Free and Simplified Tax Filing

The Impact of Direct File—by the Numbers

03. 11. 2024 • Gabriel Zucker and Bharat Ramamurti

The IRS's Direct File program offers free, simplified online tax filing, saving Americans $11B/yr and potentially $12B more in unclaimed tax credits

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Summary

Direct File is the Internal Revenue Service’s revolutionary new project to provide free, simplified, public online tax filing for the first time in U.S. history. The program launched in 2024 with a pilot program that is intentionally restricted in scope to a small share of the taxpayers that could ultimately benefit from the service. At scale, its potential benefits for American taxpayers are extraordinarily large. A public option for tax filing, Direct File can make the tax preparation market more equitable, inclusive, and competitive.

This report is the first to estimate the total financial benefits of the Direct File program for American taxpayers. It finds that, at maturity in five years, Direct File would save the average user $160 in filing fees and hours of their time each year, which saves Americans a total of $11 billion annually between filing fees and time costs. By breaking down barriers to filing, Direct File would also deliver up to $12 billion each year in additional tax credits to low-income families currently missing out. Appendix A [download full report to view] breaks down the projected taxpayer savings and impact by state. 

These savings represent an enormous return on investment given the small net cost of the program. For every dollar invested in the program, Direct File delivers $106 in benefits to American taxpayers, between savings on tax preparation fees and access to untapped tax credits. Few programs deliver this kind of bargain. 

Specifically, Direct File would deliver two types of benefits to taxpayers: 

1. Saving tax preparation costs and time for existing filers. Direct File could save existing tax filers $8 billion in filing fees and an additional $3 billion in time costs. In addition, it could spare more than 400,000 filers a year from the stress of IRS correction proceedings and audits. This does not even consider additional gains to these taxpayers in terms of increased privacy and not having their data sold to third parties.
2. Closing the tax credit uptake gap. Direct File could meaningfully close the long-standing refundable credits coverage gap — tax benefits like the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) that low-income households are entitled to but do not claim. In total, Direct File could deliver $5-12 billion in federal refunds per year to families who currently do not file returns. If EITC and CTC expansions from the American Rescue Plan were re-enacted, this figure would increase to $19-47 billion per year. These estimates do not consider additional federal credits, or additional benefits from state credits and refunds that currently go unclaimed.

On top of these savings to taxpayers, Direct File also saves the federal government money in several ways. Even under very conservative assumptions, Direct File could achieve savings of nearly $300 million across the IRS by reducing costs associated with handling paper filings and resolving errors, among other things — reducing the net cost of the program by over 60%.

The above estimates assume widespread taxpayer adoption, but the incredible return on investment does not rely on such broad adoption. Even if take-up from existing taxpayers were less than half what we estimate here, the return on investment would remain over $100 per federal dollar spent.

For reporters who would like to learn more about this report, or reach the authors, email [email protected].

 Gabriel Zucker is Program Director of Tax Policy and Partnerships at Code for America. Bharat Ramamurti is a former Deputy Director of the National Economic Council and a Senior Advisor with Economic Security Project.