INSIGHTi
Current Status of an IRS Free Direct Electronic
Filing Option
October 30, 2023
Individuals have two options when they file a federal income tax return and related forms: a paper return
or an electronic return. Electronic filing (e-filing) involves preparing a return using software preapproved
by the Internal Revenue Service (IRS) and submitting it to the IRS electronically. In the 2021 tax year,
95% (147.2 million) of individual income tax returns were e-filed; paid professional preparers submitted
57% of e-filed returns and self-preparing individuals the other 43%.
The IRS provides several options for free e-filing (e.g., the Free File and the Volunteer Income Tax
Assistance programs), but it does not allow taxpayers to file directly with the IRS through a secure portal
on its website, an option known as Direct File (DF).
This Insight examines the current status of the IRS’s efforts to develop a DF system.
Interest in an IRS Direct-File Option
The IRS looked into creating a DF system in 2001 in response to a directive from the Office of
Management and Budget to offer such a service to taxpayers. In 2002, concerned about the cost of and
political opposition to providing free direct tax filing, the IRS entered into a partnership with a number of
commercial tax preparation firms to provide free tax preparation and e-filing to low- to medium-income
taxpayers through a program known as Free File. In return, the IRS agreed to refrain from developing a
competing DF option.
This limitation lasted until 2019, when it was dropped from an extension of the memorandum of
understanding governing the Free File program. There were several reasons for its disappearance. Usage
rates for the program averaged 3% to 4% of eligible taxpayers. The IRS invested little in promoting and
policing the program. Media reports in 2019 revealed the efforts of some Free File member companies to
divert Free File-eligible taxpayers to the companies’ paid filing services.
Interest among some lawmakers in the IRS establishing its own DF service seems to have grown since
2019. The Inflation Reduction Act (IRA, P.L. 117-169) provided the IRS with $15 million to create a
direct e-file task force and deliver two reports to Congress by May 16, 2023. The task force was to
prepare one report, and an “independent third party” chosen by the IRS was to prepare the second report.
Congressional Research Service
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Mandated Reports on an IRS Direct-File Option
IRS Report
As required by IRA, the IRS report addressed (1) taxpayer “opinions, expectations, and level of trust” for
a DF system and (2) the cost of developing and operating such a system under different levels of income
and tax complexity.
Taxpayer Opinions
To assess taxpayer attitudes toward a “hypothetical free IRS-provided online tool,” the IRS task force
reviewed the results of two recent surveys and conducted interviews with 14 taxpayers about their
experiences using an IRS prototype of a DF system. The results indicated that 72% of taxpayers would be
“very or somewhat interested” in using a free IRS-run online filing tool. The report found that this degree
of interest depended on certain conditions, most notably (1) the percentage of taxpayers who regard the
IRS as a legitimate provider of such a service; (2) the availability of concurrent filing for federal and state
income tax returns; and (3) the possible advantages of an IRS filing tool relative to other filing options
(e.g., faster refunds, prefilled filing, and a reduced audit risk).
System Cost
The IRS report identified the three primary cost drivers: (1) critical software and equipment; (2) system
maintenance and updating; and (3) customer support. It provided cost estimates for three filing scenarios:
5 million filers, 10 million filers, and 25 million filers, under both a simple and a complex tax situation.
The results indicated that the annual cost of developing and operating a DF tool rose in step with the
number of filers. But the cost per filer fell as the number of filers rose: the cost per return under the
simple tax situation was about $13 with 5 million filers and $9 with 25 million filers.
Independent Third-Party Report
As required by the IRS, the independent third-party report assessed the “the overall feasibility approach,
schedule, cost, organizational design, and the Internal Revenue Service capacity to deliver a direct e-file
tax return system.”
Feasibility
According to the report, the feasibility and success of a DF system largely hinged on the presence of
certain conditions. Specifically, the report found that a feasible system would require (1) sustained IRS
managerial support; (2) gradual and flexible development; (3) sustained funding that allows for continued
upgrades in the system’s hardware and software; (4) concurrent e-filing of federal and state income tax
returns; (5) accurate, timely, and reliable customer service; and (6) secure protection of taxpayer
information and privacy.
System Cost
The third-party report estimated the annual cost of a DF option on the basis of the same cost drivers as the
IRS report. The former provided cost estimates for five filing scenarios (1 million users, 2 million users, 5
million users, 10 million users, and 25 million users) under a range of uncertainty about long-term costs.
The results showed that the per-return cost fell as the total number of filers rose. Under the least-certain
scenario, the cost per return was $9 with 5 million filers and $5 with 25 million filers.
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IRS’s Planned Test of a Direct-File Prototype in 2024
The IRS is planning to launch a pilot DF program at the start of the 2024 filing season. The program,
which aims to assess the feasibility and cost of an IRS DF system, is intended to supplement existing
federal free filing options. It is not clear how many taxpayers will participate in the program, which will
apply only to relatively simple tax situations. The Treasury Inspector General for Tax Administration
reported in early October 2023 that the pilot project will not include an option to concurrently file state
income tax returns in 2024.
One issue that could stall or derail this effort is the question of whether the IRS can implement a DF
system without congressional approval. Some lawmakers say that such approval is required before the
IRS can invest in a DF system. Others disagree, saying that no such authorization is needed because
operating a DF system is like any activity that falls within the broad grant of authority the federal tax code
gives the IRS to administer tax laws.
Author Information
Gary Guenther
Analyst in Public Finance
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff
to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of
Congress. Information in a CRS Report should not be relied upon for purposes other than public understanding of
information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role.
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