IRS overestimated Direct File costs before ending program

The Internal Revenue Service vastly overstated the projected costs of operating the Direct File free tax preparation program before terminating it for this tax season, according to a new report.

The report, released Monday by the Treasury Inspector General for Tax Administration, examined usage of the Direct File program last year during the 2025 filing season. The IRS began pilot-testing the Direct File program in 12 states in 2024 and expanded it to 25 states in 2025 before the Trump administration shut down the program last November. Earlier this month, a group of Senate and House Democrats introduced legislation to revive the Direct File program, and other free tax-filing alternatives have emerged, including one backed by former IRS commissioner Danny Werfel, who had spearheaded the Direct File program and announced it would become permanent. As part of last year's One Big Beautiful Bill Act, Republicans mandated a study of the Direct File program, which concluded that the program was little used and costly at about $138 per return. The new TIGTA report, on the other hand, found that usage of the program became more popular and the cost estimates were overstated.

"While the IRS estimated that Direct File would cost $61.2 million for Fiscal Year 2025, the IRS's actual cost for Fiscal Year 2025 totaled $16.2 million as of May 2025," said the report. "However, the IRS's reported cost for Fiscal Year 2025 continued to exclude the costs from all IRS support functions. For example, Direct File did not include costs for employees detailed to the IRS by another federal agency to help develop and pilot Direct File, costs for other IRS functions' employees who supported the program, and authentication costs."

The program also gained in usage as the number of states offering it more than doubled in 2025 and the types of tax situations it supported increased.

"The IRS expanded Direct File for the 2025 Filing Season to include additional income, deductions, and credits," said the TIGTA report. "The IRS estimated that more than 32 million taxpayers, from 25 participating states, were potentially eligible to use it. This is an increase from the estimated 19 million potentially eligible taxpayers from 12 participating states for the 2024 Filing Season pilot."

However, usage did fall far short of the number of taxpayers who were eligible to use the program last year. "During the 2025 Filing Season, the IRS estimated that 32 million taxpayers would be eligible for Direct File," said the report. "However, only 751,000 taxpayers registered to use it, 59% of which didn't end up using it to submit a tax return. IRS attributed lower than expected usage to confusion about availability and a lack of outreach."

The 751,000 taxpayers who registered with Direct File last year nevertheless represented a 78% increase from the 423,000 registered taxpayers during the 2024 filing season. Improvements were made to significantly reduce the number of rejected tax returns sent through Direct File. The program didn't alert taxpayers about the errors before they submitted a tax return, so they didn't have an opportunity to address the issue and submit a correct tax return. Direct File began importing some information returns during the 2025 filing season to reduce human error and improve the taxpayer experience. TIGTA found opportunities for expanding the import of information returns, as well as tax forms for secondary filers, corrected tax forms, and additional tax forms through individual online taxpayer accounts.

Last January, before the IRS terminated Direct File. TIGTA recommended the IRS implement programming to ensure Direct File did not allow submission of tax returns with errors that it could alert the taxpayer to fix. The IRS partially agreed and corrected programming for seven of the business rules as of April 20, 2025, but has since suspended the program entirely.