Jackson Hewitt Tax Service Inc sued H&R Block Inc to stop a new advertising campaign that it said misleads customers about tax refund loans and disparages Jackson Hewitt's competence.
The lawsuit comes on the eve of the main U.S. tax filing season, a crucial period for the largest U.S. tax preparation companies because the February-to-April quarter accounts for roughly three-fifths of annual revenue and much of their profit.
H&R Block did not immediately return requests for comment.
The lawsuit relates to so-called refund anticipation loans, which for a fee allow taxpayers quick access to expected refunds, rather than have to wait for the Internal Revenue Service to send them checks.
Last month, H&R Block suffered a setback when the U.S. Treasury Department's Office of the Comptroller of the Currency ordered a partner, HSBC Holdings Plc, to stop making tax refund loans to H&R Block customers.
Jackson Hewitt said that unlike its larger rival, it also offers taxpayers access to as much as $1,500 within one day.
According to the complaint, H&R Block falsely claimed that its Second Look Review program, which reviews past tax returns prepared by rivals, found that two-thirds of prior returns prepared by Jackson Hewitt contained mistakes.
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, the complaint said.
Jackson Hewitt also said H&R Block gives its agents a script designed to deceive them about its loan service.
Saying the ad campaign is causing irreparable harm, Jackson Hewitt is seeking to halt the alleged improper ads. It is also seeking compensatory and punitive damages.
H&R Block's advertisements are designed to undermine trust in Jackson Hewitt, Jackson Hewitt Chief Executive Philip Sanford said in a statement.
Jackson Hewitt said it prepared 2.53 million U.S. tax returns in 2010, and is based in Parsippany, New Jersey. H&R Block prepared 20.1 million U.S. returns in its 2010 fiscal year, and is based in Kansas City, Missouri.
In afternoon trading on the New York Stock Exchange, Jackson Hewitt shares rose 3 cents to $1.60, and H&R Block shares fell 8 cents to $12.42.
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.
(Reporting by Jonathan Stempel, editing by Gerald E. McCormick, John Wallace and Tim Dobbyn)