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In the face of negative headlines, TurboTax is having a great start to 2020

A nasty round of negative headlines hasn’t scared off TurboTax’s customers.

The company is poised to snap up an even larger number of tax filers who use software to prepare their returns than last year, a recent survey by Guggenheim Securities found.

About 39% of respondents who plan to prepare their taxes digitally said they would choose TurboTax, up from 34% in 2019. Only 5% expected to pick the next biggest competitor, H&R Block’s software tool.

TurboTax had faced scrutiny over the past year after ProPublica reported that the firm had steered eligible clients away from free tax filing products by making them difficult to find on web searches. The company has denied the reports’ allegations.

After those stories ran, analysts questioned whether TurboTax clients would look for alternatives, including switching to an IRS program or downgrading from one of the company’s paid products to its free software.

Instead, TurboTax has been able to attract even more potential clients. Part of the reason could be that TurboTax’s parent company Intuit increased its total sales and marketing budget, shelling out $593 million in the quarter ended January 31 compared to $548 million in the same period last year — an 8% increase. A spokesperson for Intuit declined to comment on the move, telling CNN Business: “For competitive reasons we are not able to provide details on our marketing spend.”

TurboTax’s 2020 marketing campaign, launched in January, doesn’t speak directly to the ProPublica reports, noted Dartmouth University marketing professor Kevin Lane Keller.

Moving forward, the question is how much consumers will be bothered by the controversy, Keller said.

“As long as they aren’t seen as trying to take advantage or be unfair in any way in how they sell in this tax season, I think they’ll be OK,” he said.

TurboTax’s increased marketing can help it bring in clients who could switch from free to paid products in the future, according to Ken Wong, a Guggenheim analyst who covers Intuit’s stock.

“They view it almost as, ‘Right now is the time to strike to get as many units into the door as possible,’ he said. “They’re willing to sacrifice a little bit of margin and market aggressively.”

TurboTax’s moat

Intuit, which also runs small business accounting software QuickBooks and personal finance tracker Mint, provides two free tax-return platforms. One is a commercial version available through TurboTax, and the other is offered through the IRS as part of a program called Free File that includes nine other tax preparation companies.

An IRS-funded review from October, which didn’t name TurboTax or its competitors, found that five program members used coding tricks to keep their Free File landing pages out of organic searches.

The agency barred the practice in December, also scrapping a previous deal in which it had promised it wouldn’t create its own tax filing software. Intuit supports the measures, according to its website. It’s also spending $2 million to help promote free IRS-sponsored tax filing products, up from $1.5 million last year, a spokesperson said.

These changes will raise Free File’s profile, but that’s not a threat to TurboTax, Wong said.

Just 47% of the people polled by Guggenheim knew about the program, and only 4% were both previously unaware of it and willing to switch to Free File even if it wasn’t as good to their current tax filing method. The IRS’ Tax Advocate Service has noted Free File doesn’t meet many filers’ needs.

All these factors contributed to Wong calling Intuit “our best long-term idea.” He also pointed to TurboTax Live, an on-demand web service that connects filers with accountants, as a growth engine that makes him positive on the company.

The market overall seems upbeat, too. On Monday, Intuit beat earnings expectations and said it would buy personal finance tech company Credit Karma for $7.1 billion in cash and stock. Intuit’s shares rose about 15% over the past year.

Article Topic Follows: Biz/Tech

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