The taxman approacheth

Is TurboTax free? Kinda yes … but sorta no

One reporter spent 2021 freelancing, giving her just the kind of low-paying tax mess that TurboTax’s innovative services or the IRS Free File program should be able to help with. Her foray into ‘easy’ tax prep tools proved otherwise.

BY BROOKE STEPHENSON, PROPUBLICA

If you watch TV, you’ve likely been inundated with ads about tax prep services that promise to meet your every need or let you file for free.

It’s the time of year when people open search engines and ask: “Is TurboTax free?”

ProPublica has been asking similar questions since 2013, when we first reported on how Intuit, TurboTax’s parent company, fought to keep the government from setting up a free, simple tax filing process. In the intervening years, our reporters have stayed on the story, uncovering the company’s sweeping history of lobbying and “dark pattern” customer tricks, which have helped it fend off a free government tax-filing option and create a multibillion-dollar software franchise.

Last year, we wrote a guide presenting several ways people could file their taxes for free. But this year a few things have changed: For one, TurboTax is no longer participating in the IRS Free File program, a public-private partnership that it helped construct. Under Free File, tax prep companies agreed to provide free online filing to tens of millions of lower-income taxpayers, and in exchange the government agreed not to offer its own free filing tools. In 2019 and earlier years, TurboTax and H&R Block together accounted for around two-thirds of all filings through the program, according to ProPublica’s analysis. But H&R Block left the program in 2020, and now, Intuit wrote in a blog post, it too is leaving “to focus on further innovating in ways not allowable under the current Free File guidelines.”

A spokesperson for Intuit said the company was “at all times clear and fair with its customers” and has upheld its obligations to the IRS under the Free File program.

Despite the departure of the two major players, the IRS Free File program will still let you file your federal taxes for free if you make less than $73,000 a year. You can browse the list of the remaining providers yourself, or you can answer a couple questions and have the lookup tool connect you with the providers you are eligible to use.

Wait, in case you missed that: If you get nothing else from this story, please remember that you can file your federal taxes FOR FREE.

Still, TurboTax’s departure made me wonder: What are these amazing innovations it’s offering that aren’t “allowable” under IRS guidelines? Are they worth the cost of dealing with TurboTax?

A TurboTax spokesperson said, “The Free File Program rules did not allow Intuit to provide all of the benefits we can deliver to help consumers with their complete financial health, not just in tax, but beyond.” Leaving the program would, for example, allow TurboTax to offer customers access to tax experts and other financial services, he said.

I decided to run a little test. Even though it has dropped out of the IRS Free File program, the company still offers its own “free” version and pours millions into marketing it. To see how TurboTax’s “free” version measured up, I went through the steps to file my taxes through TurboTax’s service as well as through an IRS Free File provider.

I’ve actually used both before — TurboTax on my first few years of income, and IRS providers starting in 2019, after I read reporting by ProPublica and commentary by the comedian Hasan Minhaj.

The IRS claims that 70% of Americans can file their taxes for free through Free File, but in reality, only about 1% of those who are eligible actually use the service. And we reported in 2019 that in recent years, the IRS had spent no money at all to advertise the program. On top of that, participating companies often set up roadblocks to genuinely free filing for the folks who do find the service.

Free File only requires that the partner companies offer free federal returns, so it may be difficult or impossible to file your state taxes for free, depending on your income bracket. And while the state return is the most common source of a tacked-on charge, providers can also pitch loans, “audit defense” scans or even products that have nothing to do with taxes to Free File users.

Some companies are advertised as free on the IRS website, but then require taxpayers with certain tax documents, like 1099s, to pay for a much more expensive service.

The people who get 1099s often aren’t wealthy — recipients include the approximately 1 million people who drive for Uber, and women with caretaking responsibilities who take low-paid contract work to accommodate child or elder care schedules.

Finding providers that are both genuinely free and userfriendly adds another layer of difficulty. Several of the IRS providers allow you to upload photos of your tax forms to make the process easier, but some had state restrictions and others charged you to file a 1099, which I needed to do.

