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Los Angeles accuses H&R Block and TurboTax of defrauding taxpayers

  • H&R Block and Intuit-owned TurboTax allegedly discouraged consumers from using free tax-filing options, according to a lawsuit filed by the city of Los Angeles.
  • The complaint claims the tax-prep firms "defrauded the lowest earning 70 percent of American taxpayers" by hindering access to the IRS' and other free tax filing services.
  • Investigative news outlet ProPublica has reported that H&R Block and TurboTax used code to hide the free version of TurboTax from Google and other search engines.

H&R Block and TurboTax-owner Intuit have reneged on their pledge to offer free online tax-prep services, Los Angeles officials allege. The companies "defrauded the lowest earning 70 percent of American taxpayers" by hindering access to the IRS' Free File program, according to a lawsuit filed Monday.

The program is set up to help those who earn less than $66,000 a year by letting them file their tax returns for free using a commercial service. Beginning in 2002, the online tax-prep industry agreed to offer the free service in exchange for the IRS agreeing not to compete with its own free online tax prep and filing services.

Despite offering no-cost tax-prep help, the Free File program is hardly used, according to an investigation by ProPublica. The nonprofit news organization found just 3 percent of 100 million eligible taxpayers use Free File. That translated into about $1 billion each year in unneeded fees for the tax-prep firms, ProPublica reported.

The probe concluded that H&R, TurboTax and other tax-prep firms in the Free File program used several means to induce consumers into buying services. Intuit, for instance, allegedly used code to hide the free version of TurboTax from Google and other search engines. Their products are also titled in a confusing fashion, with the "Free Edition" of TurboTax in reality charging a fee to file state forms, while the actual free version is dubbed "Freedom Edition" and could not be found on the company's home page, ProPublica found.

"Deceptive and misleading"

In court documents, Los Angeles City Attorney Mike Feuer said the companies have been "actively undermining public access to the IRS' 'Free File' program, while simultaneously employing deceptive and misleading advertising and design schemes intended to induce taxpayers" into purchasing TurboTax and H&R Block products.

Intuit "deceived" one low-income California resident into unnecessarily spending $169 on a TurboTax product when the person, who earned $14,500 per year, could've sought free tax-prep services, the city's suit alleges in citing one example of what it called the company's "unfair" business practices.

Feuer is seeking restitution for the millions of taxpayers eligible for the free IRS service and paid unnecessary fees, along with penalties and injunctions banning the firms from continuing the alleged behavior.

Intuit dismissed the notion that it did not support the free file program.

"More people have filed their taxes for absolutely free with TurboTax than all other tax prep software companies combined," a spokesperson emailed. "We are committed to offering Americans the ability to file their taxes for free, and we're committed to the IRS Free File program."

"H&R Block is proud to offer four free tax-filing options, including the IRS Free File program, our free online product, our MyFreeTaxes partnership with the United Way and our partnership with Military One Source," the company said in a statement to CBS MoneyWatch. "We are pleased that consumers' use of H&R Block's Free File program grew eight percent this tax season, exceeding the Free File program growth of 6 percent."

The IRS on Friday said it was reviewing "concerns raised about the Free File program," ProPublica said.

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