Tax Notes reporters Paul Jones and Nathan Richman discuss the $141 million settlement over Intuit’s
This transcript has been edited for length and clarity.
David D. Stewart: Welcome to the podcast. I’m David Stewart, editor in chief of Tax Notes Today International. This week: the high cost of free filing.
After years of lawsuits and investigations, the tax preparation company Intuit has reached a settlement with all 50 states and the District of Columbia over claims that it misled some users of its TurboTax software. The company will pay $141 million to settle claims that it tricked tax filers into paying for federal tax preparation services when they were eligible for free tax preparation under a federal program.
What led to the settlement by one of the largest providers of tax return software? What does this mean for future tax filing in the United States?
Tax Notes reporters Paul Jones and Nathan Richman will talk about this more. Paul, Nate, welcome back to the podcast.
Paul Jones: Thanks, great to be here.
Nathan Richman: Thanks for having me back.
David D. Stewart: Let’s start with some background. What is Free File, and how did this program come about?
Paul Jones: The IRS came to an agreement around 2002 with a number of tax preparation software providers to have these companies provide free tax preparation services using their software for lower-income filers, and I also believe military filers. This was in return for some concessions by the IRS, including that it wouldn’t create its own free tax preparation service which would compete with these companies.
Intuit, like other participants, came up with a free filing software service that would allow people who met the criteria to file for free.
David D. Stewart: I take it that people have been using these companies for tax preparation for a long time, and it seems to have been a longstanding arrangement with the IRS, but we still ended up with a legal settlement. How did things start to go bad?
Paul Jones: Intuit had created its Freedom Edition, software that was part of the IRS free filing program. However, in 2007, it also put out a separate software service called the Free Edition — you’ll note that it has a similar name — that allows for free filing, but really only for very simple tax returns. If your tax return requires more complicated preparation, it’ll require you to pay a fee.
In 2019 ProPublica put out a piece that got a lot of attention, which accused Intuit and H&R Block
Some of the allegations against Intuit included that it had literally worked to ensure that its IRS Free File software wouldn’t even come up in internet search results and that the company’s own website made it virtually impossible to navigate to the IRS free filing program. Meanwhile, it was steering people towards using this paid software that had the free option that many people wouldn’t qualify for.
A number of the accusations included that people would have to go through this entire preparation process using what they thought was going to be free filing software, and then only get notified later on that they were going to have to file with fees in order to complete their tax preparation. The argument was that a lot of people were not using the IRS Free File program and that one of the big problems is that they were being directed to use these alternative products that only allowed some people to file for free.
David D. Stewart: What was the reaction when this news broke? I take it the states didn’t take too kindly to this alleged deception.
Paul Jones: Yes. When this got out, it created a lot of controversy. There were states’ investigations launched, including by New York. There were lawsuits by local governments in California. There were calls by members of Congress to look into this.
It generated a great deal of attention and obviously a lot of negative publicity for the company. Intuit was also pursued by attorneys representing tax filers.
The company ultimately dropped out of the Free File program in 2021 and has been fighting fallout from this ever since, right up to the announcement of this settlement.
David D. Stewart: Now, I understand at the time there was a bill being considered in Congress to sort of formalize the Free File program. What happened to that?
Paul Jones: Yes, that was the Taxpayer First Act, and it included language to codify the IRS Free File program agreement.
As I understand it, critics were arguing that that would essentially obligate the IRS to stick to the agreement and not develop its own free filing software. However, that provision of the Taxpayer First Act was ultimately removed in the final legislation, which was approved in 2019.
I should note also that the Free File agreement between the IRS and tax preparation companies was amended at the end of 2019, and that was in response to the scandal as well.
Notably, however, the Free File program has not been doing well. A Government Accountability Office report that came out recently has said that there’s been a decline in the use of the Free File program, and that’s possibly in part due to the exiting of Intuit.
David D. Stewart: I mentioned at the beginning that we’re beginning to see the results of the many lawsuits and investigations that were launched. Could you tell us about the settlement?
Paul Jones: Well, as part of the settlement agreement, Intuit doesn’t admit any actual wrongdoing. But as you noted, it’s going to pay out $141 million, and most of that’s going to go to tax filers who would’ve been eligible to file for free but ended up paying because they were using Intuit’s free tax filing service that was only free for some people.
