Intuit has reached a settlement with all 50 states and the District of Columbia under which the company will pay $141 million to settle claims that it scammed users of its TurboTax software by promising a free federal tax preparation service to eligible filers, while working to trick them into using separate services that required payment.
The agreement was announced by New York Attorney General Letitia James (D) in a May 4 release, which said that the money will go to provide “restitution to millions of consumers across the nation who were unfairly charged.” The release said the company has also agreed to suspend its “free, free, free” advertisements, which states argued were used to fool filers. The states say Intuit was supposed to provide eligible taxpayers use of the company’s free tax preparation software developed through an agreement with the IRS, while Intuit then took actions to steer them toward preparing their returns using a service with a similar name, but that required many taxpayers to pay to file.
“Intuit cheated millions of low-income Americans out of free tax filing services they were entitled to,” James said. “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.”
The settlement agreement will provide payments to about 4.4 million filers who paid for tax filings using TurboTax’s “Free Edition” — which is free only to taxpayers filing what the company refers to as "simple returns" — between 2016 and 2018, when they could have filed for free using the other service Intuit developed as part of its agreement with the IRS, according to James’s office. Filers will receive automatic payments of roughly $30 for each year they paid to file.
James’s office said about $5.4 million of the settlement will go to 176,000 residents of New York who were manipulated into paying to file a federal return when it should have been free. In a separate release announcing the settlement agreement, California Attorney General Rob Bonta (D) said the agreement would send $11.4 million to roughly 370,000 Californians.
According to James’s office, Intuit also agreed to refrain from misrepresenting its tax preparation services in ads and marketing, to be clearer about restrictions in its advertising of free services, to do a better job informing users at the first opportunity whether they’re going to meet requirements to file for free, and to refrain from requiring taxpayers to start their filing over from scratch if they opt to switch to a free service.
Intuit stopped offering the service linked to the IRS agreement in 2021; the settlement agreement bars the company from seeking to reenter the IRS agreement. The company said in a May 4 statement that it had admitted no wrongdoing as part of the settlement. “Intuit already adheres to most of [the] advertising practices” it agreed to in the settlement, “and expects minimal impact to its business from implementing the remaining changes going forward,” according to the company’s statement.
The settlement agreement must still receive court approval. It represents the culmination of lawsuits and investigations into the company’s actions over the last several years, after a scandal broke following a ProPublica article that reported that Intuit and H&R Block had created free tax filing software as part of an agreement with the IRS and then deliberately sought to prevent taxpayers from using it, while tricking them into using paid services.
Intuit agreed in 2002 to provide a free filing service for some active military service members and lower-income earners, in return for the IRS not providing its own tax preparation services, according to Bonta’s office. To fulfill its part of that agreement, the company put out its Freedom Edition — its IRS Free File software. But then in 2007, it also put out a separate paid service called the Free Edition that charges fees for all but very simple tax returns.
States alleged that the company intended the second product to be confused with the first.
“A large portion of taxpayers who begin the filing process using the Free Edition are informed later in the process, after spending hours filling out their information, that they need to pay $59.99, and in some cases over $200, because their returns are not considered ‘simple,’” according to Bonta’s office, which said the company refused to notify taxpayers using the Free Edition if they were eligible for the IRS Free File service, and instead pushed them to pay fees.
The company also allegedly sought to conceal the IRS Free File service.
“Up until Intuit ceased its participation in the IRS Free File Program in 2021, TurboTax’s 'Products and Pricing' page did not list the IRS Free File product as an option,” allowing users to access it only through “a convoluted and unintuitive path that started with TurboTax’s support database or certain posts on TurboTax’s blog,” according to Bonta’s office.
James's office said that an investigation revealed that Intuit had also paid to have online search results steer consumers who were searching for the IRS Free File to the Free Edition product instead, and also “blocked its IRS Free File landing page from search engine results during the 2019 filing season.”
According to Bonta’s office, roughly 70 percent of taxpayers were eligible to file through the IRS’s Free File program that Intuit participated in, but less than 3 percent did in 2020. “This abysmal rate is due, at least in part, to tricks and tactics used by Intuit to steer taxpayers away from the IRS Free File Program and to its paid commercial products,” Bonta's office said.
“Intuit is pleased to have reached a resolution with the state attorneys general that will ensure the company can return our focus to providing vital services to American taxpayers today and in the future,” according to a statement by executive vice president and general counsel for the company, Kerry McLean, who added that approximately 100 million taxpayers had filed their taxes free of charge using the company’s products in the previous eight years.
“We believe this settlement with the state attorneys general and the District of Columbia also addresses the issues at the core of the [Federal Trade Commission] litigation, making that lawsuit entirely unnecessary,” McLean said. “Nevertheless, we are fully prepared to litigate with the FTC to prove the merits of our case.”
According to Bonta’s office, the settlement agreement also resolves California suits against the company brought by Los Angeles and by Santa Clara County.