IRS free Direct File program launches in 12 pilot states

After weeks of testing with roughly 1,500 returns, Direct File, a free tax filing program from the IRS, is now fully open in 12 pilot states, according to the U.S. Department of the Treasury.

While the pilot focuses on “simple tax situations,” the Treasury estimates the pilot could cover about one-third of tax situations for 19 million taxpayers. The Spanish language version opens later on Tuesday at 1 p.m. ET. 

“Dozens of countries have provided free tax options to their citizens for years,” Deputy Secretary of the Treasury Wally Adeyemo said during a press call on Monday. “American taxpayers who want to file their taxes for free directly with the IRS should have that option.”

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Treasury officials hope at least 100,000 taxpayers will participate in the Direct File pilot for 2023 filings as the agency makes future decisions about the program, Adeyemo said.

Within five years, the program could save the average filer $160 per year, or a collective $11 billion annually including tax prep fees and time, according to a report from the Economic Security Project released Monday.

The IRS Direct File pilot states include Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington and Wyoming. Alaska was originally included but is no longer part of the pilot.

The soft launch and limited rollout were intentionally designed to capture data to make improvements and decisions for the future, a senior administrative official said.

Direct File pilot doesn’t support state returns, but the software will guide users from Arizona, California, Massachusetts and New York to a state-supported tax-prep tool.

You may qualify for Direct File with a simple, straightforward return, with limited types of income, credits and deductions, according to IRS officials.

The pilot will only accept Form W-2 wages, Social Security retirement income, unemployment earnings and interest of $1,500 or less. This excludes filers with contract income reported via Form 1099-NEC, gig economy workers or self-employed filers.

To qualify, you must claim the standard deduction, which is $13,850 for single filers and $27,700 for married couples filing jointly for 2023.

Direct File only accepts a few credits: the earned income tax credit, child tax credit and credit for other dependents. The software also accepts deductions for student loan interest and educator expenses.

The Direct File pilot launch comes amid pushback from the private tax filing industry. There has also been scrutiny from some Republicans who have questioned the agency’s authority to create the program.

When asked about Direct File during a House Ways and Means hearing in February, IRS Commissioner Danny Werfel said the agency has “a responsibility and an authority to offer taxpayers different approaches for how to meet their tax obligation.”

Taxpayers have several free filing options this season, including IRS Free File, Volunteer Income Tax Assistance, Tax Counseling for the Elderly and private company software.