IRS’s Long-Lived Free File Gets Boost From New Pilot’s Messaging

The IRS’s partnership with the private sector to help taxpayers file returns for free appears to be getting a bump in use with the help of the launch of the agency-run pilot program this year.

Under the Free File program, the IRS and a group of tax preparation companies known as the Free File Alliance have helped a swath of taxpayers file without paying a fee since 2002.

Use of that program is up 10.55% as of April 12 compared to last year, with close to 2.4 million returns, according to data from the Free File Alliance. The IRS started its own program, Direct File, in March, and used a flood of messaging around the tool to get people in 12 partner states to use it in its pilot season. About 100,000 taxpayers have filed using Direct File as of April 15.

“We’ve been a beneficiary from the Direct File advertising,” said Tim Hugo, executive director of the Free File Alliance. “It’s been helpful for people who have looked for Direct File and can’t use it and have been able to use Free File.”

IRS Commissioner Danny Werfel told the Senate Finance Committee Tuesday that the IRS has seen a substantial increase in the number of taxpayers who have electronically filed for free across all platforms.

Republicans have blasted the Direct File pilot and some have pointed to Free File as an alternative.

“The Free File program continues to be an important part of our portfolio of free options available for taxpayers, and we encourage taxpayers to see if there’s a free option that works for them,” Werfel said in a statement Wednesday.

Available Widely

The free-filing private-sector option is broader in scope. This year it’s a partnership with eight tax-prep software companies, and allows taxpayers who made $79,000 or less in 2023 to file with one of these companies for free. Taxpayers have the option to file returns through traditional guided tax preparation or using an IRS fillable form, which doesn’t have an income limitation.

Key differences in Free File include that taxpayers in all states can use the platforms, gig workers are eligible, and it’s open until Oct. 15. Partners include 1040Now, Drake, ezTaxReturn.com, FileYourTaxes.com, On-Line Taxes, TaxAct, TaxHawk, and TaxSlayer. Tax-prep giants H&R Block and TurboTax previously participated in the program but have withdrawn from participating in recent years.

But the free-filing partnership option historically has been criticized for its low uptake with taxpayers. About 70% of taxpayers in the 2022 tax year were eligible to use it, but only 2% did so, according to an annual report to Congress from the National Taxpayer Advocate.

In the memorandum of understanding with the IRS, promoting the free-filing partnership option falls to the IRS, which until this year did little national advertising, Hugo said. The IRS instead uses email, social media, and partnership outreach to spread awareness.

“A little bit more advertising would make it go a lot farther,” Hugo said.

Hugo also pointed to a report from the Electronic Tax Administration Advisory Committee that recommended the IRS focus on enhancing existing free programs instead of developing its own due to the high costs of starting a new Direct File program. The IRS doesn’t incure short or long-term costs for the private-sector partnership option.

ETAAC, which includes tax-prep company representatives among its members, submits a report to Congress on electronic tax administration each year.

Jared Ballew, vice president of government relations at Drake Software and TaxAct, served as the chair for the 2023 report.

“The IRS knows it’s about choice and the taxpayers want to be able to choose what works for them,” Ballew said.

Direct File is projected to cost between $64.3 million and $248.9 million, depending on how many taxpayers use it, the agency estimated in the May report. The IRS launched Direct File after Democrats’ 2022 tax-and-climate law, also known as the Inflation Reduction Act, set aside $15 million for the IRS to report on the feasibility of creating a direct e-filing tax return system.

The future of the pilot is uncertain after this filing season.