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.