Scrapping Direct File Will Let the IRS Focus on Bigger Priorities

Republicans’ plans to scuttle an IRS tool offering free tax preparation and filing services in 25 states is the right move given the status of the project, the need for comprehensive tax reform, the existence of the long-standing Free File program, and the agency’s many other challenges.

The tool, known as Direct File, was launched for the 2024 tax filing season. It touts itself as providing “guided help for every part of your federal tax return,” with the option to file from one’s smartphone, tablet, or computer. Live support is also available Monday through Friday from 7 a.m. to 10 p.m.

Direct File may sound wonderful, but it’s riddled with shortcomings. An April 9 Government Accountability Office report found that the IRS hasn’t been maintaining comprehensive cost estimates for this program, for which it allocated $114 million in Fiscal Year 2024.

These findings coincide with the US Treasury’s inspector general for tax administration’s reported inability to “evaluate if the IRS’s estimated cost to develop Direct File was reasonable because the IRS could not provide documentation to substantiate how it arrived at its estimates.”

The inspector general predicted that Direct File’s costs would continue to grow above the IRS’s estimates. Those monetary resources could go a long way toward addressing some of the agency’s pressing challenges—most importantly, modernizing the agency’s outdated information systems.

The IRS is doing a poor job of implementing its modernization agenda, which comes through in a separate US Treasury report issued earlier this year. This includes replacing the systems used for core tax processing that were introduced in the 1960s. Thus the “D” grade last November from the National Taxpayers Union Foundation on the IRS modernization efforts.

There are other far-reaching challenges, including counterfeit tax returns that lead to identity theft, subpar basic customer service, and the need to crack down on the use of improper tax credits. But even if these challenges didn’t exist, the need for Direct File would still be questionable.

Another free tax prep and filing system—Free File—has been available to low-income Americans for more than 20 years. Direct File is more limited than Free File, which enables taxpayers to have their federal and state returns prepared and processed. With Direct File, that isn’t an option.

Private-sector tax prep companies, other firms, and nonprofits already provide tax services at no cost to millions of people. The related companies alone were involved with the filing of nearly 26 million tax returns in 2023, according to the American Coalition for Taxpayer Rights, which comprises the nation’s leading tax preparation, tax software, and financial services settlement companies.

The IRS estimated that 19 million people would be eligible for the Direct File pilot that was launched in 2024. However, fewer than 141,000 people submitted a tax return that Direct File accepted, even though over 423,000 created or signed into a Direct File account, according to a March report.

Surveyed taxpayers cited limited Direct File scope, complexity establishing an account, and familiarity with other tax preparation software as common deterrents, the US Treasury’s inspector general for tax administration’s report stated. The 2024 Direct File pilot also didn’t include all tax situations, including Form 8863, Education Tax Credits.

There are a host of other concerns with Direct File, centered on how it could lead to resources being diverted from modernization, enforcement and compliance, audit backlogs, and issuing refunds. There are also questions about its appropriateness given the need for comprehensive tax reform and the pressure to reduce IRS’s headcount.

The IRS is one of America’s most important federal agencies. The revenue it collects funds everything from national defense to Social Security and Medicare. Its effectiveness is critically important. But launching a poorly designed initiative risks further undermining the IRS’s progress and reputation.

Public confidence in the IRS right now is low, so it makes sense for the agency to focus on its core mission of processing tax returns and ensuring compliance with the tax code. This includes using its resources to modernize existing systems and processes rather than creating new ones.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

David M. Walker was Comptroller General of the United States and head of the U.S. Government Accountability Office from 1998 to 2008.

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