Example of TurboTax ad cited in FTC complaint, which includes small print on “for simple U,S. returns only.” (with Judge Charles Breyer inset)

A federal judge heard arguments Thursday on a Federal Trade Commission request for an immediate halt to ads promoting “free” tax-filing via San Diego-made TurboTax software.

Intuit answer to FTC complaint, filed April 20, 2022. (PDF)

Judge Charles Breyer, in a San Francisco court, quizzed both sides over FTC claims that Intuit, which markets TurboTax, was deceiving consumers with a bait-and-switch strategy.

But Breyer said FTC attorneys were “naive” and “simply outlawyered in this case,” referring to how Intuit’s legal team dragged out the process to avert a hearing sought before April 18, Tax Day.

Breyer didn’t immediately rule on FTC requests for a preliminary injunction and temporary restraining order.

In 70 minutes of give-and-take, though, he didn’t seem ready to judge TurboTax’s alleged harm to consumers severe enough for a TRO.

“You gotta have an emergency of some weight in order to invoke the injunctive powers of the court,” Breyer said, “and not to disrupt the status quo.”

Intuit also faces an administrative judge April 25 in Washington, D.C., to set a schedule for hearings on an FTC complaint against the Silicon Valley software giant.

Thursday’s hearing featured polite-but-testy remarks by Roberto Anguizola, representing the FTC, and Seth P. Waxman, the former U.S. solicitor general, defending Intuit.

Anguizola accused Waxman of mischaracterizing the FTC complaint. Waxman said the FTC misrepresented Intuit’s cooperation in the case.

“This notion that we tried to snooker the FTC is so utterly false,” Waxman said. “There is an exhaustive paper trail that will demonstrate …. this investigation was begun in a very public way three tax seasons ago.”

Waxman said Intuit “literally begged the FTC” — which sent its draft complaint almost a year ago — “to explain to us on what basis these ads were deceptive.”

The FTC’s Anguizola said that even though Tax Day has passed, “There’s still a lot of harm that can be prevented.”

He said between now and the October deadline for late-filers, Intuit could still make $35 million off TurboTax, as it had in the 2019 tax season.

“We can agree to disagree on how naive we were on the timing and whether defense counsel outlawyered us,” Anguizola said. “The deceptive claims at the core of this case are still being made by Intuit as part of their postseason strategy.”

At issue for the FTC is whether Intuit’s ads for Turbo Tax Free Edition gave consumers “clear and conspicuous” information about what it meant when it said the no-cost version was for “simple returns only.”

Anguizola said that as of March 28, the FTC had received 571 consumer complaints about free TurboTax. He said Intuit’s disclaimers appear in “mouseprint.”

“Traditionally, the consumer complaints we receive are the tip of the iceberg,” he said. “I’ve done cases with zero consumer complaints.”

But Waxman, the Intuit attorney, criticized the FTC complaint for not including declarations — written testimony — from aggrieved consumers.

(Judge Breyer at one point agreed: “People aren’t shy about grievances” if they’re wronged. “So if they think they’ve been hoodwinked, where are those declarations?”)

Instead, the FTC cited survey findings of a Yale professor.

“What we have is some gossamer survey that was done the week before they filed their complaint (in late March),” Waxman said. “The survey did not show any of the challenged ads to anybody.”

Anguizola said the survey by Nathan Novemsky, a professor of marketing in the Yale School of Management, showed that 55% of consumers who had never used TurboTax “think they have a simple tax return even though based on the questions in the survey they would be ineligible.”

He added that Intuit’s definition of simple tax return changes from year to year.

Shortly after filing the case in federal court, Anguizola said, he got an email from a consumer saying he “got snookered this year.”

Last year, the man said, he filed for free while reporting unemployment benefits. This year, he told the FTC, such benefits meant he couldn’t file for free.

The man faced a decision, Anguizola said: Do I start all over with a new return? Or do I pay and stop wasting my time?

“The harm that happened is you’re creating a … dishonest marketplace,” Anguizola said. “This is what we’re ultimately trying to avoid here.”

Waxman said that Intuit pulled its “free, free, free” TV ads from the air and its website made “lavishly, promiscuously clear” that TurboTax offered four editions, linking to a page explaining who was eligible for the free version. 

Waxman told the court that Intuit went to the FTC in November, seeking a deal to avoid any legal action.

“We don’t want to be on the wrong side of the government,” he said Intuit communicated. “We rely in repeat business.”

But he alleged that the FTC repeatedly said: “We are not willing to discuss that.”

Waxman said 14 million of TurboTax’s 50 million users file for free. Anguizola said 72% of consumers are confused about the free-filing offer, based on the Yale survey.

Along with Intuit’s 23-page response to the FTC federal-court complaint, lawyers for the company now valued at $132 billion have asked the court to seal 136 exhibits in the case.

“The documents sought to be sealed also contain confidential information regarding Intuit’s marketing and advertising strategies, including budgetary information,” an Intuit filing said. “This information is not publicly known, and if disclosed, Intuit’s competitors could exploit it to Intuit’s detriment and harm its competitive standing.”

On Monday, Slate.com posted a Lizzie O’Leary interview with ProPublica reporter Justin Elliot on his TurboTax investigations.

O’Leary asked: “You discovered in your reporting that TurboTax used code and web design to push people into its paid products. Often, nudging consumers was as simple as a font choice or color on the website, making the paid option slightly more prominent so you would be more likely to click on it. TurboTax also capitalized on how much Americans loathe doing our taxes and fear getting in trouble with the IRS.”

Elliot replied: “Over the years, I’ve talked to a lot of engineers and designers at Intuit, and there’s this marketing concept that they invoke internally called FUD, which stands for fear, uncertainty and doubt. This is used in other marketing contexts, not just tax prep, but I think it’s particularly salient in tax prep because so many people are nervous about getting it wrong.

“The stakes of getting it wrong are very real. And so the company is betting that the fear, uncertainty and doubt of users is going to outweigh any annoyance they might have of having to pay 75 or a hundred bucks for something they thought they were going to get for free.”

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