IRS’s Direct Tax-Filing Service Starts Accepting Users From 12 States

Direct File only works for a limited set of incomes and credits during the initial phase.

The Internal Revenue Service (IRS) building in Washington, on Jan. 4, 2024. Madalina Vasiliu/The Epoch Times

The Internal Revenue Service (IRS) launched its free online tax-filing service, Direct File, on Tuesday, allowing a few eligible taxpayers from 12 states to use the service as the agency evaluates the system.

The IRS opened its Direct File service to new users on Feb. 27, enabling people to sign up for four hours between 5 p.m. and 9 p.m. EST. The signup process is now closed. IRS asked taxpayers interested in using the service to check Direct File availability periodically on its website. Last week, the agency explained that the service  will be open for new taxpayers for short periods over the next few weeks.

“When we’ve determined that Direct File is operating as expected, we will reopen for new users. We can’t give a specific date or time for these availability windows, as they might change with short notice.” Direct File had already signed up 1,200 users as of Feb. 16 for its initial testing phase.

“Early users report satisfaction with Direct File and the customer service representatives they have interacted with via live chat. First filers have indicated that Direct File is straightforward and easy to use, and many have successfully filed their taxes in less than 30 minutes,” the IRS said.

At present, Direct File is open to taxpayers from 12 states—Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington, and Wyoming.

Direct File only works for a few types of income—Form W-2 or income from an employer, Form 1099-G or unemployment compensation, Form SSA-1099 or Social Security benefits, and Form 1099-INT which pertains to $1500 or less in interest income, U.S. savings bonds, or Treasury obligations.

If taxpayers have other types of income to file for tax year 2023, they cannot use Direct File. This includes income received from payment apps, online marketplaces, or payment cards; income from independent contract works and gig works; income from rent, prizes, and awards; income from pension and retirement account distributions; allocated tips; unreported tips; and alimony.

Taxpayers cannot use Direct File if their wages for 2023 were more than $200,000. For individuals with more than one employer, the income limit is $160,200.

Married couples whose joint income is greater than $250,000 are also ineligible for Direct File. If a married person is filing separately, their wages cannot exceed $125,000.

Only some types of insurance are accepted: health insurance from the employer, Medicare, Veterans Affairs health care, private health insurance the taxpayer pays for out of pocket, and the state’s Medicaid or Children’s Health Insurance Program (CHIP).

Taxpayers who bought health insurance from a marketplace like healthcare.gov or those who withdrew money from a health savings account (HSA) cannot use the service.

In terms of credits, only Child Tax Credit, Earned Income Tax Credit, and Credit for Other Dependents are currently accepted in Direct File.

As for deductions, Direct File only allows filing standard deductions and not itemized deductions. However, since roughly nine out of 10 people filing federal taxes take the standard deduction, this restriction may not affect too many taxpayers.

Harming Low-Income Americans

In a Feb. 24 X post, Sen. Elizabeth Warren (D-Mass.) praised the new IRS service. “Americans shouldn’t have to fork over their money and data to giant tax prep companies like @turbotax, just for the privilege of filing their taxes. Glad to hear from taxpayers in Massachusetts using the free and easy IRS Direct File pilot program!” she said.

However, Republicans have been warning against the initiative. In a Jan. 30 letter to the Treasury Secretary, a group of 13 Republican attorneys general raised concerns that Direct File will harm low-income Americans.

“Congress has never granted the Department of the Treasury authority to create a Direct File program. And for good reason: the American taxpayers do not want to invite the proverbial fox into the hen house. A Direct File program will also have negative consequences for low-income filers and devastate small businesses,” the letter said.

Taxpayers choose to work with tax professionals “because they want an advocate in their corner who will represent their interests against the IRS bureaucracy.”

“Why would any American trust the IRS to not abuse its power?” the lawmakers questioned.

In order to use Direct File, taxpayers should have the following applicable identification proof—Social Security number (SSN) or Individual Taxpayer Identification Number (ITIN) of the taxpayer and their dependents, an Adoption Taxpayer Identification Number (ATIN) for dependents of the taxpayer, and current driver’s license, state identification, passport, or passport card.

“If the IRS sent you (or your spouse or dependents) an Identity Protection (IP) PIN, you'll also need that.”

Direct File will not pre-fill a taxpayer’s information. The person has to manually enter all necessary details. While customer support can help with technical issues and clarify terms related to the service, they cannot give tax advice. At present, Direct File can only be used to file federal taxes.

The service is being rolled out as the U.S. Federal Trade Commission (FTC) recently filed a complaint against tax preparation company H&R Block for marketing its tax filing services as “free” when they were not for many customers.