April 14, 2021
The Internal Revenue Service’s Free File Program (FFP):
Current Status and Policy Issues
The option to electronically file (e-filing) federal individual
2007 by making electronic tax preparation and filing more
income tax returns began in 1986. Since then its usage has
accessible to paper return filers without requiring them or
grown considerably. As of the end of December 2020, 89%
the federal government to pay for commercial tax services.
of returns for the 2019 tax year were e-filed. Nonetheless,
The key to success, senior Treasury officials thought at the
17.6 million paper returns were filed for that year.
time, was for the IRS to establish a “single point of access”
for lower-income taxpayers to free online tax preparation
As a policy matter, the IRS would like to achieve an e-filing
and filing services provided by tax software companies.
rate of 100% because of its advantages over paper filing.
(The IRS did not achieve its 2007 e-filing goal until 2012,
Generally, e-filing has a lower cost for processing returns
when 83% of individual returns were e-filed.)
and reduced error rates. E-filing also speeds up the
processing of tax refunds for individuals who had too much
As a first step in implementing the EZ Tax Filing Initiative,
income tax withheld or overpaid their tax during a year.
the IRS tried to develop a digitized version of Form 1040
and accompanying schedules and instructions that could be
An element of the IRS’s strategy to promote e-filing is the
accessed at no cost through WhiteHouse.gov. It soon
Free File Program (FFP). The program permits individuals
became apparent that the IRS lacked the resources and
with adjusted gross incomes (AGIs) at or below a specified
experience needed to efficiently launch such a project. To
amount ($72,000 for the 2020 tax year) to electronically
circumvent these obstacles, in January 2002, Treasury
prepare and file their federal income tax returns, free of
Secretary Paul O’Neill asked IRS Commissioner Charles
charge, using software provided by participating tax
Rossetti to form a partnership with tax software companies
software companies, which totaled nine companies at the
to develop a system for providing free online tax
start of the 2021 filing season. The IRS provides a direct
preparation and filing services for lower-income taxpayers.
portal on its website for qualified persons to file through the
The resulting private-public partnership was known as the
FFP.
Free File Alliance (FFA).
Since its creation in 2002, the FFP has sought to achieve
Structure and Evolution of the FFP
three goals:
The FFP began when the IRS signed an agreement with the
17 original FFA member companies on October 30, 2002.
Simplify tax preparation and filing for “economically
disadvantaged and underserved” taxpayers;
From the start, there was a clear division of authority and
responsibility between the IRS and the participating
Provide more services to taxpayers who normally file
companies.
paper returns; and
The initial agreement required the companies to make
Encourage further growth in e-filing by giving lower-
available at no cost their tax preparation and filing software
income taxpayers the opportunity to file their returns
through IRS.gov to at least 60% of taxpayers ranked by
free online through software provided by tax software
AGI. The companies retained complete control over the
companies.
scope of their free-file services and eligibility requirements,
with one exception: each member company had to be
Origin of the FFP
capable of providing free filing services to cover at least
The FFP has its origin in two sources. One was the IRS
10% of individual tax returns filed for a year.
Restructuring and Reform Act of 1998 (RRA, P.L. 105-
206). Among other things, the RRA directed the IRS to
The IRS was responsible for enforcing member company
increase the share of e-filed individual returns to 80% by
compliance with the terms of the agreement. As a result, the
2007, with assistance from the private sector. Achieving
agency was authorized to cancel the agreement with one
this goal posed a significant challenge for the IRS, as the e-
year’s advance notice, if it determined that the companies,
filing rate was 23.5% in the 1998 tax year.
over an extended period, were failing to provide adequate
or required coverage.
The second source was a directive issued in 2001 by the
Office of Management and Budget’s (OMB’s) Quicksilver
A key component of the agreement arguably involved a
Task Force to implement President George W. Bush’s E-
trade-off between access to e-filing for paper filers and the
Government Initiative. One of the 24 initiatives chosen by
potential benefits of the IRS creating a direct filing option
the task force was the EZ Tax Filing Initiative. Its main
for all taxpayers. The IRS pledged not to compete in the
purpose was to help the IRS reach its 80% e-filing goal by
market for tax software. In return, member companies
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The Internal Revenue Service’s Free File Program (FFP): Current Status and Policy Issues
agreed to offer free electronic tax preparation and filing
permanently extended the FFP. The provision triggered an
services to low- to middle-income taxpayers. This meant
outpouring of dissent from several groups, including some
that the IRS could not develop prefilled tax forms and make
Members of Congress concerned about the ways in which
them available at no cost to taxpayers through a secure
member companies had used the FFP to expand their
portal on its website.
revenue. The 116th Congress ended up passing a similar
bill, but without the FFP provision (P.L. 116-25).