In fact, I had quite a few forms to file.

In 2021, I was: • A contract worker for a Southern California nonprofit. • A full-time fellow for ProPublica in New York City. • A part-time crew member at Trader Joe’s (Store 20 forever). • A freelance writer for a local investigative paper. • And a very sporadic email newsletter writer for my hometown running store in Virginia.

That adds up to three W2s and two 1099s across three states, and less than $50,000 in income, which is just the kind of low-paying tax mess that TurboTax’s innovative services should be able to help with, right?

Let’s dive in.

THE TURBOTAX SAGA

TurboTax shows you a screen to figure out if its free version is “right for you.” These are the buttons that steer you away from the free version of TurboTax: • “I want to maximize deductions and credits.” • “I donated over $300 to charity.” • “I’m self-employed/freelancer.” • “I sold stock, crypto, or own rental properties.” • “I own a small business.” • “I own a home.”

Intuit’s spokesperson told me that “Pressing buttons has no effect on whether or not a user qualifies or disqualifies from using TurboTax Free Edition. Pressing buttons generates a recommendation to use a particular TurboTax product, but the consumer is free to use whatever product they wish.”

The cheapest program I can file under as an ex-freelancer was TurboTax Deluxe, for $39.

So I start there and wait to see if TurboTax’s excellent features will make me that money back in refunds. (Spoiler: They don’t.)

The bummer is, I love using TurboTax. Not because it saves me money, but because clicking the big, eye-catching buttons gives me a false sense of control and a hit of dopamine. Click! I’m achieving!

And I think Intuit knows what appeals to me about its software, because back when it offered a genuinely free service through the IRS, that website was confusing, slow and ugly. There were no pretty buttons. And almost no one could find it, because Intuit hid it from Google and other search engines. (It stopped hiding the page from search engines after ProPublica reported on the practice.)

Anway, back to my tax filing.

After a soothing video in which I am assured that TurboTax can handle the complexities of my tax situation, the site asks for permission to access my tax returns “for purposes other than the preparation and filing” of my tax return. If I wasn’t really paying attention (which would be understandable; taxes are mind-numbing), it would be easy to assume these permissions were necessary to file my taxes and not a ploy to give TurboTax additional access to my information.

I decline.

An Intuit spokesperson told us, “The consent you referenced allows us to surface offers for other Intuit products or services, or those of third parties that would be relevant for our customers,” but “Intuit does not use or share tax information anywhere outside of the tax prep process — even with other Intuit products — unless a customer gives express consent.”

Next it tries to upsell me TurboTax MAX: Defend and Restore, which offers insurance against identity theft for another $49. I skip that too.

I’m five minutes into this process, and I’ve spent half my time rejecting TurboTax’s attempts to collect additional money or information.

I know that reading about me doing my taxes might seem even more boring than doing your own, but bear with me as I describe a few notable events from my TurboTax journey because I think they’ll help us understand more about how the tax prep industry works.

Here are some features that initially appealed to me: • Free live online chats with tax specialists. • The ability to link to my eTrade account just by logging in, saving me the trouble of entering information about stocks and dividends manually. • Expandable explainers that answer questions like, “Why am I taking the standard deduction?” and, “How do I know if I got my 2021 stimulus check?” • The ability to automatically pull my 2021 W2s for the employers that I worked for in previous years I filed with TurboTax. • The option to upload a photo of my W2 from the places where I started work during 2021, like ProPublica, instead of manually entering details from each individual box. There were occasional clarifying questions (“Box 20 seems to be blank — can you confirm this?”), but they were easy to deal with.

And all the while, TurboTax is doing the software equivalent of gently patting my head.

After I submit each W2, I’m shown an encouraging screen that tells me I’m on track for my biggest refund yet! I feel inches from those promised dollars.

Once all my W2 information has been submitted, little animated papers file themselves under the heading “Sit back while we fill in your New York return.” It gives me the impression TurboTax is working hard for me.

In reality, this is the digital equivalent of TurboTax twiddling its thumbs.

