Tax preparation giants H&R Block and TurboTax-maker Intuit have been hit with federal lawsuits by the Los Angeles City Attorney, who alleges that the companies have deliberately misled low-income taxpayers into paying for tax-filing services that are supposed to be free.
Los Angeles City Attorney Mark Feuer accused the companies at a news conference Tuesday of reneging on an agreement they made with the Internal Revenue Service in 2002 and defrauding American taxpayers by hindering their access to free tax-filing services.
"In short, we've alleged that they have misled, purposely misled low-income taxpayers into spending their hard-earned money needlessly for services they are entitled to get free from those very companies," Feuer said.
H&R Block and Intuit both denied wrongdoing.
The lawsuits, filed Monday in U.S. District Court in Los Angeles, seek to force the companies to pay the taxpayers of California restitution and fines, and to deter others of engaging in similar practices.
"While more than 100 million taxpayers [nationwide] were eligible to file for free through the Free File program in fiscal year 2018, fewer than 2.5 million — less than 2.5 percent of eligible taxpayers — actually did so," according to the lawsuit.
"We allege...that this is no accident," Feuer said. "These companies, the defendants, in this case, do provide truly free online tax preparation services for low-income earners. But we allege that they've engaged in misleading business practices, and practices that have hidden the availability of those services so that those companies can draw taxpayers into paying for services that they should be getting for free."
He said that in 2002, a consortium of tax preparation software companies and the IRS reached a private agreement to provide a free tax filing program to anyone making less than $66,000 so that the IRS would not have to create its own online system to make such services available at no cost.
But Feuer alleged the companies not only bamboozled taxpayers into paying for the free service, but they also made it "essentially impossible for the average person, who is seeking through the web, to identify how to get those services."
He alleged that the companies failed to provide links on their websites to the free filing services and even furthered the scheme by encoding programs for websites so that the free services won't show up on any search engines.
Feuer said the lawsuits come on the heels of an investigation by the nonprofit news organization ProPublica that found that about $1 billion a year has been spent by taxpayers on unneeded fees for the tax-prep firms.
In one example noted in the lawsuits, a low-income California resident was allegedly "deceived" into unnecessarily spending $169 on a TurboTax product when the person, who earned $14,500 per year, could have gotten it for free.
Intuit spokesman Rick Heineman told ABC News in an email Tuesday, "Any suggestion that Intuit does not support the IRS Free File Program is flat wrong."
"We stand behind our actions as being both appropriate and consistent with our values," Heineman said. "More people have filed their taxes for absolutely free with TurboTax than all other tax prep software companies combined. We are committed to offering Americans the ability to file their taxes for free, and we’re committed to the IRS Free File program. We look forward to working with the IRS and private industry to improve the Free File program and help it continue to grow."
In a statement, H&R Block said it "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. We are pleased that consumers' use of H&R Block's Free File program grew 8% this tax season, exceeding the Free File program growth of 6%."