Updated November 22, 2022
The Internal Revenue Service’s Free File Program (FFP):
Current Status and Policy Issues

The option to electronically file (e-filing) federal individual
As a first step in implementing the EZ Tax Filing Initiative,
income tax returns began in 1986. Since then its usage has
the IRS tried to develop a digitized version of Form 1040
grown considerably. As of July 28, 2022, 99% of such
and accompanying schedules and instructions that could be
returns for the 2021 tax year had been e-filed.
accessed at no cost through WhiteHouse.gov. It soon
became apparent that the IRS lacked the resources and
E-filing has advantages for both tax administrators and
expertise needed to launch such a project anytime soon. To
taxpayers. Generally, e-filing substantially lowers the cost
overcome these obstacles, in January 2002, Treasury
of processing returns and leads to fewer error rates. E-filing
Secretary Paul O’Neill asked IRS Commissioner Charles
also speeds up the processing of tax refunds for individuals,
Rossetti to form a partnership with tax software companies
allowing them to receive refunds sooner than they would if
to develop a system managed by the IRS for providing free
they were to file a paper return.
online tax preparation and filing services for lower-income
taxpayers. The resulting private-public partnership was
The IRS has been actively promoting e-filing for
called the Free File Alliance (FFA).
individuals, businesses, and tax practitioners since the late
1990s. A key element of this strategy is the Free File
Structure and Evolution of the FFP
Program (FFP). The program permits individuals,
The FFP began when the IRS signed an agreement with the
regardless of filing status, with adjusted gross incomes
17 original FFA member companies on October 30, 2002.
(AGIs) at or below a specified amount ($73,000 in the 2021
The agreement contained a clear division of authority and
tax year) to e-file their federal income tax returns, free of
responsibility between the IRS and the participating
charge, using software provided by participating tax
companies.
preparation companies; there were eight such member
companies at the start of the 2022 filing season. The IRS
The initial agreement required the companies to make
provides a portal on its website for eligible taxpayers to
available at no cost their tax preparation and filing services
access the FFP. Taxpayers with AGIs above FFP limit may
through IRS.gov to at least 60% of taxpayers, ranked by
e-file their returns, free of charge, through the same portal
AGI. The companies retained complete control over the
using Free File Fillable Forms .
services they provided and eligibility requirements, except
that each member company had to be capable of providing
Origin of the FFP
free filing services to at least 10% of individual tax returns
The FFP has two sources. One was the IRS Restructuring
filed for a year.
and Reform Act of 1998 (RRA, P.L. 105-206). Among
other things, the act directed the IRS to increase the share of
The IRS was responsible for enforcing member company
e-filed individual returns to 80% by 2007, with assistance
compliance with the terms of the agreement. As a result, the
from the private sector. The e-filing rate was 23.5% in the
agency was authorized to cancel the agreement with one
1998 tax year.
year’s advance notice, if it determined that member
companies, over an extended period, were failing to provide
A second source was a directive issued in 2001 by the
adequate or required coverage.
Office of Management and Budget’s (OMB’s) Quicksilver
Task Force to implement President George W. Bush’s E-
The agreement involved a trade-off between increased
Government Initiative. One of the 24 initiatives chosen by
access to e-filing for paper filers and the benefits from a
the task force was the EZ Tax Filing Initiative. It was
free direct-filing option for all taxpayers through the IRS
intended to assist the IRS’s efforts to achieve an 80% e-
website. Under the agreement, the IRS pledged not to
filing rate for individuals by 2007 by making electronic tax
compete in the market for tax filing and preparation. In
preparation and filing more accessible to paper return filers
return, member companies agreed to offer free electronic
without requiring them or the federal government to pay for
tax preparation and filing services to low- to middle-income
commercial tax services. The key to success, senior
taxpayers. This meant that the IRS could not develop
Treasury officials thought at the time, was for the IRS to
prefilled tax forms and make them available at no cost to
establish a “single point of access” for lower- and middle-
taxpayers through its website.
income taxpayers to free online tax preparation and filing
services provided by tax software companies. (The IRS did
The IRS and FFA (now known as Free File, Inc. or FFI)
not achieve its 2007 e-filing goal until 2012, when 83% of
have extended and revised the original agreement five
individual returns were e-filed.)
times. These subsequent agreements are linked to nine
memoranda of understanding (MOU).
https://crsreports.congress.gov

