IRS Cements Direct File as Option to H&R Block, TurboTax (1)

The IRS is making its Direct File free electronic filing tool a permanent choice for future tax seasons, the agency said Thursday.

The government-run option was piloted this filing season for low- and moderate-income taxpayers with simple returns in a dozen states. It was created after the Democrats’ 2022 tax-and-climate law set aside $15 million for the IRS to study the feasibility of creating such a tool.

The expansion comes in the face of opposition from the tax-prep industry and Republican lawmakers, who call the government-run tool unnecessary and costly when taxpayers already have options such as Intuit’s TurboTax and other private tax-software programs.

“We believe Direct File is costly, confusing and unnecessary, particularly in light of the fact that commercial tax preparers provided more than 23 million free returns this year as well as another 3 million free tax returns through the IRS Free File Program,” said David Ransom, counsel at the American Coalition for Taxpayer Rights, a group of tax-prep companies.

More taxpayers are expected to be eligible to use Direct File in 2025, the IRS said. The agency plans to allow individuals from more states and with more tax situations, particularly those impacting working families, to be able to use the system. Tax credits for health insurance, some refundable credits, and some retirement income were previously out of scope but are being considered for next year, the IRS said.

IRS Commissioner Danny Werfel said during a press call Thursday that it’s too early to estimate the number of possible eligible users.

“We know that there is more analysis to do, but we feel that we have enough information at this point to make the decision,” Werfel told reporters. “And an early decision on 2025 is critical for planning both for the IRS and for additional states to join the program.”

Expanded Tool

Werfel said he wouldn’t expect the cost of an expanded program to exceed $75 million.

“I don’t see a scenario in which we would significantly or materially exceed that,” he said. “It’s possible but that’s not currently the expectation.”

During its pilot season, 19 million taxpayers were eligible to file using the tool but only a fraction of those eligible ended up using it. The 140,803 taxpayers who filed their returns using the Direct File option saved about $5.6 million in tax preparation fees on their federal returns, the IRS said.

It cost a total $31.8 million—a combination of costs for the IRS and its US Digital Service partner —to create, notably lower than initial estimates.

The average refund for taxpayers who filed using Direct File was $891.78, down from the overall filing season average of $3,011. The IRS attributed the drop to the incremental rollout of the tool.

The IRS is inviting all 50 states and District of Columbia to participate next year and is expecting several new states to take part. Some states previously said they would sit on the sidelines this year to see how the IRS rollout goes, while others cited technology constraints.

Sen. Elizabeth Warren (D-Mass.), prominent supporter of a free government-run filing option, argues it saves taxpayers money and time. She urged every state to adopt it.

“The Direct File program and its permanent expansion is a good example of how the Biden administration is cutting junk fees and making government work for working people,” Warren said in a statement Thursday.

Following the close of filing season, the IRS solicited feedback from those who have a stake in the pilot. The agency said it heard from hundreds of organizations and more than 100 lawmakers on the future of Direct File.

While administration officials have said the results of the upcoming elections wouldn’t impact whether Direct File is continued, it is a chief concern of outside experts who say if Republicans gain power in Congress or take the White House, funding could be cut or the program could be halted.

“We also think it is nonpartisan that taxpayers should have options for how they file,” Werfel said. “The broader the menu of options, the better for all Americans regardless of political strip.”