For a handful of years now, the IRS’ Direct File program allowed lower- and middle-income taxpayers in some states to file their tax returns free of charge using government software.

Now, under the second Donald Trump administration, the IRS has killed the program.

Marketplace’s Nova Safo recently spoke with Daniel Werfel, who served IRS commissioner when the Direct File program was piloted under President Joe Biden about what it was like getting the Direct File program off the ground, how lawmakers responded to the program’s implementation, and what the program’s legacy might be. The following is an edited transcript of their extended conversation.

Getting Direct File started

Nova Safo: To get a sense of the basics, tell me about when you started Direct File, what the conversations were inside the building at the IRS, what you guys were trying to achieve.

Daniel Werfel: I should start by saying right before I arrived at the IRS, the Inflation Reduction Act passed [and] had language in there requiring a study of whether the IRS could successfully offer an online tax filing solution, direct to the IRS. And so I knew right away when I arrived that, at a minimum, we had a mandate to test the feasibility of the IRS delivering on such a tool. 

Once I sat down with the team, and in particular, spoke to Secretary [Janet] Yellen and others, we determined that the best way to test our ability would not be to just do it on slides or, a fancy term might be ‘in beta’, in a test environment, but actually to pilot an actual version of Direct File. And that was the first filing season that I was at the IRS, and the test went really well. 

First and foremost, the taxpayers that we surveyed, their satisfaction with the tool was very high. Invariably, the taxpayers that used the system said it was really easy to use, that it was clear, it was intuitive. Many of them finished the process within 30 minutes. And then inside the IRS, there weren't any miscues. Everything came across flawlessly, in terms of the information coming into the system.

A huge part of the test was the partnership with states, because unless you're a no-income-tax state, in order to give the taxpayer a good experience, once they're done with their federal taxes, you want a very seamless handoff to the state solution. And in that first year, we worked with four different states that have income taxes to make sure that those handoffs worked well, and that the state solutions were up to the test as well, and that worked out.

And then last was the customer service. We used the pilot as an opportunity to test some new customer service models for the IRS more broadly, including chatting with a bot at first, but if the questions got a little bit too much moving to a person, and that also worked fluidly. And this was all published in an after-action report where we announced the success of the pilot, and decided to scale the pilot. We had just south of 150,000 in the first year of the pilot, and then double that in the second year.

Safo: So, if you had to help people understand, what was the grand vision internally? What was the goal? 

Werfel: It was really to have a fuller menu of options for taxpayers. Part of the core mission of the IRS is to assist taxpayers in meeting their tax obligation. And to do that effectively, you have to talk to taxpayers and understand what they're looking for in terms of a filing experience. There's some taxpayers who still want to do paper and pen or paper and pencil, and that's mistake-prone and less efficient, but there are taxpayers who want to do that. Many taxpayers, in particular, generationally, want to file online. And there are many taxpayers who are comfortable and satisfied paying a software provider for their product to file that way. But we heard from a lot of taxpayers around the country that they were not satisfied. They wanted an additional option, which was an online, direct with the IRS, free solution.

What future goals looked like

Safo: In your grand plan, what would have happened this tax filing season, what was the next step? What was the Direct File poised to?

Werfel: More scaling. There are a couple of limiting factors that, in the years I was there, we weren't yet ready for launch to a fuller set of taxpayers. One is states. You need the state that has the income tax to be ready with their version of Direct File and ready to do the handoff. And not every state was ready in our first year, four states were ready in our second year, I think double, triple that a number of states were ready [this year], but that's not all the states, right? And so the vision would be to get to a point where every state that has an income tax has a companion Direct File, and we've worked out a very seamless handshake with them.

The other was the scope of the taxpayers who could use this solution. So there are certain types of deductions that are taken, certain types of credits you may be eligible for. One of the things that we were working towards was, if you're in the gig economy and have a Schedule C or many 1099s, the tool was not yet ready to accommodate that. And so we were working to expand the functionality so that we could reach more taxpayers who might have a certain type of deduction or credit or footprint where the software needs to be more sophisticated. 

For gig workers and nine-to-five workers, maybe living on one paycheck for the whole household, where your discretionary income is such that it's a big deal if you have to pay $150 for a piece of software to file your taxes, I wanted them to have an option from the IRS, if they wanted that option.

Safo: And the reason you were trying to keep it somewhat limited is because it would reduce the complexity of the product?

Werfel: Exactly. If you're serving 30 different taxpayer types versus 10 different taxpayer types, you can more quickly scale a better solution for those 10 taxpayer types than the 30. And so, in my mind, Direct File should plateau at a point where every dollar invested, every ounce of bandwidth and energy, is to improve the experience for lower-income or working-class Americans, versus trying to perfect it for higher-income Americans. 

Safo: And was it that this coming tax season, it was going to start auto-populating data, or was it already doing that?

