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

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

Updated May 30, 2024
The Internal Revenue Service’s Free File Program (FFP):
Current Status and Policy Issues
The Internal Revenue Service first allowed individual
develop a free online filing system that would be managed
income tax returns to be filed electronically (e-filed)
by the IRS for low-income taxpayers, who were most likely
through a pilot program involving five tax preparers during
to file paper returns. The resulting private-public
the 1986 tax filing season. Since then, e-filing has grown to
partnership was initially called the Free File Alliance
the point that 97% of individual tax returns for the 2022 tax
(FFA), which is now known as Free File, Inc. (FFI).
year were e-filed.
Despite this collaboration, the IRS did not achieve the 2007
E-filing has advantages for both tax administrators and
e-filing goal until 2012, when 83% of individual returns
taxpayers. For the former, e-filing substantially lowers the
were e-filed.
cost of processing returns and results in lower error rates,
relative to paper returns. For the latter, e-filing allows
Structure and Evolution of the FFP
individuals to receive a tax refund sooner than they would
The FFP began when the IRS signed an agreement with the
with a paper return.
17 original FFI member companies on October 30, 2002.
A key element of the IRS’s efforts to promote e-filing is the
The agreement laid down a clear division of authority and
Free File Program (FFP). The FFP makes it possible for
responsibility between the IRS and the member companies.
individuals, regardless of filing status, with adjusted gross
It required the companies to provide their tax preparation
incomes (AGIs) at or below a specified amount ($79,000 in
and filing services through IRS.gov at no cost to the bottom
the 2023 tax year) to e-file their federal income tax returns,
60% of individual taxpayers, ranked by AGI. The
free of charge, using software provided by participating tax
companies, not the IRS, set the eligibility requirements for
preparation companies. Seven such companies participated
free filing based on a taxpayer’s age, income, and state
in the FFP during the 2024 filing season. Taxpayers
residence. To participate in the FFP, a company had to
wishing to file through the FFP must use a secure portal on
prove that it was capable of providing such a filing service
the IRS’s website to access the websites of participating
to at least 10% of individual filers.
companies. Taxpayers with AGIs above the FFP limit may
e-file their returns free of charge through the same portal,
The agreement made the IRS responsible for enforcing
using a service called Free File Fillable Forms.
member company compliance with the terms of the
agreement. The agency had the authority to cancel the
Origin of the FFP
agreement with one year’s advance notice, if it determined
The FFP has its origin in two sources. One was the IRS
that member companies were failing to provide the required
Restructuring and Reform Act of 1998 (RRA, P.L. 105-
coverage.
206). The act directed the IRS to increase the share of e-
filed individual returns to 80% by 2007 from 23% in 1998,
A controversial element of the agreement was a
with input from the private sector.
commitment by the IRS to not compete in the market for
tax filing and preparation. Preventing the IRS from
A second source was a 2001 directive from the Office of
becoming a competitor was a major incentive for tax
Management and Budget’s (OMB’s) Quicksilver Task
software companies to create and participate in the FFP.
Force implementing President George W. Bush’s E-
Government Initiative. The taskforce identified 24 projects
The IRS and FFI have extended and revised the original
to achieve the initiative’s main objectives, one of which
agreement five times. These subsequent agreements are
was the EZ Tax Filing Initiative. It was intended to help the
linked to various memoranda of understanding (MOU)
IRS reach an 80% individual e-filing rate by 2007 by
intended to implement the revised agreements.
drawing on the experience and resources of tax preparation
software companies.
The second agreement (2005) reduced the free services a
member company could offer eligible taxpayers, including
Initially, the IRS tried to accomplish the aims of the EZ Tax
refund anticipation loans. In addition, the agreement barred
Filing Initiative by developing digitized versions of Form
any member company from providing free filing to more
1040 and related schedules and instructions that could be
than 50% of eligible taxpayers, and increased the share of
accessed at no cost through WhiteHouse.gov. When it
taxpayers eligible for free filing through the FFP to the
became apparent that the IRS would not complete this
bottom 70% of individuals ranked by AGI.
project anytime soon, Treasury Secretary Paul O’Neill
asked IRS Commissioner Charles Rossetti in January 2002
The 2009 agreement expanded the scope of the FFP by
to establish a partnership with tax software companies to
making free fillable individual income tax forms available
https://crsreports.congress.gov

