Will an IRS Tax Prep Service Replace H&R Block or TurboTax?

For the 2025 tax filing season, the IRS will offer its new tax prep and filing service where taxpayers can bypass accountants and popular software and file their federal tax returns directly with the agency — for free. Last year, the IRS Direct File limited program pilot was available to selected taxpayers in 12 states. Now, the IRS plans for the program to be permanent, now offering it to taxpayers in 25 states.

“The IRS is committed to delivering significantly improved services by providing taxpayers with tools, information, and assistance to make it easier to comply with their tax filing obligations,” Commissioner Danny Werfel stated in a statement about Direct File.

Meanwhile, tax preparation companies H&R Block and Intuit's TurboTax have opposed the IRS getting into the tax preparation business and have lobbied against the idea for years.

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Recently, both companies faced criticism and formal complaints from the Federal Trade Commission (FTC) for alleged deceptive advertising practices regarding their tax-free filing services and products. (More on that later.)

Related: H&R Block Faces Hefy $7 million FTC Fine

IRS Direct File program

• Last year, the IRS completed its Direct File pilot for the 2024 tax filing season.
• Twelve states, mostly those without income tax (Arizona, California, Florida, New Hampshire, New York, Nevada, Massachusetts, South Dakota, Tennessee, Texas, Washington, and Wyoming) were part of the initial limited 2024 program.
• The agency says 70% of taxpayers surveyed expressed interest in a free IRS-provided tool for preparing and filing taxes.
• IRS data revealed that people spend an average of about $250 to prepare their taxes.

As mentioned, for the current 2025 tax filing season, the following 25 states will participate in the IRS Direct File program.

Alaska, Arizona, California, Connecticut, Florida, Idaho, Illinois, Kansas, Maine, Maryland, Massachusetts, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Oregon, Pennsylvania, South Dakota, Tennessee, Texas, Washington, Wisconsin, and Wyoming

The IRS estimates that over 30 million taxpayers within these 25 states will qualify to use Direct File in 2025.

Not the same as Free File

It’s important to note that this is not IRS Free File. The proposed Direct File service would be different from IRS Free File. (That program is designed for people with income under $84,000 for the 2024 tax year.)

On the other hand, this IRS-run tax prep and filing service will ultimately be available to a wider range of taxpayers with generally uncomplicated returns and incomes up to around $200,000. The agency says it is designed to be as easy or easier to use than traditional tax prep software. But like IRS Free File, the IRS Direct File tax prep service is also electronic and free.

In addition to considering the feasibility of a Direct File system, a key IRS report focuses on taxpayer opinions and costs and contains independent analysis.

According to the report, potential benefits and challenges associated with the implementation by the IRS of a Direct File program include:

• Improved experience and cost savings for some taxpayers who currently spend money to file their taxes either with accountants or using tax preparation software.
• Operational challenges like having in-house technical expertise and sufficient customer service to support Direct File.
• Eventually, the IRS will also have to figure out how to coordinate with more states — many taxpayers are used to filing their state and federal taxes at the same time.

Of course, there’s also a question of trust. The agency acknowledges that taxpayers may question IRS motives in offering a Direct File tool. People also worry about the tool impacting IRS audits and future tax enforcement.

The IRS indicates that younger people who prepare their own tax returns might be interested in Direct File.

Additionally, according to the report, taxpayers who were shown a “functioning internal prototype of Direct File, developed for research purposes, reported that the software exceeded their expectations in terms of ease of use and simplicity.”

IRS Direct file a threat to TurboTax and H&R Block?

Intuit, maker of TurboTax, previously indicated that a potential IRS tax prep service could pose a business threat. In past SEC filings, the company reportedly wrote, “We anticipate that governmental encroachment at both the federal and state levels may present a continued competitive threat to our business for the foreseeable future.”

In recent years, Intuit settled a lawsuit over allegations that the company “tricked” taxpayers into paying for its tax software when they thought they were receiving a free version. However, as Kiplinger previously reported, in agreeing to the $144 million TurboTax settlement, Intuit did not admit wrongdoing.

Earlier last year, the FTC found Intuit TurboTax engaged in deceptive advertising of its tax-free offerings. Intuit reportedly appealed the finding.

Meanwhile, H&R Block was also the subject of an FTC investigation for improper customer data handling and deceptive advertising. The company has previously supported proposed legislation that would have effectively banned the IRS from offering certain tax filing services.

Since the launch and expansion of the IRS Direct File program, the stock prices of Intuit (maker of TurboTax) and H&R Block have experienced some downward pressure.

For example, in November last year, H&R Block shares tumbled 8.2%, while Intuit shed 5.1% following reports that the incoming Trump administration was considering developing a free tax filing app.

Also, just before the IRS Direct File pilot report was released, Intuit stock (INTU) fell to its lowest point that month, and H&R Block stock (HRB) was down 4.8%.

However, it’s hard to say whether the government-run tax prep service can compete with or harm similar services provided by those companies.

Meanwhile, last year, the IRS announced that the Direct File program will be permanent. But an issue is whether the incoming Trump administration and a Republican-controlled Congress will maintain the program.

And...some will be concerned about the cost of running Direct File. Preliminary estimates indicate that the IRS tax prep service could cost between $64 million and $249 million a year, depending on the number of taxpayers using it.

Related Content

• FTC: Intuit TurboTax-Free Filing Ads Are Deceptive
• IRS Free File Is Now Open: What to Know
• H&R Block Faces Hefty $7M Fine: What It Means for Taxpayers
• How the IRS Will Use AI During Tax Season