David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: the high cost of free filing.
After years of lawsuits and investigations, the tax preparation company Intuit has reached a settlement with all 50 states and the District of Columbia over claims that it misled some users of its TurboTax software. The company will pay $141 million to settle claims that it tricked tax filers into paying for federal tax preparation services when they were eligible for free tax preparation under a federal program.
So, what led to the settlement by one of the largest providers of tax return software? And what does this mean for future tax filing in the U.S. (United States)? Tax Notes reporters Paul Jones and Nathan Richman will talk about this more in a minute.
Later in the episode, we'll hear from Tax Notes International author Allison Christians discussing her article on the OECD's minimum tax regime.
But first, Paul, Nate, welcome back to the podcast.
Paul Jones: Thanks, great to be here.
Nathan Richman: Thanks for having me back.
David D. Stewart: So, Paul, let's start with some background. What is Free File, and how did this program come about?
Paul Jones: So, Dave, the IRS came to an agreement around 2002 with a number of tax preparation software providers to have these companies provide a free tax preparation services using their software for lower-income filers, and I also believe military filers. And this was in return for some concessions by the IRS, including that it wouldn't create its own free tax preparation service, which would compete with these companies.
And so Intuit, like other participants, came up with a free filing software service that would allow people who met the criteria to file for free, and this was part of that IRS program.
David D. Stewart: I take it that people have been using these companies for tax preparation for a long time, and it seems to have been a longstanding arrangement with the IRS, but we still ended up with a legal settlement. So, how did things start to go bad?
Paul Jones: So, Intuit had created its Freedom Edition, this software that was part of the IRS free filing program. However, in 2007, it also put out a separate software service called the Free Edition — you'll note that it has a similar name — that allows for free filing, but really only for very simple tax returns. So if your tax return requires more complicated preparation, it'll require you to pay a fee.
Well, in 2019, a publication called ProPublica put out a piece that got a lot of attention, which accused Intuit, and also H&R Block, another participant in the Free File program, of creating these products that were designed to make people think that they could file for free using them. And they were also working, allegedly, to hide and misdirect people so that they wouldn't use the free filing software that was developed in partnership with the IRS.
Some of the allegations against Intuit included that it had literally worked to ensure that its IRS Free File software wouldn't even come up in internet search results and that the company's own website made it virtually impossible to navigate to the IRS free filing program. And that it was meanwhile steering people towards using this paid software that had the free option that many people wouldn't qualify for.
A number of the accusations included that people would have to go through this entire preparation process using what they thought was going to be free filing software, and then only get notified later on that they were going to have to file with fees in order to complete their tax preparation. And the argument was that a lot of people were not using the IRS Free File program and that one of the big problems is that they were being directed to use these alternative products that only allowed some people to file for free.
David D. Stewart: So, what was the reaction when this news broke? I take it the states didn't take too kindly to this alleged deception.
Paul Jones: Yes. When this got out, it created a lot of controversy. There were states' investigations launched, including by New York. There were lawsuits by local governments in California. There were calls by members of Congress to look into this.
It generated a great deal of attention and obviously a lot of negative publicity for the company. And Intuit was also pursued by attorneys representing tax filers. And the company ultimately dropped out of the Free File program in 2021 and has been fighting fallout from this ever since, right up to the announcement of this settlement.
David D. Stewart: Now, I understand at the time there was a bill being considered in Congress to sort of formalize the Free File program. What happened to that?
Paul Jones: Yes, that was the Taxpayer First Act, I believe, and it included language to codify the IRS Free File program agreement.
And as I understand it, critics were arguing that that would essentially obligate the IRS to stick to the agreement and not develop its own free filing software. However, that provision of the Taxpayer First Act was ultimately removed in the final legislation, which was approved in 2019.
And I should note also that the Free File agreement between the IRS and tax preparation companies was amended at the end of 2019, and that was in response to the scandal as well.
Notably, however, the Free File program has not been doing well, and as I said, Intuit exited that program. And a Government Accountability Office report that came out recently has said that there's been a decline in the use of the Free File program, and that's possibly in part due to the exiting of Intuit.
David D. Stewart: So, I mentioned at the beginning that we're beginning to see the results of the many lawsuits and investigations that were launched. Could you tell us about the settlement?
Paul Jones: Well, as part of the settlement agreement, Intuit doesn't admit any actual wrongdoing. But as you noted, it's going to pay out $141 million, and most of that's going to go to tax filers who would've been eligible to file for free, but ended up paying because they were using Intuit's free tax filing service that was only free for some people.
However, the company did agree to terms that require it to change how it advertises its products, how it represents them, and also how they work.