The Internal Revenue Service’s Free File Program (FFP): Current Status and Policy Issues
The second agreement (2005) reduced the range of free
companies, say it should be kept, although not necessarily
services a company could offer to eligible taxpayers,
without changes, because it saves low- and middle-income
limited the share of eligible taxpayers a single company
taxpayers and the IRS considerable money each year.
could serve to 50%, and increased the share of taxpayers
According to the FFI, taxpayers saved an estimated $1.5
eligible for free filing through the FFP to the bottom 70%
billion from 2003 to 2018 as a result of e-filing free through
of individuals ranked by AGI.
the FFP. Proponents also claim that the FFP 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 available
FFP critics contend that the current program is too flawed
services. Taxpayers of all income levels could file using
to retain. They say member companies’ websites for FFP
these e-forms. The 2009 agreement also required FFA
filing are too complicated and in some cases deceiving; the
companies to embed a link to IRS.gov in their landing
program’s take-up rate is too low; and the IRS has not done
pages for the FFP.
enough to promote the program, assess taxpayers’
experiences with it, and monitor member companies’
The current agreement is due to expire on October 31,
compliance with the current agreement. Critics are also
2023. It includes provisions intended to raise taxpayer
concerned that some FFI companies may continue to use
awareness of the program, encourage eligible taxpayers to
the FFP as a marketing tool for their paid filing services to
regularly use it, and prevent participating companies from
FFP-eligible taxpayers. In a 2020 report, the Treasury
excluding their Free File landing pages from internet
Inspector General for Tax Administration found that over
searches for the FFP. The agreement no longer specifies
34.5 million FFP-eligible taxpayers e-filed their returns by
that the IRS should refrain from developing its own online
using member companies’ commercial software in FY2019.
direct filing system.
Reforming the FFP
FFI’s membership has shifted since 2020, as the two largest
Some argue that the FFP should be retained, but only if
providers of tax preparation and filing services in the
certain changes are made in its operation. These changes
United States withdrew from the FFA: H&R Block in 2020
would require the IRS to invest more in promoting the FFP
and Intuit in 2021. Together they handled about 70% of
among eligible taxpayers, and to more closely monitor
returns filed through the FFP for the 2019 tax year.
member companies’ compliance with the current MOU. In
addition, reform proponents contend the MOU should be
Use of the FFP
revised to require member companies to disclose to the IRS
An ongoing concern with the FFP has been its low usage
any revenue they receive from marketing their paid services
rates. In the first year of the program, 2.8 million
to FFP-eligible taxpayers.
individuals filed their tax returns through the FFP, or 3.5%
of all eligible taxpayers. Use of the program peaked in
Return-Free Filing
FY2005, when 5.1 million individuals (or 6.4% of eligible
Others argue that the FFP should be replaced with a federal
taxpayers) filed through the FFP. From 2003 to 2019, an
tax return filing system that simplifies the process,
average of 2.8% of eligible taxpayers filed using the FFP.
especially for taxpayers with uncomplicated tax situations.
But usage rates rose for the 2019 and 2020 tax years. In
This could be done by allowing the IRS to prefill returns for
2019, FFP filers represented 2.4% of all individual filers; in
individuals whose income is reported to the IRS by third
2020, that percentage grew to 2.7%. It is not entirely clear
parties; the returns would be electronically sent to taxpayers
why the filing rate rose. Claims for the economic impact
for their review; recipients would either accept the IRS-
payments issued by the IRS in 2020 by individuals who
generated returns or reject them and file their own returns.
normally do not file a tax return may have been a factor.
Two other options for simplifying the filing process would
be for the federal government to adopt a return-free filing
Policy Issues
system based on exact withholding or one based on tax-
The future of the FFP came into sharp focus in 2019. In
agency reconciliation.
April of that year, the House passed a bill (Taxpayer First
Act, H.R. 1957) to reform various aspects of how the IRS
Direct E-Filing with the IRS
interacts with taxpayers; one provision would have
Another simplification option is to replace the FFP with a
permanently extended the FFP, as it then existed. The
free, direct e-filing system managed by the IRS. P.L. 117-
provision triggered protests from some interest groups and
169, commonly known as the Inflation Reduction Act,
lawmakers and led to a congressional debate on whether to
provides the IRS with $15 million to study the cost of
codify the program, or to abolish it instead and allow the
developing and operating a direct e-filing system that
IRS to provide its own online filing and preparation
includes “multi-lingual and mobile-friendly features and
services. Fueling the protests were certain media reports
safeguards for taxpayer data.” The act requires the IRS to
that some FFA companies earned revenue from FFP-
consider taxpayers’ level of trust and expectations for a
eligible taxpayers by steering them to e-file using the firms’
direct-file system, as well as the views of independent third-
paid services. The 116th Congress eventually passed a
party entities on the cost, feasibility, and design of a direct
similar bill, but without the FFP provision (P.L. 116-25).
e-file tax return system, and the ability of the IRS to
“deliver” such a system.
Pros and Cons of Retaining the FFP
The FFP still operates, and the debate about whether to
Gary Guenther, Analyst in Public Finance
retain it still percolates. FFP proponents, led by the FFI
IF11808
https://crsreports.congress.gov

The Internal Revenue Service’s Free File Program (FFP): Current Status and Policy Issues


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https://crsreports.congress.gov | IF11808 · VERSION 7 · UPDATED