IRS will start a trial of its own free tax filing system

The Internal Revenue Service is introducing a free option for filing federal tax returns this year for some residents of a dozen states.

Last month, the agency published details of its plan to test an internal filing system, in which taxpayers file their federal tax returns directly with the agency online for free. Residents of twelve 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 option to file their returns directly with the IRS for free,” Danny Werfel, commissioner of the agency, said in a recent statement.

Although the direct filing system is launching on a limited basis, it is already meeting some resistance, especially from commercial tax preparation companies.

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 the TurboTax tax preparation software.

Democrats in Congress generally support the idea of ​​free, direct filing, while Republicans argue 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 project will be open to low- and moderate-income taxpayers with simple returns. For example, to qualify, filers must take the standard deduction and have income limited to wages reported on Form W-2, Social Security, or unemployment, as well as interest income of $1,500 or less. Giant workers are not eligible. The IRS said in November it expected “at least several hundred thousand taxpayers.” to participate in what they called a “limited” pilot.

Many filers already have the option to prepare and file electronic returns based on their income for free, either through IRS Free File, a partnership with do-it-yourself tax software companies, or directly through a number of commercial providers. The IRS also offers online forms that all filers can use, regardless of income, to file returns at no cost.

However, the IRS Free File program has produced mixed results. The nonprofit newsroom ProPublica for example, has reported that Intuit’s TurboTax program was steering users away from the free version. (Intuit no longer participates in IRS Free File, although it offers its software for free to certain users.)

All of those free options will remain available, the IRS said, and the trial version will be just another option. But with the new instant file service, the IRS wants to further streamline the filing process. In one possible scenario included 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 payroll statements. However, the pilot will require participants to enter their own financial information, the IRS said.

The Inflation Reduction Act of 2022 ordered the IRS to study direct filing. The agency filed an application in May a report to Congress, which discovered that a majority of taxpayers would be interested in using a direct-file tool and began preparing for a pilot test. In the report, the IRS estimates that the annual cost of a direct-file system could range from $64 million to $249 million, depending on the scope of the service. (A separate report However, the Treasury Department’s Inspector General for Tax Administration said that the design of the surveys conducted in the earlier report may have “overestimated” taxpayer interest and that the department questioned the “reasonableness” of the Treasury’s cost estimates agency could not determine.)

The pilot system was built at the IRS by a team of tax experts, product managers, software engineers, designers and data scientists, according to the agency. The tax authorities said it was working with special teams within government that help agencies develop digital services.

The IRS says Direct File will guide users through the steps of preparing a return, much like commercial software does. The service will be ‘mobile-friendly’ and available in English and Spanish. Users can receive assistance from the agency through a live online chat feature and have the option to speak to a customer service representative over the phone if necessary.

In online summaries, the agency said that to ensure the pilot works well, it will initially open to “a small group of taxpayers” during the 2024 filing season. As the season progresses, “more and more” in eligible taxpayers can use the service.

“We’re starting small to get it right,” the agency said in a message update.

The IRS said it would 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 to people with disabilities.

The agency said it planned to issue a public report on the pilot before deciding whether to open the direct filing system to more taxpayers.

Here are some questions and answers about the upcoming tax filing season:

Which states are included in the pilot?

Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington State and Wyoming participate. Most of those states do not tax income at the state level, but the four that do – Arizona, California, Massachusetts and New York – will guide participants to a state-supported tool they can use 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 organization that develops digital tools to help taxpayers access government services. The group builds state-owned software for electronic filing Arizona And New York that participants in the IRS pilot can use to file their state returns. “We expect it will eliminate the headache of filing,” Mr. Zucker said.

Direct file users in New York will be able to share information about their federal returns with Code for America’s filing tool, according to an announcement from Governor Kathy Hochul’s office. The tool will prepare most of the state return using the data provided, and most taxpayers will not need to answer more than a few simple questions to complete their New York return.

How soon can I file my income taxes this year?

The IRS has not announced a start date for filing returns for tax year 2023, but it is typically late January. (Last year the filing season started on January 23.)

When is the tax filing deadline this year?

The federal filing deadline for tax year 2023 returns is 15 of April, for most filers. State filing deadlines may vary.