What it will take to make Direct File permanent

The IRS pilot of a government-backed online tool to file taxes for free, dubbed Direct File, is going permanent, the tax agency announced a few weeks ago. 

The IRS is inviting all states to join and expanding the tool’s tax scope after it saw positive user ratings among those that filed their taxes with the tool. 

Here’s what it will take for the IRS to see success long-term.

Dealing with drop offs

Despite the positive marks from most of those that got through the pilot, one big question with a lot of unknowns is why some people started the pilot tool but didn’t finish.

“It’s certainly one of the number one things I would be focused on,” a former administration official familiar with the Direct File pilot told Nextgov/FCW. They asked not to be named so that they could speak openly about the pilot. “It’s not a small number that dropped off.”

Of the approximately 677,600 that finished the eligibility checker, about 20% went through the whole process and submitted an accepted tax return, according to an IRS report on the pilot, which notes that the final number of users aligned with IRS expectations.

But the IRS doesn’t have a lot of data on why people dropped off during the process, since only users that finished the pilot were asked to fill out a survey.

Some may have wanted to check their eligibility but were never planning on going through the process. Others may not have been able to prove their identity, or not wanted to, Bridget Roberts, chief of Direct File at the IRS, told Nextgov/FCW over email, noting that the IRS wants to learn more so that they can make necessary improvements. 

“That is where our user research comes in,” she said in an interview with Nextgov/FCW when asked about drop-offs. “And then, I think, looking for ways in the future to be able to offer that survey option to taxpayers who started, but didn't finish.”

Zooming in on drop-off rates at different parts of the process from the eligibility checker to final accepted return will be important, said Ayushi Roy, deputy director at the New Practice Lab at think tank New America, which fielded a feasibility analysis of a government-backed tool in 2023. 

First up, creating or signing in to an IRS account. The IRS used vendor ID.me for identity proofing in the pilot.

Only 62% of those that finished the eligibility checker created or signed into an account. 

“If I was in the product [team's] shoes at the IRS,” said Roy, “that’s the kind of thing I’d want to say, ‘Hold on. What’s going on there? What is it about the ID.me experience that we lost more people in that step?’”

The user survey the IRS fielded for the tool found that 76% of users rated the ID.me facial recognition process as very or somewhat easy. The option to verify identity through a live video agent only saw less than 2% of users rating their experience as somewhat or very difficult, but that survey was only given to people that finished the Direct File process. The IRS report on the pilot also notes that some taxpayers had trouble using the service.

ID.me would not provide the proofing rate of Direct File users or wait times for those that used its video verification option, which has been plagued by long wait times for some programs in the past.

Some that abandoned the process may have been fraudsters, an ID.me spokesperson told Nextgov/FCW, also pointing to support the company gives to those that struggle, including video verification options. Others may be people that only wanted to check their eligibility, voluntarily stopped or failed a step and were retrying, they said.

The IRS also would not provide specifics on proofing rates and wait times for ID.me, telling Nextgov/FCW that they “are consistent with other IRS applications.” The tax agency also would not give agency-wide data.

Asked what identity proofing options would be available next tax season, the IRS told Nextgov/FCW that its plans aren’t yet finalized and that adding more options is contingent on those other proofing options meeting standards set by the National Institute of Standards and Technology.

After making or signing into an account, users in the pilot could start a tax return.

According to IRS data, about 40% of users who started a tax return on Direct File eventually submitted and 35% of those that started submitted an accepted tax return.

For both the identity proofing step and the return steps, the IRS would likely want to look at how long individuals attempted to get through before they abandoned the process, Roy told Nextgov/FCW over email, as it can give clues about why people dropped off.

If the IRS wants to increase the number of users, the agency will also need to consider making Direct File available earlier in the tax season — this year the pilot didn’t open widely until March — and increasing usage among Spanish speakers, said Roy.

Only about 1% of users engaged with the Spanish version of Direct File this year, said Roy. The New Practice Lab is currently doing user research on Direct File with Spanish speakers for a forthcoming report. 

