The IRS, which began to prepare the deal in July, sees it as a key part of its push towards 80% take-up of electronic filing by 2007, saving an estimated $250m annually. Currently, taxpayers who choose to file online can pay an average of $12.50 in filing fees in addition to the cost of purchasing tax preparation software. More than 45 million taxpayers filed electronically last April.

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 agreement between the IRS and Free File Alliance, LLC was signed by IRS Commissioner Charles Rossotti and Free File Alliance manager Mike Cavanagh. Under the agreement, tax software companies will offer at no charge on-line tax return preparation and filing services to a significant portion of American taxpayers. The IRS will provide taxpayers links to these free services through irs.gov and firstgov.gov.

"We are one step closer to allowing millions of taxpayers free electronic filing of their tax returns," stated Treasury Secretary Paul O'Neill. "I look forward to the public launch of the website in January."

"This represents an important step forward for taxpayers and our e-filing efforts. This will give millions of taxpayers free access to preparation and e-filing,” stated IRS Commissioner Charles O. Rossotti. "As the filing season approaches, the IRS will continue working with the Alliance to implement this important initiative. This joint effort will help even more taxpayers benefit from e-filing.”