* Three major firms in business for tax software
* DOJ says H&R Block sought to take out competitor (Adds H&R Block comment, closing stock price)
WASHINGTON, May 23 (Reuters) - The U.S. Justice Department filed a lawsuit on Monday to prevent H&R Block Inc (HRB.N) from acquiring 2SS Holdings Inc, developer of the TaxACT digital tax preparation business, because it would hurt competition.
H&R Block, the largest U.S. tax preparer, agreed to acquire the company last October in a deal worth $287.5 million. The company had previously estimated that the deal would have increased its earnings per share by 5 cents.
However, the Justice Department's antitrust division said the transaction would have led to higher prices, hurt innovation and reduced product quality for those who wanted to do their own taxes.
"TaxACT has aggressively competed in the digital do-it-yourself tax preparation market with innovations such as free federal filing," said Christine Varney, assistant attorney general for the Justice Department's antitrust division.
"If this merger is allowed to proceed, that type of innovation will be lost," she said in a statement.
H&R Block expressed disappointment about the Justice Department's decision to challenge the deal and said that it would explore all of its legal options.
"We're especially disappointed with this decision knowing that the DOJ rejected guarantees that we would not raise TaxACT's prices," H&R Block's President and Chief Executive Officer William Cobb said in a statement.
"We continue to believe this merger makes sense, is pro-competitive and will greatly benefit consumers," he said.
The company's online tax-preparation services, H&R Block At Home software, competes with Intuit Inc's (INTU.O) TurboTax software, which is gaining market share from H&R Block, and with No. 2 player Jackson Hewitt Tax Service Inc JTX.N as more people move to "do-it-yourself" models.
H&R Block, Intuit and TaxACT represent 90 percent of all sales of consumer tax software products, according to the Justice Department.
The Justice Department accused H&R Block of touting in presentations and emails that the acquisition would eliminate a competitor and help "regain control of industry pricing..."
In a conference call with reporters, Varney declined to disclose the source of those comments until they are presented in court. She said that they showed the deal was meant "to thwart competition in the tax software market."
The complaint against H&R Block said that TaxACT has regularly expanded the free version of its filing software and thus has forced its competitors to enhance their own similar products.
TaxACT also has forced its competitors to lower prices for tax preparation products, the lawsuit said.
H&R Block shares were down as much as 4.2 percent after the news of the government challenge. They later recovered much of those losses before closing down 7 cents, or 0.4 percent to $16.26 in regular trading on the New York Stock Exchange. (Reporting by Jeremy Pelofsky, editing by Gerald E. McCormick and Carol Bishopric)