The House GOP’s Financial Services and General Government Appropriations Bill, released this week by committee Chair Tom Cole, R-Okla., targets the IRS’s Direct File program via a policy rider that prohibits the funding of “a government-run tax preparation software that Congress has not authorized.” 

Just last week, the IRS announced that Direct File would be made permanent following a pilot program that saw more than 140,000 taxpayers across 12 states use the free electronic filing system. The tax agency said the program received more than $90 million in refunds and reported $35 million in balances due during its pilot run. 

Treasury Secretary Janet Yellen touted Direct File further this week during testimony before the Senate Appropriations Subcommittee on Financial Services and General Government, noting that all states will be invited to participate in the program “as soon as next filing season,” with expansion on the horizon “to support all of the most common tax situations over the next few years.”

House Republicans’ bill, which cuts the IRS’s budget by $2.2 billion from fiscal 2024 funding levels, is the culmination of months of sustained attacks on Direct File from GOP members of Congress, state attorneys general and state treasurers and comptrollers. 

The highly lucrative tax preparation industry has also been gunning for Direct File. In an April statement to FedScoop, a spokesperson for Intuit — maker of TurboTax — said the tax agency’s Direct File post-mortem included estimates that were “clearly low, inaccurate, and the IRS even acknowledges conveniently leaving out necessary costs to build and run the pilot.”

Democrats, meanwhile, railed against Republicans’ proposed cuts to the IRS — which include a $2 billion reduction in enforcement funding — and especially the move against Direct File. Senate Finance Committee Chairman Ron Wyden, D-Ore., said in a statement that “the centerpiece” of Republicans’ budget plan for the IRS is “helping rich people cheat on their taxes.”

“If Republicans have the opportunity, they will deprive law-abiding taxpayers of the choice to file their taxes for free with the IRS’s new direct file program by shutting it down before it expands nationwide,” Wyden said. “In short, the winners in this plan are rich tax cheats like Donald Trump, and the losers are typical Americans who earn a wage, follow the law and want to file their tax returns every spring without getting ripped off by big tax software companies.”

News of the GOP’s Direct File targeting came amid a victory lap for the IRS and its Document Upload Tool, which processed its one millionth taxpayer submission. The agency had a limited rollout of the tool in 2021 and expanded it substantially in 2023 thanks in part to funding from the White House’s Inflation Reduction Act.

“The Document Upload Tool is a key part of our ambitious initiative to transform the IRS into a virtually paperless agency, and we continue to see increased use of this by taxpayers,” IRS Commissioner Danny Werfel said in a statement. “This tool saves time for taxpayers and helps IRS employees process responses faster and more efficiently.”

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The decision to make Direct File a permanent program comes after a pilot this year that allowed taxpayers in 12 states to electronically file their federal returns directly with the agency at no cost.

IRS Commissioner Danny Werfel said in a statement that taxpayers this filing season delivered a “clear message” to the agency in wanting “one no-cost option for filing electronically.”

“Giving taxpayers additional options strengthens the tax filing system,” Werfel said. “And adding Direct File to the menu of filing options fits squarely into our effort to make taxes as easy as possible for Americans, including saving time and money.”

More than 140,000 taxpayers — in Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington and Wyoming — used Direct File in 2024, according to the agency, receiving more than $90 million in refunds and reporting $35 million in balances due.

The IRS said in a Direct File 2024 post-mortem last month that there was “steadily increasing interest” in the program, though Werfel had to “consult a wide variety of stakeholders” before rendering a decision on its future. 

Now that Treasury Secretary Janet Yellen has accepted Werfel’s recommendation that Direct File continue indefinitely, the agency said it is “examining options to broaden” the system’s availability across the country, “including covering more tax situations and inviting all states to partner with Direct File next year.”

There will be “no limit” on the number of participating states in 2025, the IRS noted, and going forward, Direct File will expand “to support most common tax situations, with a particular focus on those situations that impact working families.”

Werfel said Direct File’s user experience, both within the product and in state-wide systems integrations, “will continue to be the foundation” for the program. 

“Accuracy and comprehensive tax credit uptake will be paramount concerns to ensure taxpayers file a correct return and get the refund they’re entitled to,” he said. “And our North Star will be improving the experience of tax filing itself and helping taxpayers meet their obligations as easily and quickly as possible.”

Though the agency touted positive user feedback in the weeks after the conclusion of the 2024 filing season, Direct File wasn’t without its critics. A Government Accountability Office report last month found that estimated start-up costs for the program were incomplete and “a comprehensive accounting” was needed if the pilot were to be continued and expanded. 

