Understanding the feasibility of an IRS direct file program
Internal Revenue Service
May 2023
Why This Matters for Families
Every year, American families pay millions of dollars to private tax filers, some of whom are less than trustworthy. Tax filing for many is a confusing process that creates insecurity, as families struggle to understand whether they need to file and, if they do, which credits they qualify for. While the IRS has tried previously to help these families avoid some of the charges that come with tax filing through their Free File service with an industry alliance, the uptake on that program has been low — less than 2% of eligible families used Free File in 2023; over the Free File Alliance’s 10+ year lifetime, it’s had fewer users the the IRS’s TeleFile program had in its nine year lifespan.
Families below the required household income for filing who do not file miss out on thousands of dollars in tax credits — one of the most critical anti-poverty programs in the country. Tax credits provide essential cash resources to American workers and their families. For example, the 2021 expansion of the Child Tax Credit in the American Rescue Plan is shown to have reduced child poverty in the United States by 40% that year. However, accessing these credits is notoriously difficult as they are claimed during annual tax filing.
The Customer Experience Executive Order signed in December 2021 directed the Secretary of the Treasury to “design and deliver new online tools and services to ease the payment of taxes” including “expanded electronic filing options.” Further, as s part of the Inflation Reduction Act in 2023, the IRS received $80B in funding, a portion of which was mandated to be directed towards a report on taxpayer opinions about and the cost to develop and run a direct file system, with third party input an essential part of the study. The New Practice Lab at New America was selected as one of the third parties and worked with the IRS to understand how a direct file service might work.
Our Approach
As part of our approach in this study, the New Practice Lab convened policy and delivery experts, bringing together individuals with backgrounds in both private sector software development as well as government digital services and policy implementation. The group reviewed both the IRS’s own report on Direct File and conducted interviews with subject area experts to understand the scale and scope of the IRS’ ability to operate such a service.
ORIGINAL OBJECTIVE
Understand the feasibility and capacity of the IRS to modernize the tax filing process through a digital direct file system
WHAT WE DID
As directed by Congress through the Inflation Reduction Act, the New Practice Lab, along with Professor Jurow Kleinman, engaged in a sprint research project.
This included an interview and information gathering process with members of the IRS, Department of Treasury, state government officials, and private industry representatives.
We also solicited input via written questions and surveys to tax industry groups like the Free File Alliance (FFA), as well as eight private tax preparation software companies.
Ultimately, we created a report that was submitted to Congress detailing the feasibility of a direct file program.
What We Learned
While the report submitted to Congress contained several insights about how the IRS could approach building a direct file system — if they should choose to pursue it — in summary, the report concluded that the IRS could successfully build a Direct File product, provided that it was built as a leadership priority, and that it was done in a “pilot” method — starting with a limited scope that was expanded overtime.
Critically, the report identified imperatives that would have to be addressed throughout the process of design and implementation:
Product Expectations
The IRS would need to clearly define the expectations of a Direct File system at launch, given the number of competing expectations a product might have.Gradual Rollout
Learning from other government technology rollouts, the IRS should roll Direct File out methodically, improving functionality over multiple years rather than overwhelming the system by demanding too much too quickly.Taxpayer Experience
The system would need to be continually improved and updated in accordance with customer feedback. Rather than allowing the product to become obsolete, regular maintenance and input would be required.State Tax Filing
Because taxpayers so often file their state and federal taxes together, a Direct FIle system would need to take both into account, while being mindful of how it would impact the administration of state and local benefits.Customer Support
Customer support was identified as the most significant and ongoing cost of a potential Direct File system that would largely determine its success, providing dependable customer service to users.Data Privacy and Security
Given the amount of sensitive information required for tax filing, a Direct File system would need to have tight security when it comes to taxpayer information, including systems to ensure accountability and limit data use.Funding
In order to scale according to demand, Direct File would need stable appropriations that adequately covers changing user needs, numbers, and inflationary costs.
Next Steps
With the release of the report, the IRS and the General Services Administration determined that a Direct File system could be effective, and worked to build Direct File, launched in 2024.
