Should Tax Prep Be Free? Credit Karma’s Challenge to TurboTax
Tax preparation isn't rocket science.
That's Kenneth Lin's pitch to get you to use Credit Karma, his popular credit-monitoring site, to do your taxes online for free. He's striking out at TurboTax and H&R Block, which are now charging the typical homeowner or investor more than $90. Their prices have jumped more than $20 over the past month, the tax preparer's version of surge pricing, as the April 18 filing deadline approaches.
Preparers oversell how difficult their job is, said Lin, Credit Karma's chief executive officer, who co-founded the San Francisco company in 2007. For most taxpayers, getting the maximum refund should be a simple process, he said, and gratis—not just for the simplest filers but for everyone.
“We think we can be transformative in this space,” Lin said.
The U.S. tax prep industry—with $8.9 billion in annual revenue online and off-line, according to IbisWorld—isn’t panicking yet. Credit Karma is hardly the first company to try this stunt. Even with the low, low price of zero, new players can face insurmountable barriers. Americans won’t trust just anyone with their taxes, and the incumbent players can afford to spend huge sums on marketing and technology to stay on top. TurboTax, owned by Intuit Inc., dominates U.S. online tax prep with a market share of 65 percent. In the most recent fiscal year, Intuit’s consumer tax division reported revenue of $2 billion and operating profit of $1.3 billion, a profit margin of 65 percent.
Lin acknowledges the difficulty but says Credit Karma has advantages that previous upstarts lacked. Almost half of Americans 18 to 34 years old are Credit Karma members, the company says. More than 60 million people are signed up for the platform, already sharing their financial details with Credit Karma in the process.
“We have built-in brand loyalty and trust,” Lin said. “We have a resonance with a younger generation of consumers.”
Credit Karma can offer free tax preparation because it makes money in other ways. The company, with 600 employees, gets paid to recommend financial products, such as credit cards and auto loans, to customers. It says it had revenue of $350 million in 2015 and has been profitable for a couple of years.
By breaking into tax prep, Credit Karma hopes to get better data on its members and improve its recommendations. The idea is to create a “trusted digital assistant” for its customers' financial lives, Lin said.
Delivering credit scores and loan products is one thing, navigating the maddeningly complicated U.S. tax code another. When I tried to do my taxes with Credit Karma in early February, I couldn’t figure out how to enter my bank interest properly, questions about charitable donations seemed contradictory, and there was no easy way to import last year's tax data. At first, my refund didn't match the one calculated by TaxAct, the discount online tax preparer I generally use.
Credit Karma had spotted the problems, Lin told me, and spent the first several weeks of the tax season rewriting questions. “There was a lot to learn there,” he said. Credit Karma launched a live chat feature so users can ask for help from tax professionals. Lin said he's already planning many more improvements for next year’s tax season.
As of the early weeks of the tax season, TurboTax and H&R Block seemed to be holding on to market share, Gil Luria, director of research at D.A. Davison & Co., said, based on the companies’ results as of late February and on filing data from the Internal Revenue Service.
Intuit Chief Executive Officer Brad Smith said Credit Karma could actually help TurboTax, by expanding the number of Americans who think about doing taxes online, rather than paying hundreds of dollars to hire a professional.
“After that, we’ve got to have the easiest product, and it’s got to deliver the best value for the price,” Smith said. Intuit’s investments in new technology help make it worth the money, he said. “We have to make sure we’re the last man or woman standing. That puts our energy into the innovation that’s not easily matched.”
For example, TurboTax has expanded its SmartLook feature, which lets users chat with tax professionals by video. The pros can see the customer's screen and help navigate tricky issues in real time. Smith said Intuit is investing heavily in artificial intelligence, machine learning, and big data to make filing taxes quicker and easier.
H&R Block is also emphasizing technology this year, teaming up with IBM’s Watson supercomputer to redesign tax prep in the company’s storefront offices.
Lin is skeptical of the tax industry’s tech ambitions. “A lot of that is just sort of a marketing gimmick,” he said, calling artificial intelligence a “new catchphrase” for the sort of data analysis that tech companies, from Amazon.com Inc. to Netflix Inc., have been doing for a decade or more. “You’re not a rocket scientist trying to hit an orbit on Mars,” he said.
Someday, Lin hopes, Credit Karma's platform will be able to pull together users' 1040 forms automatically by pulling data from a variety of sources. If your credit report shows you have a mortgage, for example, the software should make sure you’re claiming a mortgage interest deduction.
“This is year one," Lin said. “This is just the beginning of a big investment we’re going to make in the space.”
For now, Credit Karma’s product is simple. Certainly the price is right. With millions of Americans waiting until the last minute to file this year, Lin is hoping that will attract procrastinators desperate for help but wary of a big fee.