Updated February 2, 2022
The Internal Revenue Service’s Free File Program (FFP):
Current Status and Policy Issues
The option to electronically file (e-filing) federal individual
purpose was to help the IRS reach its 80% e-filing goal by
income tax returns began in 1986. Since then its usage has
2007 by making electronic tax preparation and filing more
grown considerably. By the end of December 2020, 89% of
accessible to paper return filers without requiring them or
returns for the 2019 tax year were e-filed. Nonetheless, 17.6
the federal government to pay for commercial tax services.
million paper returns were filed for that year.
The key to success, senior Treasury officials thought at the
time, was for the IRS to establish a “single point of access”
As a policy objective, the IRS would like to achieve an e-
for lower-income taxpayers to free online tax preparation
filing rate of 100% because of its advantages over paper
and filing services provided by tax software companies.
filing. Generally, e-filing has a lower cost for processing
(The IRS did not achieve its 2007 e-filing goal until 2012,
returns and reduced error rates. E-filing also speeds up the
when 83% of individual returns were e-filed.)
processing of tax refunds for individuals who had too much
income tax withheld or overpaid their tax during a year.
As a first step in implementing the EZ Tax Filing Initiative,
the IRS tried to develop a digitized version of Form 1040
An element of the IRS’s strategy to promote universal
and accompanying schedules and instructions that could be
individual income tax e-filing is the Free File Program
accessed at no cost through WhiteHouse.gov. It soon
(FFP). The program permits individuals with adjusted gross
became apparent that the IRS lacked the resources and
incomes (AGIs) at or below a specified amount ($73,000
experience needed to efficiently launch such a project. To
for the 2021 tax year) to electronically prepare and file their
circumvent these obstacles, in January 2002, Treasury
federal income tax returns, free of charge, using software
Secretary Paul O’Neill asked IRS Commissioner Charles
provided by participating tax software companies, which
Rossetti to form a partnership with tax software companies
totaled eight companies at the start of the 2022 filing
to develop a system for providing free online tax
season. The IRS provides a direct portal on its website for
preparation and filing services for lower-income taxpayers.
qualified persons to file through the FFP. Taxpayers with
The resulting private-public partnership was (and still is)
AGIs above $73,000 can e-file their returns free of charge
called the Free File Alliance (FFA).
through the same portal using Free File Fillable Forms.
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
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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
taxpayers; it included a provision that would have
services to low- to middle-income taxpayers. This meant
permanently extended the FFP. The provision triggered
that the IRS could not develop prefilled tax forms and make
opposition from several groups, including some Members
them available at no cost to taxpayers through a secure
of Congress, concerned about media reports that some FFA
portal on its website.
companies earned revenue from FFP-eligible taxpayers who
e-filed their returns using the companies’ paid services. The
The IRS and the FFA have extended and revised the
116th Congress eventually passed a similar bill, but without
original agreement five times. These subsequent
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 shed light on the
program’s benefits, shortcomings, and possible
The second agreement (2005) reduced the range of free
improvements.
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
FFP critics contend that the current program has too many
2009 agreement also required FFA companies to embed a
flaws to achieve its main goals. They say that member
link to IRS.gov in their landing pages for the FFP.
companies’ websites for FFP filing are too complicated, the
program historically has had a low take-up rate, and the IRS
The current agreement is due to expire on October 31, 2023
has done too little to promote the program and ensure that
(see the 2021 addendum to the 2018 MOU). It includes
member companies are adhering to the terms of the current
provisions intended to raise taxpayer awareness of the
MOU. Critics are also concerned that some FFA companies
program, encourage eligible taxpayers to use it repeatedly,
(including Intuit and H&R Block) may have benefited in
and prevent participating companies from excluding their
recent years from the FFP by marketing paid services to
Free File landing pages from internet searches for the FFP.
FFP-eligible taxpayers. A 2020 report by the Treasury
The MOU for the agreement does not specify that the IRS
Inspector General for Tax Administration found that over
should refrain from developing its own return filing system.
34.5 million FFP-eligible taxpayers e-filed their returns by
using member companies’ commercial software. According
The structure of the FFA has shifted since 2020, as the
to the report, many of these individuals may have been
program’s two largest providers of tax preparation and
unaware of the FFP or were unsure how to access it.
filing services withdrew from the FFA: H&R Block in 2020
and Intuit in 2021. Eight providers remain in the program,
Options for Reforming the FFP
including TaxSlayer and TaxNet.
The alleged shortcomings of the FFP have led some to call
for significant changes in the program. Two options appear
Use of the FFP
to have attracted considerable interest.
One concern about the FFP since it began in FY2003 has
been its low usage rates. In the first year of the program, 2.8
One option would retain the FFP but require the IRS to
million individuals filed their tax returns through the FFP,
invest more in promoting it among eligible taxpayers and to
or 3.5% of all eligible taxpayers. Use of the program
closely monitor member companies’ compliance with the
peaked in FY2005, when 5.1 million individuals (or 6.4%
MOU. Among the ways to strengthen the IRS’s oversight of
of eligible taxpayers) filed through the FFP. Since then
the FFP, the MOU could be revised to require member
(except for 2009), FFP use has mostly declined. Of the
companies to disclose the revenue they receive from
154.1 million individual tax returns filed in FY2019, 2.8
marketing their paid services to FFP-eligible taxpayers.
million were filed through the FFP (2% of eligible
taxpayers). Use of Free File increased during the first year
A second option would replace the FFP with a system that
of the COVID-19 pandemic. According to the IRS
eases the tax preparation and filing burden for taxpayers
Taxpayer Advocate’s 2020 report to Congress, “8 million
with relatively simple tax situations. Under such an option,
citizens” received an economic impact payment (i.e.,
taxpayers might prepare and file their returns through a
stimulus check) via the FFP in FY2020, and another 4.2
secure portal on the IRS website; or the IRS might prefill
million taxpayers used the FFP to e-file their tax returns.
returns for individuals whose income and deductions are
reported to the IRS by third parties, and then send them to
Policy Issues
taxpayers for their review and acceptance; or the federal
In the 116th Congress, discussion of the FFP focused on
government might adopt a return-free filing system based
whether to codify the program and to permit the IRS to
on exact withholding or tax-agency reconciliation.
develop its own competing software. In April 2019, the
House passed a bill (Taxpayer First Act, H.R. 1957) to
Gary Guenther, Analyst in Public Finance
reform various aspects of how the IRS interacts with
IF11808
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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 4 · UPDATED