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POLICY INSIGHT
BEYOND THE NUMBERS

States Should Make Tax Filing Easier for Millions by Participating in Direct File

June 11, 2024: This post has been updated.

On May 30, the IRS announced that following the success of the federal Direct File pilot, the Direct File option will be available permanently. This is welcome news for the millions of tax filers who spend an average of nine hours and $150 to complete their federal tax returns. Millions of filers will be able to easily and safely file their federal taxes directly with the IRS for free. The IRS has invited all 50 states and the District of Columbia to partner with them in Direct File to ensure that people can also file their state tax returns seamlessly.

States should partner with the IRS to participate in Direct File. States with state filing requirements should prioritize providing a filing system integrated with federal Direct File, which will help residents with low and moderate incomes file their federal and state taxes for free and claim the federal and state tax credits for which they are eligible. While the IRS continues to finalize state participation requirements, all states should explore partnering with the IRS to enable residents to file both their federal and state taxes with Direct File.

State participation is essential to reaping the full benefits of Direct File. It could be a simple, cost-effective, and easy-to-implement way for state governments to improve access to state tax benefits, including state earned income tax credits (EITCs) and child tax credits.

State lawmakers and tax administrators are crucial partners in implementing Direct File and making it a success. During the recent pilot, four of the 12 participating states offered a state filing tool integrated with federal Direct File. Data from New York and Arizona demonstrate the pilots’ resounding success: 96 percent of tax filers were satisfied or very satisfied with the experience, and 88 percent finished their state filing in less than 15 minutes.

The federal Direct File pilot demonstrated that the government can use technology to save tax filers time and money. The 140,000 pilot participants claimed more than $90 million in refunds and saved an estimated $5.6 million in filing costs. 90 percent reported high levels of satisfaction with Direct File, and 86 percent indicated that using Direct File increased their trust in the IRS.

In addition to streamlining the process and saving tax filers money, state participation in Direct File can help more people claim federal and state credits for which they qualify. These include the EITC — which 1 in 5 eligible households do not receive — and the Child Tax Credit. When federal Direct File reaches full capacity in a few years, it is projected to save tax filers as much as $11 billion annually and help them access $12 billion in federal tax credits in addition to state tax credits made available through integrated state filing systems.

Increasing access to the EITC and Child Tax Credit through Direct File will benefit all communities, but especially some communities of color who face systemic barriers to accessing refundable tax credits. Survey data in 2021 indicated that Hispanic/Latinx, American Indian or Alaska Native, Native Hawaiian or Pacific Islander, and multi-racial families are were the most likely to miss out on credits for which they were eligible, perhaps due to the high cost of for-profit tax preparation services and the time-consuming filing process. States that partner on Direct File will expand access to these poverty-reducing federal tax credits, and states with state EITCs and child tax credits will unlock even more benefits for families of color.

Providing a way to file directly with the IRS is long overdue. The Direct File expansion is a meaningful way to reduce filing costs, improve people’s experience filing taxes, expand access to effective anti-poverty policies like the Child Tax Credit and EITC, and help the government work better.