The IRS is making its free tax-filing platform permanent and open to all 50 states, the Biden administration announced Thursday, following the successful launch of the first-of-its-kind website.
This tax season, more than 140,000 taxpayers in 12 eligible states made use of Direct File – which allows users to submit simple tax returns directly to the government. Republicans have criticized it as a costly and unnecessary government alternative to private-sector offerings from Turbo Tax, H&R Block and others, while Democrats praise the effort as a cost-saver for consumers.
“Meeting your tax obligations and claiming the credits and deductions for which you’re eligible should be easy,” Treasury Secretary Janet 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 have conversations with state officials in the coming week to determine how many states and the District of Columbia 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.
But Werfel expressed hope Thursday that the program would be welcomed on both sides of the aisle, and he said he was confident Direct File would survive even under a potential, future Republican-led White House or Congress.
“I truly believe that the vision that the IRS has for the future of tax administration is a nonpartisan one … to build world-class customer service for taxpayers,” he said. “I think there’s an overwhelming interest, and it’s fully nonpartisan, that the process should be easier, less stressful, less burdensome. … Increasing the options for how they may file for free shouldn’t be seen through a political lens.”
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’ 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 the website for next year.
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 incomes 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.
Much like commercial software, Direct File uses a question-and-answer format. But it doesn’t draw from the IRS’ vast trove of financial information on each taxpayer, meaning users cannot prefill W-2 wage statements and other financial information on their tax forms. The initial 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. Every taxpayer could simply fill out their own tax forms and submit them either on paper or online.
Paid preparers and paid software, however, remain by far the most popular tax filing methods for the more than 140 million U.S. households that file returns.
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