The Internal Revenue Service plans to implement a free online filing service for American taxpayers this tax season for residents of 13 states, including California, Texas and New York.
The IRS has offered free electronic filing for lower-income tax filers for years, but the scope of the program was limited. The IRS said it has not offered more extensive online filing services due to the cost of maintaining such a program.
A 2023 report found that 5 million users would cost the IRS $64 million, while 25 million users would come with $249 million in costs. The costs, however, do not account for potential savings from having filers convert from paper forms.
The same report,however, found that 72% had an interest in the program.
Kelly Erb, tax counsel for White & Williams, noted that even for taxpayers in states with the new program, not everyone is eligible.
"If you own a business, if you have a side hustle, it's not for you," she said. "It's going to be W-2 taxpayers that don't itemize. So, really simple, the IRS says they want to kind of start out slow and roll the pilot program out."
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The provision aims to raise $340 billion, mainly from foreign subsidiaries of U.S. corporations avoiding U.S. taxes.
Erb noted that the new program will be similar to online programs like TurboTax.
"It's very similar to what you're going to be used to," she said. It's going to be in an interview-like format. So you're going to log on, there's no software, you do it directly through the IRS … They're going to ask you questions just like you would do in TurboTax or one of those other programs."
Erb said the IRS will have customer service representatives dedicated to servicing this website.
Arizona, California, Massachusetts and New York will integrate their state taxes into the new pilot program. Residents in Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming can also utilize the new program, but those states were not in a position to integrate their state taxes.
"The Direct File pilot is undergoing continuous testing with taxpayers to identify and resolve issues to ensure it's user-friendly and easy to understand," said IRS Commissioner Danny Werfel. "We continue to finalize the pilot details and anticipate more changes before we launch for the 2024 tax season. Direct File, if pursued further after the pilot, 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."
The launch of the pilot program came at the direction of Congress, which passed the Inflation Reduction Act in 2022.
