Currently, many low- and middle-income taxpayers can prepare and electronically file their tax return through the Free File program, which is operated by private companies in coordination with the IRS. That program has been controversial because users have been led to for-fee-services on the companies’ websites. Also, relatively few people use Free File.

The Inflation Reduction Act of 2022 provided the IRS with $15 million to design an IRS-run direct e-file system (known simply at Direct File). The system would be similar to Free File, except for being developed and administered solely by the IRS.

Under the act, the agency was required to send Congress a report, which would include the following:

• Taxpayer opinions, expectations, and level of trust with such a system
• Estimates of the costs of developing and running a free direct e-file tax return system
• An evaluation by an independent third-party on the direct e-file system’s feasibility, approach, schedule, cost, design, and the IRS’s capacity to deliver

The report was released in May 2023. In October 2023, the IRS announced that a small-scale Direct File program was being developed for the 2024 filing season. The pilot would enable residents of 13 states to file their returns electronically for free. Eligibility would be restricted to filers with relatively simple tax returns. Few other details were available at the time of the October announcement.

Taxpayer Interests

The IRS surveyed a random sample of taxpayers and found that the majority expressed interest in using an IRS free tool to prepare and file their tax returns. Taxpayers’ views varied, depending on their current method of preparing tax returns: 83 percent of self-preparers were interested in an IRS tool compared with 57 percent who paid a preparer. Those most likely to use a direct file program were generally younger, currently prepared their returns on their own, or had limited proficiency in English. Taxpayers’ interest in direct file was also affected by their trust in the IRS and concerns about privacy and security. Another concern was whether individuals would be able to also prepare their state tax returns using the IRS’s tool.

Costs

The costs of Direct File would depend on the number of users and the scope of tax situations covered by the tool. For example, if Direct File had a narrow scope and only 5 million taxpayers used the tool, the IRS estimates that the total annual costs would be $64 million. Assuming 25 million users and a broad scope of coverage, costs would be as high as $249 million per year. Most of the costs would be attributable to providing taxpayer support (e.g., answering taxpayers’ questions regarding their eligibility to use the tool).

Those estimates, however, do not account for any offsetting savings that might occur if some users no longer filed paper returns that are substantially more costly to process than returns filed electronically.

Independent Evaluation

An analysis by an independent third party generally agreed with the IRS’s findings. They concluded that the success of Direct File would depend on the IRS leadership’s commitment to the program and developing the tool incrementally, starting with a narrow scope and building up over time.

Status of Direct File

In October 2023, the IRS announced its preliminary plans to roll out a small pilot project in 2024 to evaluate the effectiveness of Direct File. The pilot will enable eligible taxpayers to electronically file their federal income tax return for free, but as of the October announcement, the IRS had not yet released details on the design and scope of the new system.

Eligibility will be restricted to residents of 13 states, including nine states that do not have their own income tax. The other four states—Arizona, California, Massachusetts, and New York—will work with the IRS to integrate their state taxes into the pilot. Moreover, eligibility will be limited to taxpayers with relatively simple tax returns.

Updated January 2024