For the vast majority of Americans, the IRS already knows what we owe in taxes. Instead of telling us, though, the IRS tasks us with filling out a slew of complicated forms and doing a bunch of arithmetic, which drives many people to tax-prep services.
For years, ProPublica reporter Justin Elliot has been investigating the No. 1 tax prep software in the country: Intuit’s TurboTax. What he found is that while TurboTax advertised its filing services as free, millions of customers were in fact lured into paying for its products when they didn’t have to. At the end of March, in part because of Justin’s work, the Federal Trade Commission sued Intuit. It filed an administrative complaint investigating TurboTax’s advertising, and it asked a judge for an injunction to stop TurboTax’s ads.
On Sunday’s episode of What Next: TBD, I spoke with Justin Elliot about how Intuit built its TurboTax empire and muscled out what could have been an easy and truly free way to file your taxes online. Our conversation has been edited and condensed for clarity.
Lizzie O’Leary: What kind of company is Intuit? What are its priorities?
Justin Elliot: Intuit is a Silicon Valley company. They have two main businesses: one is Turbo Tax, and the other is accounting software called QuickBooks. People who have been doing their taxes for a while may recall that TurboTax was big even going back to the ’90s, but back then it wasn’t a website. It was an actual box that you would buy with CDs in it with this tax prep software that you’d put on your desktop computer. Really the key moment that ushered in the contemporary paradigm of all of this came in the early 2000s.
In the early 2000s, the George W. Bush administration decided to take a hard look at how tax prep worked. The Bush administration was looking at doing what a lot of other developed countries ended up doing, which is having the IRS create essentially its own version of TurboTax: tax prep software that you could get online, from the government, for free, that would be easier than filling out an actual paper tax return. And at that point, because TurboTax was already a very large and profitable line of business for Intuit, and there were other competitors in the industry whose profits were also threatened by this, the tax prep industry, led by Intuit, mobilized to stop the Bush administration.
Because it was just such a threat to their bottom line?
Exactly. In simplistic, competitive terms, if you’re making a bundle of money on a product, you don’t want the government to create a free version of that product because your business is going to be crushed.
To keep the IRS from moving in on its business, Intuit amped up its lobbying machine. One line of argument was that the IRS shouldn’t be in the business of being both the tax collector and the tax preparer, and Intuit seemed to offer a compromise.
The industry led by Intuit, made a counteroffer to the Bush administration: a public-private partnership that became known as the free file program. At the heart of it was a simple quid pro quo: The IRS promised the industry that “We, the government, will not create our own product. Therefore, the government is not going to get involved in competing in your market. But in exchange, you, the industry, have to create free versions of your software like Turbo Tax. And that has to be made available to a large number of Americans.” It ended up being actually the majority of Americans that were eligible for what became known as the free file software offers.
For the next 20 years, Intuit tried to ensure that as few people as possible used the truly free version of its product. That might sound surprising given the marketing, which basically just repeats the word free so much so that it doesn’t even feel like a word anymore. But you found in your reporting that when people went online to try to find the actual free version, it wasn’t always possible. What’s going on there?
Quite early on what happened was a highly confusing ecosystem sprung up in which there were multiple versions of tax prep software, including TurboTax, that had the word free next to them, but they were not the same. If you happened to start on the wrong “free” version, you might end up having to pay, even though you actually were eligible to get the software for free if you had started on the right version. For years and years, the majority of Americans, if they had found the correct IRS website, they could have actually filed using Turbo Tax or another competitor’s product for free. But instead, millions and millions of people used the commercial “free” versions, such as Turbo Tax “free” edition.
How many millions of people?
It’s a great question. A Treasury inspector general tried to answer that question a couple years ago, after some of our reporting. The number they came up with for tax year 2019, was that roughly 14 million taxpayers paid for tax prep, even though they were actually eligible to get identical tax prep software for free, if they had just started from the right website. We did some back of the envelope math on that, based on the pricing, and it’s basically a billion dollars of extra revenue for the industry in just a single year. And this went on for like 20 years. So we’re talking about real, real money here.
