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Intuit, the owner of popular tax filing software TurboTax, will pay $141 million in restitution to millions of low-income Americans who were “unfairly charged” for services that should have been free, according to a multistate agreement announced Wednesday.
TurboTax also agreed to reform its business practices. For example, it must suspend a “free, free, free” advertising campaign that “lured” customers with the promise of free tax preparation but then asked them to pay, according to an announcement from New York Attorney General Letitia James.
All 50 states and the District of Columbia have signed the agreement.
Intuit admitted no wrongdoing as part of the agreement and expects minimal impact to its business from implementing changes, according to a company statement.
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“Intuit is clear and fair with its customers, including with the nearly 100 million Americans who filed their taxes free of charge with our products over the last 8 years — more than all other tax prep software companies combined,” said Kerry McLean, Intuit’s executive vice president and general counsel.
Intuit will pay restitution to nearly 4.4 million consumers who used TurboTax’s Free Edition during tax years 2016 through 2018. These customers were told that they had to pay for the service despite being eligible to file for free via the IRS Free File Program offered through TurboTax, according to the announcement.
Consumers are expected to receive about $30 for each year they paid for services, the announcement said. They will automatically receive notices and a check by mail.
“Intuit cheated millions of low-income Americans out of free tax filing services they were entitled to,” James said in a statement. “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.”
Until recently, Intuit offered two free versions of TurboTax. One was through the IRS Free File Program, a public-private partnership that lets low-income Americans file their taxes for free. Intuit ended its participation in July 2021. (That version of TurboTax had been available to taxpayers with income below around $39,000 and active-duty military service members with income below $72,000 in tax year 2020.)
Intuit aggressively marketed another version, the TurboTax Free Edition, as “free,” but it’s only free for taxpayers with “simple” returns as defined by Intuit, according to the announcement. Users without a simple return must upgrade to a paid version of the tax service; however, these individuals may have been eligible for the IRS Free File Program.
(For tax year 2021, Intuit refers to a simple return as one that can be filed on a Form 1040 with limited attached schedules, like one that includes student loan interest paid, according to the Federal Trade Commission.)
The service would be free for about one-third of U.S. taxpayers, while the IRS Free File products are free for about 70%, according to the announcement.
State attorneys general claim Intuit violated the states’ consumer protection laws by engaging in deceptive and unfair marketing, advertising and sales of online tax preparation, according to the agreement.
For example, in tax year 2018, Intuit hid the landing page for its IRS Free File Program from search engines for about five months during the peak of tax season, they alleged.
Further, the company’s TurboTax home page misled consumers into thinking they were eligible for the “freemium” service, and its product and pricing screen didn’t mention the Free File product, “impeding consumers from learning of its existence,” states claimed.
Last tax season, Intuit delivered more than 17 million free tax filings, the most in the industry and multiple times more than the IRS Free File Program, according to a company statement. It expects to help more than 40 million taxpayers prepare and file their tax returns for free over the next three years.
TurboTax agreed to change some of its business practices, including: better informing users whether they’ll be eligible to file their taxes for free, and refraining from requiring consumers to restart their tax filing if they switch from a paid product to a free one, the announcement said.
The Federal Trade Commission filed a lawsuit with similar allegations as the states in March. That case is ongoing.
“We believe this settlement with the state attorneys general and the District of Columbia also addresses the issues at the core of the FTC litigation, making that lawsuit entirely unnecessary,” Intuit’s McLean said. “Nevertheless, we are fully prepared to litigate with the FTC to prove the merits of our case.”
A spokesman for the FTC declined comment on these claims.