As the calendar year draws to close, the last thing on most Americans’ minds is filing their taxes. While the holidays occupy the collective consciousness for now, in little more than a month, come January 2023, Americans will begin the process of assembling the necessary documents to file their taxes. For many Americans, Intuit Inc.’s TurboTax software is the preferred method for preparing and filing tax returns. In the mad scramble come the beginning of next year, it is worth reviewing the Federal Trade Commission’s (“FTC”) recent enforcement proceedings against Intuit, as it may impact consumers’ decisions on how they prepare their taxes—begging the question: When is something actually free?
FTC Allegations
As the age-old adage goes, there is no such thing as a free lunch. Recently the FTC has put that saying to the test. In March 2022, the FTC filed[1] an administrative complaint[2] under Section 5(a) of the FTC Act, 15 U.S.C. § 45(a), against Intuit, the maker of the TurboTax tax filing software, for allegedly deceiving consumers with advertisements pitching “free” tax filing which millions of consumers could not actually use. In addition, the FTC also simultaneously filed a complaint[3] for a temporary restraining order (“TRO”) and preliminary injunctive relief pursuant to Section 13(b) of the FTC Act, 15 U.S.C. § 53(b), in the U.S. District Court for the Northern District of California, asking the Court to order Intuit to halt its alleged deceptive advertising immediately.
The FTC’s administrative complaint alleges that Intuit’s ubiquitous advertisements touting their “free” products—some of which have consisted almost entirely of the word “free” spoken repeatedly—misled consumers into believing that they could file their taxes for free with TurboTax. When in fact, according to the FTC, most tax filers could not use the company’s “free” service because it was not available to a large swath of taxpayers, such as those who get an IRS Form 1099 for work in the ‘gig economy,’ or those who earn farm income. According to the FTC, in 2020, for example, approximately two-thirds of tax filers could not use TurboTax’s free product.
Much of Intuit’s overt advertising for TurboTax appears to convey the message that consumers can file their taxes for free using TurboTax, even going so far as to air commercials in which almost every word spoken is the word “free.” For example, in one such ad called “Auctioneer,” the ad depicts a cattle auction with a fast-talking auctioneer and a crowd of cowboys:
AUCTIONEER: And free, and free, and free, and free, and free. Now a bidder and free! Now give me another bidder and free, and a free here and a free free free a free free free. Now a bidder and free! Now give me another bidder and free, and a free free free. And free, and free, and free, and free free free and free. Here we go at free, free, free and free. Free! Now give me another bidder and free. Hit free and here, free, free, free, freeeeeeeeeeeee. Free!
VOICEOVER: That’s right, TurboTax Free Edition is free. See details at TurboTax.com.
When in reality, according to the FTC, TurboTax is only free for some users, based on the tax forms they need. Additionally, according to the FTC, for many others, Intuit only tells them, after they have invested time and effort inputting their sensitive personal and financial information into TurboTax, that they cannot continue for free; as they will need to upgrade to a paid TurboTax service to complete and file their taxes.
According to the FTC, since at least 2017, Intuit has called the “freemium” version of TurboTax the “TurboTax Free Edition.” The “freemium” version of TurboTax is available only to consumers with “simple” tax returns, as defined by Intuit. Other consumers are required to upgrade to paid versions of TurboTax. However, what constitutes a “simple” tax return has varied from year to year.
According to the FTC, (1) for tax returns for Tax Years (“TY”) 2016 and 2017, Intuit defined a “simple” tax return as a return that could be filed using a 1040A or 1040EZ tax form; (2) for TY 2018 and 2019, Intuit defined a “simple” tax return as a return that could be filed on a Form 1040, with no attached schedules; (3) for TY 2020, Intuit defined a “simple” tax return as a return that could be filed on a Form 1040, with no attached schedules, except to claim unemployment income; and (4) for TY 2021, Intuit defined a “simple” tax return as a return that can be filed on a Form 1040 with limited attached schedules to cover a few distinct tax situations, including student loan interest paid. However, from TY 2018 to at least TY 2019, according to the FTC, taxpayers who claimed student loan interest deductions were not eligible for the “freemium” version of TurboTax, regardless of their income. Importantly, as noted by the FTC, taxpayers who received income reported through certain types of IRS Form 1099 were not eligible for the “freemium” version of TurboTax, regardless of their income. This group includes taxpayers who receive independent contractor or small business income, such as those working in the ‘gig economy’ by providing rideshare services or delivering groceries.
Status of the FTC Litigation and State Attorneys General Settlement
U.S. District Court Judge Charles R. Breyer held oral argument on the FTC’s TRO motion on April 21, 2022. On April 22, the court issued an order[4] denying the FTC’s TRO motion on three grounds. First, tax day, which was April 18, 2022, had passed and most taxpayers had already filed their taxes; second, even before tax day, Intuit had removed several of the most plausibly deceptive advertisements—three videos that repeated the word “free” a dozen or more times over 30 seconds before a very brief disclaimer; third, to the extent other advertisements might violate the FTC Act, the Court noted that the FTC had brought an administrative proceeding against Intuit, with an Administrative Law Judge (“ALJ”) who would hear (and likely rule) before Intuit could resume its advertising campaign in the lead-up to tax day 2023. However, the Court allowed the FTC to return to the Court for relief if Intuit resumed its full advertising campaign before the ALJ releases their report, or the facts change significantly.
