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Los Angeles city attorney sues H&R Block and maker of TurboTax for allegedly misleading low-income taxpayers

The city attorney alleges the companies defrauded low-income taxpayers and charged them for a service that the companies are required by law to provide for free.
Intuit TurboTax software on display at a retailer on Thursday, Jan. 28, 2016 in Foster City, California.
Intuit TurboTax software on display at a retailer on Thursday, Jan. 28, 2016 in Foster City, California.Peter Barreras / AP Images for Turbo Tax file

LOS ANGELES — The Los Angeles city attorney filed suit Monday against the tax preparer H&R Block and Intuit, maker of the popular software TurboTax, alleging that the companies defrauded low-income taxpayers and charged them for a service that the companies are required by law to provide for free.

The twin suits allege the companies "intentionally obscure[ed] and fail[ed] to disclose" differences between its commercial products and the "Free File" program. Free File is a free service that the IRS requires the firms to provide to anyone with an adjusted gross income of $66,000 or less — meaning 100 million taxpayers, or seven out of 10, are eligible.

Though most U.S. taxpayers are eligible for the program, fewer than 2.5 percent use it, according to the complaints filed by City Attorney Mike Feuer, which allege that part of the reason for low participation is a "deliberate" effort to hide the free service from customers.

"This is a situation where free should be free, but we allege the way these companies have structured their websites and misled consumers, free has turned out not to be free at all in so many cases," Feuer told NBC News in an exclusive interview. "We allege that these companies instead steered the low-income tax payers to paying for services that they didn't need to pay for."

The suits come after a recent report by the nonprofit investigative news organization ProPublica that alleged H&R Block and Intuit deliberately hid the free option "and actively steered customers into paid products." Based on an internal document, interviews with current and former employees, H&R Block instructed staffers to send users to paid products unless they asked about Free File. The report said that the TurboTax website was built to send users to paid products.

Free File was created 16 years ago in a deal between the IRS and the tax preparing companies. Intuit and a consortium of electronic tax filing companies promised to provide a free version of their commercial products to low-income Americans in exchange for the IRS's commitment to "not compete with the Consortium in providing free, online tax return preparation and filing services to taxpayers."

However, the number of annual users has fallen from 5 million just after its launch to 2.5 million.

The L.A. lawsuit against Intuit says that even after low-income taxpayers begin inputting information that shows they should be eligible for Free File, TurboTax "manipulates them into paying."

Feuer said the TurboTax and H&R Block websites don't contain direct links to the fully free service.

One of the authors of the ProPublica report, Justin Elliott, told NBC News that one of the ways Intuit steered TurboTax users into paying was by using code on the website that made sure Google searches would never show the Free File website. Elliott said that after ProPublica published its story about Free File, Intuit changed the TurboTax coding.

In a statement, Intuit said, "We stand behind our actions as being both appropriate and consistent with our values. Any suggestion that Intuit does not support the IRS Free File Program is flat wrong.

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

"We look forward to working with the IRS and private industry to improve the Free File program and help it continue to grow."

An Intuit spokesperson confirmed that Intuit had changed the coding on its website due "to misperception" of its intent.

H&R Block said that it offers four ways to file for free, including Free File. It said use of Free File had grown 8 percent at H&R Block this tax season, outpacing overall program growth of 6 percent.

The IRS said in a statement that it is investigating and will take fast action to ensure the program's integrity. "The IRS is reviewing the concerns raised about the Free File program. We take these issues seriously, and a senior leadership team was assembled to review the current Free File program."

"As part of this process, the IRS reached out to the software companies and others. The IRS continues to believe it's critical to provide wide access to free electronic filing of tax returns, particularly for lower-income households."

Andrew Blankstein and Gabriel Sanchez reported from Los Angeles, and Anne Thompson from New York.