“A review by the Treasury Inspector General for Tax Administration found that IRS had no documentation to support the underlying data, analysis, or assumptions used for Direct File cost estimates. We found this as well,” the GAO wrote. “Without collecting the information needed during the 2024 pilot to inform a comprehensive assessment of the costs associated with Direct File and its benefits, IRS risks making longer-term decisions without full information.”

The highly lucrative tax preparation industry has also been exceedingly critical of Direct File, calling the program “a solution in search of a problem” given other no-cost filing options. 

Those companies have sought to draw a contrast between the 140,000-plus Direct File pilot users and the millions that use their services each year. Derrick Plummer, an Intuit spokesperson, said in a statement to FedScoop that the company’s TurboTax program “has filed millions of completely free tax returns annually and has provided more than 124 million free tax returns over the past decade.”

Shortly after the Direct File announcement, Werfel made another move Thursday to bolster its taxpayer experience, naming Fumi Tamaki its chief taxpayer experience officer. Previously an adviser in the IRS Transformation and Strategy Office focused on “enterprisewide taxpayer journey improvement initiatives,” per an IRS announcement, Tamaki will now set the agency’s vision for continuously improving the taxpayer experience as part of the IRS’s larger digital transformation.

“This is a critical time for IRS, and I am excited to continue working with IRS leaders and our external partners in this role,” Tamaki said in a statement. “The Taxpayer Experience Office team and IRS have made tremendous strides in improving the taxpayer experience. I am committed to build on this work to deliver the experience that taxpayers expect and deserve.”

Billy Mitchell contributed to this article.

This story was updated May 30, 2024 with comments from an Intuit spokesperson.

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In its annual update to the IRA Strategic Operating Plan, the tax agency said it is reliant on IRA funds for digitization and other technological innovations after the appropriations process for fiscal years 2023 and 2024 zeroed out its money for modernization. When those IRA funds are exhausted by fiscal 2026, the IRS said automated taxpayer solutions will be cut back and cyber and cloud work will be incomplete, increasing the risk of cyberattacks and system failures.

“The IRS will continue focusing on making improvements and efficient use of funding,” IRS Commissioner Danny Werfel said in a press release. “We highlight accomplishments rather than taking a victory lap because more work remains. But to stress the importance of continuing this momentum, the IRS will continue working to make a difference for the nation’s taxpayers. At the same time, it’s critical that the IRS has stable, secure funding to allow technology modernization and taxpayer service improvements to continue into the future.”

The accomplishments referenced by Werfel run the gamut of digital projects. Over the past year, the IRS said it used IRA funding to expand online services — pointing specifically to improvements with the Where’s My Refund? tool — resulting in fewer phone calls, paper processes and other burdensome tasks for agency workers. Additionally, the IRS continues to tout its Direct File pilot: More than 140,000 returns this tax season were filed electronically through the agency’s program, though its future remains up in the air.

The agency also leaned into artificial intelligence, pairing the technology with advanced analytics to identify “complex partnerships for audits.” The result of that collaboration between data scientists and tax enforcement officials was 60 audits launched on corporations with average assets exceeding $24 billion, in addition to 76 examinations of “the largest partnerships in the U.S. that represent a cross section of industries including hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms, and other industries.”

Ahead of the anticipated funding shortfall two years from now, the agency said it aims to “accelerate” several digitization efforts in fiscal 2025. Those efforts include an expansion of online services and the modernization of foundational agency technology and “aged programming from the point of intake of tax returns and information systems.” Data security will be prioritized in these efforts, the agency noted.

The IRS will also lean into digitization by making as many as 150 non-tax forms available in digital mobile-friendly formats — on top of the 20 it provided in fiscal 2024 — while enabling “scanning at the point of entry virtually” for every paper-filed tax and information return.  

Still, the IRS said that absent “sustained funding,” the agency will fall short of meeting the modernization goals laid out in its report — especially once IRA appropriations run dry and “if inadequate levels of discretionary funding once again result in underinvestment and service gaps.”

“Without help from Congress, taxpayers will have a difficult time finding someone at the IRS to talk to for help in FY 26,” a supplement document to the plan stated. “The consequences will be a return to the low levels of service, technology that does not fully reflect the digital world we live in, and a return to low audit rates that allow some taxpayers to avoid paying what they owe.”