The IRS and the FFA have extended and revised the
original agreement five times. These subsequent
The debate over codifying the FFP has shed light on the
agreements are linked to nine memoranda of understanding
effectiveness of the FFP, its shortcomings, and ways to
(MOU), which apply to specific tax filing seasons.
improve the program.
The second agreement (2005) reduced the range of free
FFP proponents say it should be retained in its current form
services a company could offer to eligible taxpayers,
because it saves low- and middle-income taxpayers and the
limited the share of eligible taxpayers a single company
IRS considerable money each year. According to the FFA,
could serve to 50%, and increased the share of taxpayers
taxpayers saved an estimated $1.5 billion from 2003 to
eligible for free filing through the FFP to the bottom 70%
2018 as a result of the option to file free under the FFP. In
of individuals ranked by AGI.
the same period, the FFA claims that the program has saved
the IRS hundreds of millions of dollars in processing costs.
The 2009 agreement expanded the scope of the FFP by
adding free fillable individual income tax forms to the
By contrast, FFP critics contend that the current program is
services available through the program. Taxpayers of all
too flawed to achieve its main goals. Of particular concern
income levels were eligible to file using these e-forms. The
are the ways in which participating companies have used
2009 agreement also required FFA companies to embed a
the program to enlarge their revenue base. This expansion,
link to IRS.gov in their landing pages for the FFP.
say critics, is the result of the ban on IRS competition in the
market for electronic tax preparation and filing, as well as
The current agreement (2018) is due to expire on October
efforts by member companies to market their paid services
31, 2021. It includes steps intended to raise taxpayer
to taxpayers eligible for the FFP. Critics cite several other
awareness of the program, encourage eligible taxpayers to
reasons to explain why the FFP has been ineffective. They
use it repeatedly, and prevent participating companies from
are (1) complexity of the companies’ websites for FFP
excluding their Free File landing pages from internet
filing; (2) the program’s historically low take-up rate; (3)
searches for the FFP. Companies that engaged in this
inadequate promotion of the program by the IRS; and (4)
practice benefited from it, because taxpayers accessing their
program goals that have remained unchanged since 2003.
websites to file through the FFP were referred to pages
featuring the companies’ paid services before they were
Options for Reforming the FFP
informed that they could file at no cost through the FFP.
The alleged shortcomings of the FFP have led some to call
for changes in the program. Among the options being
The MOU adopted in 2019 to implement the 2018
considered, two general approaches have emerged.
agreement was notable for its lack of a prohibition on the
IRS developing its own software for free tax preparation
One approach would retain the FFP but require the IRS to
and a filing system through a secure portal on the IRS
invest more in promoting it among eligible taxpayers and to
website. Each previous MOU had contained such a
closely monitor member companies’ compliance with the
provision.
MOU. Among the ways to strengthen the IRS’s oversight of
the FFP, the MOU could be revised to require member
Use of the FFP
companies to disclose the amount of revenue they receive
A continuing concern about the FFP from its start has been
from marketing their paid services to FFP-eligible
its low usage. In FY2003, the first year of the program, 2.8
taxpayers.
million individuals filed their tax returns through the FFP,
representing 3.5% of all eligible taxpayers. Use of the
Another approach would replace the FFP with a system that
program peaked in FY2005, when 5.1 million individuals
eases the tax preparation and filing burden for taxpayers
(or 6.4% of eligible taxpayers) filed through the FFP. Since
with relatively simple tax situations. Under such an option,
then (except for 2009), FFP use has mostly declined. Of the
taxpayers might prepare and file their returns through a
154.1 million individual tax returns filed in FY2019, 2.8
secure portal on the IRS website; or the IRS might prefill
million were filed through the FFP (2% of eligible
returns for individuals whose income and deductions are
taxpayers).
reported to the IRS by third parties, and then send them to
taxpayers for their review and acceptance; or the federal
Policy Issues
government might adopt a return-free filing system based
In the 116th Congress, discussion of the FFP focused on
on exact withholding or tax-agency reconciliation.
whether to codify the program and to permit the IRS to
develop its own competing software. In April 2019, the
Gary Guenther, Analyst in Public Finance
House passed a bill (Taxpayer First Act, H.R. 1957) to
reform various aspects of how the IRS interacts with
IF11808
taxpayers; it included a provision that would have
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The Internal Revenue Service’s Free File Program (FFP): Current Status and Policy Issues
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