IRS Will Offer Free (But Limited) Direct E-Filing Next Year

The move deals a blow to decades of effort by Intuit and other tax-prep software vendors to stop government e-filing efforts.

A subset of taxpayers will be able to kick Intuit and its ilk to the curb and instead file their 2023 federal taxes online at no charge via a new Direct File option the Internal Revenue Service announced Tuesday.

This step by the IRS, following decades of successful lobbying by tax-prep vendors to stop the government from competing with them online, happened after Congress told the agency to change course. Last year’s Inflation Reduction Act not only provided numerous tax credits for energy-efficiency expenditures but also directed the IRS to study offering direct online filing.

The IRS is starting small, limiting Direct File to taxpayers in Arizona, California, Massachusetts, and New York (its statement says their tax departments “decided to work with the IRS to integrate their state taxes into the Direct File pilot”). Although people in zero-income-tax Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming may also be able to try it out. 

The Washington Post reported that the IRS will send invitations to selected, eligible taxpayers “around mid-February,” citing an IRS briefing. Later on, “more and more eligible taxpayers will be able to access the service to file their 2023 tax returns," it says.

This 1.0 version of Direct File—which the IRS describes as ”a mobile-friendly, interview-based service” that will be available in English and Spanish—will also only cover simpler tax situations. 

The IRS announcement says it expects this app to include W-2 wage income, interest income of $1,500 at most, unemployment compensation, and Social Security and railroad retirement income—meaning gig workers and other Schedule C types, myself included, will have to sit this one out.

Direct File’s support for credits and deductions will stick to the basics, too: the Earned Income Tax Credit, the Child Tax Credit, credits for other deductions, the standard deduction, and deductions for student-loan interest and educator expenses.

Direct File, however, won’t come with an income limit like the IRS’s Free File program, which lets people use commercial tax-prep software at no cost if their adjusted gross income doesn’t exceed $73,000. That program came out of a bargain pushed by Intuit and other tax-prep vendors: Leave online filing to the private sector, and we’ll offer apps such as TurboTax for free to lower-income taxpayers.

But almost nobody uses Free File: The latest edition of the IRS Data Book (PDF) shows that 3.3 million of 160.6 million individual tax-year-2022 returns, or just over 2%, came via that route. In 2019, ProPublica uncovered one possible reason for such low uptake: Intuit had altered pages on its site to cloak Free File references from search engines. The company later agreed to pay a $141 million settlement and left the Free File project in 2021.

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