TurboTax lost 1 million customers just when the IRS introduced its own free tax filing option and its stock is plummeting

Ten million people used TurboTax for free this year to file their taxes, a drop of about 1 million from a year ago, the Mountain View, California-based software developer said. It also lost market share with low-paying customers.

The shares dropped as much as 9.3% to $600.49 Friday in New York, the biggest intraday decline since November 2022. The stock had gained 6% this year through Thursday’s close.

Intuit has been working to cater its TurboTax software to those with more complicated tax situations, betting on the idea that those particular customers could use online assistance from experts. The company has also marketed more artificial intelligence features in its products.

Despite the loss in free customers, there are signs that Intuit’s investments are paying off. The average user of TurboTax is spending 10% more on their filing this year compared with a year ago, according to the company. Fiscal third-quarter revenue increased 12% to $6.74 billion, surpassing the $6.64 billion average of analysts’ estimates. 

The period that ended April 30 — including tax season — is the most critical for the maker of TurboTax and other financial software. Profit, excluding some items, was $9.88 a share, beating Wall Street’s expectations. 

During an earnings call after the results were released, company executives were asked about the cause and implications of the user decline. Keith Weiss, an analyst at Morgan Stanley, asked why Intuit can’t use TurboTax to appeal to the high end and the low end of the market.

Competition for those lower-paying and free customers raises “questions that could concern investors,” wrote Raimo Lenschow, an analyst at Barclays.

Chief Executive Officer Sasan Goodarzi shrugged off the importance of the free customer base. Some people are “just really looking for a free tax software — bouncing between platforms — and we are not interested in pursuing those customers,” he said. Goodarzi also highlighted that TurboTax gained share among people who traditionally have hired an accountant to handle their tax returns.

Some of those departing customers may have opted for an Internal Revenue Service-run pilot for free tax software that was available in a limited number of states this tax season and used by about 140,000 people. Intuit has long lobbied against efforts by the government to offer software for people to complete their tax returns online, calling it unnecessary because private companies already offer it for free. 

Intuit doesn’t view the free government tax filing pilot as a contributing factor in the decline, a spokesperson said.

Investors may have also wanted to see stronger results from Intuit’s business-oriented products such as QuickBooks Accounting, said Niraj Patel, an analyst at Bloomberg Intelligence. Sales from the unit containing QuickBooks, which is aimed at small businesses and self-employed users, increased 18% to $2.4 billion, were roughly in line with average estimates. 

For the current quarter, total revenue will be about $3.1 billion, ahead of analyst estimates. Profit, excluding some items, will be $1.80 to $1.85 a share in the period ending in July, also beating Wall Street’s outlook.

The company separately announced that Credit Karma CEO Kenneth Lin will depart at the end of this year. That could signal more disruption, Patel said. 

Credit Karma is a loan-aggregating service acquired by Intuit in 2020. Joe Kauffman, the unit’s president, will take over for Lin effective Aug. 1, the company said. Intuit is currently working to steer customers of Mint, a finance management app acquired in 2009 and recently shuttered, toward Credit Karma. The company now expects Credit Karma sales to increase about 2% to $1.66 billion for the full year — up from a previous outlook of about flat revenue.