IRS set to launch its free tax filing pilot program in California. Here’s how it will work

By Katie Lobosco | CNN

Washington — When tax filing season opens on January 29, some taxpayers will have the option of filing their 2023 federal tax returns with a brand new, government-run system.

Known as Direct File, the free program will be open on a very limited basis – at first, to federal and state government employees in 12 states with certain tax situations.

The Internal Revenue Service’s plan is to phase in more taxpayers through February and March to include some private sector workers in those 12 states.

RELATED: TurboTax maker Intuit barred from advertising ‘free’ tax services without disclosing who’s eligible

The IRS has built the guided filing system in-house, armed with a massive investment from the Democrat-backed Inflation Reduction Act that was passed by Congress in 2022. The law required the IRS to complete a cost and feasibility study about developing a free, electronic tax filing system, which it released in May. The agency then decided to move forward with a pilot program.

If the pilot program is successful, Direct File could eventually rival competing services in the private market.

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

Who is eligible for the pilot

At first, Direct File will be open to some 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 File to some private sector workers in those states who have certain kinds of income and tax situations supported by the tool.

Before starting to file a tax return, Direct File prompts taxpayers to answer screening questions that will determine if they are eligible.

People with income from an employer reported on a W-2, for example, may be eligible – but not if they have other types of income, such as from a side gig or a business.

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

Taxpayers who are itemizing their deductions rather than taking the standard deduction will not be able to use Direct File this year.

But there is no income threshold – unlike the existing Free File Program, which is only available to taxpayers who earn $79,000 or less. That program is provided by an alliance of eight different private companies and has historically had a low usage rate.

How Direct File works

This screenshot shows the Internal Revenue Service’s free tax filing pilot.(Internal Revenue Service) 

Direct File is an online tool that can be accessed on a smartphone, laptop and tablet.

It offers step-by-step guidance, in both English and Spanish, to taxpayers filing their federal tax returns by posing questions about their income and tax situations.

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

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

The IRS will also be offering a live-chat function that connects taxpayers with a customer service representative who will be able to answer questions about using Direct File and provide basic clarification of the tax law. The taxpayer may also get a follow-up phone call if more help is needed.

Direct File does not prepare state tax returns. But 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.

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