By Kenneth Corbin

Direct File, the free tax-preparation and filing service the IRS launched as a pilot program last year and has expanded for this tax season, could be on the chopping block in the next administration.

President-elect Trump has said he intends to nominate Billy Long to head the agency, indicating that he will oust current Commissioner Danny Werfel before his five-year term expires in November 2027.

Long is a former Republican congressman from Missouri who never served on the tax-writing Ways and Means Committee, but did back numerous tax-focused bills, including one that would have prohibited the IRS from developing its own tax-prep program.

The IRS under Werfel has billed Direct File as a free alternative to commercial tax-prep services such as Intuit's Turbo Tax, and the agency has said the pilot program saved taxpayers $5.6 million in filing fees in the 12 states in which it was available for the 2023 tax year.

Direct File was a product of a substantial budget increase the IRS received through the 2022 Inflation Reduction Act, though the agency's funding looks more precarious in the next administration when Republicans, many of whom have expressed hostility to the additional funding, will control the White House and both chambers of Congress. Already, half of the extra $80 billion allocated to the IRS under the 2022 law has been rescinded through negotiations to keep the overall government funded.

The IRS put much of its funding increase to use in beefing up enforcement in a bid to crack down on wealthy tax cheats, but it also allocated money to improve customer service and enhance its technology, including developing Direct File.

The IRS said it spent $12.9 million in development and operations costs to set up Direct File, and last May reported that it had spent $24.6 million on the program since its inception. The project also received support from the U.S. Digital Service, the cost of which wasn't included in that total. In 2023, the IRS estimated that Direct File could cost $64 million to $249 million annually to operate, depending on factors such as how many taxpayers use the service. A Government Accountability Office report last year found fault with the IRS' accounting of the program and recommended the agency "ensure that best practices are used to estimate and document the full costs" of Direct File.

An uncertain future. With the incoming administration, which has proposed slashing government spending across the board, the future of Direct File is far from certain.

"I think the program is certainly in danger," Dustin Stamper, a managing director in Grant Thornton's Washington national tax office, tells Barron's Advisor. "Many Republicans oppose it, and the new administration could simply choose to abandon the effort."

In December, shortly after Trump said he intended to nominate Long to head the IRS, 29 House Republicans signed on to a letter calling on the president-elect to issue an executive order on his first day in office directing the IRS to abandon the program, which they criticized as "unauthorized and wasteful."

"Under the guise of offering a convenient 'free-to-file' alternative preparation service, the IRS asserts itself as the tax assessor, collector, preparer, and enforcer -- all in one -- when the program is used," the lawmakers wrote.

The IRS didn't immediately respond to a request for comment about the future of Direct File and the criticisms that have been leveled against it.

Vocal critic. Intuit has publicly criticized Direct File and has made no secret that it would like to see the IRS scrap the program.

"IRS Direct File is a solution in search of a problem and that solution will unnecessarily cost hardworking Americans billions of dollars for something that already exists," Intuit spokeswoman Tania Mercado says. "Taxpayers continue to want and benefit from having an advocate when filing their taxes to help ensure that they pay only what they owe and receive the maximum refund they are eligible for."

Long didn't respond to a LinkedIn message seeking comment on his plans for the program, though the issue is almost certain to come up at his confirmation hearing. A tax firm he has recently worked with, Lifetime Advisors, didn't respond to phone and email messages attempting to reach him.

Long was an early Trump supporter whose tenure in Congress included a committee hearing when the far-right activist Laura Loomer disrupted the proceeding and Long drowned her out by loudly calling out numbers in the mode of an auctioneer, a job he used to hold before entering politics.

Confirmation questions. In addition to questions about Direct File, Senate Democrats are expected to grill Long on his post-Congress work helping businesses obtain government money through the Employee Retention Tax Credit, a Covid-era program intended to incentivize businesses to keep employees on their payrolls that has been riddled with fraud and abuse.

Two Democrats on the Senate Finance Committee, which would hold Long's confirmation hearing, are probing Long's work helping businesses apply for ERTC money. One of them, Ron Wyden of Oregon, who will be the ranking Democrat on the panel in the next Congress, called Long a "bizarre" choice to head the IRS.

"What's most concerning is that Mr. Long left office and jumped into the scam-plagued industry involving the Employee Retention Tax Credit," Wyden said in a Dec. 4 statement. "These ERTC mills that have popped up over the last few years are essentially fraud on an industrial scale, conning small businesses and ripping off American taxpayers to the tune of billions of dollars. I'm going to have a lot of questions about Mr. Long's role in this business, first and foremost why the American people ought to trust somebody involved with a fraud-ridden industry to run an agency that's tasked with rooting out fraud."

This week, Sen. Elizabeth Warren (D., Mass.), who will also serve on the Finance Committee, sent a letter to Long raising questions about his qualifications to head the IRS and his ERTC work.

Long hasn't been implicated in any fraudulent activity. He has spoken publicly about his prowess in securing ERTC funds for businesses, and his profile on X states: "'Certified Tax & Business Advisor' DM me to save 40% on your taxes. We have a new traunch (sic) of tax credits just out!"

As for Direct File, Long can expect to face political pressure to terminate the program. Rep. Adrian Smith (R., Neb.), the lead signatory on the letter to Trump calling for the termination of Direct File, issued a statement applauding Long's nomination and expressing hope that the agency would abandon the program.

On the other hand, the timing of the coming tax season could put pressure on the new administration to act quickly if it wants to wind down the program to avoid snarling the returns of taxpayers who want to use it.

"The IRS will begin accepting returns shortly after inauguration day, so if Trump was going to kill it for 2025, it would have to happen on day one of his administration," says Clint Bentz, a CPA and managing member of Clint Bentz Consulting.

Then there is the so-called Department of Government Efficiency, headed by Elon Musk and Vivek Ramaswamy, which is looking at a free mobile app for tax filing as one of its recommendations for the IRS, according to a Washington Post report. "That sounds a lot like what Direct File is trying to accomplish," Stamper tells Barron's Advisor. "I don't think the program's fate is sealed quite yet."

Write to advisor.editors@barrons.com

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January 09, 2025 12:25 ET (17:25 GMT)

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