A popular online tax service is paying $141 million in restitution to settle claims it misled customers about its charges, but the news is getting mixed responses from consumer advocates.
The settlement includes more than 70,000 New Jersey consumers who were tricked into purchasing paid versions of Intuit’s TurboTax software product and will receive a total of about $2.15 million in direct restitution.
Consumers eligible for restitution will be automatically notified by the company and they will receive a direct payment of about $30 for each year that they were unfairly charged for tax filing services.
Intuit, Inc., owner of TurboTax, settled Wednesday with the attorneys general of all 50 states over allegations that it lured customers with the promise to file their taxes for free, only to steer them toward paid options later on.
Intuit admitted no wrongdoing and the company blog posted a statement from executive vice president and general counsel Kerry McLean that said the company was “clear and fair” with its customers.
New Jersey consumer advocate Lisa McCormick said the refund is not justice and reiterated her call for a ‘corporate death penalty’ that would punish white collar crimes by abolishing the companies that engage in thievery and other corrupt practices.
“There should be free software for online filing provided by the IRS so that everyone, including small businesses, gig workers and employed individuals would be able to use and trust that they are getting every allowable deduction,” said McCormick. “When giant $15 billion corporations cheat millions of Americans, there should be more severe consequences, such as a corporate death penalty.”
McCormick’s criticism was echoed by other leading Democrats.
“Intuit cheated millions of low-income Americans out of free tax filing services they were entitled to,” said New York Attorney General Letitia James. “For years, Intuit misled the most vulnerable among us to make a profit. Today, every state in the nation is holding Intuit accountable for scamming millions of taxpayers, and we’re putting millions of dollars back into the pockets of impacted Americans.”
Overall, 4,472,788 consumers across all 50 states, as well as the District of Columbia and U.S. territories, will receive restitution paid by the company.
The states’ investigation centered on claims that Intuit used deceptive web tactics to conceal the existence of a genuinely no-cost, do-it-yourself online tax program that Intuit offered for low-and-middle-income users under an agreement with the Internal Revenue Service (IRS) and, at the same time, duped consumers who were seeking the free tax help Intuit promoted in TV commercials into upgrading to costly paid products.
Intuit offered two free versions of TurboTax. One was through its participation in the IRS Free File Program, a public-private partnership with the Internal Revenue Service (IRS), which allows taxpayers earning roughly $34,000 and members of the military to file their taxes for free. In exchange for participating in the program, the IRS agreed not to compete with Intuit and other tax-prep companies by providing its own electronic tax preparation and filing services to American taxpayers.
In addition, Intuit offers a commercial product called “TurboTax Free Edition,” which is only free for taxpayers with “simple returns” as defined by Intuit. In recent years, TurboTax marketed this “freemium” product aggressively, including through ad campaigns where “free” is the most prominent or sometimes the only selling point. In some ads, the company repeated the word “free” dozens of times in as short as 30 seconds. However, the TurboTax “freemium” product is only free for approximately one-third of US taxpayers. In contrast, the IRS Free File products were free for 70 percent of taxpayers.
“This settlement puts millions of dollars back in the pockets of New Jersey taxpayers who got scammed by Intuit’s misleading advertisements, hidden costs, and bait-and-switch tactics,” said Acting Attorney General Matthew Platkin. “Any company that engages in this kind of conduct should be held accountable, and I am proud of the role that our office played in delivering justice in this case.”
“The business practices involved here were troubling on a number of levels,” said Division of Consumer Affairs Acting Director Howard Pine. “Manipulating consumers into paying for a product advertised as ‘free’ is unacceptable, as is declining to inform low-income tax filers about a no-cost option for which they would likely be eligible. The consumer restitution is certainly important here, but equally vital are the terms of the settlement designed to ensure greater transparency and accountability by Intuit going forward.”
Intuit offers do-it-yourself online tax preparation software under the TurboTax trademark. The multistate investigation focused on an alleged pattern of deceptive practices employed by the company starting, at the latest, in 2016.
As part of the IRS Free File Program, Intuit (and other tax preparation companies) for many years offered a no-cost online tax preparation and filing program to low-and-middle-income taxpayers, as well as to active-duty military service members.
Through Intuit’s version of the Free File program, eligible consumers could file their federal tax returns by visiting IRS’s own “IRS.gov” web page, or could access the same program via an Intuit web page set up especially for the purpose.
Over the years, Intuit renamed this no-cost program multiple times, all the while advertising and selling another, completely separate online tax return software product housed on a separate Intuit web page. This other product line – known as the TurboTax Free Edition – is actually free to only about one-third of all users. Most other users end up having to upgrade to paid versions of the software dubbed Premier, Deluxe, and Self-Employed.
Among other things, the states’ investigation found that Intuit – concerned that its IRS-contracted, no-cost program was harming its bottom line – used frequent and confusing product name changes and complex web search “deindexing” tactics to hide the no-cost program’s existence from web searches.
This resulted in consumers who went online in search of the no-cost program finding instead Intuit’s commercial TurboTax web page, which appeared to promise free tax return filing software under the “Free Edition” program name, but in most cases ended up costing users anywhere from $59.99 to $119.99 in software upgrades.
The states’ investigation found that Intuit aggressively marketed its commercial TurboTax Free Edition and misrepresented the eligibility criteria for it, both on its home page and in its television advertising – most notably in a series of since-removed commercials in which the only dialogue among the participants was “free, free, free.”
Intuit also put in place a series of blocks – known as “hard stops” – in its commercial Free Edition program that would halt consumers drawn by the prospect of free tax help part way through the process and note that they could not complete their tax filing until they purchased software upgrades.
According to the AVC, between 2017 and 2021, Intuit’s failure to disclose eligibility for its IRS-hosted Free File version to eligible consumers cost those consumers more than $100 million, because they ended up using the TurboTax Free Edition software instead, and were forced to purchase upgrades to complete the process and file their taxes.
In addition to the requirement that Intuit pay restitution to affected consumers, today’s settlement includes a number of other non-monetary terms aimed at protecting consumers going forward. Among other things, Intuit must:
- Avoid making claims that consumers can only file their taxes online accurately if they use a TurboTax paid product;
- Disclose clearly and conspicuously in any advertising of its “free” tax preparation products that eligibility limitations may apply and that not all taxpayers will qualify for the free product;
- Refrain from airing its “free, free, free” video advertisements in any medium, or from airing ads that are “substantially similar” in their repetition of the word free;
- Take reasonable steps to design all TurboTax products to inform consumers using the software “at the earliest point it is reasonably possible” whether they will, or will not, be eligible to file for free using the product; and
- Submit annual reports to a multistate Oversight Committee certifying its compliance with the terms of today’s settlement, and detailing that compliance.
Under the AVC, restitution funds will be distributed to eligible TurboTax consumers through an approved settlement Fund Administrator. The Fund Administrator will be responsible for distributing information regarding the settlement, as well as actual restitution payments, directly to eligible consumers. Consumers need not take any action to receive their funds.