You discovered in your reporting that TurboTax used code and web design to push people into its paid products. Often, nudging consumers was as simple as a font choice or color on the website, making the paid option slightly more prominent so you would be more likely to click on it. Turbo Tax also capitalized on how much Americans loathe doing our taxes and fear getting in trouble with the IRS.
Over the years, I’ve talked to a lot of engineers and designers at Intuit, and there’s this marketing concept that they invoke internally called FUD, which stands for fear, uncertainty, and doubt. This is used in other marketing contexts, not just tax prep, but I think it’s particularly salient in tax prep because so many people are nervous about getting it wrong. The stakes of getting it wrong are very real. And so the company is betting that the fear, uncertainty and doubt of users is going to outweigh any annoyance they might have of having to pay 75 or a hundred bucks for something they thought they were going to get for free.
There were other things that Intuit did that I think crossed a line, and they actually stopped doing them after we wrote about them. A few years ago, when TurboTax was maintaining these two different editions that both had the word “free” in them (but only one of them was truly free), they actually added code to the backend of the website of the truly free edition that told search engines like Google not to include that website in Google results. So if you went to Google or another search engine and you put in “TurboTax free” you literally would never see the truly free edition because this code had been added to the HTML of the truly free version.
If you’re someone who is listening to this and saying, “Wait a minute, I’ve used TurboTax in the past and I saw those ads and I went on the website.” Is there anything these people should know or think about now?
There’s a couple things. One is that a bunch of state attorneys general have been investigating Intuit for a while now on, on these issues. The other interesting thing that’s going on that came out of our coverage is there’s actually a bunch of private lawsuits that have been filed. And there’s a law firm out in Chicago called Keller Lenkner that is pursuing kind of a novel legal strategy in which they’ve filed tens of thousands of arbitration claims against Intuit for people who were in this situation where they paid for TurboTax, in some cases for years, even though they were eligible to get basically the identical product for free.
The FTCs administrative complaint against Intuit will likely take some time, as the agency investigates whether Intuit’s ads were deceptive and broke the law. As for the injunction request, that’s set to be heard in U.S. district court in Washington next week. We should note that Intuit voluntarily pulled its “free, free, free” TV ads on March 24.
Intuit has said they’re going to fight the FTC on this. A lot of the effects of this FTC action, to the extent there are effects, will depend on the outcome. If the FTC gets a judge to agree, to issue an order, making TurboTax stop these ads that the FTC says are deceptive. If there’s some kind of settlement. What kind of costs, if any, are imposed on the company. You have to imagine that other companies in this space watch these sorts of things to figure out where the lines are.
I was wondering what the next steps might actually be, because right now we’re in this little window, pre-tax time, where they’re not supposed to run these ads. Is there another shoe that could potentially drop? Or is this a long process that gets played out in Washington?
I don’t think there’s another shoe that’s going to drop before Tax Day this year because these things do tend to be drawn out. But there is another major front here and that’s the legislative front. There’s been proposals in Congress on and off for years, from people like Elizabeth Warren, to appropriate money to the for the IRS to do what it was thinking about doing back in the George W. Bush administration 20 years ago, which is to join many other developed wealthy countries in having an online filing process that’s free and offered by the government to all of us as citizens. I don’t think any of that’s going to pass anytime soon, the way Congress looks right now, but it’s out there.
That brings me back to this line in one of your stories that has really stuck with me: “Intuit recognized that its success depended on two parallel missions: stoking innovation in Silicon Valley while stifling it in Washington.” It doesn’t sound like a company that has spent a lot of money and time on lobbying is just going to roll over and say, “OK, it’s 20 years later, IRS, you create your own program for this.”
Absolutely. And Intuit’s share price has soared over the last four or five years. It turns out it’s a really good business to be in if you just can put up a website and collect 75 bucks each from millions or tens of millions of people. The costs are really low at that kind of scale. It’s an incredibly profitable company; the shareholders have really been enriched in recent years. If any legislation or administrative action by the executive branch has any chance of getting the government to do more in this area, you’re absolutely going to see a lobbying fight.