TurboTax, the long-standing dominant player in the tax preparation software market, has recently faced a nascent threat to its lucrative business: A company that specializes in pitching its users financial products has entered the fray with a completely free tax prep service.
This week, TurboTax’s parent company, Intuit, unveiled a solution to this problem: spending $7.1 billion to buy the rapidly growing upstart, Credit Karma, before it could become a major competitor.
Former Justice Department lawyers told ProPublica that the deal should be investigated as a possible violation of antitrust law.
“Allowing a near-monopolist to eliminate a maverick competitor poses obvious risks of harm,” said John Newman, a former DOJ Antitrust Division trial attorney who is now a law professor at the University of Miami. The Justice Department should “take an extremely hard look at this deal,” he said. “It’s hard to imagine any reason why this should be allowed.”
Although Credit Karma’s tax product is just a few years old and has a sliver of the overall market, it was a major focus of concern at Intuit, according to the company’s public filings and former employees.
“Credit Karma was invoked over and over again” at TurboTax headquarters, said one former staffer. “The fear was very real that Credit Karma would disrupt tax.”
At stake is a huge stream of reliable profits: Intuit’s TurboTax unit generated $1.7 billion in operating income for the company last year. TurboTax had 67% of the online tax prep market in 2019, according to IRS figures analyzed by ProPublica.
An Intuit spokesman said the company “is strongly committed to providing customers with free tax filing options and that will not change with this transaction. We intend for the Credit Karma Tax product to remain available for those who want it.” A Credit Karma spokesperson declined to comment.
In public comments, Intuit CEO Sasan Goodarzi has argued that the merger is primarily about Credit Karma’s financial products business and not “because of tax.” Furthermore, he said, Intuit planned to keep Credit Karma’s free product as a separate offering because “customers should have a choice.” The acquisition, he said, “is really about creating choice for consumers and helping them save money.”
TurboTax has long lured customers by loudly advertising its “free” tax filing product and then used its deep bag of tricks to make as many tax filers as possible pay. It’s been an enormously successful strategy and one emulated in some form by its competitors.
In the past, the Justice Department has acted to prevent a more established tax prep competitor from gobbling up a smaller rival. In 2011, the agency successfully sued to stop H&R Block, whose online tax prep business is a distant second to TurboTax in market share, from buying TaxAct, a smaller competitor.
But experts say that, under the Trump administration, the Justice Department’s antitrust enforcement has grown unpredictable and it has allowed controversial mergers, so it’s unclear if the agency will intervene in this case. State attorneys general also sometimes sue to block deals that are viewed as hurting consumers.
The market for online tax prep has been remarkably stable for a decade, with the same five companies as significant players. But in 2017, Credit Karma entered with a new strategy. Its tax service is an extension of the company’s core business of using its customers’ data to pitch them financial products. Just as the company offered its users free credit scores and monitoring, it would offer them free tax prep in exchange for their data.
Credit Karma also was a unique competitor for TurboTax because of the massive scope of its user base. It now boasts 100 million users and “almost half of all U.S. millennials,” according to the company.
Credit Karma explicitly marketed itself as an alternative to TurboTax. The company boasted that it was taking on the industry, offering extra services for free that “could cost over $200 when filing with TurboTax.” One press release said, “While many companies currently advertise free tax preparation, consumers often find that they have to pay to finish or to file their state returns online.”
In its first two years, Credit Karma prepared under a million returns, according to ProPublica’s analysis of IRS electronic filing data. But last year, it began to make a move, growing to 1.5 million. Two months ago, the company announced it was expecting still more “significant growth” as it continued to improve its tax product, calling its upgrade “the company’s first major step toward fulfilling its long term vision of automating tax filing for Americans.”
Compared with TurboTax, which had filed over 39 million returns last year, Credit Karma’s tax business was still tiny. But its entrance certainly got Intuit’s attention; since 2017, Intuit has identified Credit Karma as a competitive threat in its public filings.
It’s not the first time that Intuit has allegedly tried to neutralize a threat from a free competitor. In 2005, TaxAct caused a crisis in the industry by offering free services to everyone through the government’s Free File program. Spooked, Intuit tried to get TaxAct and the other companies to agree not to do that, according to testimony by TaxAct’s CEO, who said it was “probably not legal” under antitrust law. (Intuit declined to comment.)
When H&R Block tried to acquire TaxAct, a federal judge ruled the deal wasn’t legal. The merger “would result in the elimination of a particularly aggressive competitor in a highly concentrated market,” wrote Judge Beryl Howell, and was particularly worrisome because TaxAct had bucked “prevailing pricing norms.”
Since that time, the tax software market has only grown more concentrated, with TurboTax growing from a 62% share to a 67% share. TaxAct, meanwhile, decided to abandon its maverick status, choosing instead to “focus on profitable customers,” as the parent company’s CEO put it. Its market share has dropped as profits have risen.
That has left Credit Karma as the lone threat to upend the industry. Marc Remer, a former Justice Department economist who worked on the H&R Block case and is now a professor at Swarthmore College, said Intuit’s bid to buy Credit Karma could give the Justice Department the opportunity “to set a precedent with regards to the anticompetitive effect of buying nascent but potentially significant competitors.”
Antitrust experts also told ProPublica that, given Intuit and Credit Karma’s respective market shares, the proposed deal would exceed the Justice Department’s merger guidelines regarding market concentration. Diana Moss of the pro-enforcement American Antitrust Institute pointed to the government’s recent lawsuit to stop the maker of Schick razors from acquiring Harry’s, a disruptive player that had shaken up that market.
Under the antitrust review process, Intuit and Credit Karma must submit materials about the deal to the government. At that point, the Justice Department can ask for more extensive documents and ultimately decide whether or not to intervene. The companies have said they expect the acquisition to close in the second half of this year, pending regulatory approval.