(Bloomberg) Intuit Inc. Chief Executive Officer Brad Smith is facing one of the biggest challenges in his seven-year tenure: how to restore trust in his company after fraudulent tax returns were filed through its TurboTax program.
Smith glimpsed just how serious the matter was last Thursday, when he found himself on a conference call talking with officials from all 50 U.S. states about the situation. The next morning, Intuit said it was suspending electronic state tax filings for TurboTax, one of its biggest software products. While filings resumed that same day and Intuit established its own systems weren’t broken into, the episode has led to customer complaints and raised questions about the security of the software.
Now the onus is on Smith to rehabilitate the company’s reputation so people continue to give Intuit their most private financial information. The Mountain View, California-based software maker is working with states to help spot fraudulent filers. This week, Smith sent a letter to the Internal Revenue Service calling for the government to make it easier to share information to combat fraud. It’s also working with security firms Palantir Technologies Inc. and Mandiant, a subsidiary of FireEye Inc., to look at its own systems.
“In this case it’s a competitor we all fight, which are cybercriminals, and we continue to learn and adapt,” Smith said in an interview. “We’re built to endure and we’re ultimately going to find the best solutions to prevent these bad actors from impacting our customers. I’m fired up to beat them.”
The snafu adds to other problems that Smith has already grappled with this year. Last month, some TurboTax users complained after the company changed some features in a version of the product, pushing people to pay more for the tools. He’s also facing new online tax rivals and questions about whether the Affordable Care Act is making taxes so complicated that users will choose to see accountants at competitors like H&R Block Inc. instead of using TurboTax.
In total, TurboTax generated $1.5 billion, or 34 percent, of Intuit’s annual revenue in fiscal 2014, according to data compiled by Bloomberg. The company’s stock price dropped after the e-filing suspension, following a 21 percent rise last year.
“They’ve had a few very good years and the stock has done phenomenally well,” said Gil Luria, an analyst at Wedbush Securities Inc., who has the equivalent of a hold rating on the stock. “It’s in that context that this very tough tax season comes. This tax year looks to be a pretty big setback.”
Tax fraud occurs every year. How this recent breach of content with TurboTax unfolded is still unclear. Intuit has said the fraudulent returns, which were being used to bilk states out of reimbursements, were “the result of stolen identity from other sources.” The Federal Bureau of Investigation is also looking into circumstances around the filings, a person with knowledge of the situation has said.
Among the consumers that Smith will have to win over is Katrina Ramirez, a 24-year-old college senior in Chicago who is studying economics. On Jan. 29, she received an e-mail from TurboTax that her e-file was successful—even though she has never been a TurboTax customer. With her identity having been stolen, she spent two hours on the phone with Intuit. She was eventually told to call the IRS, the Federal Trade Commission and three credit reporting agencies before the account was canceled.
“It really sucks,” she said. “I’m very unhappy with TurboTax and I don’t think I’ll ever use them.”
Smith, 50, joined Intuit in 2003 as a vice president. He later rose through the ranks to run the company’s consumer tax group and its small business division, before becoming CEO in 2008.
Since taking over, Smith has simplified Intuit’s business by selling its financial services wing to Thoma Bravo LLC for $1 billion in August 2013, after expanding into more consumer-friendly services such as the $170 million acquisition of finance website Mint.com in 2009. During his tenure, Intuit’s stock has almost tripled, with sales growing 47 percent to $4.5 billion in fiscal 2014.
This year’s tax season began with customers griping when Intuit moved certain TurboTax features that had previously been available in a basic version of the product to a deluxe version, forcing people to upgrade if they wanted those same tools. Many consumers complained.
Smith then apologized to customers twice. On Jan. 23, he wrote a post on LinkedIn Corp. entitled “In Business, Love Means Having to Say You’re Sorry,” in which he acknowledged the criticism.
Five days later, Smith apologized again on the official TurboTax site, accompanied by a video called “Sorry Wasn’t Enough,” where he read through angry messages he’d gotten from some of TurboTax’s 100 million users. He said he would refund those who had paid to upgrade TurboTax and that next year, Intuit would change the products back to how they used to be.
The fraudulent returns through TurboTax started popping up in late January. On Jan. 30 in Utah, authorities started seeing a higher than usual number of suspicious tax returns being filed. They were coming via TurboTax far more than other e-filing systems, said Charlie Roberts, a publication information officer at the Utah State Tax Commission.
Utah got in contact with TurboTax. Nineteen other states have also reported problems associated with tax returns filed via TurboTax, leading Smith to hold the conference call last week with representatives of 50 states. There were about 150 people on the call, he said.
Smith declined to comment on the potential business impact on Intuit, which is due to report earnings on Feb. 19, though the ripple effects probably won’t show up until the next set of quarterly results.
“The question is does this have some consequence on their expense structure and a little bit of revenue headwind? The answer is yes,” said Brent Thill, an analyst at UBS AG, adding that any investments Intuit makes will “make the product better and more secure.”
Smith said his priority now is to educate customers on how to keep their information secure, to educate states on how to spot fraudulent filings, and to work with the government to change the rules to make it easier for companies and public agencies to spot avenues for fraudulent returns and close them quickly.
Some customers said Smith’s actions have reassured them. Susan Gaines, 62, of North Carolina, said she is planning to file her tax returns online using TurboTax.
“I will continue to monitor it and see if there are other things that come up,” she said. “I feel like they’ve been very good in keeping the public advised.”
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