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Inside TurboTax’s 20-Year Fight to Stop Americans From Filing Their Taxes for Free

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Justin Elliott and Paul Kiel report in ProPublica:

Last fall, Intuit’s longtime CEO Brad Smith embarked on a farewell tour of the company’s offices around the world. Smith had presided over 11 years of explosive growth, a period when Intuit had secured its place in the Silicon Valley pantheon, and the tour was like a long party.

In Ontario, employees wore T-shirts with Smith’s quasi-spiritual sayings: “Do whatever makes your heart beat fastest” and “Repetition doesn’t ruin the prayer.” In Bangalore, India, workers put on Smith face masks as they posed for selfies with the man himself. Fittingly, the tour culminated in San Diego, the home of TurboTax, the software that transformed the company’s fortunes. There, Smith arrived at his party in a DeLorean, and as he walked a red carpet, cheering employees waved “Brad is Rad” signs. To Smith’s delight, his favorite rock star, Gene Simmons of Kiss, emerged. The two posed for pictures, Simmons clad in black and the beaming CEO flashing the “rock on” hand sign.

Intuit began in the 1980s as an accounting software company focused on helping people with their bookkeeping. Over time, the company, like the other giants of Big Tech, cultivated an image of being not just good at what it did, but good, period. In a recent Super Bowl ad, Intuit portrayed itself as a gentle robot that liberates small-business owners from paperwork. The company stresses values above all, urging employees to “deliver awesome” and pursue “integrity without compromise.”

Intuit’s QuickBooks accounting product remains a steady moneymaker, but in the past two decades TurboTax, its tax preparation product, has driven the company’s steadily growing profits and made it a Wall Street phenom. When Smith took over in 2008, TurboTax was a market leader, but only a small portion of Americans filed their taxes online. By 2019, nearly 40% of U.S. taxpayers filed online and some 40 million of them did so with TurboTax, far more than with any other product.

But the success of TurboTax rests on a shaky foundation, one that could collapse overnight if the U.S. government did what most wealthy countries did long ago and made tax filing simple and free for most citizens.

For more than 20 years, Intuit has waged a sophisticated, sometimes covert war to prevent the government from doing just that, according to internal company and IRS documents and interviews with insiders. The company unleashed a battalion of lobbyists and hired top officials from the agency that regulates it. From the beginning, Intuit recognized that its success depended on two parallel missions: stoking innovation in Silicon Valley while stifling it in Washington. Indeed, employees ruefully joke that the company’s motto should actually be “compromise without integrity.”

Internal presentations lay out company tactics for fighting “encroachment,” Intuit’s catchall term for any government initiative to make filing taxes easier — such as creating a free government filing system or pre-filling people’s returns with payroll or other data the IRS already has. “For a decade proposals have sought to create IRS tax software or a ReturnFree Tax System; All were stopped,” reads a confidential 2007 PowerPoint presentation from an Intuit board of directors meeting. The company’s 2014-15 plan included manufacturing “3rd-party grass roots” support. “Buy ads for op-eds/editorials/stories in African American and Latino media,” one internal PowerPoint slide states.

The centerpiece of Intuit’s anti-encroachment strategy has been the Free File program, hatched 17 years ago in a moment of crisis for the company. Under the terms of an agreement with the federal government, Intuit and other commercial tax prep companies promised to provide free online filing to tens of millions of lower-income taxpayers. In exchange, the IRS pledged not to create a government-run system.

Since Free File’s launch, Intuit has done everything it could to limit the program’s reach while making sure the government stuck to its end of the deal. As ProPublica has reported, Intuit added code to the Free File landing page of TurboTax that hid it from search engines like Google, making it harder for would-be users to find.

Twelve years ago, Intuit launched its own “free” product: the similarly named “Free Edition” of TurboTax. But unlike the government program, this one comes with traps that can push customers lured with the promise of “free” into paying, some more than $200. Free Edition was a smash hit for Intuit and its pitch for “free” prep remains core to the company’s growth. Recently, it launched a “free, free free free” ad campaign for the Free Edition, including a crossword puzzle in The New York Times in which the answer to every clue was “f-r-e-e.”