So, for example, the products are going to do a better job of communicating to a filer if they're eligible to file for free. So, as they enter in their data, the product will let them know, "Hey, you may qualify, or you do qualify to file for free."
And there's also a stipulation that if someone's begun entering in their data and they want to switch which service they're using, for example, if they are eligible to file for free, and they want to cancel the current product that they're using, maybe that's paid, and use the free product instead since they qualify for it, Intuit will facilitate porting over all of the data that they've already entered into the new service that they're going to use, that the company offers so that it's more convenient.
And the states that have been part of this settlement obviously feel vindicated. They didn't technically win, but they got a lot of what they wanted. I think there's a sense of satisfaction that people who had to pay because they weren't informed that they were eligible to file for free are going to get refunds. More than that, potentially that the terms of this agreement will help prevent people who are eligible to file for free from paying in the future.
I should note here just to be clear that Intuit argues that it does support free filing, in addition to not admitting any wrongdoing. I got a statement when I was reporting on this by its Executive Vice President and General Counsel Kerry McLean, who said that, "A hundred million taxpayers have filed for free using the company's software over the last eight years."
And the company says that it already adheres or has adopted, since this scandal broke out, many of the practices that are required by the settlement agreement. So, it's saying that it's going to have a minimal impact on its current operations to implement the remaining changes that it agreed to as part of the settlement.
David D. Stewart: So, does this settlement wrap up all of the fallout from the 2019 scandal?
Paul Jones: I don't think so. For example, there's an FTC (Federal Trade Commission) enforcement action and a lawsuit against Intuit regarding how it advertised its products as allowing for free filing and how they were presented to consumers.
I spoke with an FTC spokesperson, and they said that those are still moving forward and that the agency doesn't really believe that the settlement between Intuit and the states resolves either of those.
Intuit, by contrast, argued in its statement when the settlement between it and the states was released, that that should end the FTC litigation as well. They argue that the changes that they've made both prior to the settlement agreement and the additional changes that they'll make to their business model and their advertising as a result of this settlement should negate the FTC litigation and enforcement action.
But it doesn't seem like the federal government agrees at this point.
David D. Stewart: All right. Well, Nate turning to you, I understand that there's been some concerns that I guess, somewhat ironically, this settlement will result in fairly large tax deduction for Intuit. Could you tell us about that?
Nathan Richman: Sure. Well, for one thing, it wouldn't be the first time one of these very large settlements drew attention for somebody wanting to deduct it. A little bit ago, some senators wrote a letter protesting a deduction that opioid companies were planning on taking for one of their settlements with the states.
This all boils down to a provision in the 2017 Tax Cuts and Jobs Act where Congress amended the rule on when settlements and fines, etc., can be deducted. Now, generally, that new rule prevents deduction of most fines or settlements paid to a government entity, but there is this carve-out for what's called "restitution remediation," or payments to come into compliance with the law.
And the Intuit settlement is divided, as Paul said, into two buckets, there's $2.5 million going for administration, of the second bucket, $138.5 million for the purposes of providing restitution to covered customers. So, they use one of the magic words.
Now, the 2021 final regs didn't say only if you've got the magic words, but it is a step in that direction.
Now, in order to fall into this exception, there are two requirements. You have to identify in the document what payments are going to be restitution remediation, or coming into compliance. And then if the IRS challenges it, the taxpayer will have to establish that the payment is actually to help out the victims rather than to punish the payor.
So far, we've got some hint that by identifying the payments as for restitution to the filers, that looks like it could satisfy the identification requirement.
David D. Stewart: So, has there been any litigation around this exception?
Nathan Richman: So far, not so much. As I said, the final regs only came out in 2021, the provisions only from 2017 for 2018 tax years and later. So, most anything of this sort would probably still be in the audit stage or maybe a suit just filed. But there have been no court law that I have seen on this so far.
David D. Stewart: All right. So this is definitely a watch this space sort of situation.
Nate, Paul, this has been fascinating. Thank you both for being here.
Nathan Richman: Thanks for having me.
Paul Jones: Thanks, always a pleasure.
David D. Stewart: And now, coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now is Acquisitions and Engagement Editor in Chief Paige Jones. Paige, what will you have for us?
Paige Jones: Thanks, Dave. In Tax Notes Federal, Andrew Howlett explores the ascertainable standard exception for beneficiary controlled trust. Jay Soled and Mallory Morris argue that Congress should make investment expenses fully deductible. In Tax Notes State, Annette Nellen expands on the need to move tax and budget data into the digital age so it can better inform the public. Hale Sheppard suggests that the IRS and its aggressive challenges of conservation easements is overlooking the longstanding support for valuation based on highest and best use. In Tax Notes International, Alberto Gatto and Davide Attilio Rossetti examine how taxpayers can pay Italian tax debts with artwork and cultural assets. Three practitioners in Germany reporting the disparate results from Scandinavian courts regarding the scope of the freedom of establishment as applied to cross-border financing. In Featured Analysis, Ryan Finley reviews transfer pricing's standard of review after the Coca-Cola case.
