The owner of TurboTax will pay states $141 million to settle claims of deceptive business practices regarding “free” tax filing services.
The New York Attorney General’s Office announced the settlement Wednesday. It applies to 50 states and the District of Columbia, and calls for TurboTax to suspend its “free, free, free” ad campaign. About 4.4 million taxpayers will receive restitution.
The lawsuit alleged TurboTax and its owner, Intuit, lured customers with promises of free tax preparation only for them to end up paying. The investigation stemmed from a 2019 ProPublica report that revealed the company used deceptive tactics to steer customers away from free federally supported tax services to its more expensive commercial programs.
“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.”
Intuit offered two free versions of TurboTax. One was through the company’s participation in the IRS Free File Program, which allows taxpayers earning roughly $34,000 and members of the military taxes to file for free. In exchange for Intuit’s participation in the program, the IRS agreed not to compete with Intuit and other companies by creating its own tax prep service.
Intuit also offered TurboTax Free Edition, “freemium” software that was only free to taxpayers who filed “simple returns” as defined by Intuit. NY’s attorney general said TurboTax marketed the product aggressively and promoted it as a free service. However, only about a third of U.S. taxpayers were eligible for the “free” service. IRS Free File Products, on the other hand, were free for 70% of taxpayers.
The investigation found Intuit “engaged in several deceptive and unfair trade practices that limited consumers’ participation in the IRS Free File Program.” Those practices included using “confusingly similar” names for the products and bidding on paid search results that pointed customers to its “freemium” software. The company also blocked its IRS Free File service landing page from search engine results.
Customers who were eligible for free service but ended up paying will receive a direct payment of about $30 for each year they were affected from 2016 through 2018, according to the settlement. More than 94,000 Indiana residents are eligible, according to the settlement.
The Indiana Attorney General’s Office said affected customers will eventually be contacted by the settlement administrator:
There will be a settlement administrator hired by the multistate group. The names and contact information for all affected consumers are already known and will be given to the settlement administrator. The settlement administrator will contact each consumer and either send a check or make arrangements for payment of restitution by other means. So, consumers do not need to do anything until they have been contacted by the settlement administrator.
The exact amount of the restitution per transaction is not fully finalized because there may be some data clean-up to do. But the final amount will be somewhere around the $29.64 per unnecessary upgrade estimated in those preliminary calculations. There were an estimated 94,163 transactions involving Indiana consumers. However, that number may include multiple transactions for a given consumer. We weren’t given a number of individual affected consumers.
Intuit also agreed to several reforms, including:
- Refraining from making misrepresentations in connection with promoting or offering any online tax preparation products
- Enhancing disclosures in its advertising and marketing of free products
- Designing its products to better inform users whether they will be eligible to file their taxes for free
- 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
Intuit dropped out of the IRS Free File program in July 2021. As part of the settlement, Intuit admitted to no wrongdoing and said it agreed to pay $141 million to “put this matter behind it.”
The company also said it believed the settlement with state attorneys general makes a lawsuit from the Federal Trade Commission “entirely unnecessary.”
In March, the FTC announced a lawsuit accusing TurboTax of deceptive practices regarding its free tax filing services.