House Tax Plan Would Kill Direct File And Rescue Controversial Contingency Fees

Forbes

14-05-2025

NORTH HALEDON, NJ - APRIL 15: In this photo illustration, a 1040 U.S. Individual Income Tax Return document is seen on a desk on April 15, 2024 in North Haledon, New Jersey. (Photo illustration by)
If you were expecting the budget reconciliation process to be easy, you haven't been paying attention. Several committees are working on language related to the bill, including Agriculture, Energy and Commerce, and Ways and Means. Each of those committees will also consider amendments, proposals, and markups. That means there are several working parts and, in some cases, different priorities. Add-ons like plans to nix IRS Direct File may not have been included in early drafts, but appear as the process churns on.
Even as the Energy and Commerce Committee considered significant changes to Medicaid, including work requirements, most of the tax-specific language will come from the Ways and Means Committee. The committee released a draft version of the bill over the weekend, and a substitute amendment was made public on Monday—you can read a summary of some of the early highlights here.
Included in the substitute amendment were a few IRS-specific provisions that did not appear in the original draft. At the top of the list? Eliminating IRS Direct File.
The language in the amendment requires the Treasury to ensure that the IRS Direct File program has been "terminated" no later than 30 days after the enactment of this Act. That isn't all. The bill would then require creating a task force to "design a better public-private partnership between the IRS and private sector tax preparation services" to replace Free File and Direct File.
Under the amendment, the task force is directed to report on "1) the cost of a new public-private partnership to provide for free tax filing for up to 70 percent of all taxpayers calculated by adjusted gross income to replace free file and any IRS- run direct file programs; (2) taxpayer opinions and preferences regarding a taxpayer-funded, government-run service or a free service provided by the private sector; (3) assessment of the feasibility of a new approach, how to make the options consistent and simple for taxpayers across all participating providers, how to provide features to address taxpayer needs, and how much money should be appropriated to advertise the new option.' The amount of money earmarked is $15,000,000.
If you're feeling a bit of deja vu, you're not wrong. The Inflation Reduction Act of 2021 also created a task force to design a direct file tax return system. The task force was required to explore the "(I) the cost (including options for differential coverage based on taxpayer adjusted gross income and return complexity) of developing and running a free direct efile tax return system, including costs to build and administer each release, with a focus on multi-lingual and mobile-friendly features and safeguards for taxpayer data; (II) taxpayer opinions, expectations, and level of trust, based on surveys, for such a free direct efile system; and (III) the opinions of an independent third-party on the overall feasibility, approach, schedule, cost, organizational design, and Internal Revenue Service capacity to deliver such a direct efile tax return system." The cost? Also $15,000,000.
(Apparently, it was such a good idea that the House wants to gut it and do it all over again.)
The result of the IRA was a limited-scope pilot of Direct File, which debuted in 2024. The pilot, the IRS claimed, was a success. The tax agency said that Direct File users reported a high degree of satisfaction and quick answers to their filing questions. After the first year, the Treasury Department declared that Direct File would be a permanent, free tax filing option. The IRS also expanded the program in 2025 to include more states and the ability to handle more kinds of income, credits, and deductions.
Following the 2024 election, Musk and Vivek Ramaswamy, at that time leaders of the Department of Government Efficiency (DOGE), reportedly discussed creating a mobile app for Americans to file their taxes for free with the IRS. That program already existed—Direct File.
In 2025, the program found itself in DOGE crosshairs when Musk posted on X (formerly Twitter) that he had "deleted" 18F, the group responsible for creating the technology behind Direct File.
Critics of Direct File point to Free File, an existing program offered as part of a public-private partnership between the IRS and Free File Inc., formerly the Free File Alliance. Through this partnership, tax preparation and filing software providers make their online products available to eligible taxpayers (as compared to Direct File, an IRS program).
Free File debuted in 2003 and was occasionally marred by allegations that participating tax software companies, including TurboTax and H&R Block, hid free options to get taxpayers to pay for services. The allegations created quite a stir—and resulted in litigation.
Today, tax preparation software companies are prohibited from hiding free filing services from Google or other search results pages. Following the changes, Intuit and H&R Block opted out of the program.
While Free File remains on the books, the current administration has already signaled that it will eliminate Direct File. A Congressional move would make it official.
