Updated January 26, 2023
The Internal Revenue Service’s Free File Program (FFP):
Current Status and Policy Issues
The option to electronically file (e-filing) federal individual
To implement the EZ Tax Filing Initiative, the IRS first
income tax returns began in 1986. Since then its usage has
tried to develop digitized versions of Form 1040 and
grown considerably. As of October 28, 2022, nearly 92% of
accompanying schedules and instructions that could be
such returns for the 2021 tax year had been e-filed.
accessed at no cost through WhiteHouse.gov. When it
became apparent that the IRS lacked the resources and
E-filing has advantages for both tax administrators and
expertise needed to complete such a project anytime soon,
taxpayers. Generally, e-filing substantially lowers the cost
Treasury Secretary Paul O’Neill asked IRS Commissioner
of processing returns and leads to fewer error rates. E-filing
Charles Rossetti in January 2002 to form a partnership with
also speeds up the processing of tax refunds for individuals,
tax software companies to develop a free online filing
allowing them to receive refunds sooner than they would if
system that would be managed by the IRS for low-income
they were to file a paper return.
taxpayers, who were most likely to file paper returns. The
resulting private-public partnership was initially called the
The IRS has been actively promoting e-filing for
Free File Alliance (FFA); it is now known as Free File, Inc.
individuals, businesses, and tax practitioners since the late
(FFI).
1990s. A key element of this strategy is the Free File
Program (FFP). The program permits individuals,
Structure and Evolution of the FFP
regardless of filing status, with adjusted gross incomes
The FFP began when the IRS signed an agreement with the
(AGIs) at or below a specified amount ($73,000 in the 2022
17 original FFI member companies on October 30, 2002. It
tax year) to e-file their federal income tax returns, free of
laid down a clear division of authority and responsibility
charge, using software provided by participating tax
between the IRS and the participating companies.
preparation companies; there are seven such member
companies at the start of the 2023 filing season. The IRS
The initial agreement required the companies to make
provides a secure portal on its website for eligible taxpayers
available at no cost their tax preparation and filing services
to access the FFP. Taxpayers with AGIs above the FFP
through IRS.gov to at least 60% of taxpayers, ranked by
limit may e-file their returns, free of charge, through the
AGI. The companies retained complete control over the
same portal using Free File Fillable Forms, which are
services they provided and eligibility requirements based on
electronic versions of tax forms and schedules.
age, income, and state residence. To join the program, each
company had to be capable of providing free filing services
Origin of the FFP
to at least 10% of individual filers.
The FFP has two sources. One was the IRS Restructuring
and Reform Act of 1998 (RRA, P.L. 105-206). The act
Under the agreement, the IRS was responsible for enforcing
directed the IRS to increase the share of e-filed individual
member company compliance with the terms of the
returns to 80% by 2007, with assistance from the private
agreement. The agency could cancel the agreement with
sector. The e-filing rate was 23.5% in 1998.
one year’s advance notice, if it determined that most
member companies were not providing adequate coverage.
A second source was a 2001 directive issued by the Office
of Management and Budget’s (OMB’s) Quicksilver Task
A key element of the agreement was an IRS pledge to
Force to implement President George W. Bush’s E-
refrain from competing in the commercial market for tax
Government Initiative. One of the 24 initiatives chosen by
filing and preparation. Keeping the IRS out of that market
the task force was the EZ Tax Filing Initiative. It was
was a major objective of member companies. In return,
intended to help the IRS achieve an 80% individual e-filing
member companies agreed to provide free electronic tax
rate by 2007 by making electronic tax preparation and filing
preparation and filing services to low- to middle-income
more accessible to paper return filers through a partnership
taxpayers, giving the IRS another avenue for expanding
with the private sector.
individual e-filing.
The key to success, according to senior Treasury officials
The IRS and FFI have extended and revised the original
involved in the initiative, was that the IRS establish a
agreement five times. These subsequent agreements are
“single point of access” for lower- and middle-income
linked to nine memoranda of understanding (MOU).
taxpayers to free online tax preparation and filing services
provided by tax software companies. (The IRS did not
The second agreement (2005) reduced the range of free
achieve its 2007 e-filing goal until 2012, when 83% of
services a company could offer to eligible taxpayers,
individual returns were e-filed.)
limited the share of eligible taxpayers a single company
could serve to 50%, and increased the share of taxpayers
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The Internal Revenue Service’s Free File Program (FFP): Current Status and Policy Issues
eligible for free filing through the FFP to the bottom 70%
also claim that the FFP has saved the IRS hundreds of
of individuals ranked by AGI.
millions of dollars in processing costs.