Former staffers told reporter Justin Elliott that Intuit’s designers added these animated delays between screens to both reinforce and ease consumers’ “fear, uncertainty and doubt.” TurboTax encourages this subconscious sense I’ve had the whole time that taxes are a scary dark maze that I can only navigate if I let the software lead me by the hand.

In a statement, an Intuit spokesperson said, “The process of completing a tax return often has at least some level of stress and anxiety associated with it. … To offset these feelings, we use a variety of design elements — content, animation, movement, etc. — to ensure our customers’ peace of mind.”

The cute face of this software creates a feeling of trust that I can’t totally shake, even though I’m going through all this for a ProPublica piece, which is about the least trusting way you can undertake any activity.

This feeling fades slightly when I move on to inputting my freelance (1099) income.

Because taxes weren’t withheld from that income when I was paid, all taxes are instead calculated and owed when I file, a fact I always forget and never enjoy remembering.

TurboTax tells me I can reduce my self-employment tax by entering self-employment expenses, like cellphone service or gas mileage.

On the next screen, TurboTax offers me a list of possible applicable expenses I could deduct, and I feel a rush of affection for the site. This could be the moment TurboTax finally starts paying for itself.

Ah, but wait.

It’s another upsell — this time for TurboTax SelfEmployed.

The site tells me that if I have at least $630 in expenses to report, TurboTax Self-Employed will pay for itself. At first this seems like helpful information. Then it strikes me that if my qualifying expenses fail to clear that threshold, or just barely clear it, then by taking the offer I would have happily paid TurboTax $70 to “save” $70, and essentially walked away empty-handed.

I check: “I don’t have expenses,” even though I do. I just don’t have enough that I can afford to pay for the pleasure of reporting them.

I go through the same song and dance for a second 1099, and then we hit upsell No. 3.

Remember that offer of “NO COST” chats with tax specialists that endeared me to this service?

Well, the tax experts are back!

And ol’ Intuit is once again trying to sell me something it claims to offer for free, this time in the form of TurboTax Live Deluxe. Intuit said that while product experts are available to connect with tax filers to answer questions about the filings themselves, Live connects customers with tax experts that specialize in specific filing statuses (such as someone who knows a lot about freelancers).

Shortly after declining the live services, I get a question about how my experience has been so far.

Me: :/

When we get to the state tax section, I learn that TurboTax will charge me an additional fee for each state I need to file in.

That adds up to a $156 bill: $39 for each of the states I need to file in — California, New York and Virginia — plus $39 for TurboTax Deluxe.

According to TurboTax’s website, “Actual prices for paid versions are determined based on the version you use and the time of print or e-file and are subject to change without notice.” You can find this information if you click to expand a box called “ Important offer details and disclosures” at the very bottom of the page.

And before I can pay, it tries to sell me TurboTax MAX one last time.

Overall, a “not so good” experience.

FREE FILE THROUGH THE IRS

After looking through four or five providers, I ultimately decide to use FreeTaxUSA to test the process of filing through an IRS Free File provider. I’ve used it in the past, and while the service requires users to input their W2 and 1099 information by hand, it claims to offer free state tax filing and doesn’t charge for 1099s.

The questions don’t come with as many cool graphics, but they’re still clear and easy to answer.

Like TurboTax, I’m upsold right out of the gate, but unlike TurboTax, the upsell is not mandatory just because I did freelance work, and the upgrade they’re offering is relatively inexpensive — FreeTaxUSA Deluxe is $6.99. The offer also only appears once, rather than four times, during the process.

FreeTaxUSA also allowed me to deduct my freelance expenses for no extra cost, which helped reduce my tax bill.

In the end, FreeTaxUSA asked me for $15 for each of the states I filed in — my federal return was, as advertised, free — for a total of $45. When I reached out to FreeTaxUSA support to ask why I didn’t receive the free state tax filing I was promised, they told me that in order to file for free I needed to create an account through their Free File link.