Access to taxpayer data is tightly restricted by law—a protection that's been in the news recently because of demands by DOGE to access that data.
In 2024, a former IRS contractor was sentenced to five years in prison for disclosing thousands of tax returns, including Donald Trump's tax returns, without authorization. That contractor, Charles Littlejohn, pleaded guilty to unauthorized disclosure of tax return and return information—a violation of section 7213(a)(1) of the tax code, the most serious offense for leaking tax information. Littlejohn had faced—and was sentenced to—the maximum penalty of five years in prison. That was true even though Littlejohn leaked information for multiple taxpayers.
The substitute amendment would increase the penalties for violating section 7213(a) from "$5,000, or imprisonment of not more than 5 years" to "$250,000, or imprisonment of not more than 10 years."
The language in the bill would also expand the punishment. Currently, a leak is generally considered a single violation. Under the language in the amendment, when there are multiple disclosures, as in the case of Littlejohn, the disclosure of information for each affected taxpayer would be considered a separate violation.
Language in the amendment would also put the brakes on efforts to "regulate, prohibit, or restrict the use of a contingent fee" in connection with tax returns or claims for refund.
Contingent fees typically represent a percentage of an amount received—in the context of lawsuits, you tend to see them as a percentage of the total award. When it comes to tax returns, they may be a percentage of the expected refund or a percentage of tax "savings"—however that is defined.
Earlier this year, Treasury and the IRS released proposed regulations to update the rules for certain tax professionals, including attorneys, certified public accountants (CPAs), and enrolled agents (EAs) who can practice before the IRS. These rules have long been found in Treasury Department Circular 230.
Rules published in 2007 prohibited tax professionals from charging contingent fees for original returns but permitted practitioners to charge a contingent fee for certain services rendered in connection with an audit or challenge to an original tax return, amended returns, or claims for refund or credit. Treasury and the IRS subsequently clarified the 2007 amendments in 2008 and proposed modifications in 2009. The 2009 proposed regulations were never finalized.
The IRS has continued to bump up against contingent fees. The section of Circular 230 that prohibits practitioners from entering into contingent fee arrangements for services rendered in connection with a "matter before the IRS" would be removed under the proposed regulations. However, the term "disreputable conduct" would include charging contingent fees for preparing an original or amended tax return or claim for refund or credit, as well as charging fees that are unconscionable under the facts and circumstances.
The American Institute for Certified Public Accountants (AICPA) Code of Professional Conduct prohibits CPAs from charging contingent fees for preparing original returns, amended returns, and ordinary refund claims because of the risk that these arrangements would allow a CPA to improperly benefit from the transaction. Many state accountancy board rules also ban contingent fee arrangements for preparing an original or amended return or claim for refund or credit.
Here's why the IRS doesn't like these fees. A contingent fee based on getting a big refund may encourage evasion or abuse of tax laws by incentivizing practitioners to take unduly aggressive tax positions. That gives the practitioner "a direct, financial interest in the tax benefits of a client." And that, says the IRS, is "incompatible with ethical practice" before the Treasury Department or the IRS under Circular 230.
Contingent fees have recently gotten a second look because of employee retention credits (ERC). Those assisting companies with ERC applications often took a contingent fee—typically, a percentage of the refund due the taxpayer. The IRS encouraged taxpayers to be wary of promoters who charged a contingent fee because of concerns that the economic driver could push promoters to suggest ineligible people file a claim for the credit and that they might not inform taxpayers that they must reduce the wage deductions they claimed on their federal income tax return by the amount of the credit. Especially in cases where the contingent fee is collected upfront, the IRS has warned that in the case of an ERC denial (or audit), the taxpayer may be stuck with a reduced credit or penalty—and out the contingent fee.
The ERC contingency fees were also in the news because it has been widely reported that some tax firms paid Trump's nominee for IRS Commissioner, Billy Long, on a contingency basis. Expect that issue to come up again while contingent fees are still considered controversial. Green-lighting contingency fees by banning regulations or restrictions would change the conversation. Long's confirmation hearing is scheduled for May 20, 2025.
You can see the original draft version of the bill before the markup here. The Smith amendment version is here.
The bill is still working its way through the House where Republicans hold a slim majority. Even it's approved, the House bill must conform with the Senate version to be signed into law.
Keep checking our coverage for more details.