Intuit knows it’s deceiving its customers, internal company documents obtained by ProPublica show. “The website lists Free, Free, Free and the customers are assuming their return will be free,” said a company PowerPoint presentation that reported the results of an analysis of customer calls this year. “Customers are getting upset.”

Intuit also continues to use “dark patterns” — design tricks to get users of its website to do things they don’t necessarily mean to do — to ensure that as many customers as possible pay, former employees say. A marketing concept frequently invoked at Intuit, which goes by the acronym “FUD,” seeks to tap into Americans’ fear, uncertainty and doubt about the tax filing process.

An Intuit spokesman declined to answer ProPublica’s detailed questions about its efforts to fend off a government filing system, but he provided a statement.

“We empower our customers to take control of their financial lives, which includes being in charge of their own tax preparation,” he said, adding that a “government-run pre-filled tax preparation system that makes the tax collector (who is also the investigator, auditor and enforcer) the tax preparer is fraught with conflicts of interest.”

The IRS is seemingly the biggest threat to Intuit and other commercial tax prep businesses, but it has more frequently acted as the industry’s ally, defending the Free File program even in the face of critical internal reviews. The IRS declined to comment for this article.

The consequences of Intuit’s efforts affect a huge proportion of the taxpaying public. Americans spend an estimated 1.7 billion hours and $31 billion doing their taxes each year. Just 2.8 million participated in the Free File program this year, down from 5.1 million at the program’s peak in 2005.

Intuit’s success has made the men who run the company rich. Smith, the CEO who stepped down last year and is now executive board chair, had a stake worth $20 million when he became chief executive. It ballooned to $220 million by last year. Co-founder Scott Cook is now among the country’s wealthiest people, his fortune soaring to $3.3 billion.

This year, Intuit was close to realizing a long-held goal: enshrining the Free File program in law, effectively closing the door on the IRS ever creating a free tax filing system. But an outcry followed ProPublica’s reporting on the matter and Intuit’s treatment of its customers, prompting the provision to be dropped and state and federal investigations into Intuit’s practices.

Yet even after this setback, the company remained steadfastly confident that its clout in Washington would win the day.

“What we’re not gonna do is fight this publicly because that is exactly what they want us to do,” said Sasan Goodarzi, the new CEO, in a video released to staff this May and obtained by ProPublica. “We are actually working with the IRS and members of the Congress to ensure that the facts are very clear.”

Intuit has dominated the tax software market since 1993, when for $225 million, it bought Chipsoft, the San Diego-based company that had created TurboTax. Even then, TurboTax was the most popular option, but Intuit pursued a plan of aggressive growth. The product necessarily came on a disk, and by the end of the 1990s TurboTax boxes were nearly ubiquitous, on shelves in office supply stores across America.

As internet speeds increased and dot-com mania took hold, it became apparent that Intuit’s future was not in a box on a shelf. It was online.

The prospect of TurboTax’s growth was vast for another reason. As late as 2001, around 45 million Americans still filled out their tax forms on paper. For Intuit, those were all potential customers.

But Intuit wasn’t alone in seeing possibilities in the spread of high-speed internet. In Washington, lawmakers began pushing the IRS to modernize and get more taxpayers to file electronically. It was a no-brainer: Filing taxes online would be easier, and the IRS would save staff costs on processing paper returns.

The danger to Intuit’s growing business was obvious. If the government succeeded in creating a system that allowed the vast majority of taxpayers to file online for free, TurboTax profits would plummet. Intuit recognized that the notion of “return-free filing” was not going away on its own.

And so in 1998, the company hired Bernie McKay, a onetime Carter administration aide and a senior lobbyist at AT&T, to be its vice president for corporate affairs. Intuit executives like to talk about having a “customer obsession” in developing their products. McKay’s obsession is stopping government encroachment. Known to physically bang the table to drive home a point, McKay’s style is “aggressive to the point of offense,” said one fellow tax prep lobbyist. An Intuit spokesman said, “This mischaracterization of Mr. McKay is pure fiction.”

McKay, for his part, when asked at a recent tax industry conference which Star Wars character he is, responded, “Darth Vader.”

The year McKay was hired, Congress passed a major overhaul of the IRS. The bill, reflecting Intuit’s lobbying, said that the IRS “should cooperate with and encourage the private sector” to increase electronic filing.

