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Published: May 31, 2024 7 min read
Person filing taxes on their laptop
Money; Getty Images

After a limited pilot test, the IRS says it will keep — and expand — its free tax filing tool next year.

Known as IRS Direct File, the government-run free tax software will be coming back in 2025, potentially for folks in all 50 states and Washington, D.C., the agency announced Thursday. For the 2024 tax filing season, the tool was live in only a dozen states.

The IRS says more than 140,000 Americans successfully filed their federal taxes for free using Direct File during the pilot, saving them an estimated $5.6 million in tax preparation fees.

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The IRS launched the Direct File pilot program in March to some taxpayers with simple tax situations in 12 states. Even though nearly 19 million Americans were eligible to participate in the pilot, the IRS says it was expecting just 100,000 successfully filed federal returns. The amount of users, the agency says, exceeded expectations.

An internal study of 11,000 taxpayers who used Direct File found that 9 out of 10 filers rated the software and free filing experience as “excellent” or “above average.” One Texas resident who participated in the Direct File pilot shared: “I don’t want to call myself a dummy, but this is taxes for dummies right here.”

A sprawling 2022 law dubbed the Inflation Reduction Act mandated that the IRS study the feasibility of a federally run free tax filing system. As part of the study, the agency decided to build fully functioning software and test it out in a real-world scenario, as opposed to solely relying on hypothetical surveys and focus groups, IRS Commissioner Danny Werfel explained in a congressional budget hearing earlier this month.

Before Thursday, the fate of IRS Direct File was uncertain. Now, the IRS has confirmed the free tax software will be open to all states in 2025.

(IRS Direct File is separate from the longstanding IRS Free File program, which is a public-private partnership that allows folks under a certain income threshold to file for free with a third-party software. That program was recently extended for the next five years.)

What to expect from IRS Direct File in 2025

Aside from the confirmation that Direct File will indeed return in 2025, it's not clear who exactly will be eligible to use it next year.

The 12 states that were in the pilot are expected to stay on board. Those states are Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington and Wyoming.

The IRS says it's "inviting all states to partner with Direct File next year." That does not mean, however, that every state will accept that invite.

And even if a taxpayer's state is participating, there will likely be other criteria the filer must meet. For the 2024 filing season, the IRS only accepted "simple" tax returns, imposing a wage limit of $200,000 for individuals (and $250,000 for joint filers). Those earnings must have come from W-2 wages, interest, or federal benefits like Social Security or unemployment insurance.

Direct File did not accept returns with 1099 income from gig or freelance work, itemized deductions or tax credits other than the child tax credit, the earned income tax credit or the tax credit for other dependents.

The IRS says it plans to loosen those restrictions next year but has not shared specifics. More details will trickle out "in the coming months."

Pushback on Direct File

Despite recent praise for Direct File by some taxpayers and lawmakers, not everyone is happy with the program.

According to the nonprofit OpenSecrets, the tax-prep industry spent millions of dollars lobbying the federal government recently in a bid to quash Direct File. A TurboTax spokesperson told the organization that Direct File is a “thinly veiled scheme" that spends billions of dollars to offer a service that is already available to taxpayers by private companies (both through IRS Free File and their own offers).

However, the tax prep industry is often accused of hiding those free-filing options from customers — or up-charging them at the end of the filing process. In January, for example, the Federal Trade Commission issued an opinion and order finding that TurboTax “deceived consumers when it ran ads for ‘free’ tax products and services for which many consumers were ineligible.”

Direct File does not have much support from Republican lawmakers, either.

Not one Republican was among the 130-some signatories of the recent letter praising the Direct File program. And in March, 18 largely Republican-led states wrote a letter to the Treasury warning that “Direct File has the potential to do more harm than good for taxpayers.”

Tax officials from those states said in the letter that since Direct File is only for federal taxes, Americans may incorrectly assume state taxes are included and forget to file with their state, potentially leading to lower tax refunds or higher tax penalties for individuals as well as decreased tax revenues for states.

Some opponents have also taken aim at the cost of implementing Direct File. According to the IRS, the pilot program cost nearly $25 million, and a full-fledged version would cost $2.5 billion over the next 10 years.

In its 2025 budget request, the IRS asked for $75 million more for the expansion of Direct File — though the budget has yet to be finalized.

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