I had entered the FreeTaxUSA website via the IRS’ Free File link, but I struggled to log in to my old account that way. After cycling through this twice, I tried to see if I would have better luck restarting from the site’s homepage.

I did, but in doing so, I apparently lost that golden / freefile2021/ in my url.

At that point, I had been doing taxes for about two days straight. I got fed up and just paid, which is about the most everyman American taxpayer experience I could have had.

As a taxpayer ad consumer, you have the right to know your options, particularly when you could be spending less money.

But the big takeaway is not necessarily that one tax filing software is better or more honest than another. It’s not even that you should contact customer support before you pay (though I really should have).

The takeaway, at least for me, is that filing your taxes for “free” online is confusing and soul-sucking by design.

So take a deep breath, release a guttural scream, and don’t let some fun buttons lure you into paying more than you need to.

This story was originally published by ProPublica.

Intuit is ‘hoist by their own petard’

TurboTax maker Intuit insisted its customers had agreed to forgo their right to take their grievances to court and were required to use private arbitration instead. So a Chicago law firm built a novel legal strategy by bankrolling customers bringing claims against Intuit. Now Intuit faces tens of millions of dollars in fees in a groundbreaking legal battle.

BY JUSTIN ELLIOTT, PROPUBLICA

Faced with a class-action suit filed on behalf of customers who claim they were tricked into paying to file their taxes, TurboTax-maker Intuit knocked the case down. The company insisted its customers had agreed to forgo their right to take their grievances to court and were required to use the private arbitration system instead.

But even as Intuit was winning in the class-action case, that very arbitration system was being weaponized against the Silicon Valley company.

A Chicago law firm is using a novel legal strategy by bankrolling customers bringing tens of thousands of arbitration claims against Intuit. Win or lose, this strategy could cost Intuit tens of millions of dollars in legal fees alone — a threat that could prod the company to be more open to a giant settlement.

Nearly three years after ProPublica first reported on how many customers wound up paying for TurboTax when they could have filed their taxes for free, Intuit is fighting a complex set of legal battles to stop consumers from trying to recover money.

Besides the huge number of consumer claims that have been filed, federal regulators and state-level prosecutors are also advancing efforts against the deeppocketed company, which made $2 billion last year.

The most unusual front in the fight is the strategy to bring tens of thousands of individual consumer claims in arbitration, the alternative to the public court system that has historically been considered friendly to business.

The so-called mass-arbitration tactic was pioneered in recent years as the legal terrain became less friendly to class-action lawsuits, the traditional tool used to recover money for consumers through the court system.

The tactic is akin to using guerrilla warfare rather than having soldiers mass on the battlefield and face each other in lines. The law firm pursuing Intuit, Keller Lenkner of Chicago, has generated attention for successfully using the strategy on behalf of delivery workers for DoorDash and Postmates.

Intuit has vigorously defended its practices, denying any wrongdoing in each case. It stresses that millions of people do file their taxes for free using TurboTax each year.

“Intuit was at all times clear and fair with its customers,” a company spokesperson said in a statement to ProPublica, adding that it “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.”

Following ProPublica’s initial stories, Intuit was first sued in May 2019 in federal court. The case centered on customers who had to pay after starting the filing process using TurboTax’s Free Edition.

At the time, TurboTax maintained the heavily advertised Free Edition alongside a similarly named Free File product. The Free Edition routed some filers to a version of TurboTax that charged them a fee based on which tax forms they had to file.

Meanwhile, the Free File product, which was offered as part of a partnership with the IRS, did not route users to paid products and was truly free for anyone making less than an income threshold. But it was difficult to find. At one point Intuit added code to its website that removed the product from online search engine results.

(The company later removed those lines of code.) A subsequent investigation by the Treasury Inspector General for Tax Administration found that in 2019 alone, more than 14 million tax filers paid for online tax prep software from TurboTax and other firms that they could have gotten for free. That amounted to roughly $1 billion in revenue for the industry.

