WASHINGTON (TND) — The Internal Revenue Service is expanding its program allowing Americans to file their taxes directly with the agency for free to all 50 states and making it a permanent option after what the agency saw as a successful trial run last tax season.
A program to directly file taxes with the IRS would be a significant shift for the U.S., where a majority of taxpayers rely on paid services from private companies and has resulted in one of the highest voluntary tax compliance rates in the world.
The pilot program was available in 12 states and only for people with basic W-2s. It also didn’t include the filing of state taxes as the IRS worked to find out whether it was feasible for it to create software and processing capabilities from scratch to compete with tax preparation giants that also offer free services to taxpayers.
The practice is common in dozens of other countries but is a novel idea in the U.S. that comes with significant questions and heavy resistance from private companies that rake in millions each year helping Americans file their taxes.
IRS officials said Thursday that it would be working with states to expand who can use the Direct File program. It is also working on expanding the scope of tax situations that are supported but will focus on the most common ones that impact working families.
Code for America, a group that built Direct File-connected software used in the pilot program by some states, said that it would work to help expand the program to more states.
“The 2024 Direct File pilot was an enormous step forward in promoting equitable access to the tax system,” said Amanda Renteria, CEO of Code for America. “By adopting best practices in civic technology, starting small, and always putting taxpayers first, the IRS delivered a product that people loved, and proved beyond a doubt that the government can make it easier for Americans to file their returns.”
Republican-led states are less likely to participate in the expansion of the free file system with some attorneys general arguing that it wasn’t legally authorized and should be stopped from moving forward.
IRS commissioner Danny Werfel said that the agency’s goal is to continue making filing taxes as easy as possible for Americans and expanding its capabilities.
“User experience – both within the product and integration with state tax systems – will continue to be the foundation for Direct File moving forward,” Werfel said. “We will focus, first and foremost, on continuing to get it right. Accuracy and comprehensive tax credit uptake will be paramount concerns to ensure taxpayers file a correct return and get the refund they’re entitled to. And our North Star will be improving the experience of tax filing itself and helping taxpayers meet their obligations as easily and quickly as possible.”
The required simplicity of tax returns is one of the main drawbacks of the IRS program when compared to private sector services, which can handle more deductions, credits and other scenarios. However, advocates of an IRS-created system have argued that many of those features from private companies are hidden behind paywalls that end up costing taxpayers money to file and maximize their returns.
Private companies have been adamantly opposed to the creation of the Direct File project. They have pointed to unnecessary costs to taxpayers in building a program, a low usage rate for the pilot program and the free services offered by the industry.
The pilot program has cost the federal government nearly $32 million so far. Around $75 million has been budgeted for Direct File over the next fiscal year but the cost will fluctuate based on how many people end up using it.
“Today’s decision by Treasury and the IRS to expand Direct File doesn’t change the fact that this program is a solution in search of a problem and every American can already file their taxes for free, without any cost to the government or taxpayers. This was true on the day Direct File was launched and remains true today,” an Intuit spokesman said in a statement Thursday.
Multiple private companies also offer a free option to U.S. taxpayers through an agreement with the IRS that many people do not take advantage of.
Republicans in Congress have also been highly skeptical of expanding the IRS’ authority and capabilities from the passage of the Inflation Reduction Act that pumped billions of dollars into the agency. They have tried and succeeded on a few occasions to claw back some of those funds in various budget negotiations and frequently ridiculed the IRS for trying to play “judge, jury and executioner” when it comes to filing returns.
In a scenario where Republicans win the White House, Senate and House in the upcoming November elections, the IRS could see all of its new funding stripped away and have the Direct File project thrown out. Werfel has committed to Direct File continuing regardless of who is in office come 2025, but Democratic lawmakers have warned that it is on the ballot.
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