With April 18 fast approaching, many U.S. taxpayers scrambling to file their income taxes are in for a disappointing realization: Although the well-known proverb says, “the best things in life are free,” TurboTax may or may not be one of them.
The U.S. Federal Trade Commission (FTC) recently filed a federal complaint against Intuit, the maker of TurboTax software, alleging that the company misleads consumers by advertising free tax filing that many cannot use. The lawsuit centers on customers who allegedly started the filing process on TurboTax’s Free Edition but ultimately had to pay.
The FTC complaint asks the court to stop Intuit’s “false advertising” immediately. It has also filed an administrative complaint charging that the company’s advertising practices are illegal because they violate the FTC Act. The commission alleges that although the company has “bombarded” consumers with advertisements for free tax filing services for years, approximately two-thirds of those who filed taxes in 2020 – including gig economy workers and those earning farm income – cannot use TurboTax’s free product.
According to the FTC’s filing, Intuit ran ads promoting TurboTax’s free service more than 11,000 times across approximately 500 television stations during the last tax filing season. The company’s ads also run during many major events, including the Super Bowl and the NCAA basketball tournament. The FTC says a disclaimer appeared on the screen in at least one ad while a speaker proclaimed, “That’s right, TurboTax Free is free. Free, free, free, free.” In response to this repetitive and persuasive advertising, the FTC says consumers took the time to gather their documents, entrusted their personal information to Intuit and began the filing process, only to find that they could not file their taxes for free after all.
Several years ago, TurboTax began to offer its heavily marketed Free Edition alongside a similarly named Free File Product. While the Free Edition routed certain filers to a version of TurboTax that charged them a fee based upon the tax forms they were required to use, the Free File product, part of a partnership with the IRS, did not route users to paid services. Instead, it was entirely free for those whose income fell below a certain level. However, TurboTax only offers free filing to those with “simple” tax returns. According to the FTC, this definition regularly changes and rules out an estimated two-thirds of tax filers.
The Free File product can also prove difficult for filers to locate – at one point, Intuit even added a code to its website that removed the product from online search results – but the company later removed the code. According to a 2020 audit conducted by the Treasury Inspector General for Tax Information, more than 14 million taxpayers who paid for online tax preparation software from TurboTax and others in 2019 could have gotten the products for free.
However, the company vigorously defends its practices. According to a February 2022 statement by an Intuit representative, “Intuit was at all times clear and fair with its customers, upheld its obligations with respect to the IRS Free File program, and most significantly, not only did not hide free filing options from consumers, Intuit helped drive the adoption of free tax prep by helping more people file their taxes free of charge than all other online tax prep providers combined.” TurboTax offers a 15,000-word terms-of-use agreement that it says explains its practices. However, studies show that most users do not read these lengthy contracts frequently crammed with legalese.
TurboTax is the most popular tax software in the U.S., used by at least two-thirds of all those who file tax returns. As a result, Intuit reportedly made $2 billion in profits last year. However, it could be subject to tens of millions of dollars in legal fees, a threat that might nudge the company toward a potentially large settlement.