More Californians may be able to file their federal tax returns directly to the IRS online for free next year through a new program that federal officials promised Thursday to significantly expand in 2025.
After a test in California and 11 other states, the IRS Direct File program will be available to all 50 states next year, Treasury Secretary Janet Yellen announced. And in the coming years, the program's capabilities will expand so that more taxpayers in participating states can use it, she said.
The IRS has offered free tax filing services to low-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 offered step-by-step guidance directly from the IRS, not a third party, and it was available to taxpayers regardless of their household income.
However, as introduced, Direct File was not an option for many Californians because the system was equipped to handle returns for only the most basic types of income: wages, Social Security or Railroad Retirement Board retirement benefits, unemployment benefits and interest income of $1,500 or less. That excluded self-employed workers, business owners, contractors, freelancers and anyone who received premium subsidies from Obamacare policies, among others.
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 initial version of Direct File shows, the agency is not there yet.
“We have a lot of work to do,” Werfel said.
Yellen said that over the next few years, the IRS will expand Direct File “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 estimated that 5.2 million taxpayers in California, or about 30% of the state's total, could use Direct File in 2024. According to the IRS, only 33,328 did so. In the 12 states participating in the pilot program, 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 the actual cost will depend in part on how many states participate.
It will be up to states to opt in, Werfel said. One factor, he said, is whether the state's tax system is prepared to incorporate information transmitted from Direct File.
Yellen and Werfel called the pilot a success and said the IRS expected only 100,000 people to use it. They also pointed to user surveys that showed satisfaction with the system was extremely high, as well as requests for access to the program from taxpayer advocates and taxpayers from other states.
