IRS underreported costs of Direct File: TIGTA

Bloomberg via Getty Images

A new report from the Treasury Inspector General for Tax Administration said that Internal Revenue Service claims regarding the Direct File pilot program last tax season omitted more than a third of costs.

According to "Inflation Reduction Act: Results of the Direct File Pilot," TIGTA found that the $24.6 million the IRS reported as the cost to develop and operate the Direct File Pilot did not include all the costs incurred by the government.

"Reported totals did not include an estimated $8.8 million for costs incurred by the Office of Management and Budget for employees detailed to the IRS to help develop and pilot Direct File and costs incurred to create or leverage existing accounts through the IRS's credential service provider," the report said.

TIGTA added, "As noted in its pilot evaluation report, the IRS did not include the cost of U.S. Digital Service employees or other shared corporate costs." This included $7.3 million incurred by the Office of Management and Budget for the services of approximately 29 employees from the U.S. Digital Service, who were detailed to the IRS to help develop and pilot Direct File.

(Read more: "IRS noncommittal on future expansion of Direct File.")

"This represents an estimate of the 29 employees based on their annual salary and benefits," the report reads. "Actual costs, which we requested and did not receive from the Office of Management and Budget, could be higher or lower."

An additional $1.5 million was incurred for new Direct File users to create an IRS credential service provider account or to leverage existing CSP credentials. According to cited IRS management, these costs were absorbed just as they would for any other taxpayer creating an online account not using Direct File.

Total costs of the pilot also did not include all the costs of other IRS employees who collaborated to support the program, TIGTA said. 

Among other reported details of the pilot, which ran from Feb. 1, 2024, to April 20, 2024:

• More than 423,000 taxpayers created or signed into a Direct File account. Some 161,000 submitted a return, and nearly 141,000 had their return accepted. Error and ID-theft rates for returns submitted through Direct File were close to or lower than the rates from other tax software providers. 
• Twelve states participated in the pilot (13 more committed to participate during the 2025 season). State participation was limited by several factors, and taxpayers may be less likely to use Direct File if they can't also submit their state return, according to TIGTA.
• The IRS rejected Direct File returns for 35,675 taxpayers because of "something on their return that was not expected or allowed." TIGTA found that a system error in IRS programming to provide prior-year adjusted gross incomes prevented some taxpayers from seeing those amounts.