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In May, the Internal Revenue Service announced it was inviting states to partner with its “Direct File” program to offer Americans a new free, public option for filing their taxes. Direct File is an online tax tool developed by the IRS and successfully tested earlier this year.
Gina Maiola, Governor Kay Ivey’s communications director, told APR yesterday that Alabama will not be participating in the Direct File rollout. Maiola said in an email that “the Alabama Department of Revenue is not opting to participate in Direct File.”
Maiola explained that the state foresees “potential issues and litigation on Direct File.”
The Internal Revenue Service conducted a successful pilot of Direct File in 12 states during the 2023 filing season. Over 140,000 taxpayers submitted returns made using Direct File, saving an estimated “$5.6 million in tax preparation fees.” And one survey about users’ experiences found 90 percent reported it was “Excellent or Above Average.”
Direct File is not the first or only free option for Americans looking to file their state and federal taxes though. Maiola told APR that “Alabama currently uses a different IRS program, Free File, that is an established method that works.”
Free File is a federal program which facilitates partnerships between private companies that produce tax preparation software and state governments. Alabama currently works with five different companies to provide free tax filing options.
However, most people who used Direct File during the pilot period reported paying to file their taxes in 2023—they evidently either did not qualify for Free File, or fell victim to deceptive advertising by the tax preparation industry.
One 2020 audit by the Treasury Inspector General for Tax Administration found tax software companies made around $1 billion by charging over 14 million people who were eligible for Free File. Only around 2.4 percent of eligible taxpayers actually used Free File that year.
But even though only a fraction of eligible filers use Free File, the program also remains quite limited in its total scope, with guided options under Free File only available to taxpayers who make less than $79,000 a year. Direct File on the other hand “did not impose an income limit or other arbitrary restriction on eligibility” during the pilot period.
Three states have already opted to partner with Direct File for the next tax season: Oregon, New Jersey, and Pennsylvania. All three states have Democratic governors.
New Jersey Governor Phil Murphy said: “By cutting costly, for-profit tax filing software out of the equation with the free Direct File tool, we are saving individuals and families in our state time and money.”
Because of the state’s concerns about “potential issues and litigation,” Alabamians will not be able to file their taxes for free directly through an IRS website next year. However, Alabama taxpayers that earn less than $79,000 a year will still be able to use Alabama’s Free File partners.
