Yellen touts success of IRS pilot program that allowed direct free filing of tax returns

Secretary of the Treasury Janet Yellen speaks to the Economic Club of Chicago luncheon on Jan. 25, 2024 in Chicago, Illinois. Yellen used the address to highlight the state of the U.S. economy. (Photo by Scott Olson/Getty Images)

WASHINGTON — The U.S. Internal Revenue Service saw a successful tax filing season, providing high levels of customer service, enforcing collection from the wealthy and launching a free filing option for taxpayers, Treasury Secretary Janet Yellen told tax writers on Capitol Hill Tuesday.

The agency “met or exceeded” goals for the filing season and “successfully” piloted IRS Direct File — the first time the government has provided a free public option for eligible taxpayers to file federal returns directly to the IRS, Yellen said.

“The modernization of the Internal Revenue Service, made possible by the (Inflation Reduction Act) and discretionary appropriations, has enabled us to combat tax evasion by the wealthiest Americans that costs our country over $150 billion a year. And it’s made it easier for taxpayers to file their taxes and get the credits they’re owed,” Yellen told the House Committee on Ways and Means.

Just over 140,800 taxpayers in a dozen states filed returns that were successfully accepted via the IRS Direct File pilot program, according to the agency. The completed returns were just a fraction of the 19 million taxpayers whose tax situations qualified them for the program.

The agency launched IRS Direct File, which was open to earners with simple W-2 income and limited deductions and credits, in early March and closed it April 21.

Roughly 3.3 million people checked their eligibility for the program, and 423,450 actually logged in, according to the agency.

The states leading in returns filed included California with 33,328, Texas with 29,099, Florida with 20,840, New York with 14,144 and Washington with 13,954. Exact figures for other states in the pilot program were not provided by the IRS, but they included Arizona, Massachusetts, Nevada, New Hampshire, South Dakota, Tennessee and Wyoming.

The agency’s survey of more than 11,000 Direct File users found that 90% of respondents ranked the experience on both the platform and with customer service as “excellent” or “above average.”

The IRS has not yet announced whether it will continue or expand the pilot program next year.

Opposition and state filing

IRS Direct File faced fierce opposition from Republicans who warned the program would steal business from the tax preparation industry.

Chief also among the critics were state officials who said that states could lose revenue because taxpayers would be confused about also filing state returns — something they’re automatically prompted to do with a tax preparer or commercial tax prep software.

But supporters of free public tax filing are pointing to a “seamless” experience for Direct File users in Arizona and New York, who were able to import data from their federal to state return and file both for free.

The nonprofit Code for America built FileYourStateTaxes, a separate tool that integrated the processes.

Upon finishing their federal return with IRS Direct File, taxpayers in Arizona and New York — two of the pilot program states — were led straight to FileYourStateTaxes, where they could create an account and transfer the data onto their state return with one click, according to the nonprofit.

“Folks who have raised the question of ‘How will state filing work in Direct File?’ — it was a valid question to be raising. I think we’ve shown here that there’s a really good answer,” said Gabriel Zucker, the nonprofit’s interim director for tax policy and partnerships.

Code for America reported follow-up survey results Tuesday that showed 96% of the tool’s users were “very satisfied” or “satisfied,” while 95% found the data transfer “seamless and quick.”

The nonprofit reported that 90% of people in Arizona and New York who used IRS Direct File went on to use FileYourStateTaxes, and 98% of those returns were accepted.

Code for America did not provide the exact number of filers in either state.

Several states included in the IRS Direct File pilot do not collect state income taxes.

Other state governments already offer free public electronic filing for state income tax returns, including California and Massachusetts.

Fight over Trump tax breaks

Yellen’s testimony before U.S. House tax writers occurred against the backdrop of a looming tax fight in Congress as a Trump-era tax law nears its expiration at the end of 2025.

President Joe Biden told the North America’s Building Trades Unions last week that the 2017 law will be “expired and dead forever if I’m reelected.”

Biden and former President Donald Trump are debating their dueling tax policies as the 2024 presidential election nears.

Trump continues to vow he would raise tariffs, to more than 10%, on imports from China and Mexico. Economists have warned the increase will amount to a tax on American consumers, but Trump denies that charge.

Biden has repeatedly promised to not raise taxes on anyone making less than $400,000, to expand the child tax credit and to institute a minimum tax for billionaires.

Biden and Democrats authorized an additional $80 billion to modernize the IRS in 2022’s so-called Inflation Reduction Act, including $15 million earmarked for the agency to explore creating Direct File.

Defunding the IRS became a rallying cry for Republicans after the funding was approved.

The GOP clawed back $20 billion of the funding in a budget deal with Democrats less than two years later.

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