MW Why some hope the IRS's free tax-prep program becomes the next Obamacare

By Andrew Keshner

The longer the Direct File tax-prep program sticks around, the harder it is to end it, critics worry

It was soon after the start of Scott Bessent's confirmation hearing that taxpayers got some news they could possibly use for the upcoming filing season - and maybe beyond.

President Donald Trump's nominee for Treasury secretary spent hours last week talking to senators about tax policy, tariffs, trade and the Federal Reserve. But one of the first questions Bessent faced was whether he would let the Internal Revenue Service offer taxpayers a free tax-filing platform this tax season, which starts Jan. 27.

"Will you commit to keeping Direct File up and running if you're confirmed?" asked Sen. Ron Wyden of Oregon, the Senate Finance Committee's ranking Democrat, referring to the IRS-run tax-prep platform that's slated to become available to up to 30 million people in 25 states this year.

Last year, the government spent more than $20 million on a test run of the Direct File platform. The online platform handled fewer than 0.1% of the approximately 163 million tax returns filed last year, according to a Government Accountability Office report released in December. Now the platform is ready for primetime - at least that's what the IRS said during former President Joe Biden's administration.

"I will commit that, for this tax season, that Direct File will be operative and the American taxpayers who choose to use it will," Bessent told Wyden. "And if confirmed, I will consult and study the program and understand it better and make sure that it works to serve the IRS's three goals of collections, customer service and privacy."

Wyden seemed to appreciate the response. "It means that taxpayers are going to save - who choose to use it, because it's voluntary - hundreds of dollars, and will have a chance to see, once again, how popular it is with practically everybody except the tax-software crowd."

Shares of Intuit $(INTU)$, the maker of TurboTax, and H&R Block $(HRB)$ moved slightly lower in the days after Bessent voiced his support for Direct File, which is considered a rival to mass-market tax-prep programs.

Taxpayers are spending an average of $290 on filing their taxes, the IRS said recently, but Direct File provides a free alternative - though it can only be used for relatively simple tax returns, and it's not available in the other 25 states.

Direct File has fierce critics and backers. Supporters say they see a path to making Direct File a permanent option for taxpayers, and some have even drawn a parallel with another instance of controversial government involvement in a recurring consumer need: broader access to healthcare through the Affordable Care Act, known as Obamacare.

"When people started getting healthcare through Obamacare, they liked it and it was very hard to take away, and that's what I think will happen with Direct File," said Adam Ruben, vice president of campaigns and political strategy at the Economic Security Project.

"The more people use it, the more they are going to stand up and shake their fists and scream and say, 'No, don't take my Direct File,'" said Susan Harley, managing director for the Congress Watch division of Public Citizen, a consumer-advocacy nonprofit. This year, Direct File will be available in an array of Republican-leaning states like Idaho, North Carolina and Pennsylvania.

Obamacare's early years included a rocky 2013 rollout for Healthcare.gov and repeated unsuccessful Republican-led attempts to repeal the law. Yet a record-breaking 24.2 million consumers picked healthcare plans for 2025 through the exchange, the Centers for Medicare & Medicaid Services said last week.

The comparison to Obamacare doesn't hold up, according to Pete Sepp, president of the National Taxpayers Union, a fiscally conservative advocacy group. Perhaps the Affordable Care Act opened up new healthcare choices, but Americans already have other ways to do their taxes for free, Sepp said. That's one big point of contention for him and other critics of the Direct File project, including Intuit and H&R Block.

Commercial providers of tax-prep programs offer free versions, though critics say customers often still end up paying. The IRS Free File program, a partnership with tax-software companies, is also open to people making under $84,000.

Sepp, who wanted the Trump administration to pause the Direct File program, saw Bessent's hearing as the "last shot" to make that happen before people started their taxes this year.

"Every filing season that Direct File hangs around gives the IRS bureaucracy a chance to cement it further into its technological architecture," he said. "And that's probably what they are going to try to do, even though that architecture is crumbling in many other places."

An Intuit spokesperson told MarketWatch the company believes taxpayers win when they have someone other than the taxman advising them on how to cut their taxes and boost their refunds. "IRS Direct File is a solution in search of a problem, and that solution will unnecessarily cost hard-working Americans billions of dollars for something that already exists," the spokesperson said.

In a statement, H&R Block said the tax-preparation provider offers more with its free services than the IRS version does. "We have consistently said that Direct File isn't necessary because taxpayers already have access to free services from more than 30 providers, and after the first year of results it is obvious to us that Direct File isn't in the best interests of Americans - either those who use it or those who are funding it with their tax dollars. "

The White House did not immediately respond to a request for comment. Trump signed an executive order Monday that froze federal worker hiring and singled out the IRS for more review.

What counts as 'success' for free tax prep

The Direct File system processed nearly 141,000 federal income-tax returns in 12 states during last year's pilot run, according to the GAO report, which was published during Biden's last full month in office.

Many users were young, single and with modest pay that averaged $44,000 in adjusted gross income, the watchdog report said. Ninety percent of users surveyed by the IRS described their experience with the pilot program as excellent or above average, and IRS officials said they expected somewhere between 920,000 and 3.7 million taxpayers to use the service in the 2025 season.

The number of people who go ahead to actually file returns via the platform could differ, the report noted. Product-development costs for this filing season could range from from $34.7 million to $42.5 million, the IRS said in the report.

Last year, the IRS Free File program handled more than 3 million tax returns and tax forms, according to Tim Hugo, executive director of the Free File Alliance, a coalition of free-file software providers.

The Direct File program still only offers a limited range of options for tax help. For example, it can handle returns for people with wage income, but not for gig workers with independent-contractor pay. It expanded its offerings in 2025, including the ability to import wage-income information the IRS already has straight onto the return. This year, it can also handle the tax credit people use when they get their healthcare through the Affordable Care Act's exchange.

It remains to be seen if the program will take root on a broader scale, said Howard Gleckman, a senior fellow at the Tax Policy Center, a joint venture between the center-left Urban Institute and the Brookings Institution. "Right now, it has a pretty small constituency."

He viewed the first year as a success, because the IRS kept the program small. "The last thing they want to do is recreate a rollout of Obamacare with people's tax returns," he said, referring to the opening-day crashes of the Healthcare.gov site.

Going forward, success for Direct File would mean an easy, hassle-free experience that can bring in more people, Gleckman said. But it's an open question whether that will happen.

"In principle, it's true there is an Obamacare analogue here," he said - but with millions of people doing taxes, it could take a long time for "a critical mass of users" to swell up.

"The way this thing will get saved, if it gets saved, is you have constituents going to members of Congress, even if they're Republicans, saying 'I kind of like this thing - what are you doing to me?'" Gleckman added.

-Andrew Keshner

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January 23, 2025 13:30 ET (18:30 GMT)

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