IRS direct file program struggles to find users after late launch

With two weeks until the 2024 tax deadline, only around 50,000 people have used the IRS’s new direct file online filing system, a number well shy of the hundreds of thousands the agency anticipated for this tax year in early projections.

While the IRS has pushed hard to alert taxpayers of the direct file system across the 12 pilot states where it’s being made available, the modest uptake is raising eyebrows about the rollout and leaving experts wondering why the program wasn’t launched at the beginning of tax season in January.

“When you’re used to dealing with millions of taxpayers, 50,000 seems like a small number,” Janet Holtzblatt, a former deputy director of the individual tax division at the Treasury Department, told The Hill in an interview. “Given all of the issues here — the criteria, the limited number of states, starting this in the middle of a filing season, and this being the first year [the program was available] — many people may not even know of this.”

In January, IRS officials said they expected several hundred thousand taxpayers could use direct file during the current tax filing season.

Over the weekend, IRS Commissioner Danny Werfel said that “for the first time ever,” 19 million taxpayers would be able to file their taxes for free online using the direct file system, though the combined population of states where the direct file pilot is being rolled out is around 150 million people.

The IRS has said repeatedly it wants to start slow with direct file to build a solid operational base that can later be scaled up in terms of functionality and used more widely.

Advocates of the IRS program say it shouldn’t be held to arbitrary numerical standards in its first year and that the reliability of its launch has set a new standard for government-offered technology products.

“The IRS direct file program has turned the page on the tech meltdowns of the past by demonstrating that the government is capable of building a stable, user-friendly tax filing system,” said Igor Volsky, executive director of Groundwork Action, an advocacy group supporting direct file, in a statement to The Hill.

The modest initial usage of direct file may be all the more unexpected given recent trends in digital tax filing, which has been steadily getting more popular in the U.S. over the past decade and spiked in the aftermath of the pandemic, according to an analysis by The Hill of past IRS databooks.

In 2014, 84.5 percent of individual tax returns were filed electronically. That percentage increased by about 1 percentage point per year until 2020, when it jumped to 94.3 percent before resuming its previous trend in 2021 and then bouncing again in 2022 to 93.8 percent.

The fact the direct file program is built only to handle standard wage income — as opposed to investment, property, or interest income — may be another factor limiting more widespread initial adoption. Direct file also does not work for contractors, like Uber and Lyft, drivers or delivery workers, many of whom file their taxes with an IRS form 1099-K.

While experts acknowledge the limited applicability and eligibility of the program, they also commend its ease of use and point out the program is still in a test phase, the result of which could lead to more prolific usage.

“The product and technology is limited in terms of the number of taxpayers that are eligible to use it, at least in terms of this version of the pilot. But it seems to be a very user-friendly product, which is a promising start. It’s a good way for the government to test what works,” Villanova University law school professor Leslie Book, who has worked with the IRS’s taxpayer advocate service, told The Hill.

In addition to the midseason launch, outreach on direct file has been another point of criticism for experts who monitor IRS operations, though the agency has held multiple calls with reporters promoting the pilot system since it was announced for 2024 tax season last year.

“There’s always the issue of getting the word out and how much of the word gets spread within communities,” Holtzblatt said.

There has been at least one advertising campaign promoting the direct file pilot, too. The Better IRS campaign from the Coalition for Fair and Free Filing, launched a six-figure ad buy promoting the new IRS tool in the 12 states where it was made available, according to one of Groundwork Action, one of its affiliates.

“This advertising campaign [is] to ensure taxpayers know that direct file is an option for them this tax season and to signal to lawmakers that providing a free filing option through the IRS is popular,” Volsky said in a statement last month.

But advertising competition from the private tax preparation industry has been intense, with companies outspending the Better IRS campaign by multiple orders of magnitude.

“Turbo Tax is part of Intuit, Inc. They spent over $100 million on advertising in digital and national TV in the last year,” ad tech analytics company Media Radar said on its advertiser profile for the product. “They invest in premium ad units and advertised on over 250 different media properties in the last year across multiple media formats.”

As a greater share of tax returns have been filed electronically over the past decade, the percentage of those that have been filed by professional preparers has decreased, potentially suggesting greater taxpayer autonomy associated with greater digitalization.

According to The Hill’s IRS databook calculations, which divide the number of practitioner online-filed returns by the total number of individual returns filed over the last 10 years of available data, these shares have been decreasing.

In 2012, digitally filed practitioner-prepared returns accounted for 63.4 percent of total individual returns, ticking down steadily over the subsequent decade to 53.4 percent in 2022. This number rose in 2020 as the pandemic hit in the middle of tax filing season, but it dropped the following year to a low of 49.9 percent.