Separately, on May 4, 2022, it was announced that Intuit brokered a $141 million settlement with attorneys general from all 50 states and the District of Columbia to pay restitution and cease their advertising campaign lauding its “free” services. As part of the settlement:[5]
- “Intuit must not publish, or cause to be published, in any medium … its ‘free, free, free’ Video Advertisements” or “Video Advertisements that are substantially similar in their repetition of the word free.”
- Non-Space-Constrained ads for free tax preparation products “must disclose, Clearly and Conspicuously, and in Close Proximity to the representation that the product is free: (1) the existence and category of material limitations on a consumer’s ability to use that free product; and (2) that not all taxpayers qualify for the free product.”
- Space-Constrained ads “must disclose that eligibility requirements apply,” and “[i]f made online, Intuit must also (1) Clearly and Conspicuously include a hyperlink to a landing page or webpage on a TurboTax Website that Clearly and Conspicuously contains full disclosure of all material eligibility restrictions or (2) link by clicking on the Advertisement itself to a landing page or webpage on a TurboTax Website that Clearly and Conspicuously sets forth full disclosure of all material eligibility restrictions.”
- Space-Constrained Video ads “must visually disclose, Clearly and Conspicuously, and in Close Proximity to the representation that the product is free: (1) the existence and category of material limitations on a consumer’s ability to use that free product; and (2) that not all taxpayers qualify for the free product,” and for ads longer than 8 seconds, “Intuit must verbally disclose, Clearly and Conspicuously and in Close Proximity to the representation that the product is free, that not all taxpayers qualify.”
- The TurboTax website must “disclose (1) Clearly and Conspicuously and very near to the representation all material limitations on a consumer’s ability to use that free product, including, but not limited to, eligibility criteria for that free product, or (2) through a hyperlink (i) that is very near to the representation, (ii) that indicates that there are material limitations on a consumer’s ability to use that free product, and (iii) that links to a landing page or webpage that Clearly and Conspicuously sets forth all material limitations on a consumer’s ability to use that free product, including, but not limited to, eligibility criteria for that free product.”
- Intuit must not misrepresent “[t]hat consumers must upgrade to a TurboTax Paid Product to file their taxes online if they are eligible to use the TurboTax Free Edition Product” or “[t]hat consumers can continue using and file their taxes for free with the TurboTax Free Edition Product when that is not the case.”
- And Intuit must not misrepresent “[a]ny other fact material to consumers concerning any tax preparation product or service, such as the price; total cost; any material restrictions, limitations, or conditions; or any material aspect of its performance, efficacy, nature, or central characteristics.”
Intuit did not admit liability as part of the settlement and continues to defend its practices in the FTC administrative proceeding. Counsel for Intuit has stated that the settlement should render the FTC case “entirely unnecessary.” However, the FTC has continued to aggressively litigate its administrative action against Intuit. On August 22, 2022, FTC Complaint Counsel filed a Motion for Summary Decision[6] (the “Motion”). Intuit filed an opposition, and FTC Complaint Counsel submitted a reply. Oral argument was held on October 31, 2022. The FTC’s deadline for ruling upon the Motion was extended to December 30, 2022, to facilitate full consideration following oral argument. If the matter proceeds, an evidentiary hearing before an Administrative Law Judge is scheduled for March 27, 2023.
Conclusion
The FTC’s administrative action against Intuit presents a critical question of when something is actually “free” as advertised, despite various carveouts and exceptions. While Intuit’s settlement with state attorneys general attempts to remediate many of the criticisms levied against their prior advertising practices by enacting certain prohibitions on future advertising, the resolution of the matter with the FTC, an entirely separate regulatory agency, will have important consumer protection ramifications—namely the FTC’s ability to successfully enforce Section 5(a) of the FTC Act[7] and bring enforcement actions against future violators for deceptive advertising.
Lowey Dannenberg has a 50+ year track record of successfully representing consumers and investors who are defrauded. If you wish to speak to a member of Lowey Dannenberg’s consumer protection or securities litigation practice groups, please feel free to reach out to Christian Levis (clevis@lowey.com), Andrea Farah (afarah@lowey.com) or Anthony M. Christina (achristina@lowey.com).
[1] The FTC vote authorizing the staff to file both the administrative complaint and federal court complaint seeking preliminary relief was 3-1, with Commissioner Noah J. Phillips dissenting.
[2] In the Matter of: Intuit Inc., a corporation, Docket No. 9408 (F.T.C.).
[3] FTC v. Intuit Inc., Case No. 5:22-cv-01973 (N.D. Cal.).
[4] See ECF No. 66.
[5] Notice of Settlement with State Attorneys General, Document No. 604522, In the Matter of: Intuit Inc., a corporation, Docket No. 9408 (F.T.C.).
[6] The administrative equivalent of summary judgment.
[7] Section 5(a) of the FTC Act, 15 U.S.C. § 45(a), prohibits “unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce.”