IRS makes free online filing program permanent

The free online tax filing program piloted this year by the IRS will be made permanent and its scope will be expanded, Treasury Secretary Janet Yellen announced Thursday.

Known as “Direct File,” the online platform will be integrated with state tax systems and expanded beyond the limited number of deductions that it can currently process, Yellen and IRS Commissioner Danny Werfel told reporters.

“We’re making Direct File — the new product we piloted this year — permanent,” Yellen said, touting the boost in IRS funding from the Inflation Reduction Act.

Werfel said that the size of the expansion hadn’t yet been decided but that it would gradually become larger over the coming years to include most common tax situations, focusing on those of “working families.”

Currently, the system can only process income earned in the form of W2 wages — the way most U.S. workers are paid — along with a handful of credits like the Child Tax Credit and Earned Income Tax Credit.

Werfel mentioned a number of tax situations where the IRS saw demand for inclusion in direct file, including health care and retirement tax credits.

“The premium tax credit — under the Affordable Care Act, those that get their health insurance in the affordable care act marketplace and therefore receive a premium tax credit. That was something that was not in our eligibility scope this year,” Werfel said.

“There were other refundable tax credits that were out of scope. There was certain retirement income that was out of scope,” he added.

Sen. Ron Wyden (D-Ore.), chairman of the Senate Finance Committee, called the announcement “tremendous news for taxpayers all over the country who are tired of getting ripped off by the big tax prep companies that routinely upcharge for unnecessary services, oversell the quality of their products and offer crummy customer service.”

Wyden said “Werfel and Secretary Yellen handled this by the book, taking the time to build and test out a great new public service before announcing its expansion.”

Republicans and the private tax preparation software industry have railed against the new program. House Republicans voted to rescind funding for Direct File as soon as they took control of the lower chamber in 2023.

“There are also significant questions as to whether the IRS has the legal authority to implement such a program without congressional authorization,” Senate Finance Committee ranking member Mike Crapo (R-Idaho) said in a statement last year.

Werfel did not talk Thursday about additional types of income that could be made eligible for direct file, such as investment returns, rental property income, or independent contractor income filed on 1099-Ks.

The process of expanding Direct File will begin with figuring out which additional states will be included beyond the initial 12 where it was available this year.

“It really depends on state readiness,” Werfel said. “There will be no limit to the number of states that can participate in the coming year.”

The cost of the program for next year could be up to $75 million as outlined in the IRS’s strategic operating plan annual supplement, a sum that Werfel said the IRS would not “significantly or materially exceed.”