Since mid-June, the Treasury Department announced three states that did not participate in the IRS Direct File pilot this past filing season are opting into the program beginning next year.
During the 2024 tax filing season, eligible taxpayers in 12 states had the option to complete and electronically file their federal tax returns using a prototypical, government-run tool dubbed Direct File. On July 30, Pennsylvania joined the program, the third new state after New Jersey was added on July 24 and Oregon on June 18.
According to Treasury, 140,000 taxpayers saved a combined $5.6 million in filing fees through this year’s pilot that would have otherwise gone to commercial tax preparation software providers. In total, taxpayers used the free Direct File tool to claim $90 million in refunds. Treasury claims that the average filer spends $270 and 13 hours to do their taxes. Citing a GSA Touchpoints survey of 11,000 Direct File users, Treasury says the program is popular with taxpayers, as 90% of participants indicated their experience was “excellent” or “above average.”
IRS Commissioner Danny Werfel previously told reporters on May 30 that Direct File will remain a permanent option as the agency intends to add as many states as possible before next tax season. Ideally, it would be available nationwide, the commissioner hopes. The pilot was open to taxpayers with “simple” tax situations and had functionality to support common tax credits and deductions, including the Earned Income Tax Credit and the Child Tax Credit. Details on how the tool will be expanded have not yet been released, but the IRS is prioritizing the program in its Strategic Operating Plan for how it is spending funding from the Inflation Reduction Act (PL 117-169).
Speaking July 30 in Philadelphia, Treasury Secretary Janet Yellen said “more than 1.5 million Pennsylvania residents” are estimated to qualify for Direct File. “I am proud that the Direct File pilot during this past filing season was a significant success,” said Yellen. “Over just five weeks, interest grew as we got the word out and taxpayers started using the product. By the final week, Direct File was processing more than 5,000 accepted returns each day.”
While Direct File does not currently support state income tax returns, Pennsylvania Governor Josh Shapiro (D) announced at Tuesday’s event that it will be integrated with myPATH, the state’s free filing system. “Filing your taxes should be free and easy — that’s why we’re improving our digital services and adopting IRS Direct File here in Pennsylvania,” said Shapiro. “Thanks to the Biden-Harris Administration’s Direct File initiative, Pennsylvanians will be able to save money by filing both their state and federal taxes at no cost on an easy-to-use platform.”
Treasury also expects 1 million New Jersey residents will be eligible for Direct File in 2025 in addition to the 580,000 Oregon residents.
“The Direct File tool is revolutionary to our federal tax filing process, and it will make a world of difference for taxpayers in New Jersey and across the country,” said New Jersey Governor Phil Murphy (D). “By cutting costly, for-profit tax filing software out of the equation with the free Direct File tool, we are saving individuals and families in our state time and money.”
Senator Ron Wyden (D-OR), chair of the Senate Finance Committee, said Direct File is “long overdue” and the addition of his state is welcome news to Oregonians “who are tired of getting ripped off by the big tax software companies year after year.”
Wyden also committed to protecting Direct File, which is popular among Democratic lawmakers, who had called on the IRS to build upon the pilot. Many Republicans, however, are opposed to its continuation. After the IRS made it official that Direct File is not going anywhere, House Ways and Means Committee Chair Jason Smith (R-MO) said in a June 4 statement that Congress did not authorize the agency to create its own filing option.
“The IRS has proven itself time and again to be a poor steward of taxpayer information,” Smith’s statement read. “This latest attempt to circumvent Congress and establish a new tax program only serves to further undermine the fraying trust between the agency and the public.”
On July 31, a group of Republican senators, including Ranking Member of the Senate Finance Committee Mike Crapo of Idaho, penned a joint letter to Commissioner Werfel echoing similar sentiments. The letter argued that the Inflation Reduction Act only allowed the IRS to use an allocated $15 million to gauge public interest and assess the feasibility of such a program, and not to move forward with development beyond a “temporary and experimental” pilot.
“Instead, the IRS hired a partisan think tank and professor, who were already on record as being supportive of a Direct File program,” the senators continued. “The American people do not want an all-encompassing IRS acting simultaneously as the tax collector, tax auditor, tax enforcer, and tax preparer.”
The Republican coalition also pointed to separate reports from the Treasury Inspector General for Tax Administration and the Government Accountability Office which similarly raised concerns about transparency with the cost of running the program. Werfel commented at the end of May that the annual cost would depend on the amount of participating states, but the pilot cost $31.8 million.
The letter also criticized Direct File for lacking support for “the tens of millions of Americans who have anything other than extremely basic returns.” Income from taxpayers’ businesses, property, investment, and gig economy work are outside its scope. Lastly, they called attention to the absence of state return integration.
“This resulted in Direct File participants having to spend more time and additional resources to complete their tax filing this season,” read the letter. “Under an expanded and permanent program, this particular issue would be exacerbated.”
Werfel was asked to respond to a series of questions by August 14, including the agency’s answer to their claim that the the Supreme Court’s ruling in Loper Bright Enterprises v. Raimondo “calls into question administrative actions that go beyond the clear intent of Congress.”
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