By Kate Dore -
CNBC
As tax season begins, Americans have several options to file their returns for free, and some taxpayers will soon qualify for a new offer from the Internal Revenue Service (IRS).
Known as Direct File, the agency's free filing software will begin as an invitation-only service for a group of government workers before expanding to select taxpayers, in 12 states, in mid-March.
The software is "simple, secure and free," Laurel Blatchford, director of Inflation Reduction Act enforcement at the US Treasury Department, said in a statement Thursday.
Direct File arises after a feasibility report authorized by the Inflation Reduction Law.
The report found that nearly three-quarters of taxpayers expressed interest in a free filing system provided by the IRS.
In 2023, individual U.S. taxpayers spent an average of $150 to prepare and file returns, according to the Treasury Department.
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The IRS provided a demonstration of Direct File to CNBC and other media outlets last Thursday.
Here's what taxpayers can expect next season.
Direct File "starts small" with 12 states
The Direct File pilot program begins with a limited group of taxpayers with relatively simple returns, according to IRS officials.
"We're starting small: As filing season begins, the pilot is undergoing ongoing testing with taxpayers so we can identify and resolve issues," IRS Commissioner Danny Werfel said in a statement Thursday.
Eligible states will be Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington and Wyoming.
Although Direct File will not cover state returns for residents of Arizona, Massachusetts, and New York, you will still be able to continue your state return by importing data from Direct File.
California residents will use CalFile with some data already filled out.
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“We will work closely with the 12 pilot states on this test, which will help us gather information about the future direction of the Direct File program,” Werfel said.
Who can use Direct File?
Residents of eligible states with a simple and direct return may qualify.
The pilot program will begin with limited types of income, credits and deductions, IRS officials said.
Although only some taxpayers can use Direct File, the bilingual software includes live chat support with IRS staff.
The pilot will only accept Form W-2 wages, Social Security retirement income, unemployment income and interest of $1,500 or less.
This means the pilot will not include anyone with gig economy work or entrepreneurial income.
You must claim the standard deduction to use the Direct File pilot and the system only accepts some credits such as the earned income tax credit, child tax credit, and other dependents credit.
The program also accepts tax breaks for student loan interest and educator expenses.