Now that the 2025 tax season is over, reports indicate that the Trump Administration will terminate the IRS’s new Direct File program. This tax season marked the program’s second year after a limited pilot program was in place during the 2024 tax season. While the IRS under the Biden Administration claimed that Direct File had high marks in user satisfaction and filled a needed gap in tax filing software, the benefits of the program never truly outweighed its costs. The Trump Administration is right to save taxpayer resources by ending Direct File after this season.
Direct File is the IRS’s in-house free tax filing software developed as a result of the Inflation Reduction Act (IRA). The IRA required the IRS to conduct a study into the feasibility, cost, and benefits of an IRS-run free tax filing system. Immediately after releasing its report, the IRS quickly announced that it would develop a pilot of the free filing system which would be called Direct File. This happened without providing Congress with time to review the initial study as required by law. It also preceded congressional authority to design the program. Furthermore, reports suggest that the IRS had been developing Direct File in secret while repeatedly denying doing so.
The initial study conducted to assess the feasibility of Direct File failed to properly measure the program’s costs. The IRS estimated that Direct File could cost taxpayers between $64 million and $249 million annually, yet the Government Accountability Office (GAO) noted that this did not include the labor costs for 400 IRS customer service employees and 29 technology experts from the U.S. Digital Service who worked on the program. It also omitted the costs of technology maintenance and scaling. The Treasury Inspector General for Tax Administration’s (TIGTA) recent report notes that, while the IRS claims to have spent $24.6 million developing and operating Direct File, this assessment fails to account for $8.8 million in additional costs incurred by the Office of Management and Budget (OMB). TIGTA recently highlighted that the IRS continues to not properly account for Direct File costs.
Direct File costs were also likely to go up significantly to make the program usable for taxpayers with gig economy or business income, who itemize, or who reside in 25 states that the program was yet to cover. The program started with the easiest tax situations: taxpayers with wage income who reside in states with no income tax. Building out and deploying the software to handle more complicated tax situations common to tens of millions of taxpayers would have been much more costly.
Without a proper assessment of Direct File’s costs, there is no basis for Direct File supporters to make an informed decision to continue the program. Furthermore, the miscalculation highlights another glaring issue about how the IRS has funded the program thus far. The IRA originally allocated $15 million to study the feasibility of an IRS-run filing program. Yet TIGTA shows that the IRS quickly spent most of those funds. Subsequently it has used a variety of both IRA and non-IRA resources to develop and operate the program. The IRS diverted funding from enforcement, taxpayer service, operations, and modernization to work on Direct File even though Congress never authorized the program in the first place.
Supporters of Direct File tout it as a “free” filing service, but as we’ve seen, its administrative costs continue to soar. Its alleged benefits are also questionable since the program duplicates free and for-cost options provided by the private sector. The IRS has a longstanding partnership with private tax filing software companies called the Free File Alliance to provide free tax filing services to certain taxpayers with adjusted gross income (AGI) below $84,000 annually. In June 2024, the IRS renewed this agreement for five years, noting that Free File saw a 7% uptick in users that filing season, saving taxpayers an estimated $2 billion in out-of-pocket costs since 2003. TIGTA recently stated that the IRS has not done enough to publicize Free File despite the fact that 70% of taxpayers are eligible to use the program.
Supposed taxpayer preferences for Direct File instead of Free File were overstated and likely based on incorrect assumptions. Former IRS Commissioner Daniel Werfel repeatedly claimed that taxpayers wanted an IRS-run free filing option. Yet the initial feasibility study found that over one-third of taxpayers interviewed claimed they would not use Direct File as they already filed for free using Free File services. It also found that cost was the major factor in deciding how to file taxes. Given that cost is a major driver of filing behavior, it is very likely that other respondents would use Free File if they knew of its availability. GAO has reported separately that one-third of taxpayers they interviewed were not aware that they were eligible to use Free File.
There are also misperceptions about Direct File being a free tax filing option where taxpayer information does not go through a third-party, in contrast to using third-party services provided by the Free File Alliance. However, Direct File uses a third-party service to verify taxpayers’ identities. The third-party credential service provider ID.me is used by Direct File despite previously being dropped by the IRS after user frustration and privacy concerns.
Direct File may also be distracting the IRS from other key transformation projects. The IRA provided the IRS with $4.8 billion to modernize its information technology systems. Yet, despite the influx of funds, the creation of Direct File is one of the only major software initiatives that has been implemented from start to finish since the IRA became law.
In fact, one year after developing a Strategic Operating Plan to use the IRA funding, the IRS had still not accomplished any of its technology modernization objectives for that fiscal year. This includes critical work to replace the Individual Master File which is a 60-year-old program housing all taxpayer information that relies on the outdated coding language COBOL. The IRS instead used this funding to achieve simple improvements such as replacing old hardware.
Concerns about the IRS’s authority to create Direct File, its costs, and the IRS’s failure to make progress in other strategic technology priorities are more than enough to justify terminating the program. Without Direct File, taxpayers will continue to have access to Free File which can handle unique tax situations and can serve taxpayers across the country, unlike the more limited Direct File. The IRS can also shift to completing technology modernization priorities that have persisted for decades.
Ending the program now will also return to Congress its rightful authority to determine Direct File’s future in light of these critical failures. Supporters of Direct File who want to make it easier and less costly to file taxes should focus their efforts on simplifying the tax code itself—where the real burden lies. We welcome the new Administration’s focus on IRS modernization, such as its recent hackathon, and look forward to seeing the results of this necessary change in course.