The IRS's Direct File expansion is a quiet threat to the tax-prep oligopoly

WASHINGTON — The most subversive thing a government can do to a cozy industry is ship software that does not make people angry. The IRS Direct File program, expanded again for the 2026 filing season, remains a minority channel. It is also a proof of concept, and proof of concept is how oligopolies lose their pricing power — slowly, then in a hearing.

Intuit and H&R Block still own the customer relationship for the complicated American return, the one with equity compensation, a side LLC, and a child in two states. Direct File is not hunting that customer yet. It is hunting the W-2 filer who was upsold into a product they did not need. That is a large population, and it is the one that generated both the fees and the political backlash.

The industry's counter is that paid software catches errors, offers audit defense, and funds a free file ecosystem that, critics say, was designed not to be found. The agency's counter is that filing a return is a civic obligation, not a retail category. Both arguments will be tested in the next appropriations cycle as much as in the next product release.

For investors, Direct File is not an extinction event. It is a ceiling on take-rate and a reminder that some American "markets" exist because the public option was not allowed to exist. When that condition changes, multiples should too.