While McKay came through in his first big test, in 2002, the company found itself up against an unexpected foe, the George W. Bush administration. The threat came from a broad administration initiative to upgrade government technology. One of the proposals called for the IRS to develop “an easy, no-cost option for taxpayers to file their tax return online.”

Without such an option, taxpayers were stuck either filing on paper or, to file electronically, paying a tax professional or software company like TurboTax. Providing an alternative would be an obvious improvement, said Mark Forman, an official at the Office of Management and Budget who led the “e-government” program. The technology wasn’t all that complicated, and creating a free, automated filing system would help tens of millions of Americans. “This was seen as a low-cost, high-payoff initiative,” Forman recalled in a recent interview with ProPublica. Standing in the way, he said, was an industry “that lives off the complexity of the tax code.”

Intuit revved its new lobbying machine. Even before the OMB report was publicly released, a group of Republican lawmakers, led by TurboTax’s hometown congressman, wrote to the agency arguing that there was no reason for the government to “compete” with the “well-established” private tax prep companies. Intuit’s lobbyists also went above the OMB and pressed their case directly to the White House, Forman recalled.

At the IRS, “all hell broke loose,” remembered Terry Lutes, who was then the head of electronic filing at the agency. Intuit’s clout on the Hill meant that lawmakers were soon accusing the IRS of making “secret plans to undercut the industry,” Lutes said. The agency ran the risk of seeing its funding cut if it were to pursue the Bush plan.

The IRS commissioner at the time, Charles Rossotti, also opposed the idea. The IRS’ customer service staff, already too thin to respond adequately to Americans’ questions about the tax code, would have to grow substantially to handle millions of software queries. Congress “will never give you sufficient funding,” Rossotti told ProPublica.

So the IRS felt caught in the middle. The question became, Lutes said, “Is there some way to come out of this with something for taxpayers that addresses the administration’s objective and at the same time is acceptable to industry?”

Intuit, it turned out, did have a way. Since 1999, as part of the company’s strategy to head off encroachment, TurboTax had been offering free tax prep to the poorest filers.It was a program that served to bolster the company’s arguments that government intervention was unnecessary.

This became the basis for a deal. The industry would offer free tax prep to a larger portion of taxpayers. In exchange, the IRS would promise not to develop its own system.

Intuit organized a coalition of tax prep companies under the name the Free File Alliance, and after negotiations with the IRS, the group agreed to provide free federal filing to 60% of taxpayers, or about 78 million people at the time. Government officials touted the solution as a marvel of public and private cooperation. Americans would get free tax prep, and it would cost the government almost nothing.

For Intuit, it was the culmination of years of lobbying. The IRS had signed a contract that said it “will not compete with the [Free File Alliance] in providing free, online tax return preparation and filing services to taxpayers.”

What’s more, “free” wasn’t as unprofitable as it sounded. The alliance, guided by a lawyer who was also an Intuit lobbyist, won a series of concessions that made the program palatable to industry. Free File only required the companies to offer free federal returns. They could charge for other products. The state return was the most common, but they could also pitch loans, “audit defense” or even products that had nothing to do with taxes.

Free File had another bright side: The companies could tailor their Free File offers so that they didn’t cut into their base of paying customers. The agreement said the industry had to offer free federal services to at least 60% of taxpayers, but each company individually only had to cover 10% of taxpayers. Intuit and the others were free to limit their offers of free tax prep by age, income or state.

There was little incentive for the companies to publicize a free alternative to their paid products, and the IRS agreed that the Free File offers need only be listed on a special page of the agency’s website.

For Intuit, it was a major victory in the war against encroachment. The company could now focus on turning whatever new customers it acquired through the program into paying users, both that year and in the future.

The first year of Free File was 2003, and for Intuit, things went well. On paper, the Free File Alliance was a collection of 17 companies, all of them vying to serve the American taxpayer. But in reality, it was a group made up of two giants and a bunch of gnats. Intuit’s only significant competitor was H&R Block, and even it was a distant second. The rest of the alliance consisted mostly of tiny companies with names like Free1040TaxReturns.com. As a result, Intuit could tailor its Free File offer just the way it wanted.

But the next year, Intuit began to lose control of its creation. . .

Continue reading. There’s much more.

Written by LeisureGuy

17 October 2019 at 9:35 am

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