For years, advocates have called for a free tax filing system to allow Americans to directly file their taxes with the IRS. But the powerful lobby of tax prep corporations prevented and delayed the IRS from being adequately funded to allow a Direct File system to be developed, until now. The Inflation Reduction Act increased funding for the IRS and finally gave the IRS the capacity to develop this system.
Now, after a successful Direct File pilot program in 12 states, the US Department of Treasury and the IRS have announced their new Direct File system will be a permanent free option for electronically filing tax returns directly with the IRS. This is a huge opportunity for US taxpayers but states need to opt in to save residents time and money when it comes to filing their taxes.
Tax prep companies misled and exploited consumers
While Direct File is not intended to fully replace the for-profit tax preparation industry, it will help some filers avoid paying fees and provide a reliable, easy tax preparation method. The IRS has always required the big tax preparation software companies to offer free filing options, but these companies often ended up charging users for filings that should have been free, and their deceptive marketing practices led other users to believe filing would be free and then steered them toward paid options.
Research shows that the for-profit tax preparation industry specifically targeted the most vulnerable taxpayers, especially low-income and Black and brown communities. An estimated 70% of tax filers are eligible to file for free, but less than 3% do so. The US Government Accountability Office found paid tax preparation services made frequent errors and often employed people who were unqualified. Several states, including Maine, sued and settled with these companies for deceiving and charging consumers who were eligible for free services.
Recently completed Direct File pilot saved taxpayers time and money
The federal Direct File system was piloted in 12 states, including Massachusetts and New Hampshire. The pilot was very successful, helping 140,000 filers save time and money, including millions in tax filing costs. Participants praised the interview-style format as user-friendly, featuring a mobile option and chat function to make it easy for any taxpayer to use. The new system supports most common tax situations, and also streamlines the process by prepopulating forms with information the IRS already has on filers. With the success of the pilot, the federal government has invited all 50 states and Washington DC to participate.
Direct File will advance tax fairness in Maine – if we opt in
We urge the Mills administration to take advantage of this opportunity to allow Mainers to participate in Direct File. Maine will need to sign an MOU with the federal government and agree to integrate its state tax filing system with the federal Direct File system to allow Mainers to file their taxes using the new system (residents of states that do not opt in are ineligible for federal direct filing). Maine Revenue Services has recently been working on a complete overhaul of their IT system, and now is the time to take advantage of the Direct File opportunity.
What would this mean for Mainers? Easier and cheaper tax filing and also potentially greater tax savings. The Economic Security Project estimated Mainers could save up to $33 million dollars in filing fees spent on tax preparation software, and between $19 million and $49 million in federal tax credits that are left on the table by Mainers who don’t realize they are eligible for programs like the Child Tax Credit and the Earned Income Tax Credit. These refunds are missed by vulnerable taxpayers who need them most, including Mainers with low-income who may not realize they are eligible. In Maine, almost a quarter of eligible taxpayers do not file for the EITC.
Direct File would help advance tax fairness by ensuring more Mainers get the refunds they are entitled to and providing a dependable, free tax filing option. But only if we opt in.
