The IRS’s Free Direct Filing Pilot Program

The IRS’s Free Direct Filing Pilot Program

INSIGHTi

The IRS’s Free Direct Filing Pilot Program
Updated March 25, 2024
Individuals may satisfy their income tax obligations by filing a paper return or filing an electronic one (e-
filing). To e-file, a taxpayer must use software preapproved by the Internal Revenue Service (IRS). Most
individual returns are e-filed. For the 2022 tax year (through December 29, 2023), the IRS received 162
million returns, 93% of which (150 million) had been e-filed. Professional preparers submitted 57% of the
e-filed returns and self-preparing individuals the other 43%.
Historically, the IRS has provided taxpayers with several options for free e-filing, but those options did
not include e-filing directly with the IRS through a secure portal on its website, an option known as Direct
File (DF). As a result of several recent developments, a DF option is now available as a pilot program
during the 2024 filing season.
This Insight describes how the pilot DF system came to be and how it is intended to work.
Emergence of An IRS Direct-File Option
The IRS’s efforts to create a DF system go back to the early 2000s. The initial attempt was a response to a
2001 directive from the Office of Management and Budget to expand e-filing as part of an effort to
increase the range of online federal government services. In 2002, concerned about the cost of developing
and maintaining a DF system and facing opposition in Congress to such an initiative, the IRS formed a
partnership with a number of commercial tax preparation firms to provide free tax preparation and e-filing
to lower-income taxpayers through a program known as Free File. Under the agreement establishing the
program, member companies were to provide free e-filing to eligible taxpayers through their online
platforms, and in return, the IRS would refrain from developing its own DF system.
This restriction lasted from 2003 until 2019, when it was dropped from the memorandum of
understanding governing the Free File program. There were several reasons for this decision. Historic
usage rates for the program had ranged from 3% to 4% of eligible taxpayers. The IRS invested little in
promoting and policing the program. Some media reports in 2019 revealed that some member companies
had been diverting Free File-eligible taxpayers to the companies’ paid filing services.
Interest in the IRS providing a 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 a second report.
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IRS Report
The IRS report addressed two topics: (1) taxpayer “opinions, expectations, and level of trust” for an IRS-
run DF system and (2) the cost of developing and operating such a system under different levels of
taxpayer income and tax complexity.
To assess taxpayer attitudes toward a “hypothetical free IRS-provided online tool,” the IRS task force
reviewed the results of two recent surveys and interviewed 14 taxpayers about their experiences using an
IRS prototype of a DF system. The survey results indicated that over 70% of taxpayers would be “very or
somewhat interested” in using a free IRS-run online filing tool. The task force also found that taxpayer
interest in such a tool depended on (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 advantages of using an IRS filing tool relative to other filing options, such as faster refunds,
prefilled filing, and a reduced audit risk.
The IRS report noted that the cost of developing and updating a DF system would be driven by three
factors: (1) critical software and equipment; (2) system maintenance and updating; and (3) customer
support. It also provided cost estimates for three filing scenarios: 5 million filers, 10 million filers, and 25
million filers under both a simple tax situation and a more complex one. 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. For instance, the cost per return under a simple tax situation was
about $13 with 5 million filers but dropped to $9 with 25 million filers.
Independent Third-Party Report
The independent third-party report assessed the “the overall feasibility approach, schedule, cost,
organizational design” of an IRS DF system, and the Internal Revenue Service capacity to deliver one.
According to the report, the feasibility and success of a DF system depended on six factors:
• continuous IRS managerial support;
• gradual and flexible system development;
• sustained funding that allows for continued upgrades in the system’s hardware and
software;
• concurrent e-filing for federal and state income tax returns;
• accurate, timely, and reliable customer service; and
• secure protection of taxpayer information in a DF system.
The third-party report estimated the annual cost of a DF option using the same cost factors as the IRS
report. It 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 a DF system’s long-term costs.
In line with the IRS report, the results showed that the overall cost rose and the per-return cost fell as the
total number of filers expanded.
Current Status of the IRS’s Pilot Direct-File Program
In March 2024, the IRS opened its pilot DF program for limited use during the 2024 filing season. A main
aim of this effort is to assess the technical feasibility, cost, and taxpayer response to a DF system as
another free e-filing option for taxpayers with relatively simple tax situations. The IRS announced that 19
million individuals in Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York,
South Dakota, Tennessee, Texas, Washington, and Wyoming are eligible to file their returns for the 2023

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tax year through the DF pilot. Participants can file their returns on their smartphones, laptops, tablets, or
desktop computers.
At the moment, only certain tax items can be reported through the pilot DF program. Income reporting is
limited to W-2 wages, Social Security and railroad retirement income, unemployment compensation, and
interest of $1,500 or less. Three credits may be claimed: the Earned Income Tax Credit, the Child Tax
Credit, and the Credit for Dependents. Users may claim three deductions only: the standard deduction,
student loan interest, and educator expenses.

Author Information

Gary Guenther

Analyst in Public Finance

Disclaimer
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