IRS’ hyped Direct File tax software off to a slow start

The IRS fell short of its original goal of hundreds of thousands of users for the first year of its Direct File program, with just a little more than 140,000 taking advantage of the online pilot program for calculating taxes without resorting to a paid option such as TurboTax.

Biden administration officials insisted the pilot was a success, with millions of people checking out the tool and more than 420,000 logging in. In the end, just 140,803 filed their federal returns through the new service.

IRS officials said they intentionally “started small” and ramped up during tax season, with more than 5,000 returns a day by the end.

“From the very beginning of the Direct File pilot, we wanted to test new ways to give taxpayers an easy, accurate and free way to file their taxes online directly with the IRS,” said IRS Commissioner Danny Werfel, who called the numbers a “strong response.”

That’s tough to square with expectations.

At the end of February, the Treasury Department told Vox, a left-leaning website, that it was expecting “at least several hundred thousand” taxpayers to use the service.

Two weeks later, when the IRS launched the product, the agency reduced the target to 100,000. The agency figured the lower estimate was better because so many tax returns had already been filed. The agency exceeded that target by about 40,000.

Key congressional backers of the idea were happy with the results.

“Filing your taxes should be easy and free, and the Direct File pilot demonstrates this option is popular and efficient,” said Sen. Elizabeth Warren, Massachusetts Democrat. “It’s shameless that tax prep companies, raking in billions off charging junk fees, are trying to spin these results as anything less than a success.”

Congressional Republicans have mocked the endeavor. They said the paid products provide better services and Americans aren’t clamoring for the IRS to enter the market.

They also accuse the IRS of cooking the books with its $15 million feasibility study and say Congress never gave the agency approval to deploy the system.

“This pilot program is simply a way to expand the power of the IRS that no one asked for, especially considering Americans already have numerous options for filing free tax returns,” House Ways and Means Committee Chairman Jason Smith, Missouri Republican, said last month. “From the beginning, the Biden administration tipped the scales in favor of a direct file program that the American people did not want or need. In fact, hardly anyone has used the IRS system in their testing.”

The IRS said it never intended for the program to make a big splash this year.

“The IRS purposefully designed the pilot to follow best practices for launching a new technology platform — start small, make sure it works, then build from there,” the agency said.

Those who did use the program gave it good reviews. The IRS said that 90% of users in a survey of 11,000 ranked their experience above average or excellent. They called the program trustworthy and liked that it was free.

Only a small subset of taxpayers used the pilot, which was limited to residents of just a dozen states. Taxpayers whose income was complicated by tax credits or who wanted to itemize deductions were generally unable to use the tool.

The 12 states were Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington and Wyoming.

The 140,000 users accounted for less than 1% of the nation’s 120 million tax filers as of April 12.

Intuit, maker of TurboTax, said it has “delivered 124 million free tax returns over the last 10 years.”

“The reality remains the same today as it did the day Direct File launched: 100% of Americans can already file their taxes completely free of charge, free to the government and actually free to taxpayers,” said Intuit spokesperson Rick Heineman.

The IRS said it doesn’t know what will happen to Direct File next.

“No decision has been made about the future of Direct File at this time,” the agency said. “Over the next several weeks, the IRS will meet with a wide variety of partners and stakeholders to learn more about how taxpayers interacted with Direct File and what they expect from a direct e-filing system, then carefully review data from the pilot and feedback from those discussions. Based on that data and feedback, the IRS expects to announce a decision about the future of Direct File later this spring.”

The IRS said it has spent just shy of $25 million on the program. Most of that was for the $15 million feasibility study for Congress.