Updated January 22, 2024
The Internal Revenue Service’s Free File Program (FFP):
Current Status and Policy Issues
The Internal Revenue Service first allowed individual
Commissioner Charles Rossetti in January 2002 to establish
income tax returns to be filed electronically (e-filed)
a partnership with tax software companies to develop a free
through a pilot program that began in 1986 and involved
online filing system that would be managed by the IRS for
five tax preparers. Since then, e-filing has grown to the
low-income taxpayers, who were most likely to file paper
point that 92% of individual tax returns for the 2021 tax
returns. The resulting private-public partnership was
year were e-filed.
initially called the Free File Alliance (FFA); it is now
known as Free File, Inc. (FFI).
E-filing has advantages for both tax administrators and
taxpayers. For the former, e-filing substantially lowers the
The IRS did not achieve its 2007 e-filing goal until 2012,
cost of processing returns and entails lower error rates,
when 83% of individual returns were e-filed.
relative to paper returns. For the latter, e-filing allows
individuals to receive a tax refund sooner than they would
Structure and Evolution of the FFP
with a paper return.
The FFP began when the IRS signed an agreement with the
17 original FFI member companies on October 30, 2002.
The IRS has been promoting e-filing by individuals,
businesses, and tax practitioners since the late 1990s. A key
The agreement laid down a clear division of authority and
part of this effort is the Free File Program (FFP). The FFP
responsibility between the IRS and the member companies.
makes it possible for individuals, regardless of their filing
It required the companies to provide their tax preparation
status, with adjusted gross incomes (AGIs) at or below a
and filing services through IRS.gov at no cost to 60% or
specified amount ($79,000 in the 2023 tax year) to e-file
more of individual taxpayers, ranked by AGI. The
their federal income tax returns, free of charge, using
companies set the eligibility requirements for free filing,
software provided by participating tax preparation
based on age, income, and state residence. To join the FFP,
companies. There are seven such companies at the start of
each company had to prove that it was capable of providing
the 2024 filing season. The IRS provides a secure portal on
such a service to at least 10% of individual filers.
its website for eligible taxpayers to access the FFP.
Taxpayers with AGIs above the FFP limit may e-file their
The agreement made the IRS responsible for enforcing
returns, free of charge, through the same portal, using the
member company compliance with the terms of the
Free File Fillable Forms, which are electronic versions of
agreement. The agency had the authority to cancel the
tax forms and schedules that offer no filing assistance.
agreement with one year’s advance notice, if it determined
that most member companies were providing too little
Origin of the FFP
coverage.
The FFP originated through two sources. One was the IRS
Restructuring and Reform Act of 1998 (RRA, P.L. 105-
A controversial element of the agreement was a
206). The act directed the IRS to increase the share of e-
commitment by the IRS to not compete in the market for
filed individual returns to 80% by 2007 from 23% in 1998
tax filing and preparation. Preventing the IRS from
with assistance from the private sector.
becoming a competitor was a major incentive for tax
software companies to create and participate in the FFP.
A second source was a 2001 directive issued by the Office
of Management and Budget’s (OMB’s) Quicksilver Task
The IRS and FFI have extended and revised the original
Force implementing President George W. Bush’s E-
agreement five times. These subsequent agreements are
Government Initiative. One of the 24 projects chosen by the
linked to nine memoranda of understanding (MOU), which
task force was the EZ Tax Filing Initiative. It was intended
serve to implement the revised agreements.
to increase the probability of the IRS achieving an 80%
individual e-filing rate by 2007 by allowing paper filers to
The second agreement (2005) reduced the range of free
e-file their returns free of charge through a partnership
services a company could offer to eligible taxpayers; this
between the IRS and tax software companies.
meant that member companies could no longer offer refund
anticipation loans to FFP taxpayers. In addition, the
Initially, the IRS tried achieving the aims of the Initiative
agreement stipulated that no member company could serve
by developing digitized versions of Form 1040 (and its
more than 50% of such taxpayers, and increased the share
schedules and instructions) that could be accessed at no cost
of taxpayers eligible for free filing through the FFP to the
through WhiteHouse.gov. When it became apparent that the
bottom 70% of individuals ranked by AGI.
