New York Attorney General Letitia James recently announced a record multistate agreement with the owner of TurboTax, Intuit Inc., for deceiving millions of low-income Americans into paying for tax services that should have been free.
The agreement provides that Intuit will pay $141 million; approximately $2.5 million will be used for administrative fund costs and $138,250,000 will be earmarked to provide restitution to more than 4.4 million consumers across the nation who were unfairly billed for what had been advertised as free tax services.
In addition, Intuit must suspend TurboTax’s “free, free, free” ad campaign that lured customers with promises of free tax preparation services, only to deceive them into paying.
Representatives of all 50 states and the District of Columbia signed the 51-page agreement.
New York will receive more than $5.4 million for more than 176,000 New Yorkers who were tricked into paying to file their federal tax returns, James said.
The settlement covers 52,399 Oklahomans, 465,793 Texans, 38,075 Kansans, 81,427 Missouri residents, 34,487 residents of Arkansas, and 28,535 residents of New Mexico, the document shows, but the amounts each of those states will receive was not included.
Under the agreement, Intuit will provide restitution to customers who started using TurboTax’s Free Edition for tax years 2016 through 2018 and were told that they had to pay to file even though they were eligible to file for free using the IRS Free File program offered through TurboTax.
Consumers are expected to receive a direct payment of approximately $30 for each year that they were deceived into paying for filing services. Consumers who were affected will automatically receive notices and a check by mail.
Consumers who receive a payment from the settlement fund will not be required to return or discontinue the use of any Intuit goods or services.
“Intuit cheated millions of low-income Americans out of free tax filing services they were entitled to,” New York AG James said. “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.”
Kerry McLean, Intuit’s general counsel, said in a blog post that the company is “clear and fair with its customers.”
In resolving the issue, “We admitted no wrongdoing and are pleased to be able to continue our strong partnership with governments to best serve the needs of taxpayers across the country,” McLean said.
‘Deceptive tactics’
triggered probe
New York’s Office of the Attorney General opened an investigation into Intuit after ProPublica reported that the company was using deceptive digital tactics to steer low-income consumers toward its commercial products and away from federally supported free tax services.
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, 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 free only 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 actually free only for approximately one-third of U.S. taxpayers. In contrast, the IRS Free File products were free for 70% of taxpayers.
When using TurboTax, consumers are prompted to input their income by category. Many times the “freemium” product displayed what employees call a “Hard Stop” screen informing the customer they could not proceed for free; instead, they would need to upgrade.
In tax years 2017 and 2018, Intuit charged $59.99 for TurboTax Deluxe and $119.99 for TurboTax Self-Employed.
Intuit also named
in FTC complaint
In a similar complaint the Federal Trade Commission filed against Intuit, the agency alleged that TurboTax is free for only some users, based on the tax forms they need. “For many others, Intuit tells them, after they have invested time and effort gathering and inputting into TurboTax their sensitive personal and financial information to prepare their tax returns, that they cannot continue for free; they will need to upgrade to a paid TurboTax service to complete and file their taxes.”
Consequently, for all Hard Stops logged from TY 2016 through TY 2018, customers who were eligible for Intuit’s Free File product but upgraded in response to a Hard Stop “paid Intuit more than $100 million to file their federal tax returns,” according to the multistate settlement document.
From at least 2017 to October 2021, when consumers encountered a Hard Stop Intuit “failed to disclose … that they may have been or were eligible to use Intuit’s Free File product to accurately report their income or claim certain tax deductions,” the document reports.
The OAG’s multistate investigation found that Intuit engaged in several deceptive and unfair trade practices that limited consumers’ participation in the IRS Free File Program. The company used confusingly similar names for both its IRS Free File product and its commercial “freemium” product. Intuit bid on paid search advertisements to direct consumers who were looking for the IRS Free File service to the TurboTax “freemium” product instead.
Intuit purposefully blocked its Free File landing page from search engine results during the 2019 tax filing season – from Nov. 13, 2018, to April 26, 2019 – which “covered the vast majority of Intuit’s 2019 tax filing season” and effectively shut out eligible taxpayers from filing their taxes for free.
For tax year 2019, Intuit stopped blocking its Free File product landing page from online search engines; consequently 2,070,778 consumers filed their federal tax returns using Intuit’s Free File Product, “representing growth of 73% over tax year 2018,” the settlement reports.
TurboTax’s website included a “Products and Pricing” page that stated it would “recommend the right tax solution,” but never displayed or recommended the IRS Free File program, even when consumers were ineligible for the “freemium” product. Intuit withdrew from the IRS Free File program last July.
Intuit vows to reform
its business practices
Intuit has agreed to reform its business practices, including:
Ÿ refraining from making misrepresentations in connection with promoting or offering any online tax preparation products, such as advising customers they can claim a tax credit or tax deduction only if they use a TurboTax Paid Product or TurboTax Free Edition Product.
Ÿ enhancing disclosures in its advertising and marketing of free products.
Ÿ designing its products to better inform users whether they will be eligible to file their taxes for free; and
Ÿ refraining from requiring consumers to start their tax filing over if they exit one of Intuit’s paid products to use a free product instead.
New York AG James led the multistate investigation with Tennessee, with support from the attorneys general of Florida, Illinois, New Jersey, North Carolina, Pennsylvania, Texas, and Washington and assistance from the Federal Trade Commission.
The FTC filed its complaint against Intuit – which accused the company of luring customers with free services and hiding the added costs in the fine print and hyperlinks – in a northern California federal district court on March 28.
Attorneys for Intuit notified the court on May 4 that the company “entered a public, nationwide settlement with the attorneys general of all 50 states and the District of Columbia, to settle potential claims related to Intuit’s marketing of its online tax-preparation products.”
Intuit did not admit liability with the multistate settlement, but McLean said it should resolve the FTC’s claims. “Nevertheless, if necessary, we are fully prepared to litigate with the FTC to prove the merits of our case,” she said.