IRS offers a free online direct filing system to some taxpayers

The IRS is testing a system that would allow taxpayers to file federal tax returns directly with the agency online, free of charge. A pilot program will start next year for some taxpayers.

The pilot program, known as Direct File, will begin in the 2024 enrollment season following recent testing and a feasibility reportas authorized by the Inflation Reduction Act in 2022.

According to the report, Direct File would cost an estimated $64 million to $249 million per year, depending on the number of claimants and the complexity of the returns.

More from Personal Finance:
The IRS confirms that Black Americans face more audits
Some of the best places to park cash amid economic uncertainty
Debt ceiling issues suggest entitlement reform is needed

“The report shows that the majority of taxpayers are interested in using a tool provided by the IRS to prepare and file their taxes,” IRS Commissioner Daniel Werfel said in a call to reporters on Tuesday.

According to a 2022 survey cited in the report, nearly three-quarters of taxpayers expressed interest in a free IRS-provided taxpayer scheme, which is popular with younger taxpayers, those with limited English skills and DIY enthusiasts.

While some Democrats and consumer advocates have been pushing for a direct filing system for years, there has been resistance republican and the tax preparation industry.

“The IRS Direct E-File pilot, scheduled to start in January 2024, continues to be a solution to finding a problem,” a spokesman for H&R Block said in a statement. “With more than 30 organizations already offering free tax preparation services, this pilot project is unnecessary and faces significant obstacles in providing comprehensive tax preparation services.”

Tim Hugo, executive director of the Free File Alliance, also criticized the IRS plan. “Free File has been made available to the federal government free of charge for over twenty years. So it’s puzzling that the Treasury Department and IRS want to pay tens — even hundreds — of millions of dollars annually to create a substandard archiving option for the “American taxpayer,” he said.

And while similar systems have been implemented in other countries, concerns about cybersecurity and tax compliance remain.

“It’s a game changer for the tax system,” said Mark Everson, a former IRS commissioner and current vice chairman of Alliantgroup. “And I think the government needs to proceed with great caution.”

Currently, taxpayers with an adjusted gross income of $73,000 or less for 2022 can take advantage Free File, a public-private partnership between the IRS and the Free File Alliance, for free filing of federal statements. But the program was not widely adopted. About 70% of taxpayers qualify for free filing, but only 2% used it during the 2022 filing season, the government said Advocate for national taxpayers.

Despite the low turnout rate, Werfel said the IRS remains “strongly committed to a variety of filing options for low-income applicants,” including Free File, which has extended its IRS partnership through 2025.

“Taxpayers will always have a choice about how they submit their taxes,” Werfel said in Tuesday’s conference call. “You can use tax software. You can hire a trusted tax professional. You can use a paper tax return. Of course we would prefer it if they filed the tax return electronically, but the choice is yours.”