Updated May 12, 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
From the start, there was a clear division of authority and
disadvantaged and underserved” taxpayers;
responsibility between the IRS and the participating
companies.
Provide more services to taxpayers who normally file
paper returns; and
The initial agreement required the companies to make
available at no cost their tax preparation and filing software
Encourage further growth in e-filing by giving lower-
through IRS.gov to at least 60% of taxpayers ranked by
income taxpayers the opportunity to file their returns
AGI. The companies retained complete control over the
free online through software provided by tax software
scope of their free-file services and eligibility requirements,
companies.
with one exception: each member company had to be
capable of providing free filing services to cover at least
Origin of the FFP
10% of individual tax returns filed for a year.
The FFP has its origin in two sources. One was the IRS
Restructuring and Reform Act of 1998 (RRA, P.L. 105-
The IRS was responsible for enforcing member company
206). Among other things, the RRA directed the IRS to
compliance with the terms of the agreement. As a result, the
increase the share of e-filed individual returns to 80% by
agency was authorized to cancel the agreement with one
2007, with assistance from the private sector. Achieving
year’s advance notice, if it determined that the companies,
this goal posed a significant challenge for the IRS, as the e-
over an extended period, were failing to provide adequate
filing rate was 23.5% in the 1998 tax year.
or required coverage.
The second source was a directive issued in 2001 by the
A key component of the agreement arguably involved a
Office of Management and Budget’s (OMB’s) Quicksilver
trade-off between access to e-filing for paper filers and the
Task Force to implement President George W. Bush’s E-
potential benefits of the IRS creating a direct filing option
Government Initiative. One of the 24 initiatives chosen by
for all taxpayers. The IRS pledged not to compete in the
the task force was the EZ Tax Filing Initiative. Its main
market for tax software. In return, member companies
purpose was to help the IRS reach its 80% e-filing goal by
agreed to offer free electronic tax preparation and filing
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The Internal Revenue Service’s Free File Program (FFP): Current Status and Polic y Issues
services to low- to middle-income taxpayers. This meant
revenue from FFP-eligible taxpayers who nonetheless filed
that the IRS could not develop prefilled tax forms and make
using the paid services of certain member companies. In
them available at no cost to taxpayers through a secure
June 2020, the Senate Homeland Security and Government
portal on its website.
Affairs Permanent Subcommittee on Investigations released
a bipartisan staff memo assessing IRS’s oversight of the
The IRS and the FFA have extended and revised the
FFP. The 116th Congress ended up passing a similar bill,
original agreement five times. These subsequent
but without the FFP provision (P.L. 116-25).
agreements are linked to nine memoranda of understanding
(MOU), which apply to specific tax filing seasons.
The debate over codifying the FFP has shed light on the
effectiveness of the FFP, its shortcomings, and ways to
The second agreement (2005) reduced the range of free
improve the program.
services a company could offer to eligible taxpayers,
limited the share of eligible taxpayers a single company
FFP proponents say it should be retained in its current form
could serve to 50%, and increased the share of taxpayers
because it saves low- and middle-income taxpayers and the
eligible for free filing through the FFP to the bottom 70%
IRS considerable money each year. According to the FFA,
of individuals ranked by AGI.
taxpayers saved an estimated $1.5 billion from 2003 to
2018 as a result of the option to file free under the FFP. In
The 2009 agreement expanded the scope of the FFP by
the same period, the FFA claims that the program has saved
adding free fillable individual income tax forms to the
the IRS hundreds of millions of dollars in processing costs.
services available through the program. Taxpayers of all
income levels were eligible to file using these e-forms. The
By contrast, FFP critics contend that the current program is
2009 agreement also required FFA companies to embed a
too flawed to achieve its main goals. Of particular concern
link to IRS.gov in their landing pages for the FFP.
are the ways in which participating companies have used
the program to enlarge their revenue base. This expansion,
The current agreement is due to expire on October 31, 2022
say critics, is the result of the ban on IRS competition in the
(see the 2020 addendum to the 2018 MOU). It includes
market for electronic tax preparation and filing, as well as
provisions intended to raise taxpayer awareness of the
efforts by member companies to market their paid services
program, encourage eligible taxpayers to use it repeatedly,
to taxpayers eligible for the FFP. Critics cite several other
and prevent participating companies from excluding their
reasons to explain why the FFP has been ineffective. They
Free File landing pages from internet searches for the FFP.
are (1) complexity of the companies’ websites for FFP
The MOU for the agreement does not stipulate that the IRS
filing; (2) the program’s historically low take-up rate; (3)
should refrain from developing its own return filing system.
inadequate promotion of the program by the IRS; and (4)
program goals that have remained unchanged since 2003.
Use of the FFP
A continuing concern about the FFP from its start has been
Options for Reforming the FFP
its low usage. In FY2003, the first year of the program, 2.8
The alleged shortcomings of the FFP have led some to call
million individuals filed their tax returns through the FFP,
for changes in the program. Among the options being
representing 3.5% of all eligible taxpayers. Use of the
considered, two general approaches have emerged.
program peaked in FY2005, when 5.1 million individuals
(or 6.4% of eligible taxpayers) filed through the FFP. Since
One approach would retain the FFP but require the IRS to
then (except for 2009), FFP use has mostly declined. Of the
invest more in promoting it among eligible taxpayers and to
154.1 million individual tax returns filed in FY2019, 2.8
closely monitor member companies’ compliance with the
million were filed through the FFP (2% of eligible
MOU. Among the ways to strengthen the IRS’s oversight of
taxpayers). Use of Free File has increased during the
the FFP, the MOU could be revised to require member
pandemic. According to information provided in the IRS
companies to disclose the amount of revenue they receive
Taxpayer Advocate’s 2020 report to Congress, in FY2020
from marketing their paid services to FFP-eligible
“8 million citizens” received an economic impact payment
taxpayers.
(EIP; i.e. “stimulus check) using FFP. This includes those
who used the IRS’s “nonfiler portal.” In addition, 4.2
Another approach would replace the FFP with a system that
million taxpayers used FFP to file their tax returns over the
eases the tax preparation and filing burden for taxpayers
same period.
with relatively simple tax situations. Under such an option,
taxpayers might prepare and file their returns through a
Policy Issues
secure portal on the IRS website; or the IRS might prefill
In the 116th Congress, discussion of the FFP focused on
returns for individuals whose income and deductions are
whether to codify the program and to permit the IRS to
reported to the IRS by third parties, and then send them to
develop its own competing software. In April 2019, the
taxpayers for their review and acceptance; or the federal
House passed a bill (Taxpayer First Act, H.R. 1957) to
government might adopt a return-free filing system based
reform various aspects of how the IRS interacts with
on exact withholding or tax-agency reconciliation.
taxpayers; it included a provision that would have
permanently extended the FFP. The provision triggered an
Gary Guenther, Analyst in Public Finance
outpouring of dissent from several groups, including some
Members of Congress, concerned about the ways in which
IF11808
member companies had manipulated the FFP to earn
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The Internal Revenue Service’s Free File Program (FFP): Current Status and Policy Issues
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https://crsreports.congress.gov | IF11808 · VERSION 2 · UPDATED