The 2019 lawsuit was a traditional class-action case, in which plaintiffs’ lawyers sue a company on behalf of an entire category of consumers who have allegedly been harmed. If the plaintiffs prevail or the company settles, millions of people may be eligible to get money from the defendant.

But for decades, corporate America waged a successful battle against class-action suits, seeking to narrow their use. In recent years, companies got help from the Supreme Court, which issued a series of decisions that smothered many class-action lawsuits by making it easier for companies to hold customers to binding arbitration agreements. When consumers, including TurboTax users, sign up for a service, the terms-of-service contracts they click on often contain a buried clause that has them agreeing to pursue any grievance through private arbitration, not a lawsuit.

Studies have shown that hardly any users actually read these sprawling contracts. TurboTax’s current terms-ofuse agreement, which still contains an arbitration clause, runs to over 15,000 words of dense legalese.

Arbitrations are handled in a private forum outside the court system. Crucially for business defendants, those claims are not bundled together, as class-action cases are. This fundamentally shifts the economic incentives: If one customer was defrauded of $50, it’s not worth a lawyer’s time to pursue the case. The calculus is different if a lawyer can represent an entire class of 20 million customers who each lost $50.

“It’s been just catastrophic for consumers and workers,” said Paul Bland of Public Justice, an advocacy nonprofit affiliated with plaintiff-side law firms. “It has wiped away tons of very well-merited and powerful cases where companies clearly break the law and they just get away with it because of the arbitration clauses.”

Business groups have argued that arbitration is a “simpler and more flexible” alternative to lawsuits and that class-action cases have served mainly to enrich plaintiffs’ lawyers.

After more than a year of litigation and an appeal, Intuit effectively won the federal class-action case against it by relying on TurboTax’s arbitration clause. The U.S. Court of Appeals for the 9th Circuit ruled that TurboTax users had agreed to arbitration by clicking a “Sign In” button on the software that stated users agreed to the service’s terms of use. Those terms contained the arbitration clause.

In that clause, the law firm Keller Lenkner recognized an opportunity. The strategy pioneered by the firm essentially called the bluff of companies that required their workers and customers to settle claims via binding arbitration. It also took advantage of the fact that companies typically must pay fees to the private arbitration organization, running perhaps a few thousand dollars per case.

What makes the strategy even more unusual is that the firm does not have the typical pedigree of plaintiffs’ lawyers, who have long been a stalwart constituency of the Democratic Party. Keller Lenkner was founded by a pair of former clerks for Supreme Court Justice Anthony Kennedy, a Reagan appointee; one also was a clerk for Brett Kavanaugh when he was a George W. Bushappointed appeals judge.

If a handful of consumers pursue arbitration, the fees companies must pay amount to a rounding error. But if businesses are facing thousands of individual arbitrations — a tactic they didn’t anticipate — the potential fees quickly add up and companies can be pressured into settling. The strategy also requires deep pockets on the part of the plaintiffs’ law firm, since they advance money to their clients to cover a modest arbitration filing fee.

While the strategy has so far been used in only a small number of cases, an academic article on the phenomenon by Georgetown Law professor Maria Glover termed it a revolution of the civil justice landscape, “one in which virtually all Americans are subject to mandatory arbitration agreements with class-action waivers, and one wherein a broad swath of claims — for consumer fraud, racial discrimination, gender discrimination, wage theft, and workplace sexual harassment — have been all but eliminated.”

Keller Lenkner disclosed in a related court filing in 2020 that more than 100,000 consumers had sought individual arbitration against Intuit. The firm advanced the consumers several million dollars in filing fees.

Intuit has tried to stop the mass arbitrations. In late 2020, following the appeals court ruling that doomed the federal class-action lawsuit, the company offered to pay a settlement of $40 million in that case.

If the court had approved the class-action settlement, consumers who failed to opt out would not be able to pursue their arbitration claims. A settlement for the entire class of consumers could have knocked out many of the ongoing arbitrations for a relatively cheap price. Keller Lenkner objected to the settlement.