The 2009 agreement expanded the scope of the FFP by
FFP critics say the current program is too flawed to retain.
adding free fillable individual income tax forms to available
They say member companies’ websites for FFP filing are
online taxpayer services. Taxpayers of all income levels
too complicated and in some cases deceiving; the program’s
could file using these e-forms. The agreement also required
take-up rate remains unacceptably low; and the IRS still has
FFI companies to embed a link to IRS.gov in their landing
not done enough to promote the program, assess taxpayers’
pages for the FFP.
experiences with it, and monitor member companies’
compliance with the current agreement. Critics are also
The current MOU is due to expire on October 31, 2023. It
concerned that some FFI companies may continue to use
includes provisions intended to raise taxpayer awareness of
the FFP as a marketing tool for their paid filing services to
the program, encourage eligible taxpayers to regularly use
FFP-eligible taxpayers. In a 2020 report, the Treasury
it, and prevent participating companies from excluding their
Inspector General for Tax Administration found that over
Free File landing pages from internet searches for the FFP.
34.5 million FFP-eligible taxpayers e-filed their returns
In a significant shift, the MOU no longer specifies that the
using member companies’ commercial software in FY2019.
IRS should refrain from developing its own electronic
direct filing system through its website.
Reforming the FFP
Some argue that the FFP should be retained, but only if
FFI’s membership has shrunk since 2020. The two largest
certain changes are made in its operation. These changes
providers of tax preparation and filing services in the
would require the IRS to invest more in promoting the FFP
United States withdrew from the FFA: H&R Block in 2020
among eligible taxpayers, and to more closely monitor
and Intuit in 2021. Together they handled about 70% of
member companies’ compliance with the MOU. In
returns filed through the FFP for the 2019 tax year.
addition, proponents say that the MOU should be revised to
require member companies to disclose to the IRS any
Use of the FFP
revenue they receive from marketing their paid services to
An ongoing concern with the FFP has been its low usage
FFP-eligible taxpayers.
rates. In the first year of the program, 2.8 million
individuals filed their tax returns through the FFP, or 3.5%
Return-Free Filing
of all eligible taxpayers. Use of the program peaked in
Critics of the FFP contend that it should be replaced with an
FY2005, when 5.1 million individuals (or 6.4% of eligible
IRS-managed filing system that simplifies the process,
taxpayers) filed through the FFP. From 2003 to 2019, an
especially for taxpayers with uncomplicated tax situations.
average of 2.8% of eligible taxpayers filed using the FFP.
This could be done by having the IRS prefill returns for
Usage rose to 4.0% of eligible taxpayers for the 2020 tax
individuals whose entire income is reported to the IRS by
year. It is not entirely clear what drove the increase. Some
third parties; the returns would be electronically sent to
maintain that claims for the economic impact payments
taxpayers for their review; recipients would either accept
issued by the IRS in 2020 by individuals who normally do
the IRS-generated returns or reject them and file their own
not file a tax return may have been a factor.
returns. Another option for simplifying the filing process
would be for the IRS to adopt a return-free filing system
Policy Issues
based on either exact withholding or tax-agency
The future of the FFP became an issue for Congress in
reconciliation.
2019. In April, 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 opposition from some interest groups
169, commonly known as the Inflation Reduction Act,
and lawmakers and led to a congressional debate on
provided the IRS with $15 million to study the feasibility of
whether to codify the program or abolish it 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 opposition were media reports that
safeguards for taxpayer data.” The act required the IRS to
some FFA companies earned revenue from FFP-eligible
consider taxpayers’ level of trust and expectations for a
taxpayers by steering them to e-file using the firms’ paid
direct-file system, as well as the views of independent third-
services. The 116th Congress eventually passed a similar
party entities on the cost, feasibility, and design of a direct
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 its future still
It is unclear whether such a filing option will be available
simmers. FFP proponents, including FFI companies, say it
anytime soon. The IRS has not issued the IRA-mandated
should be kept, although not necessarily without changes,
study, and there is some continuing opposition in Congress
because it saves low- and middle-income taxpayers and the
to the IRS playing such a direct role in tax return filing.
IRS considerable money each year. According to the FFI,
taxpayers saved an estimated $1.5 billion from 2003 to
Gary Guenther, Analyst in Public Finance
2018 as a result of e-filing through the FFP. Proponents
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 8 · UPDATED