What’s Up with the TurboTax Settlement?

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Intuit’s TurboTax is one of the most trusted tax preparation brands. But this company eagerly betrayed that trust when it saw a chance to make a few extra dollars. A 2019 ProPublica article prompted a multistate investigation into the misuses of the IRS Free File feature. According to court documents, Intuit tricked many filers into paying for free tax preparation services.

The product at issue, TurboTax Free Edition, only allows taxpayers to file free returns if they had “simple” returns. Intuit and the IRS had vastly different definitions of a “simple” tax return. Additionally, Intuit ran ads promoting “free” services that weren’t really free, and didn’t include the real Free File option on its Products and Pricings page. Intuit paid $141 million to resolve these allegations.

Like many other class actions, the TurboTax scheme mostly targeted lower-income people. The money they receive from such settlements makes a big difference. Additionally, class action lawsuits deter future wrongdoing and encourage companies like Intuit to put people before profits.

Building a Class Action Lawsuit

Class action lawsuits often start with internet articles and other leads. But, these actions rarely involve official attorneys general investigations. Instead, attorneys must collect sufficient evidence to build a claim. Without such evidence, the court might throw the case out of court.

Most class action lawsuits are consumer matters. In these cases, attorneys must have evidence of fraud. Basically, fraud is an intentional misrepresentation of a current material fact. That’s a pretty subjective standard. Usually, the misstatement must entice consumers to spend money for free or false services.

Additionally, attorneys need proof of actual damages. The TurboTax class action is a good example. If someone went onto the site but didn’t pay for the not-free TurboTax Free Edition, that person cannot be part of the class.

Incidentally, such “freemium” service schemes are very common. Sometimes, they’re at least mostly honest. Bars furnish free pretzels and peanuts in the hopes that thirsty customers will buy more beer. If a company lies about a freemium service, or takes steps to steer customers away from free services to paid services, that’s illegal.

The Payout Process

Initially, the presiding judge reviews a settlement proposal to determine if it’s fair and reasonable under the circumstances. Judges rarely overturn agreed settlements. The law favors such out-of-court settlements.

Attorneys, who work on a contingent fee basis, normally get paid first. Attorneys may also deduct expenses from the settlement. In many cases, since class actions are complex, these expenses are substantial.

The named plaintiffs usually get the largest payout. Generally, these individuals have the worst damages. Furthermore, these individuals took the biggest risk and expended the most effort. They reached out to lawyers. Other class members basically rode on the coattails of the named plaintiffs.

These lead plaintiffs usually receive a lump-sum payment or a structured settlement. Other class members usually get single-dispersal payments. Sometimes, they get store credit in lieu of money, but these instances are rare.

Picture of Bret Thurman

Bret Thurman

Bret is a former lawyer and full-time writer who knows how to simplify complex topics. He received his law degree from the University of Texas at Austin. For over twenty years, he handled a wide variety of cases, including criminal defense, personal injury, family law, and consumer bankruptcy.

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