

The complaint cites numerous internal documents showing that Block senior management knew many of its customers were losing money on their Express IRAs, and details the experiences of several New York customers who made minimum contributions of $300 to open the IRAs and saw poor returns.

"Make no mistake -- we believe in the Express IRA product and are proud of the opportunities it presents for our clients," said Block chairman and chief executive Mark A. Ernst, in a statement. The company is represented by the New York law firm Stroock & Stroock & Lavan.California Attorney General Bill Lockyer recently filed another lawsuit against Block's refund anticipation loan program, making similar claims that the loans take advantage of low-income customers who don't understand the steep fees charged for the service.

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