Direct File system development funded by the Inflation Reduction Act

The IRS’s Direct File program is part of a broader initiative to modernize and streamline tax filing, enhancing accessibility for low and middle-income taxpayers. The program’s pilot phase, which began in 2024, allowed participants with simple tax situations to file their returns directly, resulting in over $90 million in refunds. The expansion will not only include more states but will also broaden eligibility criteria to accommodate taxpayers with various income forms and credits, such as 1099 income and the Child and Dependent Care Credit. This initiative aligns the U.S. tax system more closely with practices in other developed countries, where direct filing systems have been in place for years.

Background and Implications

The Direct File program was funded as part of the IRS’s allocation from the Inflation Reduction Act, which provided the agency with resources to explore innovative tax filing solutions. With a budget of $15 million and a timeline of nine months to develop the program, the IRS aims to enhance taxpayer experience and reduce reliance on commercial tax preparation services, which have historically generated significant revenue from their software offerings.

Challenges and Criticism

Despite the potential benefits of the Direct File system, it faces opposition from commercial tax preparation firms that stand to lose business. Additionally, concerns have been raised regarding data protection and the IRS’s ability to safeguard taxpayer information, particularly in light of a recent inspector general report highlighting deficiencies in the IRS Free File Alliance. This context underscores the importance of ensuring robust security measures as the IRS moves forward with this ambitious initiative.