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Direct File usage exceeded expectations, but future of IRS-run free tax prep program unclear

IRS Direct File banner image_A Closer Look
Among the nearly 141.4 million tax returns that the Internal Revenue Service had received by the week ending April 26, were 140,803 Form 1040s that arrived via the tax agency's Direct File pilot program.

The IRS and Treasury Department in separate releases said these Direct File taxpayers claimed more than $90 million in refunds, and saved an estimated $5.6 million in tax preparation fees on their federal returns alone.

OK, those Direct File returns were a minuscule part — 0.09960386 percent — of the more than 141 million 1040s filed as of last month.

But it’s a start. And it was more than the IRS projected when it kicked off the agency-run free tax prep and e-filing program.

So 140,803 Direct File returns is this weekend’s By the Numbers figure.

Limited usage by design: In its Direct File after action report released May 3, the IRS pointed out that its initial projection had been for only around 100,000 taxpayers to try out the program.

That larger-than-expected Direct File usage, noted the report, was despite only 12 percent of taxpayers being eligible to participate in the pilot. And they were in just 12 states where the pilot was conducted.

Direct File users by state

As the graph above from the report shows, Californians used Direct File the most. That’s not surprising, given the Golden State’s population and its residents familiarity with state tax filing options offered at that level.

Texans were the second most frequent Direct File taxpayers. The Lone Star State was one of eight in the pilot where taxpayers don’t have to deal with filing state tax returns reporting wage income. Joining no-tax Texas were filers in Florida, Nevada, New Hampshire, South Dakota, Tennessee, Washington, and Wyoming.

New Hampshire also doesn’t tax wage income, but does still tax interest and dividend earnings; that tax will end as of Jan. 1, 2025.

3 million were interested: Even more encouraging, says the IRS, was that millions more showed an interest in the agency-operated free tax preparation and e-file program.

Over the course of the pilot, more than 3.3 million taxpayers started the Direct File Eligibility Checker, the online program where taxpayers could find out if they could use the program.

Of those, 423,450 taxpayers logged in to Direct File, and ultimately 140,803 taxpayers submitted accepted returns.

The graphic below from the report shows additional Direct File data points during the filing season.

IRS Direct File conversion funnel 2024 tax season-2

The IRS report notes that during the Direct File exploration by taxpayers, the program sent those for whom the program would not work to other filing options, notably those that also were no-cost. That included the agency’s Free File partnership with private sector tax software manufacturers.

The data also showed that taxpayer interest in Direct File remained high throughout the filing season.

Direct File vs 2024 Filing Season Trends-2“Each week following the announcement of Direct File’s availability, growth in Direct File usage far outpaced overall filing season trends, reflecting significant upside potential, as shown in Figure 3 [shown above],” notes the report

Overall, according to the report, the Direct File pilot’s usage “far exceeded what was necessary to provide sufficient data for the IRS to evaluate.”

Direct File’s future? Hazy: What will that evaluation show? More to the point, will it be enough to give Direct File another shot next year? Right now, it’s unclear.

Magic 8 Ball hazy answerTreasury Secretary Janet Yellen told the House Ways and Means Committee on April 30 that the costs and benefits of running Direct File are still being processed, and that no official decision has been made as to whether the IRS-run option will return next year.

However, she hedged her bets a bit.

She told the tax-writing panel members that that Direct File could be broadened to include additional languages beyond English and Spanish. Also, she said previously logged wage information could be used to pre-populate returns.

Regardless of what Treasury decides, Congress could have the final say.

While Ways and Means Democrats were receptive to Direct File and Yellen’s comments, GOP members were less enthusiastic. Republicans questioned the cost of the program, as did some of the private sector tax software companies.

“The IRS claims of spending only $24.6 million taxpayer dollars on Direct File are clearly low, inaccurate, and the IRS even acknowledges conveniently leaving out necessary costs to build and run the pilot,” an Intuit spokesman wrote in an email to The Washington Post.

TurboTax exited IRS Free File in 2022, citing "limitations of the Free File program and conflicting demands from those outside the program." H&R Block software, which also has criticized Direct File, bowed out of Free File in 2021.

The money used this filing season for Direct File came from IRS funds added thanks the Inflation Reduction Act. That $80 billion boost, some of which was taken back in debt ceiling negotiations last year, is far from a given in future agency appropriations.

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