IRS direct file shut down, driving up costs for PA taxpayers

A new analysis found Pennsylvania, which signed on to use IRS Direct File stood to save about $747 million annually before the Trump administration shut the program down.

The tool was created under the Inflation Reduction Act and offered free, simplified tax filing for people earning roughly less than $200,000 yearly.

Adam Ruben, vice president of the nonprofit Economic Security Project, said the program had the potential to put billions back into families’ pockets.

"It could save existing tax filers, $8 billion in filing fees, an additional $3 billion in time saved," Ruben pointed out. "And it could help people who are missing out on tax credits like the Earned Income Tax Credit and the Child Tax Credit claim an additional $12 billion more."

A 2024 David Binder Research survey found 74% of Direct File pilot users preferred it over other filing options. Despite this, the Trump administration has canceled the program, saying it plans to shift its focus to affordability in 2026. For the 2025 filing season, nearly 300,000 taxpayers took part in the 25 participating states.

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Ruben noted the Direct File program saved the government millions by moving people from costly paper returns to efficient electronic filing. It reduced errors, cut down on audits for simple mistakes, and lowered IRS customer-service demands. The first two years of data confirmed the predicted benefits.

"Direct File was projected to achieve savings of $300 million across the IRS and you'll hear the opponents of Direct File complain about what it cost to build," Ruben observed. "But somehow, you never hear them talk about all the money that it saves for either taxpayers or for the federal government."

Ruben acknowledged low-income taxpayers rely on VITA for free tax help but it is chronically underfunded and cannot meet demand. Direct File was created to fill the gap.

He added commercial tax prep companies heavily market “free” filing but investigations show it is often a bait-and-switch, as about 75% qualify, yet fewer than 3% actually file for free because of constant upselling.

This story is based on original reporting by Josh Israel for The Pennsylvania Independent.