IRS overestimated Direct File costs last year by $45 million
The cost to run Direct File for the 2025 tax filing season was tens of millions of dollars less than what the IRS estimated it would be, according to a new watchdog report.
The Treasury Inspector General for Tax Administration found that the IRS ended up spending $16.2 million on the since-cancelled free electronic filing service in fiscal 2025 — far shy of the $61.2 million projected by the IRS.
That $45 million gap appears to undercut one of Direct File opponents’ main complaints about the customer-praised digital initiative: that it was supposedly an inefficient use of government resources.
However, TIGTA noted some caveats to that finding: The IRS initially “overestimated” how many people would use Direct File and how many “assistors” would be needed to support them. Just 751,000 taxpayers registered with Direct File for its limited second season; the IRS estimated that 32 million taxpayers would be eligible to use the tool, according to the Treasury watchdog. Of those who registered, 59% did not ultimately submit a tax return through the system.
Direct File supporters have long contended that low usage rates reflected a lack of awareness and federal engagement. Adam Ruben, vice president of campaigns and political strategy at the Economic Security Project, told FedScoop last summer that the Trump administration was “actively sabotaging the outreach efforts.”
TIGTA also attributed lower-than-expected usage of Direct File to “confusion in media coverage about availability” — likely a reference to misinformation from Elon Musk and premature reports regarding the program’s cancellation.
Another reason for the cost gap uncovered by TIGTA was that the IRS didn’t use some of its engineering and design contracts on Direct File.
“For example, the IRS expected it would need $30 million for engineering and design contracts,” the report said. “However, Direct File management stated that this cost would not be realized since Direct File was told to halt development in mid-March 2025.”
According to the report, the IRS estimated that IT labor for Direct File would cost $9.9 million but ended up costing just $3.8 million. And just $4.6 million was disbursed for IT “non-labor,” though the agency had projected that cost would be $23 million.
The watchdog also reiterated a previous critique of Direct File: that the IRS excluded certain expenses, such as costs incurred by the government.
“For example, Direct File did not include costs for employees detailed to the IRS by another federal agency to help develop and pilot Direct File, costs for other IRS functions’ employees who supported the program, and authentication costs,” the report stated. “The costs of detailed employees and other IRS employees are largely unknown since the IRS did not generally track the time associated with these employees, as we previously recommended.”
The report represents a bit of a moot point given the Trump administration’s decision to kill Direct File last year and instead point people toward the tax agency’s little-used Free File program for filers below a certain income threshold. But TIGTA did highlight some Direct File successes that should be incorporated as the agency “looks for opportunities to strengthen and expand existing free filing programs.”
For example, Direct File used a chatbot to answer user eligibility questions instead of having an IRS assistor provide responses.
“According to the IRS, as of April 2025, taxpayers interacted with the chatbot more than 16,000 times and the chatbot resolved 68 percent of the interactions without the need for a live chat,” the report stated. “This demonstrates the effectiveness of the chatbot feature to resolve taxpayer questions and free up IRS assistors to respond to other, more complicated questions.”
The IRS did not respond to a request for comment.
