Now it’s finally official. On November 4, the Internal Revenue Service sent letters to participating states informing them that Direct File will not operate for the upcoming tax season. The IRS has also released an anticipated report to Congress required by the One Big Beautiful Bill Act (OBBBA) that announces that the IRS will suspend Direct File and recommends strengthening the existing free filing program known as Free File, along with other programs that assist taxpayers. Rumors began spreading about Direct File’s demise back in April, with reports from unnamed sources claiming the program was going to be terminated, to which we responded, Goodbye and Good Riddance!
Some news reports covering this development have lamented that the IRS is “ending a free filing program” for taxpayers. That doesn’t quite tell the whole story. As NTUF has repeatedly reported, Direct File was far from free and raised concerns about duplication and conflicts of interest.
Direct File came with a significant cost. In March 2025, the Treasury Inspector General for Tax Administration (TIGTA) reported that the IRS claimed to have spent $24.6 million on Direct File. However, this figure omits $7.3 million in costs for detailees from other agencies, $1.5 million related to user account creation, and an unknown amount tied to IRS employees reassigned from other functions to support the pilot. While the IRS asserted that Direct File cost roughly $26.60 per user, TIGTA found that the true cost was closer to $78.87 per user. More recent data, see below, shows that the costs per user have skyrocketed.
A better free option already exists that actually is free. For two decades, the IRS has partnered with private tax software companies to provide no-cost-to-consumer filing through the Free File Alliance. This program already covers roughly 70% of taxpayers, offering the same “free” benefit without forcing the IRS to act as both tax preparer and tax collector. Instead of competing with private providers, the IRS should focus on improving taxpayer service and technology modernization to ensure Free File works as intended.
A conflict of interest avoided. By ending Direct File, the IRS avoids the inherent conflict that comes from being both enforcer and preparer. When the same agency that audits taxpayers also prepares their returns, it undermines trust and creates serious questions about impartiality and data privacy.
Another troubling problem with Direct File is that it violated congressional intent. In the Inflation Reduction Act, Congress authorized $15 million for the IRS to study the feasibility and costs of establishing a government-run e-filing system. The IRS produced that report but also moved ahead in developing and deploying Direct File without informing Congress despite many opportunities when the Commissioner at the time, Daniel Werfel, testified before committees. After churning through the funds set aside for the Direct File study, the IRS raided nearly every other major budget category—including core enforcement and service accounts—to keep the project afloat, as reported by TIGTA.
Because of these concerns, House Republicans sought to terminate the Direct File program and requested a study for its replacement in their chamber’s version of the OBBBA, the tax reform package it passed earlier this year. Due to the Senate’s rules, the language terminating Direct File was struck from the bill before passage.
The Findings in the IRS Report
SEC. 70607 of OBBBA authorized $15 million to the IRS to report to Congress within 90 days of enactment on:
Costs and partnerships: The cost of enhancing and expanding public-private partnerships to offer free filing for up to 70% of taxpayers, and options to replace any IRS-run direct e-file program.
Taxpayer feedback: Opinions and preferences regarding a government-run filing service versus free private-sector options
Feasibility assessment: How a new approach could make filing options consistent, simple, and responsive to taxpayer needs.
Program costs: The cost of developing and operating a free direct e-file system, including variations by income level and return complexity..
The report largely echoes what NTUF has previously written about Direct File: it is costly, duplicative, and unpopular. The report found that Direct File cost at least $41 million in 2024, a partial estimate because it does not account for all of the agency staff and support work involved with maintaining the program (resources that were diverted from higher priority transformative objectives).
Yet, despite the resources spent on Direct File, returns via the program made up just 0.5% of the 146 million returns filed in 2024. With only 296,531 accepted returns and a total program cost of at least $41 million, Direct File cost roughly $138 per return, an increase from prior TIGTA estimates.
Treasury concluded that the program’s “high costs, limited participation, and competing priorities” warranted its suspension, an acknowledgment that aligns with NTUF’s longstanding warnings about the inefficiencies and conflicts of interests of Direct File.
Improving Filing
In addition to ending Direct File, The Treasury report outlines a plan with three other steps for moving forward, emphasizing promotion of existing private-sector options through the Free File Alliance and reassessing how the IRS’s filing services can be made more accessible and consistent.
Enhance Awareness of Free File and Launch a Public Communications Strategy
Treasury notes that many eligible filers are unaware of Free File and the IRS needs to do a better job of promoting it. Under the Memorandum of Understanding between the IRS and the participating companies involved in this public-private partnership, the IRS is solely responsible for marketing and public outreach. The IRS intends to conduct an outreach campaign to highlight the program’s benefits and make it easier to access. The IRS will also improve its oversight of the program and reevaluate the surveys issued to improve user feedback to better inform decisions about the program.
Conduct a Taxpayer Survey and Engage Stakeholders
Treasury and the IRS will study taxpayer preferences for a government-run free filing service versus private sector options. The report notes that, unlike previous surveys, it will include neutral options so that taxpayers are not forced to choose between simplistic positive and negative answers, potentially overestimating taxpayer interest.
The IRS will also host a Free Filing Modernization Summit convening experts in the tax preparation industry to identify ways to improve and expand filing options. The IRS will also review programs such as Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE), which provide free tax help to eligible filers. The agency will identify ways to improve and expand their reach, coordinating with Free File partners, state agencies, and other stakeholders to ensure that any enhancements are consistent and broadly accessible.
Define “Free” Return, Collect Data, and Prepare Supplemental Report
Using information from the survey, the IRS and Treasury will develop a definition of what counts as a “free” return filing service. This will take into consideration additional services offered alongside tax filing, state tax filing, and more. Clarifying this distinction is important, because Direct File was often touted as “free” despite imposing significant costs. In contrast, Free File actually helps reduce administrative burdens at the IRS.
Conclusion
Direct File has a number of acolytes in Congress, academia, and left-leaning think tanks, all of whom are not likely to give up on their crusade. The Administration should have a robust follow-through on the report’s recommendations to ensure that policies friendlier to taxpayers are firmly in place.
It is clear that Direct File was initiated without thorough analysis of costs, alternatives, and taxpayer demand. In fact, the Treasury report notes that work flows to develop a free tax filing software began as early as 2021. The release of this new report represents a shift in strategy towards a more data-driven and outcome-oriented approach to free tax filing services.