Next year, more Californians may be able to file their federal tax returns online directly with the IRS for free through a new program.
Treasury Secretary Janet Yellen announced that the IRS’s direct filing program will be open to all 50 states next year after a trial run in California and 11 other states. Over the next few years, she said, the program’s features will be expanded so that more taxpayers in participating states can use it.
The IRS has offered free tax preparation services to low-income families for years, and companies such as H&R Block and Intuit that make tax preparation software also offer limited free services. However, direct filing has two distinguishing features: It provides step-by-step guidance directly from the IRS (rather than a third party), and it can be used regardless of a taxpayer’s household income.
However, as introduced, direct filing is not an option for many Californians because the system can only handle the most basic types of income — wages, Social Security or Railroad Retirement Board retirement benefits, unemployment benefits and interest income. US dollars or less. This excludes the self-employed, business owners, contractors, gig workers, and anyone who receives significant subsidies under Obamacare.
IRS Commissioner Danny Wayfair said that ultimately, the agency wants to “create a fully digital experience for taxpayers, if they choose,” so they can conduct all business with the IRS online. As the initial version of Direct File shows, the agency has yet to achieve this goal.
“We still have a lot of work to do,” Werfel said.
Yellen said that in the coming years, the IRS will expand direct filing “to support all the most common tax situations.” Those include premium tax credits, refundable tax credits (such as the earned income tax credit) and more types of retirement income, Wayfair said.
Officials estimate that by 2024, 5.2 million taxpayers in California, or about 30% of the state’s taxpayers, will be able to use Direct File. Across all 12 states in the pilot, 19 million taxpayers are eligible and 140,803 people use it to file their tax returns.
Trade groups representing tax preparation companies have called direct filing wasteful and unnecessary, noting the program’s low participation rates and high costs. Wayfair said the pilot program cost $31.8 million and is budgeted for next year at $75 million, but the actual cost depends in part on how many states participate.
It will be up to states to opt in, Wofel said. One factor, he said, is whether the state’s tax system is ready to incorporate the message delivered by direct files.
Yellen and Wayfair called the pilot program a success and said the IRS had expected only 100,000 people to use it. They also point to surveys of users showing extremely high levels of satisfaction with the system, as well as requests from taxpayer advocates and taxpayers in other states to access the program.
