The Internal Revenue Service (IRS) launched its Direct File pilot program earlier this year to become the nation’s tax preparer and tax collector. Launched with ambitious goals – the program has fallen short of their own predictions. For taxpayers, the most concerning facts are: (1) less than one percent of eligible taxpayers used the program, (2) the program did not save taxpayers significant time or money, and (3) the IRS has failed to provide information on how much this actually costs taxpayers.
Here is what proponents said would happen vs. what actually did:

Expectation vs. Reality

Expectation: 19 million tax filers were eligible and 300,000 tax filers were expected to use IRS Direct File to file their taxes.

Reality: Only 0.7% of Eligible Taxpayers Utilize Direct File

In February 2024, a Treasury spokesperson explained that about 19 million taxpayers would be eligible this season, with the IRS expecting “at least several hundred thousand” to participate. However, recent reports from the agency note the IRS accepted just more than 140,000 returns through Direct File, which is approximately 0.7% of those eligible.

Expectation: IRS Direct File will save taxpayers money.

Reality: Taxpayers Paid the Equivalent of $814 per Return or 5x the Average Cost for Commercial Tax Preparation

The IRS says it budgeted $114 million for its Direct File pilot in fiscal 2024. With the current estimates of total users that have used Direct File thus far, that’s approximately $814 per return.

Reality: IRS Did Not Provide Accurate Estimates About the Costs

Last spring, the agency estimated annual costs of a permanent program between $64 million and $249 million, but the Government Accountability Office (GAO) report criticized the IRS for lacking any “documentation to support the underlying data, analysis or assumptions.”

Expectation: IRS Direct File will help low- income Americans by ensuring they receive the tax credits and deductions they deserve.

Reality: Only Taxpayers with Simple Returns can Use Direct File

Direct File program is built only to handle standard wage income, as opposed to investment, property, or interest income. Direct File also does not work for contractors, like Uber and Lyft drivers, or delivery workers, many of whom include a form 1099 when filing their taxes.

Reality: IRS Disproportionately Audits Black & Low-Income Taxpayers

A recent study from Syracuse University found that the IRS was five times more likely to audit low-income households earning less than $25,000 a year. The IRS also confirmed that the agency audits Black Americans at much higher rates. The IRS has not addressed these systemic inequities.

Expectation: IRS Commissioner Danny Werfel promised to work with Congress before moving forward with implementing an IRS-run tax preparation system.

Reality: Congress Has Not Approved the Direct File Pilot Program

According to Washington Post reporting, the IRS unilaterally built a pilot program to give itself the power to prepare and file tax returns without Congressional approval and before a study on the feasibility of such a system was completed.

Expectation: IRS Direct File will save taxpayers time and simplify tax filing.

Reality: There is No Evidence that Direct File Actually Saves Taxpayers Time in Filing

The recent GAO report included an admission from the IRS that “they expect little change in the time Direct File users spend completing a tax return compared to using commercial software.” Even the IRS has acknowledged that a government-run tax preparation system would be unable to help taxpayers file their state and local taxes – forcing busy Americans to spend more time and additional resources to fulfill their obligations each tax season.

Expectation: Congress required the IRS to conduct a neutral feasibility study to measure taxpayer interest in Direct File.

Reality: IRS Ignored Study Predicting Low Taxpayer Interest

MITRE (an independent think tank) measured public attitudes towards an IRS-run tax prep system in 2023. According to the Wall Street Journal, “A mere 37% of tax filers with simple returns would use an IRS tax preparation service. The number drops to 29% if the system doesn’t include a similar state tax-prep function.” A widespread view among respondents was, “I don’t think it’s the IRS’s role to prepare taxes.” But the IRS ended up burying this study in favor of skewed research from the New America Foundation, an organization with a clear history of advocating for and a direct financial stake in a Direct File program.

SOURCES

  1.  https://www.vox.com/future-perfect/24071005/irs-direct-file-free-tax-software-turbotax-review
  2.  https://www.vox.com/future-perfect/24071005/irs-direct-file-free-tax-software-turbotax-review
  3. https://www.warren.senate.gov/newsroom/press-releases/warren-celebrates-launch-of-new-irs-direct-file-pilot
  4. https://www.gao.gov/assets/d24107236.pdf
  5. https://home.treasury.gov/news/press-releases/jy2172
  6. https://www.gao.gov/assets/d24107236.pdf
  7. https://www.finance.senate.gov/hearings/the-presidents-fiscal-year-2024-irs-budget-and-the-irss-2023-filing-season
  8. https://home.treasury.gov/news/press-releases/jy2172
  9. https://www.gao.gov/assets/d24107236.pdf