The IRS has made its free tax filing tool permanent. Now, these states want to take it a step further.

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Connecting state and local government leaders

Maryland and North Carolina are the latest to join Direct File. They are also planning to allow taxpayers to seamlessly file their state returns alongside their federal ones. It’s a new frontier for tax filing tools, experts say.

A steady drumbeat of states have announced they will join the Internal Revenue Service’s Direct File program for next year’s tax season, in a move one expert said shows “momentum” for the initiative.

Maryland this month became the ninth state to say it will add the tool for the 2025 filing season, which allows eligible taxpayers to file their federal taxes electronically and for free directly with the IRS. Oregon was the first to join the program in June, followed by New Jersey, Pennsylvania, New Mexico, Connecticut, North Carolina, Wisconsin and Maine.

The IRS piloted Direct File in 12 states during the 2024 filing season, after being mandated to study such a scheme under the Inflation Reduction Act. Filers with relatively simple returns that met certain requirements were eligible for the pilot program in those states. The agency estimated that 140,000 taxpayers participated in the pilot, claimed more than $90 million in refunds and saved an estimated $5.6 million in filing costs—an outcome that exceeded the agency’s usage goal.

Four of the states that participated in the pilot—Arizona, California, Massachusetts and New York—integrated their state systems with the Direct File tool so that taxpayers could go seamlessly from filing their federal return to filing their state return.

Maryland and North Carolina will do the same: They recently announced that they would partner with Code for America, the civic tech nonprofit, to align their state tax filing systems with the Direct File tool. Arizona and New York used Code for America’s state-level tool, called FileYourStateTaxes, during the pilot. Now that the Direct File is permanent, the nonprofit has announced plans to expand the tool.

While state-level tax filing tools are nothing new, tax experts say that making their use seamless with federal filing tools represents a new frontier. Doing that, they said, would help bring the U.S. in line with much of the rest of the world on tax filing procedure and make it easier and cheaper for filers to access tax breaks and benefits.

“Some of the most important social supports in our country are delivered through the tax code, and for far too long, too many people either have struggled to access those supports or have not accessed them at all,” said Gabriel Zucker, program director of tax policy and partnerships at Code for America. “There's plenty of interventions that can help people get the support they're supposed to get, but there's nothing like creating a single, streamlined, easy, free front door to access the tax system.”

Zucker cautioned that it isn’t “child’s play” to create a system that allows taxpayers to file their state returns, given the differences between state tax codes and the unique or “edge cases” that could cause issues. But making things as simple for filers as possible is a challenge that Code for America embraces, he said.

“You find a way to present this in a way that empowers people and is understandable to people who aren't, you know, spending all day, every day with it,” Zucker said. “People do love to talk a lot about how complex the tax code is, but at the end of the day, a lot of people will have situations that aren't that complicated, that you can talk about people with, and people can understand, and people can be empowered to take control of their situations.”

Presenting tax jargon in simple language for filers was one of Code for America’s major takeaways from the first year of the FileYourStateTaxes tool and the Direct File pilot. The group is working to take any learnings and use them to improve the tool and states’ integration with Direct File. Helping taxfilers understand what happens next with their returns and providing them with opportunities to review their information were also takeaways Code for America drew from the pilot. It helps build trust between the taxpayer and their filing software, they said.

Not everyone is convinced that the Direct File program is the best way to proceed, however. Advocacy groups like the nonprofit Taxpayers Protection Alliance and tax preparation companies like H&R Block and Intuit—which produces the TurboTax filing software—have lobbied against the initiative for years, arguing that the IRS is ill-prepared to handle people filing taxes directly with them and cannot do it at a competitive price. 

The Taxpayers Protection Alliance found that of 19 million eligible filers, only 140,000 people used Direct File during the pilot, approximately 0.7%. That would mean that with $114 million budgeted for the program this year, the IRS will pay around $814 for each completed return.

The Government Accountability Office also dinged the IRS in April for not providing a full analysis of the costs associated with Direct File, and its benefits.

H&R Block and Inuit have also argued they already have free preparation software, although investigations by the federal government into both companies have found that their software is not always free and that they have engaged in deceptive marketing practices.

“IRS Direct File is a solution in search of a problem and every American can already file their taxes for free, without any cost to the government or taxpayers,” an Intuit spokesperson said in an email.

“We continue to believe this program is not in the best interest of Americans—either those who use it or those who are funding it with their tax dollars,” an H&R Block spokesperson said in an email.

Having the IRS handle tax preparation, in concert with state governments, represents an opportunity for better data portability, Zucker said, making it easier to flag potential tax credits that filers are eligible for. There is clear interest in having this program expand, he said.

“States believe in it; states are going to do it,” Zucker said. “You're not going to see all 50 states in for 2025 clearly, but you're going to see more and more states joining in the years to come, as I think the enthusiasm and the interest and the ability to deliver these products is there.”

For state leaders, having Direct File as an option represents a further step towards making tax filing season cheaper and easier for taxpayers. Maryland Comptroller Brooke Lierman said it will help the state have “the most transparent, efficient and modern system in the nation.”

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