More Californians may be able to file their federal tax returns directly with the IRS online for free next year thanks to a new program that federal officials pledged Thursday to significantly expand in 2025.
After a trial in California and 11 other states, the IRS Direct File program will be made available to all 50 states next year, Treasury Secretary Janet Yellen announced. And over the next few years, the program’s capabilities will be expanded 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 limited free services are also available from companies such as H&R Block and Intuit that make tax preparation software. Direct File, however, had two distinctive features: It offered step-by-step guidance directly from the IRS, not a third party, and it was accessible 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 process returns with only the most basic types of income: wages, Social Security or Railroad retirement benefits. Retirement Board, unemployment benefits, and interest income of $1,500 or less. This excluded, among others, self-employed workers, business owners, contractors, gig workers and anyone who received bonuses for Obamacare policies.
Ultimately, the agency wants to “create a fully digital experience for taxpayers if they choose,” so they can do all their IRS business online, the IRS commissioner said, Danny Werfel. As Direct File’s initial release shows, the agency isn’t 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 other types of retirement income, Werfel said.
Officials have estimated that 5.2 million California taxpayers, or about 30% of the state’s total, could use Direct File in 2024. According to the IRS, only 33,328 have done so. Across the 12 pilot states, 19 million taxpayers were eligible and 140,803 used it to file their returns.
A trade group representing tax preparation companies 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 adhere to it, Werfel said. One factor, he said, is whether the state’s tax system is ready to incorporate the information transmitted by Direct File.
Yellen and Werfel called the pilot a success, saying the IRS expected only 100,000 people to use it. They also highlighted user surveys that showed extremely high satisfaction with the system, as well as requests for access to the program from taxpayer advocates and taxpayers in other states.
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