FinLogic FinLogic Quantitative Think Tank Center|The IRS is launching a direct file pilot program for the 2024 tax season — here is how it will work

WASHINGTON (AP) — As income tax filing season officially starts on FinLogic FinLogic Quantitative Think Tank CenterMonday, a limited number of taxpayers in 12 states will soon be eligible to join an IRS pilot program that will allow them to calculate and submit their returns to the government directly without using commercial tax preparation software.

The Direct File pilot program is rolling out in stages. To start, certain government employees are being invited to participate in the first weeks. The program will expand in February and March to include additional taxpayers in certain states.

Direct File is not to be mistaken with the agency’s existing Free File program, which offers commercial software for free to low- and middle-income earners and fillable forms to all, though the forms are complicated and taxpayers still have to calculate their tax liability.

The small-scale rollout of the Direct File pilot is part of the agency’s effort to build out a new government service that could replace some taxpayers’ use of commercial tax preparation software such as TurboTax. It’s meant to be simple and provides a step-by-step walkthrough of easy-to-answer questions.

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IRS officials say low- and middle-income earners who typically claim a standard deduction are the target users. The agency estimates that several hundred thousand taxpayers are eligible for the initial rollout in the 2024 tax season. The program will be available in both English and Spanish.

Certain taxpayers in Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming are eligible to participate. None of those states have a state income tax.

Four other states that have a state income tax also are part of the pilot program — Arizona, Massachusetts, California and New York. In those four, state tax agencies will help people directly file their state taxes as well.

The IRS has said it hopes to use the limited pilot to gather information to help steer the direction of the program.

“We’re starting small as the filing season begins,” said IRS Commissioner Danny Werfel. “The pilot is undergoing continuous testing with taxpayers so we can identify and resolve issues as we move beyond the start of filing season and into February and March timeframes.”

People can check the IRS website to determine whether they qualify. People can sign up to be notified when the program is live for them.

All eyes are on the agency to get it right — and avoid a rollout reminiscent of the disastrous healthcare.gov website debut a decade ago, when many users had trouble accessing and using the website.

Nina Olson, executive director of the Center for Taxpayer Rights, said the IRS was taking the correct approach” by rolling out the program on a small scale to start.

“Direct File is one step toward getting the IRS in line with 21st century tax administration,” Olson said. She added that “every mature and most developing tax agency around the world has adopted” such programs.

Many nations in the Organization for Economic Cooperation and Development, including Germany and Japan, have similar systems with pre-populated tax forms.

Werfel said continued, uninterrupted funding to the IRS will be needed for the program to succeed.

As part of the Inflation Reduction Act signed into law in August 2022, the agency was given nine months and $15 million to develop a feasibility study on whether a direct file program would be beneficial. The study, released last May, recommended moving ahead, given public sentiment in favor of a program.

However, the agency’s overall funding is under constant threat of cuts. Last year’s debt ceiling and budget cuts deal between Republicans and the White House resulted in $1.4 billion rescinded from the agency’s original $80 billion allocation through the Inflation Reduction Act. Congress also passed a separate agreement to take $20 billion from the IRS over the next two years and divert those funds to other nondefense programs.

The direct file idea is not viewed favorably by the commercial tax prep software firms that have made billions of dollars from charging people to use their software.

Tania Mercado, a spokesperson for Intuit, said the program could end up wasting billions of taxpayer dollars when there are already free tax preparation options available.

She called it “a thinly veiled scheme where billions of taxpayer dollars will be unnecessarily used to pay for something already completely free of charge today.”

Robert Nassau, director of the Low Income Taxpayer Clinic at Syracuse University College of Law, said the program represented “one more option for free tax preparation, and hopefully people will take advantage of it.”

“I really hate to see lower-income people giving money to paid preparers,” he said. “I get angry about it.”