Taxpayers sue TurboTax for allegedly tricking them into paying for ‘free’ tax prep

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Lawyers who say TurboTax cheated low-income customers out of free tax-prep services have filed a class-action lawsuit on behalf of those consumers.

The lawsuit is seeking monetary relief for consumers, as well as an injunction that would “prohibit Intuit from engaging in this scheme in the future,” said attorney Norm Siegel of Stueve Siegel Hanson. Attorneys with Gibbs Law Group and Stueve Siegel Hanson filed the suit Sunday in U.S. District Court in California’s Northern District.

The legal action follows an investigation by the nonprofit news website ProPublica that alleged TurboTax intentionally steered customers away from its Free File services. Free File is a program that provides free tax prep to any taxpayer with less than $66,000 a year in income.

TurboTax’s parent company Intuit INTU, +2.70%  contracts with the Internal Revenue Service to provide the service to its customers, along with H&R Block and other tax prep software companies. (H&R Block HRB, +0.92% is not named in the lawsuit.)

See also: You don’t have to pay federal income tax if you make this much money

But according to ProPublica, TurboTax took extraordinary steps to keep customers from accessing the free service, including allegedly using website coding that forced customers searching for Free File away from TurboTax’s website.

TurboTax has previously disputed those allegations, but has also acknowledged that the company made certain websites easier to find. An Intuit spokesman told MarketWatch that the company does not comment on pending litigation, as did a spokeswoman for the IRS.

The lawsuit names three individuals as plaintiffs, including a college student with less than $6,000 in income who ended up paying $85.58 to file his taxes with TurboTax, a retiree with income under $22,000 who paid $86.88, and a mother with less than $34,000 in income who paid $179.

In all three cases the taxpayers had clicked on what appeared to be a free version of TurboTax, but the website ultimately forced them to a paid version, the lawsuit alleges. The lawsuit seeks to represent anyone who lives in the U.S. who was eligible for Free File but paid money to TurboTax.

As the lawsuit describes, ProPublica reporters Googled GOOG, +0.02%  “irs free file” and companies in the Free File Alliance, the group of tax prep software companies that contract with the IRS to provide Free File services, popped up.

The reporters clicked on the link to TurboTax, which used the word “free” numerous times. The ProPublica journalists created a fake profile of a housekeeper who had earned less than $34,000 and would qualify for Free File. Following TurboTax’s instructions, this person would have ultimately been charged $119.99 to file with TurboTax, ProPublica said.

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“As a result of these deceptive tactics by industry participants, only a tiny fraction of eligible taxpayers [has] taken advantage of the IRS Free File program,” the lawsuit states. “While more than 100 million taxpayers were eligible to file for free through the Free File program in fiscal year 2018, fewer than 2.5 million — less than 2.5% of eligible taxpayers — actually did so.”

The suit accuses TurboTax of breaching its contract with the IRS to provide Free File services, and of violating consumer protection laws in California, New York and Pennsylvania by, among other charges, misleading taxpayers and misrepresenting the true cost of its products.

When customers who paid for TurboTax even though they were eligible for Free File called TurboTax to ask for refunds, some customer service reps told them the ProPublica stories were “fake news.”

U.S. senators and 2020 presidential candidates Elizabeth Warren, a Democrat, Bernie Sanders, an Independent, and other lawmakers have called on the IRS and Federal Trade Commission to investigate TurboTax, as did Democratic New York governor Andrew Cuomo.

Shares of Intuit are up 23% so far this year compared to a 9% gain for the Dow Jones Industrial DJIA, +1.38%  and a 13% increase for the S&P 500 SPX, +1.40%

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