At a hearing before U.S. District Court Judge Charles Breyer, a lawyer for Intuit complained that “the Keller firm is able to threaten companies — Intuit’s not alone — into paying $3,000 in arbitration fees, for a $100 claim.”

Breyer questioned whether the proposed settlement was in the best interest of consumers.

“I did think when I looked at this, and saw that, really, that this was a way to avoid or otherwise circumscribe arbitration, that it seemed to be that Intuit was, in Hamlet’s words, hoisted by their own petard,” Breyer said, adding, “I think arbitration is the petard that Intuit now faces.” His comments were first reported by Reuters.

Breyer rejected the settlement in March 2021.

Since then, the arbitrations have proceeded slowly.

Limited data disclosed by one of the main arbitration organizations covers cases resolved through the end of 2021. It offers a glimpse of the arbitration dynamics, showing outcomes in a handful of cases: Intuit won at least nine and consumers won five, with the arbitrator awarding consumers as little as $35 and as much as $3,348. Intuit has continued to win most of the cases this year, according to a person familiar with the claims.

In one case, Intuit had to pay the consumer’s attorney fees of $9,500. In another, the plaintiff’s lawyers had to pay Intuit’s attorney fees of $5,025. Arbitrators can order the plaintiff to pay the company’s attorneys’ fees if a claim is deemed to be frivolous.

The data also shows several dozen cases that were either dismissed or settled, without giving any detail on how much money changed hands, if any.

The biggest hit for Intuit was on the cost of the arbitration itself, with administrative fees totaling more than $220,000 for around 125 cases. At that rate, 100,000 cases would cost the company more than $175 million in fees alone.

Legal filings suggest Intuit may have already paid tens of million dollars in arbitration fees by now, but public records of the payments won’t be disclosed until more arbitrations are completed.

Intuit has argued that many of the arbitration claims are bogus, and a lawyer for the company dubbed Keller Lenkner’s tactic “a scheme to exploit the consumerarbitration fee structure to extort a settlement payment from Intuit.”

The lawyer also asserted that many of the claims involve users who either didn’t use TurboTax or did use it but filed for free. More than 1,000 cases — likely ones that fall into one of those two categories — have been withdrawn by Keller Lenkner, the public data shows.

In part because arbitrations are conducted in secret, it’s difficult to tell much about the success of the strategy in past mass arbitrations. Keller Lenkner has previously said that in a recent two-year period it secured more than $190 million for more than 100,000 individual clients, an average of $1,900 per client.

In a separate case filed against Intuit by the Los Angeles city attorney and Santa Clara County attorney on behalf of California consumers, the two sides are still fighting over what documents and data Intuit has to hand over. Both sides recently proposed a trial date of July 2023, but it has not yet been finalized.

Meanwhile, the Federal Trade Commission and a set of at least five state attorneys general are still actively investigating Intuit. Tech news outlet The Information reported last month that the FTC, now led by progressive chair Lina Khan, was pushing forward with the investigation despite a recent Supreme Court ruling that trimmed the agency’s authority in such cases.

One FTC commissioner, Rohit Chopra, voted to proceed with the case before he left the agency last October. But Chopra’s vote was in place only temporarily, according to a person familiar with the matter. The rest of the commission did not take up the matter at the time. An FTC spokesman declined to comment.

This year, the IRS Free File program allows anyone making less than $73,000 last year to use tax prep software and file a federal return for free.

But the program, which was originally conceived as an alternative to the IRS offering its own free filing service, is entering its first year without the participation of the two titans of the online tax prep industry. In 2019 and earlier years, TurboTax and H&R Block together accounted for around two-thirds of all filings through the program, according to ProPublica’s analysis. Intuit announced last year it was leaving the program “to focus on further innovating in ways not allowable under the current Free File guidelines.”

Only much smaller and less recognizable companies like TaxAct, TaxHawk and TaxSlayer, which only hold a sliver of the overall market, remain.

This story was originally published by ProPublica.

“It’s been just catastrophic for consumers and workers,” said Paul Bland of Public Justice. “Companies clearly break the law and they just get away with it because of the arbitration clauses.”

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