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News

IRS Direct File Program’s Success Relies on State Participation More Than Election Results

By:
Karen Sibayan
Published Date:
Nov 4, 2024

Bloomberg Tax reported that the IRS is relying on states to make the Direct File program, its free online tool for filing tax returns, successful and overcome opposition—even a Republican sweep of the general election. 

According to Bloomberg Tax, the more people who use the program and in as many states as possible, the more chances it has of succeeding against the opposition. The opposition came this summer from Republican lawmakers, Reps. Adrian Smith's (R-Neb.) and Chuck Edwards' (R-N.C.) proposal to prohibit the Treasury Department from continuing to develop or create new versions of the program, reported Bloomberg Tax on July 23. Tax preparation companies are also against the program.  

As Direct File enters its first full-fledged tax filing season, 15 of the 24 states that have joined Direct File for 2025 have Democratic administrations. Although nine Republican-led states have signed up, Bloomberg Tax reported that eight states, with Idaho excluded, do not have an income tax. 

Nevertheless, if the program progresses, the demand could entice more states to use it going forward, making it more challenging to eliminate, said Vanessa Williamson, a senior fellow at the Urban-Brookings Tax Policy Center. 

However, logistical and technical challenges could lessen enthusiasm for the program and stir up criticism. Additionally, Williamson noted that the issue's partisan nature could cast a negative light on good faith mistakes as "they are not going to walk into a media ecosystem that’s going to treat them that way.”  

Direct File’s seamless integration with state tax systems will be the key to the IRS's success. According to Bloomberg Tax, a 2022 survey conducted by MITRE Corporation found that 60% of participants stated they would stick with their current commercial software if IRS options could not prepare state returns as well. The result envisions a hypothetical scenario where alternatives are free. 

IRS Commissioner Danny Werfel and other administration officials have said that the results of the 2024 general election will not impact Direct File's continuation as a program. However, they have not directly addressed how they would respond if Republicans defunded the program.  

Congressional Republicans are not the only ones opposing Direct File. More than a dozen state Republican attorneys general have also opposed the IRS’ authority to expand the program and disapproved of its effect on tax preparation businesses. In Virginia, where Democrats control the General Assembly, they have called for Republican Gov. Glenn Youngkin to take part in the program. 

However, in an August letter, Youngkin stated that legal questions and IT system issues were some of the problems stopping Virginia from joining in 2025. Virginia Department of Taxation spokesperson Heather Cooper noted that the agency continues to look into it as “a potential option for future filing seasons.” 

Virginia Sen. Stella Pekarsky, a Democrat who has asked Youngkin to participate in the program, anticipates that Democrats will introduce a bill in 2025 to “clear whatever hurdles are in the way.” 

Although federal-state return integration has yet to be needed, the goal, even as the program expands, is to accommodate a more extensive range of taxpayers with different circumstances and higher incomes, Bloomberg Tax reported.

Only three states had systems hooked into Direct File for the limited pilot the IRS ran with 12 states earlier in 2024. Still, more are working with third parties so that in the coming years, taxpayers can enter information and have it populate state forms. 

Some states expressed support for the program. Michigan, for instance, said no to joining next year due to worries that its IT systems cannot integrate with Direct File. However, the Michigan Department of Treasury spokesperson Ron Leix stated that the agency has a large IT project and expects to join in 2026, according to Bloomberg Tax.

This year, the tax and partnership program director, Gabriel Zucker, noted that five states are working to integrate into the program with tech nonprofit Code for America, which is funding the initial implementation. The organization worked with Arizona and New York to integrate their systems for 2024’s pilot. Other states are working with Fast Enterprises, a government contractor that handles many state internal systems. 

Integration is more challenging for certain states. For instance, New Jersey’s income taxes are based on gross income, while the IRS utilizes adjusted gross income, which makes integration trickier, said Marita Sciarrotta, the state's acting tax director. She noted that New Jersey is pursuing a partnership with Code for America but might not have the integrated version ready at the beginning of the tax filing season. 

Ayushi Roy, deputy director of New America’s New Practice Lab and co-author of the IRS Direct File Third-Party Report, said the IRS also needs to continue investing in constituent outreach and other types of support to ensure the tool's success in states.