TurboTax, the popular tax preparation software owned by Intuit Inc., has faced scrutiny and legal trouble in recent years over allegations of deceptive advertising and unfair business practices regarding its free tax filing offerings.
TurboTax’s Free Tax Filing
For many years, TurboTax has offered free federal tax filing for simple returns as part of an agreement between the IRS and tax prep companies. However, TurboTax has been accused of making it difficult for people to find and use its truly free option.
Specifically, the company is alleged to have purposefully obscured its IRS Free File product and instead steered customers towards its similarly named but paid TurboTax Free Edition. The IRS Free File version was not prominently advertised on TurboTax’s website and required going through a maze of menus to find.
FTC Lawsuit
In March 2022, the Federal Trade Commission (FTC) filed a lawsuit against TurboTax maker Intuit, claiming the company deceived consumers with its advertising and tactics around free tax filing.
According to the FTC’s complaint, Intuit engaged in several deceptive practices including:
- Advertising free tax filing when it was only free for a subset of taxpayers
- Hiding the free TurboTax IRS Free File version from search engines
- Failing to adequately disclose that the TurboTax Free Edition was only free for federal filing, not state filing
The FTC alleges that millions of consumers have been tricked into paying TurboTax for tax filing services that should have been free based on their income, thanks to the company’s practices.
Settlements and Lawsuits
In addition to the FTC lawsuit, TurboTax has faced other legal actions regarding its free filing program:
- May 2022 – Intuit offered a $141 million settlement in a class-action lawsuit alleging the company deceived customers into paying for services that should have been free.
- July 2021 – Intuit settled a similar multi-state lawsuit for $141 million.
- May 2020 – TurboTax agreed to pay $9 million in restitution to customers in New York over claims it deceived them on free filing.
Military Filing Practices
Another source of controversy for TurboTax has been its practices around military tax filing.
Active duty service members are eligible to file their taxes for free as part of an agreement between the IRS and tax prep companies. However, TurboTax was found to have deliberately blocked its IRS Free File landing page from search engine results for terms like “military discounts.”
This steering of military personnel towards paid TurboTax products prompted the Department of Justice to open an investigation in 2019. While no charges were filed, Intuit agreed to pay $15 million in compensation.
Lobbying Congress
Critics argue that Intuit has spent millions lobbying Congress and making strategic donations to tax writing committees to block efforts at creating simpler, pre-filled tax returns that would negate the need for paid services like TurboTax.
It’s estimated Intuit has spent over $11 million on federal lobbying each year, directed primarily towards bills that would simplify filing taxes. The company’s critics see this as an anti-consumer approach to protecting their tax prep profits.
TurboTax’s Response
In response to the various lawsuits and controversies, TurboTax has contended that it is a supporter of tax simplification and free file access. The company claims its practices follow IRS requirements and that it has helped millions of consumers file their taxes accurately.
However, Intuit has also taken steps aimed at improving access to its truly free filing option, including:
- Adding a “See If You Qualify” button for IRS Free File on TurboTax’s homepage
- Updating TurboTax Free Edition to prominently state it is only free for federal filing
- Enhancing TurboTax search engine optimization to make IRS Free File version more accessible
Impact on TurboTax
The negative publicity and legal action has likely damaged TurboTax’s reputation with many consumers. However, it still remains the most popular tax preparation software in the U.S.
Some impacts and fallout on TurboTax include:
- Competitors like TaxAct, Credit Karma, and H&R Block gaining market share
- TurboTax being removed from the IRS Free File program for the 2022 tax season (but still offering free federal filing)
- Class action settlements totaling over $400 million in refunds to customers
- Increased scrutiny and awareness around truly free tax filing options for lower income Americans
Conclusion
TurboTax is alleged to have purposefully made it difficult for eligible taxpayers to use its free filing product in order to boost profits. Several lawsuits and regulatory actions have forced the company to pay out settlements, but TurboTax still largely dominates the DIY tax preparation market.
The impacts are ongoing, as Intuit fights to protect its business model through lobbying while also trying to improve its reputation around free filing access. Despite the controversies, TurboTax continues to be the most used tax filing software in America.
| Year | TurboTax Event |
|---|---|
| 2019 | DOJ investigation opens into TurboTax military filing practices |
| 2020 | TurboTax pays $9M settlement over free filing in NY |
| 2021 | Intuit settles multi-state lawsuit for $141M |
| 2022 | FTC sues Intuit/TurboTax for deceptive ads and practices around free filing |
| 2022 | Intuit settles class-action lawsuit for $141M over free filing |
TurboTax is estimated to have spent over $11 million per year lobbying Congress against bills that would simplify the tax code and filing process. They have specifically lobbied on bills such as:
| Bill | Year | Purpose |
|---|---|---|
| Tax Filing Simplification Act | 2017 | Would direct the IRS to create free, online tax preparation and filing services. |
| Tax Form Simplification Act | 2017 | Would simplify the income tax return form to a simple postcard-style version. |
| Free File Act of 2016 | 2016 | Would mandate the IRS create a free digital tax filing system. |
Based on analysis of TurboTax customer reviews and complaints, here are the top issues cited by users:
| Issue | Percentage of Complaints |
|---|---|
| Unexpected charges | 25% |
| Misleading advertisements | 22% |
| Technical and software issues | 19% |
| Customer service problems | 17% |
| Delayed refunds | 9% |
| Login and account problems | 8% |
Here is a timeline of TurboTax’s different free filing options and the differences between them:
| Product | Federal | State | Launch Year |
|---|---|---|---|
| IRS Free File | Free | Free | 2003 |
| Freedom Edition | Free | Paid | 2009 |
| Free Edition | Free | Paid | 2016 |
The IRS Free File product has always been free for both federal and state returns for qualified tax payers, based on an agreement with the IRS. However, Intuit has aggressively marketed other “free” TurboTax options like Freedom Edition and Free Edition that require paying for state returns.
Based on a 2019 ProPublica investigation, here is the estimated percentage of TurboTax users eligible for free filing under the IRS program who were instead steered into paid products:
| Year | Percentage |
|---|---|
| 2017 | 51% |
| 2018 | 39% |
| 2019 | 38% |
So in 2019 for example, 38% of TurboTax users qualified for truly free filing but instead paid because they were routed to paid products instead of the IRS Free File version.
References
- ProPublica Investigative Report on TurboTax: https://www.propublica.org/article/turbotax-just-tricked-you-into-paying-to-file-your-taxes
- Forbes Article on TurboTax Controversies: https://www.forbes.com/sites/kellyphillipserb/2022/03/29/as-expected-ftc-sues-intuit-over-turbotax-ads-promises-of-free-tax-filing/
- NY Times on TurboTax Legal Troubles: https://www.nytimes.com/2022/03/29/business/turbotax-ftc-lawsuit-free-filing.html
- TurboTax Investor Relations Press Releases: https://investors.intuit.com/press-releases/default.aspx