However, the company did agree to terms that require it to change how it advertises its products, how it represents them, and also how they work.
For example, the products are going to do a better job of communicating to a filer if they’re eligible to file for free. As they enter in their data, the product will let them know, “Hey, you may qualify, or you do qualify to file for free.”
There’s also a stipulation that if someone’s began entering in their data and wanted to switch which service they’re using, Intuit will facilitate porting over all of the data that they’ve already entered into the new service that they’re going to use.
For example, if they are eligible to file for free, and they want to cancel the current product that they’re using, and use the free product instead since they qualify for it.
The states that have been part of this settlement obviously feel vindicated. They didn’t technically win, but they got a lot of what they wanted. I think there’s a sense of satisfaction that people who had to pay because they weren’t informed that they were eligible to file for free are going to get refunds. More than that, potentially the terms of this agreement will help prevent people who are eligible to file for free from paying in the future.
I should note here just to be clear that Intuit argues that it does support free filing, in addition to not admitting any wrongdoing. I got a statement when I was reporting on this by its Executive Vice President and General Counsel Kerry McLean who said that 100 million taxpayers have filed for free using the company’s software over the last eight years.
The company says that since this scandal broke out it already adheres or has adopted many of the practices that are required by the settlement agreement. It’s saying that it’s going to have a minimal impact on its current operations to implement the remaining changes that it agreed to as part of the settlement.
David D. Stewart: Does this settlement wrap up all of the fallout from the 2019 scandal?
Paul Jones: I don’t think so. For example, there’s an Federal Trade Commission (FTC) enforcement action and a lawsuit against Intuit regarding how it advertised its products as allowing for free filing and how they were presented to consumers.
I spoke with an FTC spokesperson, and they said that those are still moving forward and that the agency doesn’t really believe that the settlement between Intuit and the states resolves either of those.
Intuit, by contrast, argued in its statement when the settlement between it and the states was released, that that should end the FTC litigation as well. They argue that the changes that they’ve made both prior to the settlement agreement and the additional changes that they’ll make to their business model and their advertising as a result of this settlement should negate the FTC litigation and enforcement action.
But it doesn’t seem like the federal government agrees at this point.
David D. Stewart: All right. Well, Nate, turning to you, I understand that there’s been some concerns that I guess, somewhat ironically, this settlement will result in fairly large tax deduction for Intuit. Could you tell us about that?
Nathan Richman: Sure. Well, for one thing, it wouldn’t be the first time one of these very large settlements drew attention for somebody wanting to deduct it. A little bit ago, some senators wrote a letter protesting a deduction that opioid companies were planning on taking for one of their settlements with the states.
This all boils down to a provision in the 2017 Tax Cuts and Jobs Act where Congress amended the rule on when settlements and fines can be deducted. Now, generally, that new rule prevents deduction of most fines or settlements paid to a government entity, but there is this carveout for what’s called “restitution remediation,” or payments to come into compliance with the law.
The Intuit settlement is divided, as Paul said, into two buckets. There’s $2.5 million going for administration and $138.5 million for the purposes of providing restitution to covered customers. So, they use one of the magic words. The 2021 final regs didn’t say only if you’ve got the magic words, but it is a step in that direction.
Now, in order to fall into this exception, there are two requirements. You have to identify in the document what payments are going to be restitution remediation, or coming into compliance. If the IRS challenges it, the taxpayer will have to establish that the payment is actually to help out the victims rather than to punish the payer.
So far, we’ve got some hint that by identifying the payments as for restitution to the filers, that looks like it could satisfy the identification requirement.
David D. Stewart: Has there been any litigation around this exception?
Nathan Richman: So far, not so much. As I said, the final regs only came out in 2021, the provisions only from 2017 for 2018 tax years and later. Most anything of this sort would probably still be in the audit stage or maybe a suit just filed. But there have been no court law that I have seen on this so far.
David D. Stewart: All right. This is definitely a watch this space sort of situation.
Nate, Paul, this has been fascinating. Thank you both for being here.
Nathan Richman: Thanks for having me.
Paul Jones: Thanks, always a pleasure.