What to Know Before Using Free Tax-return Services

Credit Karma Tax, a new online service, says it charges users nothing to prepare and file their tax returns. Instead, it hopes to gather their data

By Laura Saunders, wsj.com

Credit Karma has attracted 60 million users over the past decade by offering free credit information. Now the financial technology upstart is hoping to attract millions more via free tax-return preparation.

U.S. taxpayers this year can use a new Credit Karma unit to complete their returns online for no cost—even if they don’t give the company permission to use their data for other purposes. The company says the service can handle more than eight dozen federal forms and be used to prepare most state returns as well.

Credit Karma, which is based in San Francisco, is the latest entrant in a field of tax-preparation services that already includes Intuit Inc.’s TurboTax, H&R Block and Blucora Inc.’s TaxAct.

It is hoping to attract users in the fastest-growing category of tax filers: people who prepare their own returns using the internet instead of desktop software or a paid preparer.

The industry giant is Intuit’s TurboTax Online, which had more than 28 million users last year, or nearly five times the number of users a decade ago. Online tax-prep provided 89% of Intuit’s $1.97 billion operating revenue from consumer tax products for its most recent fiscal year.

Online tax-prep products offered by Block and TaxAct had about five million users each last year.

Meanwhile, sales of once-popular desktop software have declined. Last year TurboTax sold about 5 million desktop units, compared with nearly 7 million a decade ago.

Credit Karma declined to say how many people have already used its new offering, called Credit Karma Tax, although it says 1.7 million people joined a waiting list to try the service after its initial announcement in early December. To enter the tax-prep field, the company bought a tax-software firm for an undisclosed sum.

Credit Karma says its tax service doesn’t charge online customers any fees at all. Currently some customers of other firms pay a fee while others don’t, but users attracted by free offers can wind up paying fees if they opt for add-on services or upgrades.

Both Intuit and H&R Block said that can happen, but their products provide more benefits. “A large percentage of TurboTax Online customers pay nothing,” said a spokeswoman for Intuit. “And we never share customer data with a third party without the customer’s consent.”

A spokesman for Block said, “H&R Block gives support for complex issues that many taxpayers need, whether one is filing on a desktop, tablet or smartphone.”

There are other ways Credit Karma’s approach differs from that of rivals. It seeks to collect income and other data from its tax-prep users to make recommendations for credit cards and other financial products to them.

Credit Karma doesn’t charge for these solicitations and says it doesn’t share personal information or sell it to third parties. Instead, the third-party firms pay Credit Karma if the member applies for and receives a product through its site.

To use Credit Karma Tax this year, people will need first to become members of Credit Karma. That means providing certain information, including address, date of birth, mobile phone number and the last 4 digits of a Social Security Number.

Prospective users should also be aware that the program can’t yet import data—so it must be entered manually.

Recent Credit Karma filers Mike Zaccardi and Rosylen Mangohig say they didn’t realize they could deny the company the use of their return data and still file their taxes using it. A company spokeswoman says this information is clearly stated on the site.

Ms. Mangohig, who is 41 years old and works as an administrator at a medical clinic in Oakland, Calif., says she was pleased with how Credit Karma Tax functioned and found that it gave her the same tax totals as an H&R Block tax program.

But she wasn’t pleased when she soon received a notice from her credit-card company asking her to update her income. “I don’t want financial companies to know my income and try to sell me products based on it,” she said. She deactivated her Credit Karma account.

The spokeswoman for Credit Karma says the request Ms. Mangohig received had nothing to do with her Credit Karma membership.

Mr. Zaccardi, a 29-year-old energy trader in Jacksonville, Fla., says he is happy to have Credit Karma have his tax information: “I’m careful with my credit, and I’m happy with their products. I want to get those offers.”

He adds that he recently completed his aunt’s “fairly simple” tax return using Credit Karma Tax. Last year tax prep cost her $64.99, he says, but “this year it was very smooth, and free.”

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