IRS returns to relying on tax prep companies for free filing options without Direct File

The IRS is recommitting to its decades-old partnership with tax prep companies as the main option for Americans to file their taxes online for free, the agency told lawmakers in a new report this week. 

This follows the official cancellation of the free, online government option started under the Biden administration, called Direct File.

When Direct File launched in 2024, it was a massive shift from the decades-long protocol of the IRS relying on tax software companies to offer free options for most Americans, instead of the government offering its own free service — a move that could draw business away from the tax prep industry.

The industry program, called Free File, didn’t end with Direct File, but the IRS had decided to offer its own option, too, after low usage rates were reported with the Free File program.

Many Republicans opposed the IRS service, calling it “a threat to taxpayers’ freedom from government overreach.” Tax prep companies also lobbied against the program, which offered taxpayers with relatively simple tax situations in 25 states a free way to file online, directly with the IRS. 

Democrats, meanwhile, have heralded Direct File as filling in a core responsibility of the government — tax filing — and saving taxpayers money in the process. The average taxpayer spends $150 and 9 hours a year on their taxes, and billions of dollars in benefits delivered through the tax code go unclaimed every year.

The IRS is cancelling Direct File because of its cost and low participation rates. Direct File “diverted IRS resources from other core priorities,” the agency said in the new report, requested by Republicans, who put $15 million towards this effort in their signature tax and policy law signed by Trump earlier this year.

The suspension of the program “is in the best interests of American taxpayers and the IRS,” David Ransom, counsel to the American Coalition for Taxpayer Rights, a trade association of tax prep and software companies, said in a statement. 

“Treasury is finally shifting resources towards solutions that work, including IRS-affiliated free tax preparation programs, as well as the public-private partnership for free tax filing and improving technology at the agency,” the chair of the House Ways and Means Committee, Jason Smith, R-Mo., said in a statement.

“American workers and families deserve a tax filing system that meets their needs,” he added.

The tax agency spent $41 million on Direct File during the most recent filing season, although IRS said in its new report that Direct File got support from other parts of the agency, too, which aren’t reflected in that price tag.

Only about 1% of those eligible for Direct File used the product this year — something the IRS attributed to a “lack of awareness and public confusion” in a previous report about the program’s performance during the most recent tax filing season. 

That confusion could be due, in part, to news coverage during the most recent filing season that was largely focused on the question of if the tool existed or would continue in the future. Billionaire Elon Musk also caused confusion — and a drop in Direct File use — when he posted on X that the team powering Direct File was “deleted” in early February.

Direct File was “killed before hitting scale,” Merici Vinton, Direct File’s former deputy and current executive fellow at University of California, Berkeley, told Nextgov/FCW. 

“Of course Direct File could have scaled to more users over years and reduced costs per person,” she said. The new IRS report calls out that at the program’s use rate this year, it cost $138 per accepted tax return.

The costs of Free File are “minimal” to the IRS, the tax agency said, although it's also been plagued by low participation rates. In 2025, just under 3% of those eligible used the service.

Those that don’t use it may be paying to file their taxes instead. 

Over 14 million people eligible for Free File may have paid to file their return with tax software companies that were part of that service in 2020, according to the Treasury Inspector General for Tax Administration, which urged the IRS to create its own free, direct e-file system in 2023.

“It is a fundamental taxpayer right to be able to file one’s return directly with the federal government electronically, just as one could with paper returns,” Nina Olson, former National Taxpayer Advocate told Nextgov/FCW in a statement. She’s currently the executive director of the nonprofit Center for Taxpayer Rights.

“The failure to provide this option leaves taxpayers exposed to all sorts of upselling and completely unregulated products, including unauthorized use and disclosure of taxpayer information,” she said.

Congress’ watchdog, the Government Accountability Office, has also previously recommended that the IRS offer free, online filing options beyond Free File. Several major tax prep companies like Intuit, which runs TurboTax, and H&R Block have left the program in recent years, GAO noted — putting the IRS’ only free online option for taxpayers at risk.

Those former member companies also reached a settlement with a coalition of state attorneys general for having pushed people toward products they’d have to pay for, even when they could’ve used free options, and have entered settlements for deceptive advertising.

Currently, eight companies participate in Free File. Some tax prep companies offer free tax filing services beyond Free File, although their use is sometimes conditioned on taxpayers' consent that their data can be used for marketing.

Moving forward, the IRS is planning a “targeted communications campaign” around Free File and other free options the IRS offers, including the largely in-person VITA program offered to low income taxpayers.

The agency also wants to do more surveys on taxpayer preferences. It ran a survey in August and received over 50,000 responses, although those results “are not statistically representative” and therefore aren’t included in the report, the IRS said. Previous surveys in the run-up to Direct File may have overstated interest in a free government option, a previous watchdog has found.

The Treasury Department is also planning to convene tax prep industry leaders in a new Free File Modernization Summit. 

“These partnerships remain the most effective way to broaden access to free tax preparation while minimizing costs to both the government and taxpayers,” the IRS said in the new report.

Supporters of Direct File may still disagree.

“The bottom line here is that the government built something that people liked, but that doing so upset the private industry,” said Adam Ruben, the vice president of the Economic Security Project, in a statement. “So now the Trump Administration is bending to the power and influence of that industry at the expense of the American people.”