The IRS launches its free tax filing pilot program

The IRS launches its free tax filing pilot program

The US IRS is scheduled to launch its free tax filing pilot program. How will the program work?

When the tax filing season begins on Jan. 29, some taxpayers can file their 2023 federal tax returns using a new government-run system.

The free program, Direct File, will be open on a very limited basis — initially, to federal and state government employees in 12 states with certain tax statuses.

The IRS plans to gradually introduce more taxpayers over February and March to include some private sector workers in those 12 states.

The IRS built an internally directed filing system, armed with a huge investment from the Democratic-backed Inflation Reduction Act passed by Congress in 2022. The law requires the IRS to complete a cost and feasibility study on developing a free Electronic Tax Filing System, which will be released in May. The agency then decided to move forward with a pilot program.

If the pilot is successful, Direct File can finally compete with competing services in the private market.

On a call with reporters Wednesday, IRS Commissioner Danny Werfel said that the IRS tool is an additional option for people to file their tax returns and will not replace any existing options for filing returns.

Who is eligible to file tax returns through the program?

Initially, Direct File will be open to certain federal and state workers in 12 states: Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington, and Wyoming.

By mid-March, the IRS expects to open direct filing for some private sector workers in those states with certain types of income and tax statuses supported by the tool.

Before filing a tax return, Direct File asks taxpayers to answer screening questions that will determine whether they qualify.

For example, people with income from an employer reported on Form W-2 may be eligible — but not if they have other types of income, such as income from a side job or business.

Those with income from unemployment compensation, Social Security benefits, and income benefits less than or equal to $1,500 may also be eligible to use Direct File in this year's pilot phase.

Taxpayers who itemize their deductions instead of taking the standard deduction cannot use Direct File this year.

But there is no income threshold — unlike the current Free File program, which is only available to taxpayers who earn $79,000 or less. A consortium of eight private companies provides this program and has historically had a low utilization rate.

How does a live file work?

Direct File is an online tool accessed on smartphones, laptops, and tablets.

It provides step-by-step guidance in English and Spanish for taxpayers filing their federal tax returns by asking questions about their income and tax situations.

Direct File shows taxpayers the math behind their refund or calculated liability at several steps along the way, according to a demo shared with reporters this week.

Before using Live File, taxpayers must create an account and verify their identity using ID. Me is a digital identity network already used by other federal government programs.

The IRS will also offer a live chat function that connects taxpayers with a customer service representative who will be able to answer questions about using Live File and provide basic explanations of tax law. The taxpayer may also receive a follow-up phone call if further assistance is needed.

Direct File does not prepare state tax returns. However, taxpayers who are required to file a state return will be directed to their state filing system after completing their federal return, and some of their information will be carried over.

Comprehensive reform of the IRS

The free federal tax filing program is just one of many changes happening at the IRS after receiving new funding from the Inflation Reduction Act, totaling $80 billion over a decade. But there are continuing threats from Republicans to cut the agency's funding.

Democrats say the money will help the IRS ramp up its enforcement efforts on high-income taxpayers and improve the antiquated taxpayer services system.

With this funding, the IRS has improved phone service, put a plan in place to digitize all paper tax returns, and is expected to improve this year to its existing online tool, "Where's My Refund?" So you can provide taxpayers with more detailed information about the status of their refund.

The agency also collected millions of dollars in back taxes by cracking down on millionaires who didn't pay what they owed.

But Republicans claimed the IRS would use the money to go after middle-class taxpayers and small business owners and launched several efforts to claw back the money.

Some lawmakers have repeatedly proposed restoring funding from the inflation-reducing law. Last year, in a deal to address the debt ceiling and avoid a US default, Democrats agreed to allow the cancellation of $20 billion in inflation-reducing law funds.

The Biden administration said the reduction would remain the same as what the IRS can do over the next few years. Officials have repeatedly said that taxpayers who earn less than $400,000 a year will not face a tax increase because of the new funding.