The Internal Revenue Service is introducing a free option to file federal tax returns this year for some residents of a dozen states.
Last month, the agency released details of its plan to test an internal filing system in which taxpayers would file their federal tax returns online directly to the agency for free. Residents of 12 states are eligible to participate if they meet certain criteria.
“This is a critical step forward for this innovative effort that will test the feasibility of offering taxpayers a new way to file their tax returns directly with the IRS for free,” Danny Werfel, the agency’s commissioner, said in a recent statement.
Although the direct-filing system is being rolled out on a limited basis, it has already faced resistance, particularly from companies responsible for commercial tax preparation.
An Intuit spokeswoman, Tania Mercado, criticized the Direct File project as a “half-baked solution” and a waste of taxpayer money. “The Direct File scheme is a solution in search of a problem,” she said. Intuit makes TurboTax tax preparation software.
Democrats in Congress generally support the idea of free, direct tax filing, while Republicans argue that the idea, part of President Biden's plan to overhaul the IRS, would give the agency even more power over ordinary taxpayers.
The Direct File Pilot is open to low- and moderate-income taxpayers filing simple tax returns. For example, to be eligible, filers must take the standard deduction and have income limited to wages, Social Security or unemployment benefits, and interest income reported on Form W-2 of $1,500 or less. Gig workers are not eligible. The IRS said in November it expected “at least several hundred thousand taxpayers.” to take part in a so-called “limited” pilot project.
Many filers already have the option to prepare and file free electronic tax returns based on their income, either through IRS Free File, a partnership with do-it-yourself tax software companies, or directly through some commercial providers. The IRS also provides online forms that any filer, regardless of income, can use to file tax returns for free.
However, the IRS Free File program has had mixed results. For example, nonprofit newsroom ProPublica reported that Intuit's TurboTax program was turning users away from the free version. (Intuit no longer participates in IRS Free File, but offers its software for free to certain users.)
All of these free options remain available, the IRS said, and the trial will be just another option. But with the new direct file service, the IRS wants to further streamline the filing process. In one possible scenario contained in the agency's report to Congress, the IRS could fill out tax returns with information it already has, such as data from W-2 pay stubs. However, the pilot will require participants to enter their own financial information, the IRS said.
The Inflation Reduction Act of 2022 required the IRS to consider direct filing. In May, the agency submitted a report to Congress finding that the majority of taxpayers would be interested in using a direct file tool and began preparing for a pilot test. In the report, the IRS estimated that the annual cost of a direct file system could range from $64 million to $249 million, depending on the scope of the service. (However, a separate report from the Treasury Department's Inspector General for Tax Administration said that the design of the surveys conducted in the earlier report may have “overstated” taxpayer interest and that the department could not determine the “appropriateness” of the agency's cost estimate. )
According to the agency, the pilot system at the IRS was built by a team of tax experts, product managers, software developers, designers and data scientists. The IRS said it is working with special teams within the government that help agencies develop digital services.
According to the IRS, Direct File walks users through the steps of preparing a tax return, like commercial software does. The service will be “mobile friendly” and available in English and Spanish. Users can receive help from the agency through a live online chat feature and have the option to speak with a customer service representative on the phone if necessary.
In online summaries, the agency said the pilot will initially be rolled out to “a small group of taxpayers” over the course of the 2024 filing season to ensure it works well. As the season progresses, “more and more” eligible taxpayers will be able to use the service.
“We’re starting small to get it right,” the agency said in an update.
The IRS said it will promote the filing option in part through its network of grassroots and community partners, such as the Volunteer Income Tax Assistance program, which provides free tax assistance to low- and moderate-income filers and people with disabilities.
The agency said it plans to release a public report on the pilot before deciding whether to open the direct tax filing system to more taxpayers.
Here are some questions and answers about the upcoming tax filing season:
Which states are included in the pilot project?
Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington State and Wyoming participate. Most of these states do not levy taxes on state-level income, but the four states that do – Arizona, California, Massachusetts and New York – direct participants to a state-sponsored tool to file their state returns.
“It's exciting that this is happening,” said Gabriel Zucker, associate policy director for tax benefits at Code for America, a nonprofit that develops digital tools to make it easier for taxpayers to access government services. The group is developing state electronic filing software for Arizona and New York that will allow participants in the IRS pilot to file their state returns. “We expect this will reduce filing headaches,” Zucker said.
Direct file users in New York will be able to share information on their federal returns using Code for America's archiving tool, according to an announcement from Gov. Kathy Hochul's office. The tool prepares the majority of state tax returns using the data provided, and most taxpayers only need to answer a few simple questions to complete their New York tax return.
How quickly can I file my income taxes this year?
The IRS has not announced a start date for filing tax returns for the 2023 tax year, but it is typically the end of January. (Last year, the filing season began on January 23rd.)
When is the tax return deadline this year?
The federal filing deadline for 2023 tax returns is April 15 for most filers. State filing deadlines may vary.