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The TurboTax scandal provides a key lesson about tax preparers

Ethan Wolff-Mann
Senior Writer

Over the past few weeks, reports emerged that Intuit, which owns TurboTax, and H&R Block were hiding the free versions of their products in online searches, products they create in partnership with the IRS.

Sen. Elizabeth Warren (D-MA) and other lawmakers have called for the Internal Revenue Service and the Federal Trade Commission to investigate.

According to ProPublica, search engines like Google were told by the websites’ code to ignore web pages for the free version of TurboTax. Furthermore, Intuit bought ads designed to appear when people searched for free tax preparation on Google. These ads pointed users to the paid versions of TurboTax.

On Thursday, a new report shed light on the intentions behind these moves. In an article called “TurboTax and H&R Block saw free tax filing as a threat — and gutted it,” ProPublica details company guidance from H&R Block telling employees not to send potential customers to the free file website unless they specifically ask about it.

“We want to send users to our paid products before the free product, if at all possible,” the memo said, according to ProPublica. Sources echoed this at TurboTax as well, making the code hiding the free page from search engines even more troubling.

What these stories make clear is that tax preparers are not fiduciaries. These companies are not required to, or make, decisions with their customers’ best interests in mind. And due to the complexity of the tax system, someone might never know that they could have filed their taxes for free, instead of paying for tax help, which can often climb to over $100.

Where it gets tricky

Sure, TurboTax and H&R Block are companies whose mission is to turn a profit, so it’s not unreasonable to expect them to steer taxpayers to pay for their products. But in the case of TurboTax’s free edition, the company enjoys a preferential relationship with the IRS through the Free File initiative of 12 companies, of which TurboTax is the biggest.

The IRS agrees not to make its own tax software – which would be free and thus a highly competitive product – and in return, companies including Intuit/TurboTax and H&R Block agree to provide the Free File program to people making less than $66,000. However, these tax preparers’ actions seem to violate the spirit of the partnership.

From the numbers, there is clearly a problem, and this may show why. Though 70% of Americans should be eligible to file their taxes at no cost, only 3% of eligible tax returns have been filed through this partnership.

The partnership, which exists through a memorandum by the IRS, is not law, but a bill passed the House with bipartisan support to make it one, which would effectively guarantee the IRS would never develop a not-for-profit free alternative.

However, the bill has stalled in the Senate as the news of the companies’ actions became clear, as many lawmakers are not happy.

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Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.

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