States Should Opt Into IRS Direct File as the Program is Made Permanent

Filing your taxes should, for most people, be easy, fast, and free. That is the premise – and the promise – behind the IRS Direct File program, which after a successful pilot year will be made permanent, as officials announced today. While there is plenty of room to expand Direct File at the federal level, states can take matters into their own hands and bring this benefit to their residents by opting into the program.

In the first year of the Direct File pilot, the free public online tax filing program was available to taxpayers in 12 states: Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington, and Wyoming.

The scale for the first year of Direct File was intentionally small. But as the program grows, it could make tax filing free and easy for even more Americans. To hasten this expansion, state governments should opt into the program for next year’s tax filing season.

People who used Direct File in its inaugural year were impressed. Of the 15,000 Direct File users who participated in an IRS survey, 90 percent ranked their experience as excellent or above average, and 94 percent would recommend the service to a friend or family member.

Direct File has tremendous potential to make tax filing less expensive, faster, and easier for millions of Americans. By breaking down barriers to filing, it can also help more low- and moderate-income families get tax credits they’re eligible for, like the Earned Income Tax Credit and Child Tax Credit.

Research from Code for America and the Economic Security Project found that, at maturity, Direct File could save the average user $160 in filing fees and hours of their time each year, which provides Americans a total of $11 billion annually between filing fees and time costs. It could also deliver up to $12 billion a year in additional federal tax credits to eligible families.

Taxpayers in every state could benefit from expanding Direct File. For instance, that study found that Direct File could:

• Save Oregon taxpayers $101.8 million in filing fees every year
• Deliver between $63.4 and $162.5 million in additional federal tax credits to taxpayers in Louisiana every year
• Yield between $597 million and $1.52 billion in additional federal tax credits to taxpayers in North Carolina every year if 2021’s federal credit expansions were restored
• Provide $2.25 billion in total value to California taxpayers, between filing fees, time cost of filing, and additional federal credits claimed

These savings represent an enormous return on investment given the small net cost of the program. The same report found that Direct File would deliver $106 in benefits to American taxpayers for every dollar invested once the program is fully up and running.

For states, joining Direct File should be a no-brainer. The upsides are huge, and the cost is minimal. Most states are already using software for their own free filing tools for state income taxes that can easily link to Direct File.

Joining Direct File is also a great way for states to boost the reach of their own tax credits for low- and moderate-income workers and families. The data cited above is for additional uptake only of the federal credits, but 31 states plus D.C. and Puerto Rico have EITCs and 14 have CTCs. By reaching eligible but non-participating taxpayers, Direct File could help expand the impact of these state-level tax credits as well.

Taxpayers can reap big benefits from free online filing, despite the hollow protestations of massive tax-prep corporations. Now that we know Direct File is going to be sticking around, states should act soon to ensure their residents can save millions of dollars and hours of valuable time next spring.

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