IRS Ends Direct File Program
Published December 26, 2025
The Treasury’s Report on the Replacement of Direct File was publicly released on November 5. Direct File was launched as a limited pilot program in 2024 and allowed residents in participating states to directly file tax returns through the Internal Revenue Service (IRS).
The One Big Beautiful Bill Act (OBBBA) required the IRS to present a report on Direct File to Congress by October 2. The report was required, in part, to evaluate "taxpayer opinions and preferences regarding a taxpayer-funded, government-run service or a free service provided by the private sector."
The report noted that Direct File will not be available for the 2026 filing season. During the 2024 tax filing season, over 140,000 tax returns were accepted using Direct File, and that increased to over 296,000 filed tax returns through Direct File this year.
While the report noted high taxpayer satisfaction, costs and taxpayer usage were cited as reasons for shuttering the service. Direct File accounted for less than 0.5% for individual returns and cost at least $41 million in its first year of operation, an approximate cost of $138 per return filed.
The report highlighted other free tax preparation options and filing programs available through public-private partnerships. The IRS Free File program is a public-private partnership that is intended to benefit approximately 70% of taxpayers based on the income limits for the program. This partnership allows eight companies to offer free filing services. These services can be accessed through IRS.gov/filing/irs-free-file-do-your-taxes-for-free.
In addition, the IRS operates two longstanding programs to assist taxpayers, the Volunteer Income Tax Assistance (VITA) program and Tax Counseling for the Elderly (TCE) program. Both programs use trained volunteers to assist eligible taxpayers with filing tax returns.
The IRS will move forward with resources focusing on VITA, TCE and Free File partnerships. The IRS will also launch the Free Filing Modernization Summit to evaluate future solutions to reduce barriers to filing tax returns.
IRS Requests Comments on Scholarship Granting Organizations Regulations
On December 12, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) issued Revenue Procedure 2026-6 (2026-2 IRB 1), which provided the procedure for allowing states to make an Advance Election to participate in the new tax credit in 2027. The newly enacted federal tax credit is for individuals who make cash contributions to eligible Scholarship Granting Organizations (SGOs).
Under the One Big Beautiful Bill Act (OBBBA), this nonrefundable credit will become available for qualified contributions made on or after January 1, 2027. The credit is capped at $1,700 per taxpayer annually and is available only for donations to SGOs that provide scholarships for elementary and secondary school students from low- and middle-income families in states that elect to participate.
For a contribution to qualify for the tax credit, the state must participate as a “covered state” and submit a list of SGOs that meet statutory requirements for certification. The Treasury and IRS will permit states to elect “covered state” status to allow SGOs additional time to prepare for the 2027 tax credit.
States can take action on or after January 1, 2026, by filing Form 15714, Advance Election to Participate Under Section 25F for 2027. This is currently the only way to make the Advance Election.
The Treasury and IRS will publish future guidance with additional details and deadlines related to the Advance Election. The state will need to submit its SGO list at a later date and resubmit the list annually on January 1 of the participating year. The IRS has requested comments on the new form and procedure for Advance Election. The IRS intends to address the comments in the proposed regulations.
All written comments will be accepted by Andres Garcia, Internal Revenue Service, Room 6526, 1111 Constitution Avenue NW, Washington, DC 20224, or by email to [email protected]. Include “OMB Control No. 1545-2335” with a submission deadline of February 17, 2026.
IRS Criminal Investigation Annual Report Released
On December 12, the IRS Criminal Investigation (IRS-CI) announced the release of its Fiscal Year 2025 Annual Report. The IRS-CI report highlighted record-breaking enforcement results and strategic priorities for the year.
“Our work plays an integral role in shutting down criminal networks that try to exploit government programs and launder funds,” said IRS-CI Chief Guy Ficco. “We continue to evolve – integrating new technological tools, expanding our global partnerships, and streamlining operations – to make it harder for criminals to hide.”
The report details that IRS-CI identified $10.59 billion in financial crimes, a 15.7% increase from the prior year. Tax fraud investigations accounted for $4.5 billion, more than double compared to 2024. The agency increased the number of search warrants by 25% and increased referrals for prosecution to the Department of Justice by 14%.
Additionally, IRS-CI seized 2.35 petabytes of digital evidence, reflecting a nearly 60% rise in cybercrime-related investigations. IRS-CI special agents returned $100 million to crime victims, and special agents seized over $800 million in assets in 2025.
IRS-CI devoted approximately 64% of its investigative time to tax-related crimes, including refund schemes and payroll fraud. Other priorities included narcotics-linked financial crimes, which accounted for 11% of investigation time, resulting in 447 convictions. The report also successfully noted that cyber-enabled fraud offenders were given an average sentence of 63 months of prison time.
The report emphasized IRS-CI’s growing use of advanced technology and global partnerships to combat financial crime. Initiatives included participation in multi-agency task forces and collaboration with international law enforcement to address cross-border fraud and money laundering.
Applicable Federal Rate of 4.6% for January: Rev. Rul. 2026-2; 2026-3 IRB 1 (15 December 2025)
The IRS has announced the Applicable Federal Rate (AFR) for January of 2026. The AFR under Sec. 7520 for the month of January is 4.6%. The rates for December of 4.6% or November of 4.6% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2026, pooled income funds in existence less than three tax years must use a 4.0% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.”
