Success of IRS’s Direct File, Politics Aside, Is Tied to States

The IRS is banking on states for the success of its new, free online tool for filing tax returns.

The more people use it, in as many states as possible, the bigger chance the Direct File program has of surviving opposition from Republican lawmakers and tax preparation companies.

That is, if a GOP sweep in next week’s elections doesn’t kill the program before it gets much further off the ground. House Republicans, hostile to an IRS role as tax return preparer, this summer proposed to block the agency from any more work on the project.

As the program looks to its first full-fledged tax filing season, 15 of the 24 states that have joined Direct File for 2025 are led by Democratic administrations. Nine Republican-led states are signed up, but eight of those—Idaho is the exception—don’t have an income tax.

Regardless of politics, if the program progresses, demand for it could convince more states to participate in future years and make it harder to get rid of, said Vanessa Williamson, a senior fellow at the Urban-Brookings Tax Policy Center.

At the same time, missteps could dampen enthusiasm and energize critics.

“The problem is that the sort of normal challenges—the logistical challenges, the technical challenges—all exist, but overlaid on top of it is this sort of partisan dynamic that means that good faith mistakes are not going to walk into a media ecosystem that’s going to treat them that way,” Williamson said.

For the IRS, a key to success will be seamless integration with state tax systems. In a 2022 survey conducted by MITRE Corporation, 60% of respondents said they would stick with their current commercial software if IRS options couldn’t prepare state returns too, in a hypothetical scenario in which all options were free.

“That ability to transport information from the federal return into the state return is really a key selling point. It’s the magic in tax software that you see with Intuit and H&R Block and things like that,” said Marita Sciarrotta, New Jersey’s acting tax director.

IRS Commissioner Danny Werfel and other administration officials have said that the results of the upcoming elections won’t impact whether Direct File is continued, but they haven’t directly addressed how they would deal with defunding by Republicans. The IRS referred to reports to Congress on the impact of Direct File for this article.

Political Barriers

Congressional Republicans aren’t the only opponents of the IRS’s Direct File ambitions.

Over a dozen state Republican attorneys general have challenged the IRS’ authority to expand the program and criticized its impact on tax prep businesses, including in Virginia, where Democrats control the General Assembly and have pushed Republican Gov. Glenn Youngkin to join the program.

Youngkin said in an August letter that legal questions and IT system issues were among issues preventing Virginia from joining in 2025.

Heather Cooper, a spokesperson for the Virginia Department of Taxation, said the agency continues to explore it as “a potential option for future filing seasons.”

But Virginia Sen. Stella Pekarsky, a Democrat who has called on Youngkin to join the program, said the problems are surmountable and the biggest hindrance is a “commitment from the governor to work with us and to prioritize this.” She called the criticism from Republican attorneys general “extremely political” and said she believes the IRS does have authority for the program.

Pekarsky said she expects Democrats to introduce a bill next year to “clear whatever hurdles are in the way.”

Steps to Integration

While federal-state return integration isn’t required at this point, it is the goal, even as Direct File expands to accommodate a far broader range of taxpayers with various circumstances and higher incomes.

For the limited pilot the IRS ran with 12 states earlier this year, only three states had systems hooked into Direct File, but more are working with third parties so that in the coming years taxpayers will be able to enter information and have it populate state forms as well.

Some states that expressed support for the program—Michigan, for one—declined to join for next year because of concerns their IT systems can’t integrate with Direct File. Ron Leix, a spokesperson for the Michigan Department of Treasury, said the agency has a large IT project underway and expects to join for 2026.

To move toward integration, five states are working with tech nonprofit Code for America this year, which is funding the initial implementation, said tax and partnership program director Gabriel Zucker. The organization worked with Arizona and New York to integrate their systems for this year’s pilot. Other states are working with Fast Enterprises, a government contractor that already handles many state internal systems.

“If you use software to file your tax returns, you’re used to an experience where the software is asking you questions” and then taking “those answers and putting those answers in the right places on your tax return,” said New York’s acting tax commissioner, Amanda Hiller, calling that feature critical to the program’s success.

That’s easier said than done in some states. New Jersey’s income taxes are based on gross income, while the IRS uses adjusted gross income, making integration a challenge, said New Jersey’s Sciarrotta. The state is pursuing a partnership with Code for America but may not have the integrated version ready at the start of the filing season, she said.

The IRS will also have to continue to invest in constituent outreach and other kinds of support to ensure the tool’s success at the state level, said Ayushi Roy, deputy director of New America’s New Practice Lab and co-author of the IRS Direct File Third-Party Report.

“It’s not a field of dreams. If you build it, they won’t necessarily come,” she said.