By Peter Rudegeair and Cara Lombardo
Credit Karma Inc. is in talks to sell its tax-preparation business to Square Inc., according to people familiar with the matter, a move meant to head off potential antitrust objections to the personal-finance portal's pending $7.1 billion sale to TurboTax maker Intuit Inc.
Terms of the potential deal couldn't be learned. A sale of the unit would require approval from the Justice Department, which is concerned that bringing together Credit Karma's small but growing tax-preparation business with industry-leading TurboTax would leave taxpayers with fewer, and potentially pricier, e-filing options, the people said.
Credit Karma, best known for its website and app where more than 100 million users look up their credit scores for free, expanded into tax services via a 2016 acquisition. The San Francisco-based company doesn't charge anything for the e-filing service; rather, the income information Credit Karma gleans from users' taxes helps it fine-tune its main business of recommending credit cards and loans.
Square, the financial-technology company run by Twitter Inc. Chief Executive Jack Dorsey, helps small businesses accept credit- and debit-card payments. Credit Karma's tax business would augment Square's Cash App offering, a bank-account alternative that lets consumers transfer money and buy bitcoin from their smartphones.
Do-it-yourself software has displaced accountants for many American tax-filers. Nearly 72 million individuals prepared their own taxes and filed them online for the 2020 season, a 25% increase from 2019, according to Internal Revenue Service figures. The number of returns prepared by tax professionals and filed online fell slightly to about 80 million.
But online tax preparers have been criticized for not acting in consumers' best interests. In a series of articles last year that drew the attention of lawmakers, ProPublica reported that TurboTax steered low-income taxpayers, who would have been eligible to file their federal tax returns for free, into paid versions of its software. An outside review commissioned by the IRS found that some of the companies that participated in a program to prepare taxes for millions of filers at no charge used coding that hid free offerings from online searches.
The Justice Department's antitrust enforcers have focused their attention on financial and technology companies. In recent weeks, federal prosecutors filed a blockbuster antitrust lawsuit against Google over its search-engine practices and lined up witnesses for a potential lawsuit to block Visa Inc.'s $5.3 billion acquisition of startup Plaid Inc.
The department needs to "take a fresh look at how new technologies are changing the competitive dynamics in these industries, particularly the financial-services industry that is key to every American consumer and small business," Assistant Attorney General Makan Delrahim told The Wall Street Journal in August.
Credit Karma has spent recent months looking to find a buyer for the tax business. Based on feedback from the government, Credit Karma targeted potential bidders that have the financial wherewithal and strategic vision to grow tax businesses, people familiar with the matter said. Square appears to satisfy those conditions.
Intuit executives have said that Credit Karma's large user base and its tools to manage consumer borrowing and saving were the big drivers of its takeover offer, not Credit Karma's tax-prep business. Intuit's two personal-financial management offerings, Mint and Turbo, have less than half as many users as Credit Karma.
Brent Kendall contributed to this article.
(END) Dow Jones Newswires
October 30, 2020 10:29 ET (14:29 GMT)Copyright (c) 2020 Dow Jones & Company, Inc.