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The IRS said that the pilot — which allowed for taxpayers in Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington and Wyoming to electronically file their federal returns in 2024 directly with the agency at no cost — “started out small” and picked up “steadily increasing interest” from filers in those 12 states. 

“From the very beginning of the Direct File pilot, we wanted to test new ways to give taxpayers an easy, accurate and free way to file their taxes online directly with the IRS,” Commissioner Danny Werfel said in a statement. “We saw a strong response from the pilot, and Direct File’s users generally found it fast and easy to use. This is an important part of our effort to meet taxpayers where they are, give them options to interact with the IRS in ways that work for them and help them meet their tax obligations as easily and quickly as possible.”

Werfel added that the agency will now review results from the pilot, take in feedback and make a decision on Direct File, with the expectation of “an announcement about future plans later this spring.”

“We will consult a wide variety of stakeholders to understand how lessons from Direct File can help us improve the entire tax system as well as assess next steps,” Werfel said.

The IRS said usage of Direct File surpassed expectations and “far exceeded what was necessary to provide sufficient data for the agency to evaluate.” The pilot program ran as the agency embarked on broader IT and customer service modernization initiatives fueled in part by billions in Inflation Reduction Act funds. 

The IRS’s decision to develop a free tax filing tool represents a major challenge to the highly lucrative tax preparation industry. The development of a free tax filing tool — something most taxpayers have access to in developed countries — could eat into the revenues of firms like H&R Block and Intuit, the maker of TurboTax.

In a statement Friday, an Intuit spokesperson questioned some of the statistics cited by the IRS in its Direct File statement. 

“IRS claims of $90 million in refunds to Direct File filers acknowledges that those that filed their taxes with Direct File potentially received average refunds of around $640 which is thousands of dollars lower than the IRS’s own data showing the nation’s average refund is around $3,000,” Intuit spokesperson Rick Heineman said. “This means filers using Direct File not only paid for an already free service with their tax dollars but on average also got a substantially smaller refund.”

The IRS said in its press release that the total amount spent by the agency on Direct File was $24.6 million, a figure that Heineman said was “clearly low, inaccurate, and the IRS even acknowledges conveniently leaving out necessary costs to build and run the pilot.”

A Government Accountability Office report issued earlier this month found that the IRS’s budget estimates for Direct File didn’t include start-up costs for the technology behind the system. The congressional watchdog said the IRS would need “a comprehensive accounting” of Direct File’s costs if the agency decided to extend the program beyond 2024.

This story was updated April 26, 2024, with comments from an Intuit spokesperson.

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The Government Accountability Office said pricing estimates for Direct File — the electronic filing program made available this tax season for payers in 12 states — didn’t include start-up costs, including for the technology underpinning the system.

“A review by the Treasury Inspector General for Tax Administration found that IRS had no documentation to support the underlying data, analysis, or assumptions used for Direct File cost estimates. We found this as well. A best practice for economic analysis is a transparent methodology, including analytical choices and assumptions,” the GAO wrote, adding that start-up tech costs for “a novel system” of this kind “could be substantial.”

The tax agency, which received tens of billions of dollars from the Inflation Reduction Act to improve the taxpayer experience, budgeted $114 million for Direct File for fiscal 2024. Those funds, which came from appropriations accounts, included $50 million for business systems modernization, $38 million for taxpayer services and $26 million for operations support.

While acknowledging “several uncertainties in the estimates” for the Direct File pilot, the IRS projected an annual price tag to run the program of between $64 million and $249 million, with approximately $21 million in tax preparation cost savings for filers.

The GAO said that a May 2023 report from the IRS to Congress “did not fully align with best practices for cost estimation.” The agency now risks missing several “time-sensitive opportunities” for estimates connected to Direct File, including in cost categories such as customer service, the integration of state returns, supporting additional tax situations and extra labor.

Estimates for technology costs appear to be an especially unwieldy target. In its report to Congress, the IRS said that Direct File would require “frequent updates” given changes to tax law. The underlying technology may also need updating based on customer feedback, the report noted.

In a letter to the GAO’s director of tax policy and administration, IRS Commissioner Danny Werfel said the agency’s cost estimate shortcomings were due in part to “the lack of a baseline or comparable data available.” Information collected during the pilot, Werfel added, “will allow us to develop an accurate baseline for this novel government service.”

Werfel left the door open in his letter for Direct File to be a one-and-done program. Agency officials told the GAO in February that senior IRS leaders “had not decided on the future of the pilot beyond the 2024 tax filing season,” pointing to mitigating factors such as a “lengthy” hiring process to properly staff the program, especially if “new capabilities are to be added.”

