The Internal Revenue Service outlined plans Thursday to revive the Direct File free tax filing system that it tested this past tax season and make it a permanent option for next tax season and beyond, expanding the number of states and tax situations for which it will be available.
The decision comes after a successful limited pilot during this past filing season, in which 140,803 taxpayers in 12 states
The IRS has closely analyzed data collected during the pilot, held a number of meetings with various groups of stakeholders and elicited feedback from individual Direct File users, state officials and representatives across the tax landscape. It heard directly from hundreds of organizations across the country, over 100 members of Congress, and from those interested in using Direct File in the future. The agency has also heard from a limited number of stakeholders who believe the current free electronic filing options provided by third-party vendors are adequate.
"The IRS will make Direct File a permanent option to file federal tax returns, and we will work to expand the service and make it available to more taxpayers starting with the next filing season," said IRS Commissioner Danny Werfel during a press call Thursday. "To that end, we are interested in working with all states that want to partner with Direct File. There will be no limit to the number of states that can participate in the coming year. We are also exploring ways to make additional taxpayers eligible to use the system next year and beyond. Over the coming years, our goal is to gradually expand the scope of Direct File to support most common tax situations, focusing in particular on tax situations that impact working families."
Werfel recommended to Treasury Secretary Janet Yellen to make Direct File permanent, citing overwhelming satisfaction from users and improved ease of tax filing among the reasons for his recommendation, which Yellen accepted.
"President Biden is committed to saving Americans time and money and ensuring families receive the tax benefits they're owed," Yellen said in a statement. "Providing a free tool to all Americans who want the option to file directly with the IRS is key to achieving those goals. After a successful pilot, we are making Direct File permanent and inviting all 50 states to offer this free filing option to their residents. The Treasury Department and IRS look forward to working with states to expand Direct File to Americans across the country."
The IRS will look at options such as expanding support for claiming tax credits, such as the Premium Tax Credit for health insurance.
"We're mindful that the most important decision we made during the pilot was to focus on executional certainty," said Werfel. "We took the time to get it right and found the right first step to test the demand and user experience and build a strong product. We will apply that same critical lesson next year, as we take a strategic approach to expanding Direct File's availability and capability. User experience both within the product and integration with state tax systems will continue to be the foundation for Direct File moving forward. 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 filed 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 Treasury Department estimates that Direct File users saved $5.6 million in tax preparation fees.
"Direct File helped catalyze the IRS's digital transformation," said Werfel. "To build Direct File, the IRS assembled a team of experienced tax experts, digital project specialists, engineers and data scientists from across the federal government. The Direct File team consisted of partners from the U.S. Digital Service and GSA 18F [the digital service delivery function at the federal government's General Services Administration], as well as private sector partners who all brought critical agile technology expertise. Working side by side at the IRS headquarters and collaborating with remote team members across the country, the Direct File team developed and delivered a strong technology product."
He noted that the Direct File pilot also gave the IRS an opportunity to test customer service innovations on a large scale. Live chat was integrated directly into the product so that taxpayers didn't have to leave the system for customer support. "This was not the IRS's first use of live chat, but it was the largest live chat deployment we have undertaken," said Werfel. "We're exploring how this approach can strengthen taxpayer service overall."
He sees Direct File as a critical tool for the IRS to accomplish its core mission to meet taxpayers where they are, give them options to interact with the IRS in ways that work for them, and help them meet their tax obligations as easily and quickly as possible.
"Direct File is an important component of a stronger, comprehensive tax system that gives taxpayers electronic filing options that best suit their needs," said Werfel. "There is strong interest in no-cost filing options across the country. Millions of taxpayers who do not live in one of the 12 pilot states visited the Direct File website to learn more about this option or asked live chat assistors to make Direct File available in their states."
He noted that Direct File will continue to be one option among many from which taxpayers can choose, but the IRS plans to still work with the Free File group of third-party tax software providers.
"We have heard from many taxpayers who prefer to file their taxes directly with the IRS," he said. "We also know that many taxpayers prefer to work with a third party, whether that is a trusted tax professional or use tax preparation software, both free and commercial. The IRS will continue to support all filing options. Giving taxpayer options strengthens the tax filing system. Direct File is an additional option to filing federal tax returns. It is not meant to replace other important options by commercial providers who are critical partners with the IRS in delivering a successful tax system for the nation. We also remain committed to the IRS's ongoing relationship with the Free File who have been critical partners in serving taxpayers for two decades. As we work to expand Direct File, we will work to strengthen all no-cost options for taxpayers, including the Voluntary Income Tax Assistance Program and the Tax Counseling for the Elderly program."
A range of reactions
The future of Direct File may also depend on the outcome of the November election, as a number of Republicans have expressed their opposition to the program. Werfel was asked about that during the press conference.
"I truly believe that the vision that the IRS has for the future of tax administration is a nonpartisan one," he responded. "Our focus is to build world-class customer service for taxpayers, meet the generation of taxpayers that's emerging where they are, and how they want to interact with the IRS and meet their tax obligations. I think there's an overwhelming interest, and it's fully nonpartisan, that the process should be easier, less stressful, less burdensome."
"We think the idea of increasing the options for taxpayers, and in particular increasing the options for how they may file for free, shouldn't be seen through a political lens," he added. "And so we want to move forward in a way always at the IRS that is apolitical, that focuses on serving taxpayers, meeting where they are, helping them meet their obligations, which is core to our mission. That's why I think it will always be the case for all IRS under any administration, that our goal is to help taxpayers and to provide them the best possible set of choices and options for how they file."
An advocacy group applauded the continuation of the program. "IRS Direct File delivered on the promise of free and simplified tax filing for taxpayers, and we are excited to see that the program is here to stay. It was evident that taxpayers saw the value of Direct File, both in making their lives easier and demonstrating what great government customer service looks like," said Adam Ruben, vice president of campaigns and political strategy at the Economic Security Project, a member of the Coalition for Free and Fair Filing, in a statement. "We are already working with our partners in states across the nation to support the expansion of Direct File next year so more taxpayers can take advantage of free and simplified tax filing in the next tax season."
A coalition of tax software vendors oppose the decision to extend the Direct File program.
"This decision today on IRS Direct File has been foreshadowed since the day the 'pilot' was announced one year ago, even though less than 1% of the 19 million taxpayers eligible for Direct File this year chose to use it," said American Coalition for Taxpayer Rights spokesperson David Ransom. "We believe Direct File is costly, confusing and unnecessary, particularly in light of the fact that commercial tax preparers provided more than 23 million free returns this year as well as another 3 million free tax returns through the IRS Free File Program. Taxpayers would be better served if the IRS focused on promoting the existing IRS Free File Program."
TurboTax maker Intuit also weighed in with its response. "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," said Intuit spokesperson Tania Mercado. "This was true on the day Direct File was launched and remains true today. Out of those eligible for Direct File, only 140,000 taxpayers, or approximately 0.7% used it. In stark contrast, TurboTax has filed millions of completely free tax returns annually and has provided more than 124 million free tax returns over the past decade. The data is clear, taxpayers continue to want and benefit from having an advocate when filing their taxes to help ensure that they pay only what they owe and receive the maximum refund they are eligible for. Intuit TurboTax is proud to advocate for taxpayers, and provides a tax return lifetime guarantee for accuracy and maximum refund."
The expansion was greeted with approval from Senate Finance Committee Chairman Ron Wyden, D-Oregon, who has been backing the program.
"Direct File expanding nationwide is 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," he said in a statement. "Commissioner Werfel and Secretary Yellen handled this by the book, taking the time to build and test out a great new public service before announcing its expansion."
