Weekly Column: Time To End Direct File, Not Make It Permanent

In May, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) made the mistake of converting the Direct File pilot program into a permanent, unauthorized, multibillion-dollar government detour into the tax preparation business.  What is advertised by the Biden Administration and its allies as a government?run “easy and free” way to file federal tax returns is now slated to become a bloated government diversion, putting an already troubled agency into a deeper hole.  I previously wrote about the problems with Direct File and the Attorney General of Idaho, Raúl Labrador, has similarly underscored such issues.  New post-filing season data confirms the program’s flaws.

As part of the Inflation Reduction Act, Democrats led an effort to require the IRS to write a feasibility report on creating a new tax preparation online portal called Direct File.  The following year, the IRS submitted the report which consisted of multibillion-dollar, long-term cost estimates that the IRS’s own auditor flagged as being “subject to considerable uncertainty.”  Sidestepping the red flags raised in the report and by other stakeholders--including Congress--the IRS announced it would undertake a “pilot” of Direct File the same day it issued the feasibility report.  With its recent decision likewise avoiding these concerns, the IRS will now spend considerable taxpayer dollars to not only compete with tax preparation companies--many of which provide these services at little to no cost--but also with its own programs.

For decades, the private tax software industry has spent billions of dollars developing products to file and legally lower customer’s taxes.  To the benefit of many, the private sector already provides much of its tax software for free.  For example, in 2023, the private tax software industry filed 23.8 million tax returns for free.  Unlike Direct File, which is labeled “free” but will cost taxpayers billions of dollars, these private tax preparers genuinely come at no cost.  In addition, the Free File, Volunteer Income Tax Assistance (VITA), and Tax Counseling for the Elderly (TCE) programs—all run by volunteers for the IRS—prepare millions of returns a year and will also be Direct File’s competition. 

Competing with yourself or businesses offering quality products for free is an unwise decision.  “The government’s free tax-filing software is virtually guaranteed to fail,” writes Tony Scott, a former Chief Information Officer (CIO) for the Obama Administration, and former Microsoft CIO.  According to Mr. Scott, “a clear, demonstrable need for IRS Direct File appears to be missing.”  The Direct File pilot program results prove he is right.  Despite a massive marketing campaign and the Treasury Department expecting 500,000 filers, only 140,803 out of 19 million eligible tax filers used Direct File, an adoption rate of less than one percent.  While some proponents have characterized these results as “wildly successful,” the former Microsoft CIO’s assessment is more accurate.

How much is Direct File costing taxpayers?  The Direct File feasibility report had a budget of $15 million, or $141,500 a page.  The Government Accountability Office lambasted the IRS for failing to keep accurate records of the program’s true cost.  It is unlikely the IRS would be as lenient if ordinary taxpayers copied its record?keeping techniques.  Government watchdog estimates put Direct File’s cost at $129 million for 2024, which amounts to paying $902 per filed return.  The Department of Treasury enthusiastically claimed Direct File saves tax filers an estimated $5.6 million in tax preparation fees.  Only in Washington, D.C. is spending $129 million to save $5.6 million framed as a success.  By comparison, the aforementioned existing IRS programs, VITA and TCE, cost around $2.50 per return.  The existing Free File Program cost the government less than a penny to file a return. 

Instead of diverting resources and attention to a redundant, expensive new government-run program, the IRS would better serve taxpayers by highlighting the existing options available to them and improving basic customer service.  It is time to end Direct File, not make it permanent.

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