IRS calls its free Direct File tax-prep tool a success. Will it be back in 2025?

By Andrew Keshner

'Regardless of where it goes from here, I am proud of the success,' IRS commissioner says of Direct File

The free tax-filing platform that the Internal Revenue Service launched this year handled more returns than its initial goal, saved Americans millions in tax-filing fees and left many users feeling satisfied, IRS and Treasury Department officials said Friday.

Now it's a question of whether the IRS's no-fee Direct File platform, which had its test run in 12 states this tax-filing season, ever comes back.

IRS and Treasury officials unveiled new numbers Friday on the pilot program, which was meant to be a government-run filing option to rival software from TurboTax (INTU), H&R Block (HRB) and other paid preparers.

"We have not made a decision about the future of Direct File," IRS Commissioner Danny Werfel said, adding those determinations could come later this spring. "Regardless of where it goes from here, I am proud of the success."

The Direct File platform prepared federal income-tax returns for nearly 141,000 households, exceeding officials' goal of handling 100,000 returns. These were relatively simple income-tax returns with a limited number of deductions and credits.

The program saved those taxpayers a combined $5.6 million in filing fees, according to the IRS and Treasury Department. It also built goodwill with users, as more than eight in 10 users said the experience increased their trust in the IRS, Werfel noted.

A $24.6 million experiment

The Direct File pilot started small and ramped up its availability in March. It was built to conceivably cover the tax-filing needs of 19 million Americans across the 12 participating states: Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington and Wyoming.

The IRS spent $24.6 million in direct costs to research, develop, build and run the pilot, Werfel said.

Last year, the IRS estimated the platform would cost $64 million annually if it were simple in scope and built to handle up to 5 million users. If it were built to handle many complex returns, the yearly costs would jump to nearly $250 million, according to IRS projections.

TurboTax maker Intuit blasted the pilot results announced Friday, and spokesman Rick Heineman questioned the $24.6 million price tag. The IRS and Treasury Department acknowledge that additional costs to use the U.S. Digital Service, a federal-government technology unit the IRS used to help build out Direct File, were not part of the cited costs.

The taxpayers served by the Direct File program were less than 1% of the 19 million people actually eligible for the program, paling in comparison with the reach of TurboTax, "which files millions of completely free tax returns each year and has delivered 124 million free tax returns over the last 10 years," Heineman said.

The Federal Trade Commission alleged earlier this year that TurboTax has long misled consumers about how many of its services are actually free. TurboTax denies the allegation.

Between free commercial offerings and other IRS methods to do taxes for free, Heineman said, "the reality remains the same today as it did the day Direct File launched; 100% of Americans can already file their taxes completely free of charge, free to the government and actually free to taxpayers."

While TurboTax questioned the IRS's results, consumer-advocacy groups praised them, saying they offered justification to make the platform bigger in 2025. "Direct File is a shining example of the government working to better the lives of Americans," said Susan Harley, managing director of the nonprofit Public Citizen's Congress Watch division.

The Direct File platform is closed now that Tax Day has come and gone. Taxpayers who filed for an extension have until Oct. 15 to submit a return, but they'll have to do so elsewhere.

'Many Republicans will want to kill Direct File'

As for the political backdrop, a senior Treasury official said the outcome of this year's presidential election would not play into the decision to continue the program in 2025. Representatives for Republican presidential candidate Donald Trump's campaign did not immediately respond to a request for comment.

Republicans have been fighting to pull back the billions of dollars in extra IRS funding provided by the Inflation Reduction Act of 2022. The funds are mostly for tax enforcement, but also for customer service. The pilot program grew out of a mandate in the law that the IRS study whether it could run its own filing platform.

Rep. Jason Smith, a Missouri Republican who chairs the House Committee on Ways and Means, has previously said the Direct File program "is a way to expand the power of the IRS that no one asked for."

The Direct File program would be in real jeopardy if Republicans controlled both Congress and the White House, Howard Gleckman, a senior fellow at the Tax Policy Center, said Friday.

"It's clear that many Republicans will want to kill Direct File," he said. While Gleckman hasn't heard Trump take a stance, it's also tough to envision a scenario where a Trump White House would rebuff a GOP request to pull the plug, he noted.

If the Direct File program is continued and expanded, one option could be adding more states where people can file their federal and state income taxes for free, a senior IRS official said.

The other possibility is building out its capabilities so the platform can handle more complexity. For instance, taxpayers with wage income from a salaried job could use the Direct File system, but gig workers who earned their income as independent contractors could not.

Friday's numbers also indicated the platform couldn't serve everyone who wanted to use it.

While the program was running, more than 3.3 million people used the IRS's eligibility tracker to determine whether they could use the tool, Werfel said. More than 400,000 people logged into the platform, presumably to see how it could handle their return, and 140,803 people ultimately filed their federal returns with Direct File.

Many of those returns came during the last week of tax season, according to Werfel, who said the program "stood up well under the final volume push."

-Andrew Keshner

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04-27-24 0826ET

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