What the GAO found
Taxpayers with income below a certain threshold can use the Free File program provided by the IRS and Free File, Inc. (FFI), a consortium of tax preparation companies, to electronically prepare and file their free federal tax returns. The GAO found that the vast majority of taxpayers eligible for the program used other deposit methods, which they may have been paid to use. Of those who used the program, 44% had an adjusted gross income of $17,000 or less.
Individual Taxpayer Reporting Methods for the 2020 Tax Year
The IRS and FFI have an agreement that governs the program, including provisions to improve the taxpayer experience. The IRS audits companies for compliance with this and certain other provisions. The GAO compared the current Free Files Agreement with federal guidelines for digital services and found differences. Through negotiation between the IRS and the FFI, opportunities may exist to better align the current agreement with federal guidelines, such as ensuring access for taxpayers with disabilities.
The IRS and FFI recently extended the current agreement through October 2023; however, short-term extensions failed to meet the growing challenges. For example, two large companies recently left the program, one citing taxpayer experience requirements. IRS data for most of the 2022 filing season shows that fewer taxpayers are using the program within a year of leaving one of these companies last year. Stakeholders had different views on whether maintaining the current program or having the IRS develop its own online filing system would provide a better experience for taxpayers. Either way, the IRS does not manage the risk of relying on the Free File program because it helps taxpayers file for free online. Under the terms of the agreement, individual businesses can leave the Free File program at any time, and FFI can end the program if the IRS develops its own system. By not managing these risks through the development of additional free online filing options for taxpayers, the IRS may not be able to achieve its strategic goal of enabling all taxpayers to meet their tax obligations.
Why GAO Did This Study
The IRS and FFI offer free tax filing services to a large majority of taxpayers. Historically, the IRS had agreed that it would not develop its own online filing services in exchange for participating companies offering free services to eligible taxpayers.
The GAO was asked to review the Free File program. This report (1) describes the demographics of Free File users; (2) assesses the IRS’ oversight of taxpayer experience provisions; and (3) identifies key challenges and alternative approaches that may exist for the IRS to help taxpayers file online at no cost.
The GAO analyzed the IRS data; assessed IRS monitoring of agreements with FFI and compared them to federal guidelines on digital services; reviewed SRI documents and studies; and used interviews with selected study authors (called stakeholders) and IRS officials to inform the analysis.