IRS would be unable to complete such a project anytime
soon, Treasury Secretary Paul O’Neill asked IRS
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The Internal Revenue Service’s Free File Program (FFP): Current Status and Policy Issues
The 2009 agreement expanded the scope of the FFP by
FFP critics say the current program is too flawed to retain.
making free fillable individual income tax forms available
They say member companies’ websites for FFP filing are
to any taxpayer, regardless of income, via the IRS’s Free
too complicated and in some cases deceiving; the program’s
File portal. The agreement also required FFI companies to
take-up rate remains too low; and the IRS still invests little
embed a link to IRS.gov in their landing pages for the FFP.
in promoting the program, assessing taxpayers’ experiences
with it, and monitoring member company compliance with
The current MOU is due to expire on October 31, 2025. It
the current MOU. Critics are also concerned that FFI
includes provisions intended to raise taxpayer awareness of
companies may continue to use the FFP as a means of
the program, encourage eligible taxpayers to regularly use
promoting their paid filing services to FFP-eligible
it, and prevent participating companies from excluding their
taxpayers. In a 2020 report, the Treasury Inspector General
Free File landing pages from internet searches for the FFP.
for Tax Administration found that over 34.5 million FFP-
In a significant shift, the MOU no longer specifies that the
eligible taxpayers e-filed their returns using member
IRS should refrain from developing its own electronic
company commercial services in FY2019.
direct filing system through its website.
Reforming the FFP
FFI’s membership has shrunk since 2020. 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 monitoring member company
returns filed through the FFP for the 2019 tax year.
compliance with the MOU. In addition, these proponents
say that the MOU should be revised to require member
Use of the FFP
companies to disclose to the IRS any revenue they receive
An ongoing concern with the FFP (which goes back to its
from marketing their paid services to FFP-eligible
early years) has been low usage rates. In the first year of the
taxpayers.
program, 2.8 million individuals filed their tax returns
through the FFP, or 3.5% of all eligible taxpayers. Use of
Return-Free Filing
the program peaked in FY2005, when 5.1 million
Some FFP critics support replacing the program with an
individuals (or 6.4% of eligible taxpayers) filed through the
IRS e-filing service that simplifies the process, especially
FFP. From 2003 to 2019, an average of 2.8% of eligible
for taxpayers with uncomplicated tax situations. One option
taxpayers filed using the FFP. Usage rose to 4.0% of
would involve the IRS electronically sending prefilled
eligible taxpayers for the 2020 tax year. Part of this increase
returns to individuals whose entire income is reported to the
was due to claims for the economic impact payments the
IRS by third parties for their approval or disapproval.
IRS issued in 2020 to individuals who normally do not file
Another option would be for the IRS to adopt a return-free
a tax return.
filing system based on methods such as exact withholding
or tax-agency reconciliation.
Policy Issues
Congress focused on the FFP’s future in 2019. In April of
Free Direct E-Filing with the IRS
that year, the House passed a bill (Taxpayer First Act, H.R.
Some FFP critics advocate replacing or supplementing it
1957) to reform some of the ways in which the IRS
with a free, direct e-filing system managed by the IRS. P.L.
interacts with taxpayers. One provision would have
117-169, commonly known as the Inflation Reduction Act
permanently extended the FFP, which would have meant
(IRA), provided the IRS with $15 million to study the
permanently barring the IRS from creating its own direct e-
feasibility and cost of developing and operating a direct e-
file service through a secure portal on its website. The
filing system that includes “multi-lingual and mobile-
provision triggered opposition from some interest groups
friendly features and safeguards for taxpayer data.” As
and lawmakers and led to a congressional debate on
mandated by the IRA, the IRS and an independent third
whether to codify the FFP or to direct the IRS to abandon it
party issued reports in May 2023 addressing these issues.
and provide its own online filing and preparation service.
The IRS found that 72% of a survey group had an interest
Contributing to this opposition were media reports (mainly
in using an IRS direct-e-file system; the IRS also estimated
from ProPublica) that some FFA companies had steered
that the annualized cost of developing and operating such a
FFP-eligible taxpayers to using the firms’ paid services.
system could range from $64 million to $249 million,
The 116th Congress passed a similar bill, but without the
depending on the number of users and the scope of services.
FFP provision (P.L. 116-25).
During the 2024 filing season, the IRS plans to operate a
Pros and Cons of Retaining the FFP
pilot program to allow taxpayers in 12 states to e-file their
The FFP still operates, but its future remains uncertain. FFP
returns directly with the IRS. Participants must take the
proponents, including FFI companies, say it should be kept
standard deduction, receive income from wages reported on
because it saves low- and middle-income taxpayers and the
W-2 Forms and Social Security and unemployment benefits
IRS considerable money each year. According to the FFI,
only, and have no more than $1,500 in interest income.
taxpayers saved an estimated $1.5 billion from 2003 to
2018 as a result of e-filing through the FFP, and the IRS
Gary Guenther, Analyst in Public Finance
saved hundreds of millions of dollars in processing costs.
IF11808
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The Internal Revenue Service’s Free File Program (FFP): Current Status and Policy Issues


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