At the conclusion of the recent filing season for 2024 tax returns, the Trump administration announced that the Internal Revenue Service (IRS) will end its free Direct File (DF) program that taxpayers have used on the IRS website to file their own tax returns. The decision was based on fact-finding by the Department of Government Efficiency (DOGE) that DF duplicated Free File (FF)—a public-private free offering that has been available since 2003.
Senator Elizabeth Warren denounced the decision ending DF, saying that Trump and Musk are “going after Direct File because it stops giant tax prep companies from ripping taxpayers off for services that should be free. Americans want a free and easy way to file their taxes—Trump and Musk want to take that away.”
E-File, Free File (FF), & Direct File (DF)
Taxpayers often confuse FF and DF—two separate IRS free on-line self-prep tax options. Both programs rely on the 1986 creation of IRS e-file (electronic-filing), which was originally available only to paid tax preparers like CPAs and firms like H&R Block and TurboTax.
Prior to e-file—in which completed tax returns go directly from tax preparers’ computers into the IRS computer system—the IRS had to convert paper returns into computer-readable form, an error-prone process. E-file has reduced this error rate and has expedited tax refunds. Today 100 million tax returns are e-filed; three out of every four individual returns are now filed electronically.
In 2003, IRS created Free File Alliance LLC, a public-private partnership, with several tax software firms—H&R Block, TurboTax and others—that provide free commercial tax preparation and e-filing services on the IRS’s own website. Over the years, Alliance membership has changed—H&R Block leaving in 2020 and TurboTax in 2021, and others joining. Taxpayers using IRS Free File can check the IRS website every year to determine which private tax firms are participating. In 2024, the Alliance included eight firms.
Each tax software firm sets its eligibility requirements for use of their software products, but the cumulative offers must allow 70 percent of US taxpayers to be eligible for at least one tax software product. For example, use of FF online tax filing in 2025 was limited to taxpayers with adjusted gross income no higher than $84,000.
Following the success of FF, the Inflation Reduction Act of 2022 awarded the IRS $80 billion in supplemental funding through 2031 to increase staffing and develop its own online tax software service in addition to those of the Free File Alliance. This new tax product debuted in 2023, and is available to residents of 25 states whose adjusted gross incomes are no higher than $200,000 and do not itemize deductions.
It is this Direct File program that the IRS will end after this most recent tax filing season, as Free File continues to be available to taxpayers.
Why the IRS is Dropping Direct File (DF)
Some in Congress and commercial tax firms contend that DF is a waste of taxpayer money because free filing programs already exist. The Department of Government Efficiency (DOGE) has targeted DF as a candidate for elimination, telling IRS staff assigned to the program in March to stop working on its development for the 2026 tax filing season.
The 2025 tax season saw many taxpayers begin the DF process but never finish it. The IRS reported that 423,450 taxpayers logged into DF, but only 140,803 submitted accepted returns. It is unclear if users gave up in frustration or by what other means they submitted their tax returns. The average American typically spends about $140 per year preparing returns, either paying commercial tax firms to do their returns or buying do-it-yourself commercial tax software to use on their own computers.
During its brief history, DF has lacked the acceptance level that FF experienced. Initial Biden administration endorsements were enthusiastic as plans developed to spend the $80 billion supplemental funding, but this quickly dissipated. As one commercial tax preparation spokesman said, “Direct File is and has been a solution in search of a problem, a drain on critical IRS resources and a waste of taxpayer dollars.”
What of the IRS Itself in These Tax Software Developments?
It appears that the decision to end Direct File was made at the presidential level based on DOGE cost-cutting recommendations, or possibly by the US Treasury Department, which oversees the IRS. Critics like Elizabeth Warren are correct to cite lack of taxpayer input in this decision.
IRS management is currently in the throes of disorganization after the January 20 resignation of former Commissioner Daniel Werfel, then unprecedentedly high turnover in that position pending Senate confirmation of a permanent commissioner nominee. As of this writing, Interim IRS commissioner Gary Shapley was ousted from the role just two days after taking it, following an internal struggle between Treasury Secretary Scott Bessent and White House advisor Elon Musk.
Shapley is the second interim IRS chief for the administration. He was appointed to replace former interim head Melanie Krause, who resigned over administration access to IRS tax data for immigration enforcement. Deputy Treasury Secretary Michael Faulkender will now serve as acting head of the IRS while President Trump’s choice for the job—Billy Long—awaits Senate confirmation to become the fifth person to hold the commissioner job so far this year.
Meanwhile, the IRS—which had 100,000 employees before Trump took office—will lose about a third of its workforce this year due to resignations and layoffs, with over 20,000 employees signing up for the administration’s resignation offer. So much for the $80 billion awarded in 2022 to beef up staffing.
The IRS: Tax Collector or Welfare Agency?
Misesians believe that any taxation is theft, and, in the words of Mises, “government can spend or invest only what it takes away from its citizens, and that its additional spending and investment curtails the citizens’ spending and investment to the full extent of its quantity.” The IRS, however, does not simply collect taxes; it also provides a means to redistribute income among taxpayer groups, applying tax credits and deductions specifically designed to reduce taxes for some taxpayers at the expense of those who don’t qualify for them. In this respect, the IRS resembles a welfare agency.
Tax credits such as the following are now so numerous that additional IRS forms are required to claim them:
- Earned income tax credit
- Child tax credit
- Child adoption tax credit
- Child and dependent care tax credit
- Clean vehicle purchase tax credit
- Home energy tax credits
- Foreign tax credit
- Education tax credits
Tax deductions for taxpayers’ out-of-pocket expenses include these:
- Medical and dental expenses
- State income taxes or state sales taxes
- State property taxes
- State personal property taxes
- Home mortgage interest and points
- Charitable contributions
- Casualty and theft losses in federally-declared disaster areas
- Legal expenses related to income-generating activities
- Gambling losses up to the limit of gambling winnings
- Federal estate tax paid on behalf of a deceased taxpayer
- Amortizable bond premium
- Impairment-related work expenses of a disabled person
- Contributions to an Individual Retirement Account
Yet the Underlying Issue is the US Tax Code Itself
The existence of tax credits and deductions reveal that the US Tax Code is far from a flat tax regime that would treat all taxpayers equally with no favoritism among groups. In fact, the US Tax Code is highly progressive, taxing high-income taxpayers proportionally more than lower-income at graduated tax brackets ranging from 10 percent to 37 percent of taxable income, aligning with the view among many that high-income taxpayers should pay their “fair share.”
The US Constitution specifies that all taxation legislation must pass both the Senate and House of Representatives before a presidential signature makes it law. When writing and debating legislation, Congress responds to lobbying from many sources, which is the means by which the numerous credits and deductions were incorporated into the US Tax Code.
Due to leftward-shifting political preferences in recent years, changes in the Tax Code have shifted IRS responsibilities toward increased income redistribution. For unique events, such as the covid pandemic, Congress distributed means-tested “stimulus payments” through the IRS database because it included bank account numbers and income eligibility details.
Thus, the government relies on a federal agency with responsibilities beyond mere tax collection. How the IRS may evolve from here is unclear, depending on the leadership that Americans elect into congressional and executive branches. But first, the IRS’s internal management and employment disarray needs resolution, and its focus needs redirection to best serve the public in the least politicized manner possible.
