More Californians may be able to file their federal tax returns directly online with the IRS next year under a new program that federal officials promised Thursday to significantly expand by 2025.
After a trial period in California and 11 other states, the IRS's Direct File program will be made available to all 50 states next year, Treasury Secretary Janet Yellen announced. And in coming years, the program's capabilities will be expanded so that more taxpayers in participating states can take advantage of it, she said.
The IRS has offered free tax preparation services to lower-income households for years, and there are also limited free services available from companies like H&R Block and Intuit that make tax preparation software. However, Direct File had two distinguishing features: it provided step-by-step guidance directly from the IRS, not a third party, and it was available to taxpayers regardless of their household income.
As introduced, however, Direct File was not an option for many Californians because the system was equipped to process returns with only the most basic types of income: wages, Social Security or Railroad Retirement Board benefits, unemployment compensation, and government interest income. $1,500 or less. That excluded self-employed people, business owners, contractors, gig workers and anyone who received premium subsidies under the Obamacare policy.
Ultimately, the agency wants to create “a fully digital experience for taxpayers if they choose” so they can do all their business with the IRS online, said IRS Commissioner Danny Werfel. As the first version of Direct File shows, the agency isn't there yet.
“There is still a lot of work to be done,” Werfel said.
Yellen said the IRS will expand Direct File in coming years “to support all of the most common tax situations.” These include the premium tax credit, refundable tax credits (such as the earned income tax credit) and more types of retirement income, Werfel said.
Officials estimate that 5.2 million California taxpayers, or about 30% of the state's total, could use Direct File by 2024. According to the IRS, only 33,328 did so. Across all 12 states that participated in the pilot, 19 million taxpayers were eligible, and 140,803 used it to file returns.
A trade group representing tax preparation companies has called Direct File wasteful and unnecessary, pointing to the program's low participation rate and high cost. Werfel said the pilot cost $31.8 million and has a budget of $75 million for next year, although actual costs will depend in part on the number of participating states.
It's up to the states to sign up, Werfel said. One factor, he said, is whether the state tax system is willing to incorporate information from Direct File.
Yellen and Werfel called the pilot a success and said the IRS had expected only 100,000 people to use it. They also pointed to user surveys showing that satisfaction with the system was extremely high, as well as requests from taxpayers and ratepayers in other states for access to the program.