The IRS report on the pilot doesn’t include any information about the demographics of users.

The Direct File team is also planning on increasing outreach and communications for the tool, something that was relatively limited during the phased rollout, said Roberts.

Tough choices

The tax agency is also staring down trade offs as it looks to expand the scope of Direct File and the states it's offered in with finite resources.

The total cost for the pilot was just over $31 million. The IRS has a $75 million placeholder in its fiscal 2025 budget for the tool.

One of the IRS’ first priorities: engaging with states to source new partners, said Roberts. Direct File was only offered in 12 states during its pilot in the most recent tax season.

A lot of the work of connecting to new states was done this year on the IRS side, said Roberts. The IRS team built an application programming interface to allow taxpayers in Arizona, Massachusetts and New York transfer encrypted data to the state tool so that they didn’t have to start over. In California, users uploaded PDFs of their federal return, and other states in the pilot didn’t have state-level income taxes. 

“Each new state that comes online is easier than the one before because we've learned things [and] states have learned things. But every state is different… so there's no kind of magic button that brings a state in,” said Gabriel Zucker, Interim Program Director of Tax Policy and Partnerships at Code for America, of the state-side process of joining the project. 

The nonprofit worked with Arizona and New York to create a companion tool for users to finish their state-level taxes and will be working with additional states next year to help them join Direct File.

As for widening the scope of the tool, it’s not as simple as adding a few yes-or-no questions, Merici Vinton, Direct File deputy service owner, told Nextgov/FCW.

“We’re trying to use your information to progressively answer the questions throughout the product, so it’s all intertwined,” said Vinton.

“The supported tax situations are the single biggest determinant of the complexity of the product,” the IRS report notes. “The Direct File platform used this filing season contained more than 350 screens. Under the hood were more than 1,000 ‘facts’ representing information about the filer’s tax situation.”

Another to-do item is “building a sustainable team within the IRS,” said Vinton. “Last year was very much a startup and a pilot… It was just whatever it took to make it work, and so this year, it’s actually also about the sustainability and the operations of building a team with a great culture that produces great work that people want to come work for.”

Although the specifics are still being worked out, the agency expects to keep its approach of a blended team with employees from the IRS, vendors, 18F and U.S. Digital Service, said Roberts.

Long term, maintaining stable funding for Direct File will be key. 

“Technology projects are not just a one-and-done,” said Roberts. “You need consistent, multi-year funding to be able to not only deliver them, but to continue to improve them and enhance them in future years.”

Some Republicans on Capitol Hill have criticized Direct File, even blocking funding for it in recent budget bills unless the IRS gets direct authorization for the program from several congressional committees. 

Rep. Jason Smith, R-Mo., chair of the Ways and Means Committee, said in a statement after Direct File was made permanent that the program makes the IRS “tax preparer, filer and auditor.”

That could have relevance for another open question: the potential for prepopulation. 

Although some are eager to have the IRS pre-fill Direct File, at least in part, by importing information it already has about taxpayers — the Direct File report notes that pre-population was one of the most commonly requested features — there isn’t universal buy-in, said Roy, noting that “some people see it as an invasion of privacy.”

The Direct File team did add the feature of importing the prior year’s adjusted gross income during the pilot by connecting to users’ online accounts, said Roberts. 

Asked if they would add more importing, she said, “it’s definitely something we want to look at,” but noted the challenge of timing — employers send W-2’s to the IRS in January and the IRS needs time to make that information usable. 

Big picture, importing information also could give Direct File a competitive advantage vis-a-vis the tax prep industry — members of which have panned the pilot — in addition to igniting political concerns around overreach, the former administration official noted.

For the team that fielded the pilot, maintaining focus will also be important as some clamor for upgrades such as prepopulation. 

“The Direct File team’s success was built on ruthlessly prioritizing,” said Zucker, pointing to the IRS approach of starting small and iterating over time.

“We need to deliver a second year and that is the top priority — not all the fancy bells and whistles,” said Vinton. “What excites us most is a successful year two and keeping that focus is, I think, going to be really important.”