Assuming the IRS does move forward with Direct File for the 2024 tax year, the GAO offered three recommendations to the commissioner regarding how the agency can ensure best practices on cost estimates, proper documentation on the program’s benefits and the leveraging of data to inform future decisions about the system. 

“Without collecting the information needed during the 2024 pilot to inform a comprehensive assessment of the costs associated with Direct File and its benefits, IRS risks making longer-term decisions without full information,” the GAO wrote. “Taken together, these steps should help support data-driven evaluation by IRS leadership and members of Congress.” 

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The Barcode Automation for Revenue Collection to Organize Disbursement and Enhance (BARCODE) Efficiency Act, introduced Thursday by Sens. Tom Carper, D-Del., and Todd Young, R-Ind., would require paper returns that are prepared electronically to include a scannable 2D barcode that the tax agency could easily convert to digital form, simplifying the processing of returns.  

The bill calls for the use of allocated Inflation Reduction Act funding to implement the technology. The $80 billion infusion from the 2021 law has so far been used on everything from the IRS’s electronic Direct File pilot program to leveraging artificial intelligence to better identify tax avoiders. 

“The main thing here is that this legislation will help the IRS conserve their resources, minimize processing errors and reduce delays in refunds to taxpayers,” a spokesperson for Carper told FedScoop. “And that’s really the core of what Sen. Carper cares about.”

Leading up to the launch of the IRS’s free electronic filing pilot program, which is available this year to select taxpayers in 13 states, Carper urged the agency to make the process more equitable and accessible, including in letters that he and Sen. Elizabeth Warren, D-Mass., sent to Commissioner Danny Werfel.

“As government officials, we have a responsibility to be good stewards of taxpayer dollars. That includes ensuring that tax returns are processed accurately and in a timely manner,” Carper said in a statement. By implementing “commonsense technology” called for in the bill, the IRS will be more efficient and ultimately “make a big difference for millions of American taxpayers,” he added. 

The Government Accountability Office and the National Taxpayer Advocate have previously made calls to reduce paper returns and improve the processing of such returns. The 2D barcode method, which would eliminate the agency’s current manual transcription process, has been used by several state tax agencies, some for 20-plus years. 

While more than 4 in 5 tax returns are now filed electronically, those who still choose the paper route represent a substantial cost and efficiency problem for the agency. The IRS’s Taxpayer Advocate Service in 2022 estimated that 50%-60% of the individual income tax returns submitted on paper and processed in 2021 and 2022 were prepared with tax return software and would not have required manual transcription if the 2D barcodes had been included.

Young, who has previously prodded the IRS on privacy and transparency issues from his time on the Senate Finance and Banking Committee, said in a statement that the bill will go a long way toward reducing the time it takes for the tax agency to process individual returns.

“Millions of Americans are forced to wait months — and sometimes years — for the IRS to process their tax returns,” Young said. “Our bipartisan bill will better serve taxpayers by improving the processing of paper returns, reducing errors, and requiring the IRS to operate more efficiently.”

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As part of the “limited-scope pilot,” taxpayers in Arizona, California, Massachusetts and New York will be presented with the option to electronically file their federal returns in 2024 directly with the agency at no cost. 

Additionally, taxpayers in nine states with no income tax — Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming — may also be eligible to take part in the program.

IRS Commissioner Danny Werfel said in a statement that the agency will work closely with officials in the four participating states, whose revenue departments signed separate Memorandums of Understanding with the IRS last month. Information-gathering from the pilot will inform the “future direction” of Direct File, Werfel added.   

While all states were invited to join the pilot, “not all states were in a position” to do so in 2024, the agency noted. Taxpayers with “relatively simple returns” in the 13 states will be eligible to participate. Those who receive the Earned Income Tax Credit and the Child Tax Credit can also partake in the Direct File pilot. 

The IRS was tasked with studying the feasibility of a free, direct filing tax program as part of the agency’s nearly $80 billion funding infusion via the Inflation Reduction Act. The Direct File pilot program comes after the IRS delivered a report to Congress in May that detailed costs, benefits and operational challenges, all of which will be evaluated in the pilot program.

“We have more work in front of us on this project,” Werfel said. “The Direct File pilot is undergoing continuous testing with taxpayers to identify and resolve issues to ensure it’s user-friendly and easy to understand. We continue to finalize the pilot details and anticipate more changes before we launch for the 2024 tax season.” 

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