IRS gears up to launch Direct File pilot

The IRS is getting ready to debut its new Direct File pilot program that will offer some taxpayers a guided, online IRS tool to file their taxes directly with the federal government for free.

Limited to people with certain, simple tax situations in 12 states, the IRS is intentionally starting small in order to make changes as it is opened up to more people and test if it's a viable option for the IRS long-term after this tax season, an IRS official told reporters during a Thursday briefing. The agency is expecting that several thousand individuals will potentially use the service.

The IRS, U.S. Digital Service and 18F have been building the pilot internally since May, when the Treasury Department directed the IRS to move ahead with the project after the IRS submitted a Congressionally-mandated report on such a system. That report was required by the Inflation Reduction Act, which gave the IRS $80 billion, although that has since come under fire from Republicans in Congress.

“Direct File is an important innovation in our ongoing efforts to transform the IRS and lead the agency into a digital, more taxpayer-focused future,” IRS Commissioner Danny Werfel told reporters on Wednesday. 

The IRS doesn’t have a fixed launch date for the system, although the official said that it would be more widely available to eligible taxpayers in mid-March. Taxes are due for most taxpayers this year on April 15. 

At first, the pilot will be invite-only via email before a more phased launch over time, the IRS official said. Once the Direct File landing page opens, interested taxpayers can sign up to get notified when the pilot is more widely available, they told reporters. 

The official also stressed that the tool is mobile-friendly, available on smartphones, tablets and desktop computers and in English and Spanish with a toggle option for language on every page. 

The tool, previewed for reporters on Thursday, works in a step-by-step interview format that only shows questions that are relevant to the taxpayer, leaving out questions that aren’t necessary based on information already entered by the user, according to the IRS. 

Using understandable language in the pilot was also a priority for those building the tool, the IRS official noted, and the tool will also show the math behind its calculations along the way.

Live chat and phone assistance will also be available for users, who start off with an eligibility screener to check they can use the tool. 

Direct File is only going to be available in certain states, with some enabling more options than others. In Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington state and Wyoming, eligible taxpayers can use the tool to file federal returns, as they don't have state-level income tax returns.  

In Arizona, California, Massachusetts and New York, the tool will guide users to a state tool where they can file state-level returns. Except for those in California, Direct File will allow users to bring the data they entered into the IRS tool with them to populate the state return before asking more questions to the user.

The pilot also has other limitations in terms of eligibility, including income type — independent contractors can’t participate, for example — as well as the credits and deductions the taxpayer will be taking. The tool also doesn’t support taxpayers taking itemized deductions, and is limited in terms of health insurance — individuals with plans from Healthcare.gov aren’t eligible. 

The tool does, however, support unemployment recipients, those getting Social Security benefits and those with interest less than $1,500.

To use the pilot, individuals will have to verify their identity via ID.me, a vendor that the IRS faced pushback over in early 2022 because of the use of facial recognition technology, although the IRS has since then added options via ID.me that don’t require biometrics. 

Once users go through the eligibility check, they’ll be presented with a checklist that includes personal information, as well as questions about income, deductions and credits. 

The tool also incorporates review steps at the end of those sections — and at the end of the process — and includes links for confused taxpayers to find more information about commonly asked questions on different pages. Users can also leave the pilot entirely and come back to finish, as the tool saves information as they enter it, the IRS official said.

The system represents an alternative to the IRS’ decades-long reliance on a program it offers with tax prep companies — called Free File — to provide free options for most Americans to file online, although the IRS has stressed that the new tool is and would be only another option, not a requirement for taxpayers, if the IRS decides to offer it after this tax season.

Free File has largely been underutilized by taxpayers, however, and has seen the exit of some major tax prep companies in recent years. That includes Intuit, which runs Turbotax — a company that recently faced a crackdown from the Federal Trade Commission for using deceptive advertising practices because most taxpayers aren’t eligible for free tax prep from Turbotax, as the company has advertised.

Both Intuit and H&R Block have previously called the IRS pilot program a “solution in search of a problem” in comments to Nextgov/FCW.

Editor's note: This article has been updated to reflect the states that do not have state-level income tax.