New IRS statistics demonstrate Direct File is costly and redundant

Earlier this year, as the IRS rolled out its new Direct File tax preparation tool, administration officials forecasted hundreds of thousands of Americans would use it.

Well, the final report is in, and it’s now clearer than ever that supporters of Direct File vastly overestimated Americans’ interest in having the government complete their tax returns. Just 0.7% of the 19 million eligible taxpayers used this IRS tool, showing Americans have little interest in the government serving as both tax preparer and tax collector.

It’s time for the proponents of Direct File to recognize it for what it is — a costly and unnecessary program — and redirect those resources into building out Free File, a long-standing public-private partnership that already provides free tax preparation to millions of low- and middle-income Americans. 

Unsubstantiated costs and benefits

The IRS understated the cost of Direct File this year, admitting that it didn’t count the costs associated with work completed by the U.S. Digital Service to build and run the pilot. Expanding Direct File so it is available to more taxpayers — including those with complex returns — in more states will only run up costs further.

An April report by the nonpartisan Government Accountability Office  criticized the IRS for failing to include start-up costs in its cost estimates and noted, “Without a comprehensive accounting of costs, IRS's estimates could understate the full amount of resources required to develop and maintain a permanent Direct File program.”

The same report raised questions about the use case for Direct File and if it was able to assess its efficacy, saying the IRS “did not consistently identify relevant metrics for measuring these potential benefits.” Moreover, the latest data indicates the average Direct File refund was $892, $2,100 less than the average return. Even accounting for Direct File’s narrow eligibility requirements, $2,100 is a large gap that indicates the tool may not be providing Americans the best possible service.

In other words, the IRS is contemplating expanding the Direct File program without knowing how much it will cost or even if it will actually benefit Americans.

Better use of funds 

Rather than spending millions of dollars on an unproven, unnecessary and costly program, the IRS should redirect its resources towards bolstering Free File, a tested free filing system for Americans that costs taxpayers nothing. Through a public-private partnership, taxpayers who earn less than $79,000 annually, or about 70% of all taxpayers, can receive a free return each year from a private tax preparer. This year, companies provided free returns to roughly 2.8 million Americans — 17 times as many as Direct File — through Free File.

Moreover, many tax preparers offer free returns to low-income Americans outside of their work with the Free File Alliance. The industry gave away 25.8 million free returns in 2023, worth roughly $900 million. Data for this year is still being tabulated.

By shifting the cost of completing free returns from the government to private industry, the IRS would be able to further invest in improving customer service. While the agency has made admirable progress in addressing its pandemic backlog, a January GAO report concluded it still has serious work to do. The IRS missed its processing time goals for some returns, and, distressingly, the rate of errors made during processing increased.

These are the issues worthy of the IRS time, energy and funding — not attempting to solve a nonexistent problem with a costly, redundant solution.