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Regulation and Compliance > Federal Regulation > IRS

What's the Future of IRS Direct File? GAO Wants to Know.

By Melanie Waddell

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What You Need to Know

  • IRS estimates its Direct File pilot for the 2024 tax filing season should save taxpayers $21 million in compliance costs.
  • It also expects that the yearly costs of a Direct File tax system could range from $64 million to $249 million.
  • Cost and benefit data collected during the pilot period will affect future decisions about the Direct File system, GAO says.

The Internal Revenue Service estimates that its Direct File pilot program for the 2024 tax filing season will save taxpayers $21 million in compliance costs and make it easier for eligible taxpayers to claim credits and deductions, reducing the volume of paper returns and reducing errors.

However, IRS evaluation documents “did not consistently identify relevant metrics for measuring these potential benefits,”  according to a new Government Accountability Office report.

The just-released GAO report states that IRS officials told the GAO in February that senior leadership “has not decided on the future of the pilot beyond the 2024 tax filing season.”

IRS officials “reported that the time required to continue Direct File would depend on several factors, such as the size of the team working on the program,” and noted that hiring new employees to replace outgoing employees is a lengthy process.

Thus, “IRS officials will have a short amount of time to analyze cost and benefit information before making decisions about the pilot for the 2025 tax filing season,” the GAO report states.

What It Costs

Questions have been raised about how much funding will be required to support such a system, including the provision of a sufficient level of customer service, according to the GAO.

The Inflation Reduction Act of 2022 appropriated funds for IRS to study the cost of developing and running a free Direct File tax return system.

For its just-released report, the GAO said that it evaluated IRS estimates of the costs and benefits of Direct File and opportunities to use the pilot to collect data to improve those estimates to inform future decisions.

GAO compared the IRS’s initial cost and benefit estimates against best practices for cost estimation and an IRS strategic goal of ensuring a Direct File system is cost effective.

The IRS, according to the report, told Congress in May 2023 that it estimated the annual costs of a Direct File tax system could range from $64 million to $249 million, depending on the number of taxpayers served and the complexity of tax situations supported.

The IRS noted that it assumed a Direct File system would start with a limited tax scope.

“The IRS also included elements of a sensitivity analysis, another best practice for cost estimation, to examine how changes in assumptions may affect cost estimates,” the report states. “The IRS described how costs were expected to change depending on the number of taxpayers served and the complexity of tax situations supported.”

However, the IRS’s cost estimates did not address other recommended best practices, such as ensuring all costs were included and documented.

The GAO and the Treasury Inspector General for Tax Administration found that the IRS had no documentation to support the underlying data, analysis, or assumptions used for Direct File cost estimates.

Further, IRS officials told the GAO that the cost estimates did not include start-up costs, such as technology for a novel system, which could be substantial.

“Without a comprehensive accounting of costs, the IRS’s estimates could understate the full amount of resources required to develop and maintain a permanent Direct File program,” the report states.

The IRS should “use the cost and benefit data collected during the pilot along with other relevant considerations, to inform future decisions about the Direct File system,” the GAO said.

Melanie Waddell

@Think_MelanieW

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