Yahoo Finance IRS is expanding its free filing program. Here's what that means for taxpayers.
Direct File, the tax agency's free tax filing tool, will be available to more taxpayers next year.
Direct File, the IRS’s free online tax filing tool, is here to stay.
During a pilot phase this spring, 140,000 participants received a total of $90 million in refunds. Nine in 10 users rated the software as "excellent" or "above average," according to a government survey.
This past season, only taxpayers with "simple" returns in a handful of states could use Direct File. Now, the IRS is expanding eligibility to allow more taxpayers across the country access to free filing.
"After a successful pilot, we are making Direct File permanent and inviting all 50 states to offer this free filing option to their residents. The Treasury Department and IRS look forward to working with states to expand Direct File to Americans across the country," Treasury Secretary Janet Yellen said in a statement.
Yahoo Finance spoke with experts, including a former IRS commissioner, to learn more about what to expect for the 2025 filing season.
Read more: Free tax filing: 7 ways to get your 2023 taxes done
Who can use Direct File?
The IRS has not announced how many taxpayers will be able to use the program, or what the eligibility criteria will be.
A former IRS official said the agency will likely focus on making the program available for Americans earning less than $400,000. That was the “bright line” used in recent campaigns, said Mark Everson, former IRS commissioner and vice chairman of alliantgroup, a tax consulting firm.
Experts said expanding eligibility would take time, and the agency would likely prioritize rolling out a credible site rather than race to enlist as many users as possible.
"[The IRS] wants to make sure that it's stable, that it holds up, and that it actually works so that we don't have the kind of meltdown that we had … during healthcare.gov," said Igor Volsky, manager of the BetterIRS, a coalition campaigning for free tax filing options.
The 2024 pilot program was "small and simple," Everson said. In addition to being available to taxpayers from only 12 states, it limited the types and levels of income accepted. Taxpayers could only report earnings from W-2s, unemployment, Social Security, and $1,500 or less in interest income; anyone earning over $200,000 was excluded.
The IRS could adopt a similar approach for the expansion. “My sense is, [IRS officials] are just being very thoughtful in how they grow this so that they don't grow too fast and too big,” Volsky said.
Meanwhile, the IRS's long-standing free file program — a separate service providing qualified taxpayers free filing software through affiliated private sector partners — will be available through 2029.
Is a Direct File system necessary?
Advocates view the system as a viable option for free tax preparation. By contrast, the average taxpayer spends $270 annually on commercial software.
"This is the start of American taxpayers having a truly free and easy option to file their taxes directly with the IRS, saving people time and money," Democratic Sen. Elizabeth Warren of Massachusetts said in a statement. "For years, giant tax prep companies like TurboTax and H&R Block have gamed the system to make millions by taking a bite out of refunds and monetizing personal information."
A study by BetterIRS, a coalition of nonprofits that advocates for free tax filing, found that a lack of free filing options disproportionately hurts lower-income families. Its researchers said many storefront tax preparation services prey on poor and minority neighborhoods for business, charging up to hundreds of dollars.
"It is kind of absurd that you have to pay a private company just to fulfill your civic duty and file your taxes," Volsky said.
Intuit Turbotax, a market leader in commercial tax software, argues that American families have always had free filing options. Taxpayers earning under $79,000 can file for free with the IRS's software partners.
"TurboTax has filed millions of completely free tax returns annually and has provided more than 124 million free tax returns over the past decade," Tania Mercado, Intuit's spokesperson, told Yahoo Finance.
Everson said the expansion of Direct File could cripple the tax software industry. Intuit Inc. (INTU) stock has fallen 5% this year.
Meanwhile, free filing options have a publicity problem. A study from the US Government Accountability Office (GAO) showed only 4% of eligible taxpayers took advantage of a free filing option in 2021. GAO researchers found that many people are confused by advertisements for paid versions.
See full coverage: Taxes: Everything you need to file your taxes on time
Is Direct File trustworthy and reliable?
Some lawmakers and state attorneys general have expressed concerns about the IRS acting as tax preparer, filer, and auditor — potentially giving the agency too much power.
Volsky disagreed.
"There are all kinds of rules and regulations" preventing the IRS from using Direct File information to audit taxpayers. "That would be illegal, as well," he added.
The Economic Security Project, a left-leaning nonprofit, pointed out that people don't make the same argument for the Social Security Administration.
"There's no nobody's saying that [the Social Security Administration is] somehow skimming seniors because it's more profitable for Social Security to keep more money," Volsky said.
Direct File users received an average refund of $650, far less than the national average of $2,869 in 2024. While the program only included taxpayers earning up to $200,000, the national average refund for income under that threshold was between $2,800 and $4,500.
The IRS has yet to explain the discrepancy, but both experts said the pool of users needs to be bigger to provide a more accurate average.
"I would suspect that once you expand the scope, both in terms of filing cases, geographically, etc… you're probably going to get numbers that are similar," Volsky said.
Rebecca Chen is a reporter for Yahoo Finance and previously worked as an investment tax certified public accountant (CPA).
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