IRS Direct File Program: An Overview

IRS Direct File Program: An Overview

May 7, 2024
IRS Direct File Program: An Overview
The assessment and collection of federal taxes owed depend
part of a broader push by the George W. Bush
on the level of taxpayer compliance with tax laws and
Administration to expand the range of online federal
regulations. Two factors shaping this compliance are the
government services.
cost and ease of preparing and filing a tax return.
In 2002, the IRS elected to reach this goal through a
Electronic filing (e-filing) provides benefits to taxpayers
partnership with a number of commercial tax software firms
and tax administrators like the IRS. The main benefits to
to provide free online tax preparation and filing to lower-
taxpayers are faster delivery of refunds and resolution of
income taxpayers through a program called Free File. At
filing errors. For the IRS, processing costs are much lower
the start of the program, member companies agreed to
than they are for paper returns. E-filing rates for federal
provide free e-filing to eligible taxpayers through their
individual income tax returns now exceed 90%.
online platforms, and the IRS agreed not to develop its own
DF system.
The IRS offers certain taxpayers three options for free e-
filing. One option is the IRS-run Free File program, which
This commitment lasted until 2019, when it was dropped
allows lower-income taxpayers to e-file free of charge
from the memorandum of understanding governing the
through the websites of participating tax software
year-to-year operation of the Free File program. Critics of
companies. Another option is the Volunteer Income Tax
the program had been pushing for the IRS to develop its
Assistance (VITA) grant program, in which the IRS
own DF tool in part because of concerns about Free File.
partners with local community organizations to help low-
They said the program had achieved its main objective of
income individuals, disabled individuals, and persons with
substantially boosting e-filing among lower-income
limited English proficiency e-file their returns free of
taxpayers. Several 2019 reports noted that eligible taxpayer
charge. The third option is the Tax Counseling for the
usage rates had largely remained between 3% and 4%, the
Elderly program, which provides free tax preparation and
IRS invested little in promoting the program, and there was
filing for taxpayers 60 years of age and older.
evidence that some member companies had sought to
increase revenue by diverting Free File-eligible taxpayers to
Historically, the IRS had not offered taxpayers the option of
their paid filing services.
filing directly through a secure portal on its website, an
option known as direct-file (DF). Such an option first
Congressional interest in an IRS free DF tool appears to
became available as a pilot program for a limited number of
have grown since 2019. The Inflation Reduction Act of
taxpayers during the 2024 filing season.
2022 (IRA, P.L. 117-169) provided the IRS with $15
million to create a DF task force and deliver a report to
This In Focus discusses how the pilot DF program came to
Congress by May 16, 2023, that included the opinions of an
be, how it operated, and whether the IRS may offer it (or
“independent third party.”
something similar) again in the future.
IRS Taskforce Report
Evolution of IRS Direct-File Option
The IRS task force report addressed two topics: (1)
Arguably, the IRS’s efforts to create a DF system began
taxpayer “opinions, expectations, and level of trust” for an
with the Internal Revenue Service Restructuring and
IRS-run DF system and (2) the cost of developing and
Reform Act of 1998 (P.L. 105-206, RRA98). The act
operating such a system under different levels of taxpayer
directed the IRS to develop and implement a plan to
income and tax return complexity.
achieve an e-filing rate of 80% for individual tax returns by
2007, with input from the private sector. The act also
To assess taxpayer opinions of a “hypothetical free IRS-
required the IRS to develop procedures for implementing a
provided online tool,” the IRS task force reviewed the
return-free filing system for tax years beginning after 2007.
results of two recent taxpayer surveys and interviewed 14
Nothing came of the second requirement, except for a
taxpayers about their experiences using an IRS-built
report the IRS issued in 2003 that focused on the additional
prototype of a DF system. The survey results indicated that
resources the IRS would require to create and operate such
over 70% of taxpayers would be “very or somewhat
a system and changes in federal tax law that would facilitate
interested” in using an IRS-run DF tool.
taxpayer use of such a system.
The task force also found that taxpayer interest in such a
The first directive initiated a process that seems to have
tool varied with (1) the percentage of taxpayers who
culminated in the 2024 DF pilot program. The process
regarded the IRS as a legitimate provider of such a service;
began with a 2001 directive from the Office of
(2) the availability of concurrent filing for federal and state
Management and Budget to the IRS to expand e-filing as
income tax returns; (3) the availability of prefilled returns;
https://crsreports.congress.gov

