The Internal Revenue Service has added a new feature to the Direct File free tax filing program that will import a taxpayer’s adjusted gross income from the previous year, according to the Treasury Department as a new government report finds the program could cost the IRS considerably more than the estimated $64 million to $249 million per year to maintain.

The IRS has been pilot testing the Direct File program in 12 states this tax season after launching it last month and has been seeing steadily increasing use, even though the pilot program is currently limited to certain types of income such as W-2 wages, Social Security and unemployment compensation and only supports the standard deduction. However, it promises to rival commercial tax software if more features get added to increase its usage, such as the ability to directly import prior tax return information, as in the newly added feature.

“An important update has been made to IRS Direct File to better serve taxpayers and minimize user error,” said a Treasury official in an email Tuesday. “When taxpayers finish their returns and it’s time to file, they must enter last year’s AGI or temporary PIN as the final step before submitting. With online filing options taxpayers have previously used, this information is imported from past years. An upgrade made today to Direct File will pull last year’s AGI from the information the IRS already has about you to minimize taxpayer error. In the opening weeks of Direct File being widely available, this was the most common mistake taxpayers would make because the information was not readily available to them because Direct File is a new tool. This upgrade is an example of how Direct File is being updated with taxpayers at the forefront.”

The Treasury said taxpayers are only able to access information from their own IRS account, which is protected via National Institute of Standards and Technology-compliant identity verification, and they cannot retrieve information for anyone else.

“Direct File was built with and for taxpayers and has been continuously improved based on their feedback and experience,” said Bridget Roberts, Direct File lead at the IRS, in a statement Tuesday. “This important update will allow Direct File users to take advantage of information the IRS already has to simplify the filing process even further.”

Separately on Tuesday, the Government Accountability Office released a report on the Direct File program that found more actions are needed during the pilot program to improve information on its costs and benefits. The IRS estimated that Direct File could cost between $64 million and $249 million annually, depending on assumptions such as the number of taxpayers served. The IRS estimated that participating taxpayers may save $21 million in tax preparation costs, according to the GAO report, but the IRS’s cost estimates did not include startup costs, such as the technology required for a new system. The GAO recommended, among other things, that the IRS estimate the full costs of developing and operating a Direct File system.

The program is largely funded by the Inflation Reduction Act of 2022, which allocated $80 billion over 10 years to the IRS to improve taxpayer service, technology and enforcement, although Congress later rescinded about $20 billion of that amount as part of a deal to avert a default on the debt limit. The Inflation Reduction Act appropriated funds for the IRS to study the cost of developing and running a free Direct File tax return system and included a provision for the GAO to oversee the distribution and use of such funds. 

A group of tax software companies have banded together to oppose expansion of the Direct File program and issued a statement in response to the GAO report.

“The report released today by GAO confirms the IRS Direct File program is an unnecessary and expensive solution in search of a problem,” said David Ransom, counsel for the American Coalition for Taxpayer Rights. “As the report demonstrates, the agency’s cost estimates — already in the hundreds of millions — failed to include startup costs, including the technology needed to launch the tool. As the tax filing season nears its end, we’re seeing just how little the appetite is for government-completed tax returns. Roughly 50,000 of the 19 million eligible Americans — far less than one percent — have used Direct File. In contrast, the tax industry provided nearly 30 million free returns last year. The millions of dollars spent on Direct File would be better directed towards improving IRS customer service and promoting Free File, a long-standing public-private partnership that provides free returns to low-income Americans.”  

The IRS reported to Congress in May 2023 that it estimated the annual costs of a Direct File tax system could range from $64 million to $249 million depending on the number of taxpayers served and the complexity of tax situations supported, the GAO noted. The IRS also described the assumptions it used to estimate those costs. It assumed the Direct File system would start with a limited tax scope, as it did this tax season. The IRS also included elements of a sensitivity analysis to examine how its changes in assumptions could affect cost estimates. The IRS described how those costs were expected to change depending on the number of taxpayers served and the complexity of tax situations supported.

However, the report noted that the IRS’s cost estimates did not address other recommended best practices, such as ensuring all costs were included and documented. The GAO and the Treasury Inspector General for Tax Administration found the IRS had no documentation to support the underlying data, analysis or assumptions used for its Direct File cost estimates. IRS officials told the GAO that the cost estimates didn’t include startup costs, such as technology for a new system, which could be substantial. 

On the positive side, the report acknowledged that the Direct File pilot provides opportunities for the IRS to estimate potential benefits for taxpayers and improve tax administration. The IRS estimates the Direct File pilot for this tax season will save taxpayers around $21 million in compliance costs. The IRS also sees other potential benefits of Direct File, such as making it easier for eligible taxpayers to claim credits and deductions, reducing the volume of paper returns, and reducing errors. However, the IRS evaluation documents did not consistently identify relevant metrics for measuring these potential benefits.

IRS officials told the GAO in February that its senior leadership has not decided on the future of the pilot beyond the 2024 tax filing season. IRS officials reported that the time required to continue Direct File would depend on several factors, such as the size of the team working on the program. They noted that hiring new employees to replace outgoing employees is a lengthy process, so IRS officials will only have a short amount of time to analyze the cost and benefit information before making decisions about the pilot for the 2025 tax filing season.

“Direct File is a completely new service offered by the IRS and, in terms of technology and customer support, is not something the IRS or other federal agencies have offered before,” wrote IRS Commissioner Danny Werfel in response to the GAO report. “Unlike other government technology projects like student loan relief, passport applications and the Free Application for Federal Student Aid (FAFSA), Direct File is not the only option for taxpayers but is one of many options available for taxpayers to fulfill their tax filing obligations.”

The IRS is keeping track of several customer service costs and metrics during the pilot phase, including live chat assistance, wait time, average handle time, and shifting demand throughout the day and the filing season as a whole. It’s also looking at technology costs, as well as the costs of integrating state tax returns and of supporting additional tax situations.