And now, for a closer look at what's new and noteworthy in our magazines, I'm here with Allison Christians, who is the H. Heward Stikeman Chair in Tax Law at the McGill University in Montreal. Welcome to the podcast, Allison.
Allison Christians: Thank you. It's great to be here as always.
Paige Jones: Glad to have you back. We're here to discuss your recent Tax Notes International article titled, "Let the GILTI/GLOBE Games Begin." Could you give us a brief overview of your article?
Allison Christians: A brief overview of a world's changing tax system. What? OK, I'll give it a shot.
I think we all know that pillar 2 is somewhere out there in the universe, and a lot of people might not have looked too closely at it for good reason. But I dug into the rules and started thinking about how it interacts with the U.S. GILTI regime, and started noticing some really interesting principles and features at work.
And this column is exploring one of those, which is this sort of top-down top-up tax shuffle thing going on and what are the incentives it creates.
Paige Jones: Thank you for that overview. So, what inspired you to write this article aside from obviously all the talk and the conversations surrounding these two pillars?
Allison Christians: Right. I mean, it's a sexy topic, right? Pillars all over the place, everybody loves to talk about pillars, I love pillars. I, as you know, in the pages of your very magazine, I tried to get the OECD to consider a third pillar. No dice on that, so I've got to study the ones we have.
So I, like everyone else, I kind of danced around the rules until they dropped in October of last year, and then I printed them out on real paper, because it's a rule book, right? And I have to read tax statutes on paper, I can't do that on the screen.
I printed them out and then there was more and then there was like commentary, and then there were examples. And when the examples came out, I got really excited. I was like, "OK, this is where you start to see where the rules are supposedly really going to work, and you start to get a sense of the structure. So I'm going to dig in."
And then at the same time, I was working with some people through the International Senior Lawyers Project, which is a pro bono project, working with a [International Institute for] Sustainable Development, IISD which is another nonprofit, to try to figure out, well, is there a toolkit of some kind to help developing countries cope with the complexity of GloBE?
So that was just more fuel for the fire. I was already interested in GloBE. I was already thinking about it from a developing country perspective or countries with fewer resources. And working with this group was like, "OK, now I have a reason to really make sure I fully understand all the technical aspects as well as the policy." And here we are.
Paige Jones: Now that these rules have come out, we're looking at implementing rules very soon, actually. And we've got countries all over the world trying to dig through these rules, trying to understand how it affects them and their tax systems. Do you think we'll look at or that we'll see a global implementation of this as soon as they want it to happen?
Allison Christians: Yeah. So, we are going to see implementation. There are going to be things, and people will say, "This is implementation." And then we'll say, "OK, that's implementation." So, we are going to see that.
What I think we're going to see, which happens with every cycle of international law-making, is that the basic concepts are going to stay there, and they're going to track through the whole process. But the implementation from country to country is going to just diverge a little bit here and a little bit there.
And let's not pretend that we've solved tax competition. We haven't solved tax competition, we've moved the goalpost a bit, to use a sports metaphor. We've moved the goalpost, and to think that countries aren't going to be actively strategizing around how to protect their national interests in this new playing field, that's folly, they clearly are going to be doing that.
So are they going to implement? They're going to do something that people will say is implementation, and we will all clap. We will all give ourselves a pat on the back for changing the world. But will we change the world? No, I'm not sure that we have. Not so sure.
Paige Jones: I guess we'll just have to wait and see. But before we let you go, where can listeners find you online?
Allison Christians: Oh, that's a great question. That's my favorite question. You can find me on Twitter @profchristians. You can find me on TikTok @profchristians. You can find me on YouTube, I think it's just Prof Christians. I try to use the same theme because Allison Christians is way too long for all of the handles. And, of course, I'm on LinkedIn and all of those other sites as well. Thanks so much for pointing people to my socials.
Paige Jones: We're happy to do so. And thank you for joining us on the podcast.
Allison Christians: It's been great to talk to you. Thank you.
Paige Jones: Wonderful. And you can find Allison's article online at taxnotes.com. And be sure to subscribe to our YouTube channel Tax Notes for more in-depth discussions on what's new and noteworthy. Again, that's Tax Notes with an S. Back to you, Dave.
David D. Stewart: That's it for this week. You can follow me online @TaxStew, that's S-T-E-W. And be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.
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