IRS to Try Out Its Free E-Filing Tax Return Program in 13 States Next Year

According to the IRS, Arizona, California, Massachusetts, and New York have decided to work with the agency to integrate their state taxes into the Direct File pilot program for the 2024 filing season. Taxpayers in nine other states without an income tax—Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming—are also eligible to participate in the pilot program. In addition, the state of Washington agreed to join the integration effort for its application of the Working Families Tax Credit. All states were invited to join the pilot program but not all states were in a position to do so at this time, the IRS said.

The IRS announced in May that it was rolling out its own free online tax-filing system in a move that would put the agency in direct competition with online tax preparation software giants like TurboTax and H&R Block.

The IRS conducted a feasibility study that concluded the agency was technically capable of providing this type of tool to taxpayers and that there was interest among taxpayers in using a free IRS-provided program to prepare and file their taxes.

In a Direct File report the IRS submitted to Congress on May 16, as required by the Inflation Reduction Act, 72% of American taxpayers surveyed said they were “very interested” in or “somewhat interested” in using a government tool to electronically file their tax returns.

However, a report recently released by the Treasury Inspector General for Tax Administration (TIGTA) said taxpayers’ willingness to use the Direct File program may be overstated because of the survey the IRS used to gauge their interest.

TIGTA said it was concerned that taxpayers were not provided with a neutral option when providing responses to the taxpayer experience survey. According to TIGTA, research shows that developing a survey with a five-point scale, to include a neutral option, rather than a four-point scale as used by the taxpayer experience survey, is preferable because it does not put taxpayers into a “forced choice” response scenario.

“As noted in the Direct File Report, 72% of taxpayers responded that they would be either ‘very interested’ or ‘somewhat interested’ in a Direct File tool. Yet, this percentage would likely be reduced had the TES used a five-point scale that offered taxpayers a neutral response option,” TIGTA said in the report.

A free, government-run, online tax-filing system for taxpayers has been talked about as a possibility for many years. Supporters of the idea have said the option would make tax return services more equitable and accessible for all Americans. Critics have expressed skepticism about the IRS taking on the dual roles of both tax collector and tax preparer, arguing that the new service could create a power imbalance between taxpayers and the government.

Big tax preparation companies have been among those critical of the idea of a government-run e-filing tax system, as they could stand to lose millions of dollars when IRS Direct File goes live.

Derrick Plummer, a spokesman for Intuit, maker of tax filing software product TurboTax, said in a statement last August that a free tax return filing system built by the government “is a solution in search of a problem, and that solution will unnecessarily cost taxpayers billions of dollars.” He added, “An IRS Direct File system is redundant and will not be free—not free to build, not free to operate, and not free for taxpayers.”

Werfel said if pursued further after the pilot program concludes, IRS Direct File “would be another option eligible taxpayers have to help them prepare their tax returns in addition to existing options such as the use of a tax professional, tax software, Free File, or another option. It’s consistent with the IRS mission to make sure taxpayers have available options that work the best for their personal situation.”

The IRS was tasked with looking into how to create a free online tax filing system as part of the nearly $80 billion in funding it received from the Inflation Reduction Act, which was signed into law in August 2022. It gave the IRS nine months and $15 million to report on how such a program would be implemented.

The report’s initial cost analysis shows an option run by the IRS “could cost less than $10 per return to provide, and of course would be free to taxpayers—by comparison, simple electronic filing options currently available to taxpayers are around $40.”

The feasibility study estimates that annual costs of Direct File may range, depending on the program’s usage and scope, from $64 million for 5 million users to $249 million for 25 million users.

Taxpayer eligibility to participate in the pilot program will be limited by the state in which the taxpayer resides and will be limited to taxpayers with “relatively simple returns”—certain types of income, credits, and deductions, the IRS said. The agency anticipates specific income types, such as wages on a Form W-2, and certain tax credits, like the earned income tax credit and the child tax credit, will be covered by the Direct File pilot program.

Direct File will be a mobile-friendly, interview-based service that will work as well on a mobile phone as it does on a laptop, tablet, or desktop computer, the IRS said. The tax filing service will be available in English and Spanish for the pilot program.

Direct File will first be introduced to a small group of eligible taxpayers in filing season 2024. But as the filing season progresses, more eligible taxpayers will be phased in and able to access the service to file their 2023 tax returns, according to the IRS.

Taxpayers participating in the pilot program will have access to help by IRS employees staffing the Direct File customer support function, the agency said. IRS customer service representatives will provide technical support and provide basic clarification of tax law related to the tax scope of Direct File. Questions related to issues other than Direct File will be routed to other IRS customer support.

Direct File will cover only individual federal tax returns during the pilot program and will not prepare state returns, the IRS said. However, once a federal return is completed and filed, Direct File will guide taxpayers who want to file a state return to a state-supported tool that taxpayers can use to prepare and file a stand-alone state tax return. For the pilot program in 2024, where taxpayers may have state or local tax obligations, the IRS said it will limit eligibility to states that are actively partnering with the agency on Direct File.

“We have more work in front of us on this project,” Werfel said. “The Direct File pilot is undergoing continuous testing with taxpayers to identify and resolve issues to ensure its user friendly and easy to understand. We continue to finalize the pilot details and anticipate more changes before we launch for the 2024 tax season.”