Credit Karma builds presence in the free tax prep field

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Credit Karma, a personal finance site that offers free credit scores and credit monitoring, expanded into offering free tax prep services last year and is quickly growing as it enters its second tax season.

Last year, the San Francisco-based company filed approximately 1 million tax returns, according to Jagjit Chawla, general manager of Credit Karma Tax. Chawla joined Credit Karma about 15 months ago after working for a decade at Google developing hardware products like Google Home and Chromecast.

“Last year, a million Americans filed their taxes with us,” he said. “That means there are a million Americans who trust us to do something as important as filing their taxes. That creates stickiness in the product. They come back and engage with us.”

Credit Karma has 80 million members, many of whom come back every quarter to check their credit scores. The company hopes to entice many more of them onto its tax prep service for its second tax season.

Unlike some of its competitors, Credit Karma’s free offering goes beyond a simple federal tax return. The company is filing both the full 1040 as well as the shorter 1040A and 1040EZ forms. It also handles associated schedules like the itemized Schedule A, the Schedule C for profit or loss from a business, Schedule SE for the self-employed, K-1 income, and state tax returns for 42 states and the District of Columbia, along with electronic filing, all for free. The software doesn't support multistate filing, though. The company makes money by offering services through partners such as banks, who pay Credit Karma, but the site has no payment function of its own.

Chawla said Credit Karma doesn’t provide its customers’ information to its partners, but gives them the option to sign up with the partners.

“We never sell, share or enter your data with anyone,” he said. “You can choose to share your data from Credit Karma Tax, which is the entity that prepares taxes, with Credit Karma, and it’s completely optional. If you choose not to consent and share data, you can still go ahead and prepare your taxes for free.”

The goal is to build engagement with the product and hopefully bring back members for repeat visits. Even when members do join Credit Karma, their data is only used internally to provide them with financial offers that might potentially entice them to sign up with partners, who offer products such as loans and credit. If consumers get approved by one of Credit Karma's partners, the company gets paid.

One of Credit Karma’s partners, MetaBank, is offering tax refund advances this year on prepaid debit cards from American Express. Chawla believes the Earlybird Advance will especially appeal to taxpayers claiming the Earned Income Tax Credit and Additional Child Tax Credit, who will have to wait some extra time for the IRS to process their returns.

Unlike some of its competitors, Credit Karma Tax is not part of the Free File Alliance, which includes tax software vendors’ free offerings.

“The memorandum of understanding with the Free File Alliance is that if you want to join, you have to do at least half your returns as paid returns, which is ironic because we are 100 percent free,” said Chawla. “We don’t want to charge anything to anyone, so we technically do not qualify.”

Credit Karma was able to jumpstart development of its tax prep product last tax season by acquiring an existing site,, based in Charlotte, N.C. It is continuing to rely on the employees there, along with the employees in San Francisco. Last year, it was able to get the service ready for tax season in 79 days, thanks to a “tiger team” of CPAs who can do computer coding. The group has about 50 employees.

“We acquired not just the product, but their engineers, so we have those people as a core part of my team now and they continue to be the tax experts,” said Chawla. “Over the last year, we have built what we call a ‘tiger team.’ They’re kind of unicorns in some sense. They’re very hard to find. They’re CPAs who can code. When the tax tables come out or the calculation changes come out, we have experts who can read it and code it up.”

This year, the company is adding mobile access to Credit Karma Tax, along with 24/7 chat support. Chawla noted that about 60 percent of the users log on after 10 P.M. He anticipates that many users will be asking about the new tax laws, even though many of the provisions won’t apply to the tax returns they will be filing this season. However, the chat support staff doesn’t include the CPAs who help develop the software.

“The help is mostly provided by non-CPAs,” said Chawla. “We don’t technically want to do any tax advice so we don’t have CPAs on staff answering those questions. But the tiger team trains them on how to deal with the questions.”

Every evening, they plan to meet to see which questions are coming in from the most people. “I was concerned during the government shutdown that people were going to start asking us about what’s going to happen to my refund,” said Chawla. “I am in no place to answer that. It’s not my prerogative at all. But we have to still serve our members so the refund advance program helps them.”

If Congress can’t agree to prevent another shutdown when the latest temporary funding runs out in February, those questions might start coming in after all. “If the refunds do get delayed I’m glad we have a product we have worked on,” said Chawla. “It was like pulling teeth to build that, with three different companies trying to do that in such a short amount of time. We keep it free so there is some cost and we eat the cost, but it’s an investment. You have to invest in your members.”

Meanwhile, the company is gearing up for what promises to be a strenuous tax season. “I can’t wait for the next 90 days to pass,” said Chawla. “I wish I could fast forward time.”

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