IRS to launch free online filing system pilot in March

The IRS is expecting several hundred thousand taxpayers to use its new online tax filing portal when it launches to the public in March, but officials aren’t putting a limit on the number of people who can use it.

The new digital tax filing system known as Direct File was initially characterized by the agency as a limited pilot program, but an IRS official said Thursday the program has no upper bound on the amount of taxpayers it can handle across the 12 states where it’s being rolled out.

The Direct File system will be available in Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington and Wyoming.

Anyone who meets the program’s eligibility requirements and lives in one of the 12 pilot states will be able to use the free Direct File system to file their 2024 taxes, the official said on a call with reporters.

Eligibility for Direct File is limited to people with form W2 income, which is standard wages, unemployment compensation, Social Security benefits and interest of $1,500 or less. Other types of income, such as returns on stock or other investments, won’t be supported by the program.

That means “gig economy” workers who report their income on 1099 forms won’t yet be able to use the system.

Additionally, Direct File can only handle the standard deduction, rather than itemized deductions for work expenses. The standard deduction for 2024 is $14,600 for people filing by themselves and $29,200 for married couples.

The types of tax credits Direct File supports is also limited. Only the child tax credit, the earned income tax credit and the credit for other dependents are selectable in the system.

While taxpayers make the final decision about what credits they want to apply, the system does make prompts and recommendations about what options are best for taxpayers, similarly to how commercial tax preparation software works.

Companies in that industry, which in the past had signed an agreement with the IRS that the agency wouldn’t try to compete with them, have been railing against the program.

“Republicans and the tax prep lobby have in the past reacted as if this is just going to be pretty much the end of Western civilization,” Senate Finance Committee Chair Ron Wyden (D-Ore.) said last April during a hearing with IRS Commissioner Danny Werfel.

IRS officials say they are starting small with the program but that it is being designed to be scalable.