Under the agreement with the Free File Alliance, tax software companies will offer at no charge on-line tax return preparation and filing services and the IRS will provide taxpayers links to these free services through irs.gov and firstgov.gov. Each participating company must offer the service free to at least 10% of the US population, based on regional, income or demographic sectors of its choosing. The companies may overlap, but the proposal requires that the group as a whole cover at least 60% of taxpayers. The IRS, which began to prepare the deal last July, sees it as a key part of its push towards 80% take-up of electronic filing by 2007, saving an estimated $250m annually. More than 45 million taxpayers filed electronically last April, representing 35% of taxpayers.

The Treasury says the IRS is still working out final details and testing the free-filing web-sites before promoting them heavily during the tax-filing season. The IRS has told Alliance member firms to say nothing publicly about free offers before the official announcement, but some of them have given out details of their own eligibility criteria. TaxBrain will help prepare and file for free a federal return for taxpayers age 50 or older, regardless of income, while TurboTax, which dominates the software market for self-preparers, plans free service for returns with adjusted gross income under $27,000 or slightly higher if the return claims a credit available to low-income workers.

Some commentators have criticised the free filing initiative, saying that the lower-income groups targeted are those least likely to be online; others have alleged that taxpayers drawn to the tax firms' Web sites will be exposed to offers of high-cost loans secured by tax refunds, a claim that was rubbished by the IRS and the firms themselves.