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The Direct File Pilot Shows That a Public Tax Filing Option Saves Money, Improves Customer Service
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The Direct File Pilot Shows That a Public Tax Filing Option Saves Money, Improves Customer Service

States should move to adopt integrated free filing.

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A person uses IRS Direct File at the Internal Revenue Service Building on April 05, 2024 in Washington, D.C. (Getty/Tasos Katopodis)

The Treasury Department and the IRS recently announced that Direct File—a free option for filing federal tax returns that are fairly straightforward—will be made permanent and made open to all 50 states plus the District of Columbia beginning in 2025.  The announcement came in response to the overwhelmingly positive response to this year’s pilot.

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Direct File, which allowed tax filers to submit their tax returns directly with the IRS for no charge, was established in response to an Inflation Reduction Act provision mandating that the IRS explore the feasibility of a public online filing service. The pilot enabled filers with relatively simple tax situations who lived in one of 12 states—Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington, and Wyoming—to file their tax returns electronically for free. In the four pilot states with state incomes taxes—Arizona, California, Massachusetts, and New York—Direct File was linked to a state-supported tool that allowed free online filing.

In its first year, eligibility for the pilot was limited to filers with income from wages, Social Security, unemployment compensation, and a modest amount of interest who didn’t itemize their deductions. Direct File users could claim deductions for student loan interest and educator expenses and the portal could be used to claim the earned income, child, and other dependent tax credits. Direct File was designed to work on a range of devices, including mobile phones, and customer support was available through live chat in both English and Spanish.

Filers saved an estimated $5.6 million in tax preparation fees on their federal returns alone.

The direct file pilot exceeded participation targets

The Direct File portal was opened in a “soft launch” and was made fully available to the public on March 8.  During the filing season, more than 3.3 million people logged on to the Eligibility Checker to see whether they were eligible to use Direct File, 423,450 logged into Direct File itself, and 140,803 submitted returns that were accepted by the IRS, exceeding the 100,000-return goal established for the pilot. Filers using the portal received more than $90 million in tax refunds and paid $35 million in taxes owed. Filers also saved an estimated $5.6 million in tax preparation fees on their federal returns alone. The IRS spent a total of $24.6 million on the pilot—lower than expected—with operational costs of just $2.4 million. Nearly half of Direct File users surveyed by the IRS reported they had paid for tax filing in 2023 with about one-third using an online method that they paid for and 16 percent using a paid preparer.

86 percent of survey respondents said the experience of using Direct File increased their trust in the IRS.

Tax filers’ experiences with the portal were overwhelmingly positive

More than 15,000 Direct File users completed a follow-up survey designed to gather user feedback and inform the IRS’ decision about whether to make the pilot permanent. Survey results were overwhelmingly positive, with:

  • 86 percent of respondents saying the experience increased their trust in the IRS.
  • 90 percent of respondents who used Direct File’s customer service options rating that experience as “excellent” or “above average.”
  • 80 percent of respondents saying they would recommend Direct File to a friend or family member. Only 6 percent of respondents were “detractors” who reported a negative experience.

Responses to the IRS’ survey were echoed in independent follow-up efforts by the nonprofit organization Code for America, which worked with state officials in Arizona and New York to build an integrated state filing portal, and by the Economic Security Project (ESP), which surveyed Direct File users as well as those who used paid tax preparers or paid software programs. The Code for America survey found that 87 percent of Arizonans and New Yorkers surveyed would recommend Direct File and the linked FileYourStateTaxes tool to friends and family and 93 percent preferred Direct File to their previous filing method. The ESP survey found that Direct File users were much more likely than nonusers to report that filing their taxes was less expensive and faster than it was in the prior year.

Pilot results show that state integration can work smoothly

The 2024 pilot involved four states with state income taxes and eight states without a state tax.*  The IRS viewed integration as a critical component of Direct File so that filers would not use the federal tool and then become frustrated by an inability to seamlessly file their state tax return. Filers in Arizona, Massachusetts, and New York were able to transfer information from their federal account to a state tool using a secure transfer system. In California, filers were able to upload a PDF of their federal return. Direct File users were able, but not required, to use the integrated systems for filing their state returns.

Code for America’s follow-up survey found high levels of user satisfaction with the state integration, with 96 percent of Arizona and New York users surveyed saying they were “satisfied” or “very satisfied” with the state FileYourTaxes tool. Integration worked smoothly with 88 percent of Arizona and New York users surveyed saying they were able to file their state return within 15 minutes. The high degree of satisfaction demonstrated that it was possible to overcome what had previously been identified as a challenge to the long-term success of Direct File.

Expanding Direct File to more states would enable more tax filers to benefit

While the IRS kept the 2024 pilot deliberately small to test the new approach, it has now invited all 50 states and the District of Columbia to participate beginning with the 2025 filing season. Integrated filing systems ensure that people would not be forced to pay for filing a state return if they use the free federal platform and can help people save time and effort, as well.

The IRS should build on the success of the pilot

The success of this year’s pilot points the way for improvements that can broaden the reach of Direct File while bringing more simplicity to tax filing. First, the IRS should explore options for prepopulating electronic returns with information available from documents such as W-2s that employers use to report wages and other compensation to the IRS and 1099-INTs used to report interest earnings. This would streamline filing and reduce the risk of inadvertent errors. Second, Direct File should be expanded to cover a broader range of tax circumstances, such as by broadening the types of income received and the tax credits and deductions claimed. Third, the IRS should explore more user-friendly options for identity verification. The ID.me system used for identity verification proved to be a stumbling block for some Direct File users, with IRS survey participants noting that it involved a level of security that was note required by other online filing options.

Conclusion

By making Direct File a permanent option, the IRS has taken an important step toward simplifying tax filing for millions of Americans, saving families time and money. In doing so, Direct File can help build confidence in the tax code and boost trust in the IRS.

* Direct File included a link that guided filers to a state site where Washington State filers could apply for that state’s refundable Working Families Tax Credit.

Acknowledgments

The author wishes to thank David Correa for their assistance in the preparation of this article.

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Author

Jean Ross

Former Senior Fellow, Economic Policy

Team

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