The Internal Revenue Service’s Free File Program (FFP): Current Status and Policy Issues
to any taxpayer, regardless of income, through the IRS’s
are that (1) member company webpages for FFP filing are
Free File portal. The agreement also required FFI
confusing and in some cases misleading; (2) the program’s
companies to embed a link to IRS.gov in their FFP online
take-up rate remains too low; and (3) the IRS still invests
landing pages.
too little in promoting the program, assessing taxpayers’
experiences with it, and monitoring member company
The current MOU has been extended to October 31, 2029.
compliance with the existing MOU.
It includes provisions intended to raise taxpayer awareness
of the program, encourage eligible taxpayers to regularly
Critics also say that the program allows FFI companies to
use it, and prevent participating companies from excluding
divert FFP-eligible taxpayers to using their paid filing
their Free File landing pages from FFP internet searches.
services. In a 2020 report, the Treasury Inspector General
And in a significant departure from previous rules, the
for Tax Administration found that over 34.5 million FFP-
MOU contains no commitment from the IRS to not develop
eligible taxpayers e-filed their returns using member
its own free direct e-filing system.
company paid services in FY2019.
Use of the FFP
Reforming the FFP
A perennial concern with the FFP has been low usage rates
Some argue that the FFP should be retained, but only if
among eligible taxpayers. In FY2002, the first year of the
certain changes are made in its rules and procedures. These
program, 2.8 million individuals (3.5% of eligible
changes would require the IRS to invest more in promoting
taxpayers) filed their tax returns through the FFP. To date,
the FFP among eligible taxpayers and in monitoring
use of the program reached a peak in FY2005, when 5.1
member company compliance with the MOU. In addition,
million individuals (6.4% of eligible taxpayers) filed
some argue the MOU should be revised to require member
through the FFP. Between FY2003 and FY2019, 2.8% of
companies to disclose to the IRS any revenue they receive
eligible taxpayers, on average, filed using the FFP. Usage
from marketing their paid services to FFP-eligible
jumped to 4.0% of eligible taxpayers in FY2020, driven in
taxpayers.
part by low-income taxpayers who usually file no returns
claiming the economic impact payments managed by the
Return-Free Filing
IRS.
Some advocate replacing the program with an IRS e-filing
service that simplifies the process, especially for taxpayers
Policy Issues
with simple tax situations. One option would allow the IRS
Concerns about the FFP’s performance surfaced during
to send prefilled returns to taxpayers whose income is
congressional consideration in 2019 of a bill to reform
reported to the IRS by third parties; recipients could accept
certain aspects of IRS’s taxpayer service. In April of that
the prefilled return or reject it and file their own return.
year, the House passed a bill (the Taxpayer First Act, H.R.
1957) to strengthen and codify taxpayer rights and further
Free Direct E-Filing with the IRS
transform the IRS into a customer-friendly agency. One
Some FFP critics call for replacing or supplementing it with
provision would have codified the existing FFP, which
a free direct-file system managed by the IRS. P.L. 117-169,
would have permanently barred the IRS from providing its
commonly known as the Inflation Reduction Act (IRA),
own direct e-file service.
provided the IRS with $15 million to study the feasibility
and cost of developing and operating a direct-file tool that
The prospect of a statutory ban on an IRS direct-file tool
offered “multi-lingual and mobile-friendly features and
triggered a vigorous debate over the pros and cons of such a
safeguards for taxpayer data.” The IRS and an independent
step. Opposition from some interest groups and lawmakers
third party issued reports in May 2023 addressing these
led to the enactment of a version of the bill (P.L. 116-25)
issues. The IRS found that 72% of a survey group
without the controversial provision. The amended Free File
expressed an interest in using an IRS direct-e-file system; it
MOU adopted in 2019 removed the provision barring the
estimated that the annualized cost of developing and
IRS from developing its own direct-file tool.
operating such a system may range from $64 million to
$249 million, depending on the number of users and the
Adding to this opposition were media reports (mainly from
complexity of their returns.
ProPublica) that some FFA companies had steered FFP-
eligible taxpayers to using the firms’ paid services.
During the 2024 filing season, the IRS operated a pilot
program that allowed specified taxpayers in 12 states to e-
Pros and Cons of Retaining the FFP
file their returns directly with the IRS. Participants were
FFP proponents, including FFI companies, argue that the
restricted to taking the standard deduction and to reporting
program should be retained because of its significant cost
income from wages, Social Security and unemployment
savings. According to one estimate, FFP filing saved
benefits, and up to $1,500 in interest earnings. The IRS is
taxpayers $1.7 billion in tax preparation and filing fees and
evaluating the results and intends to decide soon whether to
saved the IRS hundreds of millions of dollars in processing
offer the pilot again during the 2025 filing season.
costs from 2002 to 2018. Another reason to retain the FFP
is the advanced technology embedded in the program.
Gary Guenther, Analyst in Public Finance
FFP critics say the FFP has too many flaws and should be
IF11808
replaced by an IRS direct-file tool open to all taxpayers,
regardless of income. Among the problems cited by critics
https://crsreports.congress.gov

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

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.

https://crsreports.congress.gov | IF11808 · VERSION 10 · UPDATED