Eligible taxpayers in 13 states will have the opportunity to test out the Internal Revenue Service’s foray into free tax preparation in the upcoming tax season, the agency announced Tuesday.
Taxpayers who want to try out the pilot program will need to have relatively simple tax returns. They’ll also need an invitation from the tax agency in order to participate, the IRS said.
In May, the IRS announced it would test a program that will let people file their taxes for free directly with the agency, instead of using paid options like tax software or an accountant.
The goal of the pilot program is to see if the federal tax collector can feasibly get involved in tax-return preparation. The prospect of the IRS offering free tax prep has been panned by Republican members of Congress and by tax-prep companies that stand to lose customers, including H&R Block HRB,
This past tax season, individuals and businesses spent an average of $250 and 13 hours preparing their taxes, according to IRS estimates.
Now the IRS is sharing some details about how the closely watched pilot program is going to work.
The program will be open to certain taxpayers in nine states that have no state-level income tax: Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Wyoming and Washington. It will also be available to certain taxpayers in four states with their own income taxes: Arizona, California, Massachusetts and New York.
At this point, the IRS tax-prep platform is only equipped to handle very simple returns for taxpayers with income from W-2 wages, Social Security or jobless benefits and interest income under $1,500.
It can also handle claims for credits like the Earned Income Tax Credit and the Child Tax Credit, as well as deductions such as the widely used standard deduction, the student-loan-interest deduction and the educator-expense deduction.
“We still have much more work in front of us,” IRS Commissioner Danny Werfel told reporters Tuesday at a briefing about the program.
The IRS still needs to determine how many tax returns the program can handle and how the agency will invite taxpayers to use it, he said. The agency plans to slowly roll out the pilot to determine what works and what doesn’t, he added.
The IRS anticipates that at least several hundred thousand taxpayers will choose to participate in the free program, which the Treasury Department directed the IRS to create.
The web-based program will be available in English and Spanish on computers and smartphones and will have customer-service representatives trained to troubleshoot user problems.
“I can’t stress enough, if direct file is pursued further after the pilot, it would be just another choice taxpayers have to help them prepare their income-tax returns,” Werfel said. “It would be an addition to existing options, such as the use of a tax professional, commercial tax software, Free File or another option.”
The Free File program is an existing IRS partnership with certain tax-software companies that lets people under a certain income threshold file their taxes for free, but few eligible taxpayers use the program.
While some consumer advocates staunchly support the idea of a free IRS-run tax-prep option, skeptics maintain that it wouldn’t help taxpayers.
One consumer advocate called the IRS free tax prep program an important step to counter tax preparation companies “that have for far too long annually milked filers of their hard-earned cash,” said Robert Weissman, president of Public Citizen, a consumer advocacy organization that’s part of a coalition supporting an IRS-run filing system.
TurboTax maker Intuit has been an outspoken critic of the program and has questioned whether the IRS can both fairly collect taxes and provide taxpayers with a refund that’s as big as possible.
“The Direct File scheme is a solution in search of a problem, and that half-baked solution now has the potential to become a financial nightmare for tens of millions of Americans while unnecessarily costing billions of dollars for something free of charge today,” Intuit spokesman Rick Heineman said in a statement.
“Americans have made it clear — they prefer existing tax preparation options over a government-run system,” Tom Gannon, H&R Block’s chief government relations officer, said in a statement. “Today there are more than 30 free tax-filing choices available from non-profit organizations and tax preparation companies such as H&R Block, and the IRS should focus additional funding on improving its existing services for taxpayers.”
Intuit shares closed 0.4% lower Tuesday, but are up more than 38% year to date. H&R Block shares gained 0.4% Tuesday and were up more than 20% in 2023.
When Congress passed the Inflation Reduction Act last summer, it set aside $15 million to study whether a direct-file program was feasible. More than $11 million of the $15 million has been earmarked for use through early July, according to a report this month from the Treasury Inspector General for Tax Administration.
The watchdog report said the IRS may have overstated the amount of consumer interest in having the agency prepare income-tax returns.
After the Treasury watchdog’s report came out, U.S. Rep. Jason Smith, a Republican from Missouri who chairs the House Ways and Means Committee, said it underscored the “trust gap” between the IRS and the public.
“The Biden administration’s so-called ‘study’ into establishing a direct e-file system was a foregone conclusion designed to further their goal of inserting the IRS into every aspect of Americans’ lives,” he said.