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The IRS has revealed plans to make the free electronic tax return filing system, which was trialed in 2024, a permanent feature. The agency has invited all states with a state income tax to join the program and assist people in filing their state returns for free from 2025. The Direct File project, which was initially funded by the Inflation Reduction Act, has faced opposition from private tax preparation companies and will require continued funding to grow.
The IRS to Make Electronic Tax Return Filing System Permanent
The IRS has announced plans to permanently establish its free electronic tax return filing system, Direct File, in 2025. It is calling on all 50 states and the District of Columbia to assist taxpayers in filing returns under the new system.
The Direct File program was trialed in 2024 for individuals with straightforward W-2s in 12 states. Furthermore, the IRS is encouraging states with income tax to offer free filing for state returns. During the pilot, agencies in Arizona, Massachusetts, California, and New York facilitated direct state tax filing.
IRS Commissioner Announces Future Plans
IRS Commissioner Danny Werfel will report later this year on the number of states planning to participate in the program in 2025. The Inflation Reduction Act, signed into law by President Joe Biden in 2022, tasked the IRS with developing a “direct file” system and provided $15 million for this purpose.
“The IRS has been underfunded for decades, so taxpayers haven’t gotten the support they deserve,” Treasury Secretary Janet Yellen said in a call. “Thanks to the Inflation Reduction Act, we’re changing this.”
IRS Direct File Program Success
The Direct File trial began in March and has been used by over 140,000 taxpayers, with claims exceeding $90 million in refunds. Werfel believes that expanding the program is key in simplifying taxes for Americans, saving time and money.
He added, “We know there is more analysis to do, but we have enough information at this point to make the decision. And an early decision on 2025 is critical for planning — both for the IRS and for additional states to join the program.”
Opposition to the Direct File Program
The IRS has faced strong blowback from private tax preparation companies profiting from software charges. These companies have spent millions lobbying Congress. The average American spends approximately $140 preparing their tax returns annually.
For the Direct File program to continue expanding, it requires sustained funding under the Inflation Reduction Act, which initially allocated $80 billion for the IRS. However, some of this fund has been redirected to other programs by lawmakers.
House Republicans incorporated a $1.4 billion reduction to the IRS in the debt ceiling and budget cuts package passed last summer. A separate agreement will divert an additional $20 billion from the IRS over the next two years to other nondefense programs.
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