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Case 2:07-cv-04753-TON Document 34-4 Filed 03/05/08 Page 71 of 72
DEPARTME NT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTO N. D.C. 20224
INF!. IMATION TECHNOLOGY SERVICES

March 30, 2006
Mr. Timothy Hugo
Executive Director
Free File Alliance, LLC
6350 Rolling Mills Place, Suite 102
Springfield, VA 22152
Dear Mr. Hugo:
I am writing in response to your request explaining how the level of coverage for
services offered through the Free File program was determined by the IRS during the
renewal process to extend the partnership agreement between the IRS and the Free
File Alliance.
Overall, the Free File program was a resounding success in 2005. Last year, over
five million federal returns were filed through the program at no cost to the taxpayer.
This represented a 43 percent growth over the 2004 fiUng season. Another positive sign
of the program's success was the reduction in the number of calls about program or
vendor issues to the IRS from taxpayers.
As this was the final year of the agreement, the IRS needed to consider how best to
proceed to maintain and grow this important program. One major concern was the
overall health of the online and self-prepared market segment. In 2005, 75 percent of
the e-file growth in this segment could be attributed to the Free File program. If this
trend continued, the IRS was concerned that it could cause many vendors to go out of
business, innovation to be dramatically reduced or cease entirely, and investment in this
segment to diminish or end. Industry analysts stated in their filing season reports that
Free File represented a threat to future revenues and profits of the publicly traded
company participants. After careful consideration, it became clear that we needed to
pursue the following policy during the renewal process:
•
•

Maximize Free File program availability to the taxpayer while maintaining the health
and viability of the online and self-prepared tax software market segment, and
Focus on product and service quality, offer clarity and security.

In order to maintain the viability of the free file program, IRS proposed to limit
companies to income ranges that represent 70 percent or 75 percent or less of the
individual taxpayer population. This represented an adjusted gross income (AGI} of
approximately $50,000 and $60,000 respectively based on current information. Even
with these limitations, more than 90 million taxpayers will be eligible to participate in this
program. The Free File Alliance agreed to the IRS' proposal to provide guaranteed

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Case 2:07-cv-04753-TON Document 34-4 Filed 03/05/08 Page 72 of 72

2
cove rage to 70 percent of taxpayers. fn Octo
ber 2005, the IRS and the Free File
Allia nce agreed to a four-year term extendin
g its partnership to provide free federal
onlin e tax preparation and e-file services to
eligible taxpayers.
I hop e this informaticm is helpful. If you need
furth er assistance, plea se cont act
Kim McDonald, Acting Director, Strategic Serv
ices Division, at (202 } 283-4790.

Sincerely,

P-=----

BertW. DuMars

Director, Elec tron ic Tax Administration
cc: Mr. Step hen M. Ryan, Cou nsel to the Free
File Alliance