IRS Direct File Program: An Overview
and (4) possible advantages of using an IRS filing tool
during the 2024 filing season. According to the IRS, 19
relative to other filing options, such as faster refunds and
million individual taxpayers with relatively simple returns
reduced audit risk.
residing in Arizona, California, Florida, Massachusetts,
Nevada, New Hampshire, New York, South Dakota,
The IRS report noted that the cost of developing and
Tennessee, Texas, Washington, and Wyoming were eligible
updating a DF system would be driven by (1) the
to file their 2023 tax returns through the pilot.
acquisition of critical software and equipment; (2) system
maintenance and updating to reflect tax code and taxpayer
Filers’ income was limited to W-2 wages, Social Security
eligibility changes; and (3) customer support.
and railroad retirement income, unemployment
compensation, and interest of $1,500 or less. They were
Under a set of assumptions about these cost drivers, the
allowed to claim three credits (i.e., the Earned Income Tax
report provided cost estimates for six filing scenarios
Credit, the Child Tax Credit, and the Credit for
ranging from 5 million to 25 million filers under simple and
Dependents) and three deductions (i.e., the standard
more complicated tax situations. According to the results,
deduction and those for student loan interest payments and
the annual cost of developing and operating a DF tool used
educator expenses).
by taxpayers with simple tax situations rose from $64
million for 5 million filers to $221 million for 25 million
According to the IRS, 3.3 million taxpayers looked into
filers. Customer support accounted for 63% of the
their eligibility to file through the pilot and over 140,800
estimated cost for 5 million filers and 86% of the estimated
taxpayers filed accepted returns, saving an estimated $5.6
cost for 25 million filers. Economies of scale lowered the
million in tax preparation fees. A General Services
estimated cost per return for a simple tax situation from $13
Administration TouchPoints survey of over 11,000 users
for 5 million filers to $9 for 25 million filers.
found that 90% of respondents viewed their experience as
“excellent” or “above average.”
Independent Third-Party Opinion
As required by IRA, the IRS selected New America and
The IRS’s FY2024 budget for the pilot is $114 million. By
law professor Ariel Jurow Kleiman to comment on the
the end of the 2024 filing season, the IRS had spent $24.6
“overall feasibility, approach, schedule, cost, organizational
million on the program, including $2.4 million for operating
design, and Internal Revenue Service capacity to deliver …
costs and $10.5 million for system development.
a direct efile tax return system.”
Future Status
In the third party’s view, the success of such a system
A key question is whether the IRS will continue to develop
depended on (1) consistent IRS managerial support; (2) a
and offer a DF tool capable of handling a wider range of
gradual and flexible approach to system development; (3)
returns. Several factors likely will influence the decision.
sustained funding; (4) the availability of concurrent and
coordinated e-filing for federal and state income tax returns;
One factor is the level of support for such a tool among
(5) accurate, timely, and reliable customer service; and (6)
senior IRS managers. The IRS Commissioner has made no
secure protection of taxpayer information.
decision about continuing a DF option for the 2025 filing
season. The IRS is reviewing the pilot results and plans to
New America and Kleiman estimated the cost of a DF
issue a report later this year on its costs, benefits, customer
system for five filing scenarios (1 million, 2 million, 5
support, and user experiences.
million, 10 million, and 25 million filers) covering a range
of uncertainty about such a system’s long-term costs. The
Another factor is the availability of congressional funding
annual cost ranged from $22 million to $47 million for 1
for an IRS-run DF tool. Some Members oppose such a
million filers and from $126 million to $213 million for 25
system and may be willing to bar the IRS from using
million filers. Economies of scale reduced the per-return
FY2025 discretionary funds to offer a DF option. Critics
cost as the number of filers rose.
argue that it is a waste of public funds for the IRS to
provide a free DF service when it already provides three
Government Accountability Office (GAO) Report
free e-filing options and tax software companies offer free
The IRA directed the GAO to oversee the use of IRA funds,
e-filing to many taxpayers with simple returns. Some also
including DF funds. In a 2024 report, GAO contended that
argue that an IRS DF tool would create a conflict of interest
the IRS had not provided the “comprehensive cost and
between the IRS’s responsibility to collect taxes owed and
benefit estimates” required to guide decisions regarding the
an obligation under the tool to ensure that taxpayers receive
future of the pilot program. It also asserted that the IRS task
the tax benefits they are due.
force’s 2023 cost estimates were not properly documented
and failed to account for a DF tool’s start-up costs. It
Backers of an IRS DF tool say the IRS should at least offer
further noted that the IRS had not identified the “metrics” it
an expanded pilot DF program in the 2025 filing season to
will use to evaluate the costs and benefits of the pilot
shed light on the costs and benefits of a program covering a
program.
broader range of returns.
Preliminary Pilot Results
Gary Guenther, Analyst in Public Finance
Testing of the pilot began in early February 2024, and the
IRS opened it in mid-March for use by eligible taxpayers
IF12654
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IRS Direct File Program: An Overview

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