Free For A Fee: Intuit’s TurboTax Scandal

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tax notes Journalists Paul Jones and Nathan Richman Discuss Intuit’s $141 Million Deal
Possible tax breaks for the TurboTax free version program and Intuit.

This transcript has been edited for length and clarity.

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David D. Stewart: Welcome to the podcast. I’m David Stewart, Editor in Chief Tax Notes Today International, This week: The high cost of free filing.

After years of lawsuits and investigations, tax preparation company Intuit has struck a settlement with all 50 states and the District of Columbia, claiming it misled some users of its TurboTax software. The company will pay $141 million to settle claims that it defrauded tax filers into paying federal tax preparation services when they were eligible for free tax preparation under a federal program.

What led to a settlement by one of the largest providers of tax return software? What does this mean for future tax filings in the United States?

tax notes Journalists Paul Jones and Nathan Richman will talk more about this. Paul, Nate, welcome back to the podcast.

Paul Jones: Thanks, nice to be here.

Nathan Richman: Thank you for bringing me back.

David D. Stewart: Let’s start with some background. What is Free Files and how did this program come about?

Paul Jones: The IRS came to an agreement around 2002 with several tax preparation software providers to provide these companies with free tax preparation services using their software for low-income filers, and I believe military filers too. . This was in exchange for some concessions by the IRS, in that it would not create its own free tax preparation service that would compete with these companies.

Intuit, like other participants, came up with a free filing software service that would allow those who meet the criteria to file for free.

David D. Stewart: I think people have been using these companies for tax preparation for a long time, and it seems like it’s been a long arrangement with the IRS, but we still have a legal settlement. How did things get worse?

Paul Jones: Intuit created its Freedom Edition, software that was part of the IRS free filing program. However, in 2007, it also introduced a separate software service called Free Edition—you’ll notice it has a similar name—that allows for free filing, but really only for very simple tax returns. If your tax return requires more complex preparation, it will require you to pay a fee.

in 2019 publica put out a piece that got a lot of attention, which accused Intuit and H&R Block
, another participant in the Free File Program, to create these products that were designed to trick people into thinking they could file for free using them. They were also allegedly working to disguise and misdirect people so that they don’t use free filing software developed in partnership with the IRS.

Some of the allegations against Intuit included that it had literally worked to ensure that its IRS Free File software wouldn’t even pop up in Internet search results and that the company’s own website made it nearly impossible to navigate the IRS Free Filing Program. Is. Meanwhile, it was leading people to use this paid software, which had a free option for which not many people would qualify.

Many of the accusations also include that people have to go through this entire preparation process for what they thought was going to be free filing software, and only then are informed later that they are accompanied by fees to complete. Must file. their tax preparation. The argument was that many people were not using the IRS Free File program and one of the bigger problems was that they were being directed to use these alternative products that only allowed some people to file for free. Used to allow

David D. Stewart: What was the reaction when this news came? I think the states did not take this alleged hoax very kindly.

Paul Jones: Yes. When this matter came to light, it created a lot of controversy. An investigation was launched into states including New York. Lawsuits were carried out by local governments in California. A call was made by the members of Congress to look into it.

This attracted a lot of attention and apparently created a lot of negative publicity for the company. Intuit was also pursued by lawyers representing tax filers.

The company eventually pulled out of the Free Files program in 2021 and has been fighting the fallout of the deal since just before it was announced.

David D. Stewart: Now, I understand that a bill to formalize the Free File Program was being considered in Congress at the time. What happened with him?

Paul Jones: Yes, that was Taxpayer First Act, and it included language to codify the IRS Free File Program Agreement.

As I understand it, critics were arguing that this would essentially force the IRS to stick to the agreement and not develop its own free filing software. However, that provision of the Taxpayers First Act was eventually removed in the final legislation, which was approved in 2019.

I should also note that the Free File Agreement between the IRS and tax preparer companies was amended in late 2019, and that too in response to the scandal.

Notably, though, the Free Files program isn’t performing well. A recent Government Accountability Office report said there has been a decline in the use of the Free Files program, and this is probably due to Intuit’s exit.

David D. Stewart: I mentioned in the beginning that we are starting to see the results of several lawsuits and investigations that were initiated. Can you tell us about the settlement?

Paul Jones: Well, as part of the settlement agreement, Intuit does not admit to any actual wrongdoing. But as you mentioned, it’s going to pay out $141 million, and most of it going to tax filers who would be eligible to file for free, but ended up paying because they didn’t. We were using the free tax filing service of the company which was only free for some people.

However, the company agreed to terms that require it to change the way it advertises its products, how it represents them, and also how they work.

For example, products are going to do a better job of communicating to a filer if they are eligible to file for free. As soon as they enter their data, the product will tell them, “Hey, you may be eligible, or you are eligible to file for free.”

There is also a stipulation that if someone has started entering their data and wants to switch which service they are using, Intuit will provide the facility to port all the data they already have. Just registered in the new service that they are going to use.

For example, if they are eligible to file for free, and they want to cancel the current product they are using, and want to use the free product instead because they qualify for it.

The states that have been part of this agreement clearly feel right. They didn’t win technically, but they got pretty much what they wanted. I think there’s a sense of satisfaction that people who had to pay because they weren’t informed they were eligible to file for free are going to get a refund. Also, potentially the terms of this agreement will help prevent people who are eligible to file for free in the future.

I should note here just to be clear that Intuit argues that it supports free filing, in addition to not admitting any wrongdoing. I received a statement when I was reporting by its Executive Vice President and General Counsel, Kerry McLean, who said that 100 million taxpayers have applied for free using the company’s software over the past eight years.

The company says that since the scam came to light, it has already followed or followed many of the practices required by the settlement agreement. It is saying it is going to have the least impact on its current operations in order to implement the remaining changes, which were agreed as part of the agreement.

David D. Stewart: Does this settlement cover all the fallout of the 2019 scam?

Paul Jones: I do not think so. For example, there is a Federal Trade Commission (FTC) enforcement action and a lawsuit against Intuit over how it advertised its products as allowing free filing and how they were presented to consumers.

I spoke to an FTC spokesperson, and they said they’re still moving forward and that the agency doesn’t really believe that the agreement between Intuit and the states resolves either of those.

Conversely, Intuit argued in its statement that when the settlement was issued between it and the states, it should also end FTC litigation. They argue that the changes they have made prior to the settlement agreement and the additional changes they will make to their business model and that their advertising should negate FTC litigation and enforcement action as a result of this agreement.

But it does not appear that the federal government agrees on this point.

David D. Stewart: Okay. Well, Nate, turning to you, I understand that there are some concerns that I think, somewhat ironically, this agreement will result in a fairly large tax cut for Intuit. Can you tell us about it?

Nathan Richman: Sure. Well, for one thing, this wouldn’t be the first time one of these very large settlements has caught anyone’s attention…

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