Werfel: Last filing season, we had an option for you to start bringing forward your information from previous years. And that's always opt-in, by the way. There's a lot of sensitivity around this idea of pre-population. I think there's some people who feel like that's too much IRS being the preparer and the decider of your balance due or your refund amount. The idea to meet taxpayers where they are is to give them an option. There are tax jurisdictions out there in the world where the entire filing process is: They send you an alert that your taxes are ready, and you go and look at it, and you either say yes or no. And there's a lot of obstacles for the U.S. getting to that point, but there is a fair amount of pre-population that can be done to make your filing go from 40 minutes to 30 minutes, or 30 minutes to 20 minutes. And by the way, pre-populating means you're not keying in the information on your own. In addition to it being less burdensome, it also is less error-prone.

The politicization of Direct File

Safo: How much pushback did you get? How much pressure were you facing?

Werfel: A lot. It was a very, very contentious issue. I just penned an op-ed on the administration formally announcing the end of Direct File, and I think I started [saying] there were few issues more contentious when I was Commissioner than whether the IRS should offer an online filing software for free or not. On the one side were the taxpayers who were seeking it, who were frustrated that the free online solution that was offered by the software vendors was not meeting their needs. And I laid out all the reasons, including hard to find, too much upselling, lack of confidence on how their data was being used. And then on the other side of the table was the software industry basically saying that Direct File is unnecessary: We have a very good Free File program, and millions of people have used it and are satisfied with it, and there's no need for a Direct File solution. For reasons which maybe [belong] in a whole other show, those two positions fell along political lines, where the Democrats largely pushed the IRS to create and scale the Direct File solution, and the Republicans on the other side demanded that we stop the Direct File program in its tracks. I got angry letters on both sides pushing me as the IRS Commissioner to expand [or] eliminate, depending on your vantage point.

Safo: I was looking at the last Senate hearing you testified at and Sen. Mike Crapo was coming at you with, “For the money you're spending on this, the private sector could file infinitely more returns. This is a total waste of money. Why do it? It's duplicative.” So why do it? Isn't it duplicative?

Werfel: It's not duplicative, if you're listening to your customer or your taxpayer. You walk into a supermarket, and suddenly your favorite supermarket only sells Coke, no more Pepsi. And you're a Pepsi fan. It's like, “Well, why do you need both? I mean, they're both soda.” Yeah, because some of my customers want Coke and some of my customers want Pepsi, right? Those moments aren't duplicative, because the store themselves is connecting with its customers and seeing what they want. 

I'm telling you we had customers, or taxpayers, in this case, who were unhappy with the free solution provided by the software vendors, for the reasons that I described. And so we want to be a good customer service enterprise, and so we'll offer a solution. So you walk in and you say, “Well, I love the Free File solution offered by the vendors, but my neighbor down the street really loves Direct File.” Why can't we be an IRS for both customers? Or taxpayers, in this case.

Direct File’s legacy

Safo: How do you feel about the fact that you put all this work and blood, sweat and tears into this and it's just gone?

Werfel: I thought a lot about that. There are a couple of legacies to Direct File that will live on. One is, Direct File worked really well, and it's a great example of how the IRS can do technology, or how the government can do technology, effectively. So whether you didn't like it for whatever reason, the tech journey that the IRS went on, there's a lot to learn from that. Second, there was so much attention on free filing because of Direct File. Know how the Super Bowl happens right as filing season is starting? So you get a lot of Super Bowl ads from the software vendors. A lot of the Super Bowl ads started shifting to celebrating their free solutions. There's been a lot more focus. And if you read the report that the Treasury Department issued ending Direct File there are reflections in there that the Free File program that we have needs to be improved, and there is a call for more transparency and scrutiny of whether the customers that are using the Free File solution are having a positive experience.

So I’m going to look at it glass half-full, and say that the Direct File program did lead to better attention. And I think it's a moment for the private sector vendors that pushed hard to have Direct File terminated, because they felt that they could produce a free solution that would render Direct File unnecessary — all right, great. Let's see it. Because how are you going to close the gap of customer concerns that were previously there? The Treasury Report provides us, in the public, with tools to see if the private sector meets the moment. 

Safo: You mentioned a lot of letters, lawmaker letters, etc. Can you point the pressure directly back to the industry in the pressure you felt against Direct File?

Werfel: There's a little bit of a sense of — you take all the evidence you have, circumstantially or whatnot, and you see what picture is being painted here, right? And you could easily make the case, based on all the reporting that's been done in this space, that it was a strong lobbying campaign by the industry to move on from Direct File and have it eliminated. I don't know for sure whether the members of Congress or the current administration, who decided ultimately to terminate Direct File, were doing it in response to industry pressure or not. I don't know. I just know that the atmosphere around this feels like this was something that the industry invested to try to make sure that Direct File didn't exist anymore. 

Safo: Is there anything else you want taxpayers to know?

Werfel: I would just encourage that, rather than looking backward and lamenting Direct File and the decision to terminate it, I think the more productive focus right now is making sure that we use the tools that were announced in the Treasury report on transparency and accountability for the industry, to work together to make sure that we have a really good understanding of what does “free” mean? Is the free solution accessible? Is it getting a good take-up rate? Are we dealing with some of the issues effectively, like upselling and other things, to make sure that the Free File program is working effectively? Right now, it feels particularly important. In a world where affordability is a top issue on Americans’ minds, and for many Americans $100 or $200 fee to file your taxes is really meaningful, you know, that's a whole food shop, or maybe multiple food shops, it's really important that we get Free File right.