Updated January 24, 2022
The Internal Revenue Service’s Free File Program (FFP):
Current Status and Policy Issues
The option to electronically file (e-filing) federal individual
accessible to paper return filers without requiring them or
income tax returns began in 1986. Since then its usage has
the federal government to pay for commercial tax services.
grown considerably. By the end of December 2020, 89% of
The key to success, senior Treasury officials thought at the
returns for the 2019 tax year were e-filed. Nonetheless, 17.6
time, was for the IRS to establish a “single point of access”
million paper returns were filed for that year.
for lower-income taxpayers to free online tax preparation
and filing services provided by tax software companies.
As a policy objective, the IRS would like to achieve an e-
(The IRS did not achieve its 2007 e-filing goal until 2012,
filing rate of 100% because of its advantages over paper
when 83% of individual returns were e-filed.)
filing. Generally, e-filing has a lower cost for processing
returns and reduced error rates. E-filing also speeds up the
As a first step in implementing the EZ Tax Filing Initiative,
processing of tax refunds for individuals who had too much
the IRS tried to develop a digitized version of Form 1040
income tax withheld or overpaid their tax during a year.
and accompanying schedules and instructions that could be
accessed at no cost through WhiteHouse.gov. It soon
An element of the IRS’s strategy to promote universal
became apparent that the IRS lacked the resources and
individual income tax e-filing is the Free File Program
experience needed to efficiently launch such a project. To
(FFP). The program permits individuals with adjusted gross
circumvent these obstacles, in January 2002, Treasury
incomes (AGIs) at or below a specified amount ($73,000
Secretary Paul O’Neill asked IRS Commissioner Charles
for the 2021 tax year) to electronically prepare and file their
Rossetti to form a partnership with tax software companies
federal income tax returns, free of charge, using software
to develop a system for providing free online tax
provided by participating tax software companies, which
preparation and filing services for lower-income taxpayers.
totaled eight companies at the start of the 2022 filing
The resulting private-public partnership was known as the
season. The IRS provides a direct portal on its website for
Free File Alliance (FFA).
qualified persons to file through the FFP.
Structure and Evolution of the FFP
Since its creation in 2002, the FFP has had 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
2007 by making electronic tax preparation and filing more
services to low- to middle-income taxpayers. This meant
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The Internal Revenue Service’s Free File Program (FFP): Current Status and Policy Issues
that the IRS could not develop prefilled tax forms and make
services of certain member companies. In June 2020, the
them available at no cost to taxpayers through a secure
Senate Homeland Security and Government Affairs
portal on its website.
Permanent Subcommittee on Investigations released a
bipartisan staff memo assessing IRS’s oversight of the FFP.
The IRS and the FFA have extended and revised the
The 116th Congress ended up passing a similar bill, but
original agreement five times. These subsequent
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 some participating companies have
used the program to enlarge their revenue base. This
The current agreement is due to expire on October 31, 2022
expansion, say critics, is the result of the ban on IRS
(see the 2020 addendum to the 2018 MOU). It includes
competition in the market for electronic tax preparation, as
provisions intended to raise taxpayer awareness of the
well as efforts by some member companies to market their
program, encourage eligible taxpayers to use it repeatedly,
paid services to taxpayers eligible for the FFP. Critics add
and prevent participating companies from excluding their
that FFA companies’ websites for FFP filing are too
Free File landing pages from internet searches for the FFP.
complicated, the program has a low take-up rate, and the
The MOU for the agreement does not stipulate that the IRS
IRS has done little to promote the program since 2014.
should refrain from developing its own return filing system.
Further complicating the future of the FFP were the recent
Use of the FFP
decisions of two leading sellers of tax preparation software
One concern about the FFP since it began in FY2003 has
(Intuit and H&R Block) to withdraw from the FFA. Some
been low usage rates. In the first year of the program, 2.8
contend that their departure removes a key obstacle to the
million individuals filed their tax returns through the FFP,
IRS offering its own free file option for all taxpayers.
or 3.5% of all eligible taxpayers. Use of the program
peaked in FY2005, when 5.1 million individuals (or 6.4%
Options for Reforming the FFP
of eligible taxpayers) filed through the FFP. Since then
The alleged shortcomings of the FFP have led some to call
(except for 2009), FFP use has mostly declined. Of the
for changes in the program. Among the options being
154.1 million individual tax returns filed in FY2019, 2.8
considered, two general approaches have emerged.
million were filed through the FFP (2% of eligible
taxpayers). Use of Free File increased during the first year
One approach would retain the FFP but require the IRS to
of the COVID-19 pandemic. According to the IRS
invest more in promoting it among eligible taxpayers and to
Taxpayer Advocate’s 2020 report to Congress, “8 million
closely monitor member companies’ compliance with the
citizens” received an economic impact payment (i.e.,
MOU. Among the ways to strengthen the IRS’s oversight of
stimulus check) using the FFP in FY2020. This included
the FFP, the MOU could be revised to require member
persons who used the IRS’s “nonfiler portal.” Another 4.2
companies to disclose the revenue they receive from
million taxpayers used the FFP to file their tax returns in
marketing their paid services to FFP-eligible taxpayers.
the same year.
Another approach would replace the FFP with a system that
Policy Issues
eases the tax preparation and filing burden for taxpayers
In the 116th Congress, discussion of the FFP focused on
with relatively simple tax situations. Under such an option,
whether to codify the program and to permit the IRS to
taxpayers might prepare and file their returns through a
develop its own competing software. In April 2019, the
secure portal on the IRS website; or the IRS might prefill
House passed a bill (Taxpayer First Act, H.R. 1957) to
returns for individuals whose income and deductions are
reform various aspects of how the IRS interacts with
reported to the IRS by third parties, and then send them to
taxpayers; it included a provision that would have
taxpayers for their review and acceptance; or the federal
permanently extended the FFP. The provision triggered
government might adopt a return-free filing system based
opposition from several groups, including some Members
on exact withholding or tax-agency reconciliation.
of Congress, concerned about the ways in which member
companies had manipulated the FFP to earn revenue from
Gary Guenther, Analyst in Public Finance
FFP-eligible taxpayers who nonetheless filed using the paid
IF11808
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The Internal Revenue Service’s Free File Program (FFP): Current Status and Policy Issues
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