Santa Clara County Counsel James Williams and California Attorney General Rob Bonta announced this month a $141 million nationwide settlement of litigation with Intuit Inc. over the company's TurboTax Free File online service.
The settlement, negotiated by a coalition of more than 30 attorneys general, resolves allegations that Intuit steered consumers eligible for free online tax preparation and filing services into the company's paid products.
Bonta said, "For more than a decade, Intuit used underhanded tricks and deceptive tactics to steer low-income and military taxpayers into paid products despite knowing that they qualified for free help."
Intuit is a financial software company based in Mountain View known for its flagship products: QuickBooks, Mailchimp, Mint and Credit Karma as well as its tax preparation software TurboTax.
The company was founded in 1983 when businessperson Scott Cook hired Stanford computer science student Tom Proulx to design the computer-based personal accounting software that became Quicken. Today the company has 14,000 employees in nine countries and in 2021 generated $9.6 billion in revenue.
More than 100 million people worldwide use Intuit's services, according to the company's website.
The company's TurboTax online tax preparation and filing service is used by 40 million taxpayers annually in the United States.
Officials with Intuit were not immediately available to comment on the settlement.
The dispute has its roots in a deal made in 2002 between the Internal Revenue Service and Intuit and other tax preparation companies. Under the arrangement, Intuit would provide free tax filing services to low-income taxpayers and in return IRS would not itself provide tax preparation and e-filing services.
In fulfillment of that pledge, Intuit's "Freedom Edition" provided free tax preparation and filing for active duty military personnel and individuals with income below certain levels.
However, Intuit later added another service, this one confusingly called "Free Edition," that was free in theory but not in practice.
The new service was only free for "simple returns," a concept defined by Intuit to exclude any minor deviation from the standard return, no matter how common. According to the state attorney general, "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.'"
The state attorney general said that "investigation of these products found that Intuit steered users away from its IRS Free File product and towards its 'free' commercial product using deceptive techniques."
Lawsuits challenging Intuit's conduct were initiated in 2019 by Williams, county counsel of Santa Clara County, as well as by the city of Los Angeles. The suits were ultimately jointly administered in Los Angeles County Superior Court.
The suits alleged that, among other things, the company violated California laws prohibiting false advertising and unfair and deceptive trade practices. A release following the filing of the Santa Clara suit said, "Intuit intentionally and deceptively steered taxpayers to TurboTax and away from free alternatives, promising consumers they could file their taxes using TurboTax "for $0" or "free free free." But the promises of free filing were a sham for most people."
The settlement agreement provides for a $141 million payment to a fund to provide redress to individual consumers. In addition, the settlement enjoins Intuit and its affiliates from violations of California's Unfair Competition Law and prohibits the company from making false representations to consumers such as, for example, that the consumer must use TurboTax paid services to obtain a tax credit or tax deduction.
Intuit must also make affirmative disclosure about eligibility for free services in its advertising materials.
According to the settlement agreement, 371,403 California consumers are "Covered Consumers," a term used to describe consumers who were eligible for free tax services in 2016, 2017 or 2018, who started to use Free Edition but were told that that they were ineligible, and who thereafter used a paid product of TurboTax.
California has 8.3% of all Covered Customers, a higher percentage than any state other than Texas.
California is expected to receive $11.4 million from the settlement to be used for restitution.
The settlement agreement is subject to court approval.
One provision states that Intuit does not admit "any liability regarding allegations of violations that occurred prior to entry of this Judgment."
While the settlement, if approved, will settle the claims of the coalition of attorneys general, it will not resolve all the legal issues relating to Intuit's Free Edition software.
According to attorney Benjamin Whiting of Chicago's Keller Lenkner LLC, that firm represents tens of thousands of consumers who have initiated arbitration proceedings against Intuit seeking damages for paying for "free" services. In addition, on March 28, the Federal Trade Commission instituted an action on the United States District Court for the Northern District of California challenging the company's marketing practices.