The IRS announced its free agency-run electronic filing system Direct File will be made permanent, a move that proponents claim will help streamline the tax filing process and critics say is unnecessary.
The decision was announced at the end of May and comes after the IRS conducted a yearlong pilot to see how effective the software was. The Treasury Department said it wants to build off the success of the limited pilot and work with states that want to partner with Direct File in the expansion.
“The clear message is that many taxpayers across the nation want the IRS to provide more than one no-cost option for filing electronically,” IRS Commissioner Danny Werfel said.
The pilot involved taxpayers with relatively simple tax situations in a dozen states. The IRS said 140,803 taxpayers filed their taxes with Direct File and decided to make the program permanent after talking to a wide array of stakeholders (including those who think the current system is adequate), members of Congress, and Direct File users.
The Treasury Department in President Joe Biden‘s administration said the system helped the taxpayers who used it claim more than $90 million in refunds and save an estimated $5.6 million in filing costs.
“President Biden is committed to saving Americans time and money and ensuring families receive the tax benefits they’re owed,” Treasury Secretary Janet Yellen said. “Providing a free tool to all Americans who want the option to file directly with the IRS is key to achieving those goals.”
Josh McCabe, the director of social policy at the Niskanen Center, told the Washington Examiner that Direct File for taxpayers who have straightforward taxes and take the standard deduction has proven “a really useful platform.”
“But it’s got some pretty major limitations. If you itemize, if you have different types of income,” it might not be the most helpful, he said.
Notably, McCabe said several countries other than the United States already have free agency-run electronic filing systems akin to Direct File.
The IRS was initially given the funding for the Direct File pilot as part of the Inflation Reduction Act, which had no Republican support and was blasted for infusing the IRS with billions of dollars in new funding. Regarding a direct filing system, Republicans fear giving the IRS too much control over all aspects of taxation.
Dan Savickas, director of policy at the right-leaning Taxpayers Protection Alliance, opposes the expansion. Savickas said making Direct File permanent should have been an “open debate” in Congress rather than a unilateral move by the IRS that was “largely behind the scenes.”
“The second problem is that the IRS has no incentive to save Americans money when they file their taxes,” Savickas told the Washington Examiner. “A company like TurboTax wants to provide the best services for Americans, generate the most savings, and find the deductions that work for them. The IRS is tasked with generating revenue, so they have no incentive to find the best deductions and the most savings.”
“So when the tax collector becomes the tax filer as well, that’s a natural problem,” he added.
After the decision to make Direct File permanent, a spokeswoman for Intuit, which runs popular tax filing software TurboTax, said the program “is a solution in search of a problem.” The spokeswoman pointed out that the number of taxpayers eligible for Direct File and used it this past year massively dwarfs the millions who use TurboTax annually.
“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,” she said. “Intuit TurboTax is proud to advocate for taxpayers and provides a tax return lifetime guarantee for accuracy and maximum refund.”
The IRS surveyed to gauge user experiences during the Direct File pilot. The report found that usage was in line with expectations for the pilot and “far exceeded what was necessary to provide sufficient data to evaluate.”
Some 90% of respondents rated their experience with the program as either “above average” or “excellent,” and 86% said their experience with Direct File increased their trust in the IRS itself.
It is worth noting that this year is an election year and there is a chance that Biden gets voted out of office and replaced by a Republican, presumably former President Donald Trump. That could imperil Direct File’s future as a service given Republican pushback on the matter.
“I don’t think it’s a coincidence they announced this in the lead-up to an election year, and they are sort of counting on folks giving the Biden administration credit for this,” McCabe said.
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McCabe said the main question about staying power is whether the program will be engrained long enough that a lot of people come to rely on it. The 12-state pilot was not near such a level, but if the expansion is successful, it could insulate Direct File to some degree.
“So if this gets up and running in the next year and you see millions of people relying on it, it’s going to make it harder to cut back on this, but if that’s not the case, then not many people are going to notice if this goes away,” he said.