IRS makes free tax return program permanent and is asking all states to join in 2025

WASHINGTON (AP) — The IRS said Thursday it will make permanent the free electronic tax return filing system that it experimented with this year and is asking all 50 states and the District of Columbia to help taxpayers file their returns through the program in 2025.

The IRS tried the Direct File project for the 2024 tax season on a limited basis in 12 states for people with very simple W-2s, the employee’s wage and tax statement.

The agency also is inviting all states with a state income tax to sign up and help people file their state returns for free. During the 2024 pilot, tax agencies in Arizona, Massachusetts, California and New York helped people directly file their state taxes.

IRS Commissioner Danny Werfel said the IRS will report later this year on how many states plan to participate in the program in 2025.

The IRS was tasked with looking into how to create a “direct file” system as part of the money it received from the Inflation Reduction Act signed into law by President Joe Biden in 2022. It gave the IRS nine months and $15 million to report on how such a program would work.

“The IRS has been underfunded for decades, so taxpayers haven’t gotten the support they deserve,” Treasury Secretary Janet Yellen told reporters in a call Thursday. “Thanks to the Inflation Reduction Act, we’re changing this.” The IRS is part of the Treasury Department.

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Since the Direct File trial began in March, more than 140,000 taxpayers used it to file their tax returns, claiming more than $90 million in refunds, agency officials said.

Werfel said expanding the program will provide another filing option to taxpayers and “fits squarely into the IRS’ effort to make taxes as easy as possible for Americans, including saving time and money.”

“We know there is more analysis to do, but we feel that we have enough information at this point to make the decision,” he said. “And an early decision on 2025 is critical for planning -– both for the IRS and for additional states to join the program.”

The IRS has face intense blowback to Direct File from private tax preparation companies that have made billions from charging people to use their software and have spent millions lobbying Congress. The average American typically spends about $140 preparing their returns each year.

For the Direct File program to keep growing, it will need continued funding under the Inflation Reduction Act, which initially included $80 billion for the IRS. Some of that has since been diverted by lawmakers to other programs.

House Republicans built a $1.4 billion reduction to the IRS into the debt ceiling and budget cuts package passed by Congress last summer. A separate agreement will take an additional $20 billion from the IRS over the next two years to divert to other nondefense programs.

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