IRS Free File Program: IRS Should Develop Additional Options for Taxpayers to File for Free
Fast Facts
IRS and a consortium of tax preparation companies offer free online tax preparation services and filing help under the Free File program. About 70% of taxpayers could use it, but less than 3% of taxpayers do.
IRS wants to improve Free File, including enhancing access for taxpayers with disabilities. But improving Free File may increase requirements on tax preparation companies, leading them to opt out. Stakeholders had differing views on whether IRS should keep Free File after its 2023 agreement expires or develop its own online filing system.
Our recommendations address these and other issues we found.
Highlights
What GAO Found
Taxpayers whose incomes are below a certain threshold can use the Free File program provided by IRS and Free File, Inc. (FFI), a consortium of tax preparation companies, to electronically prepare and file their federal tax returns for free. GAO found that the vast majority of taxpayers eligible for the program used other filing methods, which they may have paid to use. Of those who did use the program, 44 percent had an adjusted gross income of $17,000 or less.
Individual Taxpayers' Filing Methods for Tax Year 2020
IRS and FFI have an agreement that governs the program, including provisions intended to improve the taxpayer experience. IRS checks the companies' compliance with this and certain other provisions. GAO compared the current Free File agreement with federal guidelines for digital services and found differences. Through negotiation between IRS and FFI, opportunities may exist to better align the current agreement with the federal guidelines, such as ensuring access for taxpayers with disabilities.
IRS and FFI recently extended the current agreement to October 2023; however, short-term extensions have not addressed mounting challenges. For example, two large companies recently left the program with one citing the taxpayer experience requirements. IRS data through most of the 2022 filing season shows that fewer taxpayers are using the program in the year following the departure of one of these companies last year. Stakeholders had different views on whether maintaining the current program or IRS developing its own online filing system would provide a better experience for taxpayers. Regardless, IRS is not managing the risk of relying on the Free File program as the way it helps taxpayers file for free online. Under the terms of the agreement, individual companies can leave the Free File program at any time, and FFI can end the program if IRS develops a system of its own. By not managing these risks through the development of additional free online filing options for taxpayers, IRS may be unable to achieve its strategic goal to empower all taxpayers to meet their tax obligations.
Why GAO Did This Study
IRS and FFI offer free tax filing services to a large majority of taxpayers. Historically, IRS had agreed that it would not develop its own online filing services in exchange for the participating companies offering free services to eligible taxpayers.
GAO was asked to examine the Free File program. This report (1) describes demographic characteristics of Free File users; (2) evaluates IRS's oversight of taxpayer experience provisions; and (3) identifies key challenges and alternative approaches that may exist for IRS to help taxpayers file online at no cost.
GAO analyzed IRS data; evaluated IRS's oversight of agreements with FFI and compared these to federal digital service guidelines; reviewed IRS documents and studies; and used interviews with selected authors of studies (called stakeholders) and IRS officials to inform the analysis.
Recommendations
GAO is making three recommendations to IRS, including that it add relevant practices from federal guidelines into its next agreement with FFI, and that it identify and develop additional options for free online filing by the time the current Free File agreement expires. IRS agreed with the recommendation to add relevant practices to improve the taxpayer experience into the next FFI agreement. IRS did not agree with the other recommendations, including that it develop additional free filing options. GAO maintains that developing such options would help mitigate risks identified with the Free File program.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Internal Revenue Service | The Commissioner of IRS should seek agreement with FFI on incorporating recommended taxpayer experience improvements and relevant practices from guidelines for federal digital services, such as the 21st Century Integrated Digital Experience Act requirements regarding access for users with disabilities. (Recommendation 1) |
Open
IRS agreed with this recommendation. In October 2022, IRS's Deputy Commissioner for Services and Enforcement stated IRS is identifying federal digital web requirements related to mobile accessibility. IRS also plans to review a sample of Free File providers' mobile capabilities to assess the mobile experience and then discuss with Free File, Inc. (FFI) to identify opportunities for improvement and enhancement of the taxpayer experience. IRS expects to implement these actions by February 2024. In March 2023, IRS and FFI extended their agreement until October 2025 and did not add new taxpayer experience requirements. We will continue to monitor IRS's efforts to address our recommendation.
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| Internal Revenue Service | The Commissioner of IRS should seek agreement with FFI on eliminating the MOU provision requiring IRS to notify FFI immediately if it commits funding to offer services for free to taxpayers. (Recommendation 2) |
Open
IRS disagreed with this recommendation. In October 2022, IRS's Deputy Commissioner for Services and Enforcement reiterated IRS's position. The IRS official stated that it continues to believe this provision is necessary to maintain trust and transparency with Free File, Incorporated (FFI). In March 2023, IRS and FFI agreed to extend their agreement through October 2025 and did not remove this provision. We understand IRS's concerns about maintaining trust in the program and our report recognizes IRS's efforts to communicate and coordinate with FFI. We continue to believe that IRS should work to eliminate this provision so that IRS can freely pursue new filing options for taxpayers as resources and technology permit. Eliminating the provision would in no way prohibit IRS from choosing to discuss its plans with FFI to maintain transparency and trust. Further, the Inflation Reduction Act of 2022 directs IRS to report to Congress by May 2023 on a potential IRS-run electronic tax filing system, including assessing the costs of such a system, taxpayer opinions, and an assessment of IRS's capacity to deliver such a system. IRS published this report in May 2023 and is preparing for a Direct File pilot for the 2024 tax season. We believe that as part of this process IRS should consider the extent to which this provision could make it more difficult to transition to a new system if Congress decides on such a course of action. We will continue to monitor IRS's efforts to address this recommendation.
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| Internal Revenue Service |
Priority Rec.
The Commissioner of IRS should, before the expiration of the current Free File MOU in October 2023, work with relevant stakeholders to identify and develop additional options for free online filing of tax returns that would reflect current guidelines for federal digital services. (Recommendation 3) |
Open
IRS originally disagreed with this recommendation. In its April 2022 comments on the report, IRS stated that it did not believe a public free filing option would significantly improve the taxpayer experience and it did not have sufficient funding to do this. In August 2022, Congress provided IRS with $15 million in the Inflation Reduction Act to study the possibility of an IRS-run system. In January 2023, IRS and Free File Inc. agreed to extend the current Free File Memorandum of Understanding to October 2025. In May 2023, IRS issued its report to Congress on the potential for a free direct file system. IRS concluded that there is taxpayer interest in such an option and IRS is technically capable of delivering such a system. However, IRS noted that doing so would require additional resources and add complexity to IRS operations. IRS also plans to use a pilot program to gather data to assess issues identified in the report before deciding whether to deploy a full-scale direct file system. Ensuring IRS is positioned to offer free online filing services to taxpayers will help mitigate the risks and uncertainty associated with the current Free File program.
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