“Meeting your tax obligations and claiming the credits and deductions for which you’re eligible should be easy,” Treasury Secretary Janet L. Yellen said Thursday. “We will make Direct File a permanent IRS service and invite all states to participate in Direct File starting next year.”
To opt in, state governments must create their own online platforms for state tax returns that can be linked to the Direct File website. IRS Commissioner Danny Werfel said he would assess how many states would be willing and capable of joining the program in 2025.
Some Republican-led states have signaled they are less likely to participate: The attorneys general of 12 of them alleged in February that the Direct File program wasn’t legally authorized and should be stopped.
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But Werfel expressed hope Thursday that the program would be welcomed on both sides of the aisle, and said he was confident it would survive no matter which party controls the White House or Congress. “I truly believe that the vision that the IRS has for the future of tax administration is a nonpartisan one,” he said, adding that “the process should be easier, less stressful, less burdensome.”
Code for America, which built the Direct File-connected software used by New York and Arizona this year, said Thursday that it would be open to providing the technology to states onboarding next year. Gabriel Zucker, who runs the organization’s tax programs — including the Get Your Refund website that lets taxpayers submit their information to volunteers who prepare their returns for free — said the nonprofit is exploring options, including support from donors to make those websites low-cost or free for state governments.
“Our mission broadly is that government should work for people. And our mission specifically on the tax team is that people get the benefits they’re owed through the tax code,” Zucker said. “I truly can’t think of anything more aligned with that than Direct File.”
The idea of filing taxes directly to the government, rather than through commercial software or a paid tax preparer, has been floated for decades; the practice is routine in dozens of countries, including Australia, South Korea and much of Europe. In 2022, Congress instructed the IRS to study the feasibility of a free tax-filing site, allocating $15 million for a study.
The IRS came back with a study and an announcement: It was building a website in time for the 2024 tax season.
Questions about cost have dogged the project, with Republicans in Congress and several statehouses questioning whether the IRS should build a website that Congress had not explicitly authorized. Shortly after the tax season concluded, Werfel said that the agency spent much less than projected on the site — $10.5 million to develop it and $2.4 million to operate it, including the cost of call center employees who answered live chat questions from users. The tax-season operating cost amounted to about $17 per return from the IRS’s budget. By comparison, the typical household spends more than $200 each year to file their taxes.
Those IRS costs did not include investments from other Biden administration agencies, including the U.S. Digital Service, which pitched in thousands of hours of manpower to build the website, valued at more than $7 million.
Werfel said Thursday that the outlay for a nationwide version of the program will depend on how many states sign up, but that the Biden administration has budgeted $75 million for it.
The initial version of Direct File allowed users to report only four types of income — wages, interest, Social Security and unemployment — meaning that many people were ineligible, including gig workers or anyone with private retirement income. Werfel said the IRS is looking at expanding eligibility further each year until the site can eventually process all common tax situations. People who have certain retirement income and people who buy health care on the insurance marketplace are among the groups he would like to include next as the website’s capacity grows.
The multibillion-dollar tax industry is vociferously opposed to the program; on Thursday, tax software industry group American Coalition for Taxpayer Rights blasted Direct File as “costly, confusing and unnecessary.” But a wide variety of community-based organizations and Democrats praised news of a permanent program.
Senate Finance Committee chair Ron Wyden (D-Ore.) called the expansion “tremendous news for taxpayers all over the country who are tired of getting ripped off by the big tax prep companies that routinely upcharge for unnecessary services, oversell the quality of their products and offer crummy customer service.”
In a statement, he disagreed with Werfel’s view that Direct File would continue regardless of who is in office in 2025 and beyond. “I’m convinced that Donald Trump and Republicans in Congress will shut it down if they have the opportunity. Taxpayers must remember that Direct File is on the ballot in November,” Wyden said.
Much like commercial software, Direct File uses a question-and-answer format. But it doesn’t draw from the IRS’s vast trove of financial information on each taxpayer, meaning users cannot pre-fill W-2 wage statements and other financial information on their tax forms. The pilot included four states that volunteered to link their state tax forms to Direct File (Arizona, California, Massachusetts and New York) and eight of the nine states that currently have no state income tax (Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming).
All taxpayers have other free options. Some companies make versions of their software available through the IRS-sponsored Free File program, which the agency recently renewed through 2029. Volunteers prepare millions of returns for low- and middle-income people each year. And every taxpayer could simply fill out their own tax forms and submit them either on paper or online. But paid preparers and paid software remain by far the most popular tax filing methods for the more than 140 million U.S. households that file returns.
