A pilot version will be available to some taxpayers in 13 states next year, according to CNN.
IRS is undergoing a significant overhaul of its operations despite ongoing threats from Republicans to cut its future funding or even abolish the agency entirely.
Ultimately, the IRS tax filing system could become an alternative to private tax preparation companies like H&R Block and TurboTax by Intuit.
However, the scope of the initial online program will be very limited. Only taxpayers with specific tax situations in those 13 states will be eligible to participate.
IRS expects that at least several hundred thousand taxpayers will choose to participate in the pilot project.
Critics of Direct File, including H&R Block and Intuit, argue that the government system is likely to provide worse conditions for taxpayers than those currently available. They believe that the federal tax collector should not also act as a tax preparer.
Taxpayers will still be able to use professional tax software, commercial tax software, or the existing Free File program provided by seven different private companies.
The Direct File pilot program will help IRS determine whether a government tax filing system can be offered to a larger number of taxpayers in the future.
Who Will Be Eligible for the Pilot Program Some taxpayers in Arizona, California, Massachusetts, and New York will have the opportunity to participate in the pilot program during the 2024 tax season, starting in January.
The Direct File pilot project will cover only individual federal tax returns. However, once the federal return is filed, taxpayers will have access to a state-supported tool they can use to file their state tax return.
Taxpayers in nine other states that do not have state income tax—Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming—may also be eligible to participate. However, not every taxpayer in the participating 13 states will be allowed to use Direct File next year. Eligibility will be limited to taxpayers with specific types of income who qualify for certain credits and deductions.
IRS has not yet specified the exact tax situations that will be compatible with the pilot program next year. However, it is expected that those with wage income reported on Form W-2 and those eligible for tax credits such as the Earned Income Tax Credit and the Child Tax Credit may be able to use the program.
Major Changes IRS has endured years of funding cuts, leading to reductions in staffing and audits. However, thanks to the Democrats' Inflation Reduction Act, a substantial federal spending package passed by Congress in 2022, the agency will receive a stable stream of long-term funding. This funding will aid in combatting tax evasion and transforming the agency's operations.
IRS claims that these funds have already helped improve taxpayer service. In the 2023 filing season, the agency answered 3 million more calls and reduced wait times from 28 minutes to three minutes compared to the previous year.
IRS has also begun a plan to digitize all paper tax returns by 2025, with expectations of reducing processing time by half and speeding up tax refunds by four weeks.
The Inflation Reduction Act included a provision allocating $80 billion to IRS over ten years, but Republicans raised concerns about whether these investments would lead to increased audits for the average American. Earlier this year, Republican lawmakers were able to restore $20 billion in funding as part of a bipartisan debt ceiling resolution.
The White House asserts that the funding cut will not fundamentally change what IRS can do over the next few years. Representatives of the Biden administration have also repeatedly stated that taxpayers earning less than $400,000 per year will not face increased audits due to the new funding.