Tax season opens Jan. 29, but new IRS Direct File tool not coming until March

The IRS is moving further into the tax-prep business this year with a free filing system that could save taxpayers from hiring accountants or paying for commercial tax-prep software.

The agency begins accepting returns Monday, but the pilot Direct File system won't be widely available until mid-March, Internal Revenue Service officials said last week. New York is one of 12 states chosen for the pilot program.

Initially, only taxpayers with relatively simple financial situations will be eligible to use the new system. But if it takes off, the government-run tax tool could provide some serious competition for the $33 billion tax prep industry. After its soft launch this year, the IRS may expand Direct File in the future to include more taxpayers. 

Several hundred thousand tax filers are expected to participate in the pilot program this year.

Direct File will be offered in English and Spanish and should be accessible through a variety of devices including smartphones, laptops, tablets and desktop computers. Its goal is to give taxpayers an easier, more user-friendly way to file their federal taxes and to help them claim tax credits that may otherwise be forgotten. The IRS noted last year in a report to Congress that 5 million eligible taxpayers fail to claim an Earned Income Tax Credit every year.

The system uses an interview-based approach, much like commercial tax-prep tools, asking the taxpayer a series of questions that helps it generate the return. It also has a live chat option that users can select to contact IRS staff for technical assistance and some limited guidance on tax law.

Direct File is not meant to replace other means of tax filing. The IRS still accepts returns that are filed the traditional ways, including those prepared on paper and sent through the mail as well as returns sent electronically through the agency’s existing Free File system, which offers guided filing through third-party software providers for taxpayers with adjusted gross incomes of $79,000 or less. Taxpayers also can keep using commercial software and professional tax preparers.

Financial services firms Intuit Inc. and H&R Block Inc. have sharply criticized Direct File this year as a waste of money. 

H&R Block said in a statement that "the IRS should focus additional funding on improving its existing services for taxpayers." A spokesperson for Intuit, which makes Turbo Tax software, said that while tax prep services are driven to maximize their customers' refunds, the IRS is focused instead on generating revenue for the government.

The IRS Direct File service, Intuit spokesperson Tania Mercado said, “could be a recipe for overpaying.”

People who use Direct File must accept the standard deduction and report only limited types of income like W-2 wages, Social Security payments and unemployment compensation. They also cannot report more than $1,500 in interest income.

The system also won’t work for filers who plan to claim tax credits other than the Earned Income Tax Credit and tax credits for children and dependents.

The IRS is expected to announce the launch of Direct File for New York in mid-March. Taxpayers who want to file earlier than that should use other methods.