The upcoming pilot program for an in-development tax preparation and electronic filing option operated by the IRS will be limited to a small handful of states, some with and several without a state-level income tax, and will cover some of the most popular low- and middle-income credits. (IR 2023-192; Fact Sheet 2023-23)
In May, the IRS announced it will test drive a new, optional in-house e-filing option for select taxpayers for the 2024 tax filing season. Until now, details on eligibility and scope of Direct File have been sparse as the IRS looks to add onto existing free filing agreements with third-party preparation software providers with its own tool.
On October 17, the IRS announced the pilot program will be available in four states with income taxes: Arizona, California, Massachusetts, and New York; and nine others without an income tax: Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. According to a news release, every state was given the chance to participate, but not all could.
“This is a critical step forward for this innovative effort that will test the feasibility of providing taxpayers a new option to file their returns for free directly with the IRS,” said IRS Commissioner Danny Werfel. “In this limited pilot for 2024, we’ll be working closely with the states that have agreed to participate in an important test run of the state integration. This will help us gather important information about the future direction of the Direct File program.”
While the capacity of the pilot is still a work in progress and subject to change, the IRS clarified Tuesday that it anticipates being able to handle income reported from sources like Form W-2 wages, Social Security and “railroad retirement income,” unemployment compensation, and interest under $1,500. Taxpayers will also be able to claim the earned income tax credit, child tax credit, and the credit for other dependents, as well as the standard deduction. Other write-offs include student loan interest and educator expenses.
“Based on current projections, we anticipate that at least several hundred thousand taxpayers across the country will decide to participate in the pilot,” an IRS official said.
The IRS plans to share results of the pilot after next tax season and will evaluate the success of the technology that goes into making the platform function on desktops and mobile devices. State integration, customer support, and fraud detection will also be looked at before a full-scale launch.
“The IRS announcement of the 2024 Direct File pilot is a crucial step toward putting resources into the hands of millions of families with children by removing a major barrier to tax filing,” said Megan Martin, Executive Vice President at the Center for the Study of Social Policy, a member of the Coalition for Free and Fair Filing.
“We join our partners in applauding the announcement by the IRS and hope that the experience and needs of low-income filers and individuals who face the most barriers to accessing the tax system continue to shape the development of the tool,” she added.
“For far too long, American taxpayers have been left without a simple, easy, and free tool to file their taxes through the IRS,” said Delaware Democratic Senator Tom Carper in a statement shared with Checkpoint. “Today’s announcement from the IRS is a major step towards dramatically improving the taxpayer experience and making the process of filing income taxes more efficient for everyone. The Direct File pilot program is proof that when we invest in our agencies, the American people will benefit.”
Some Republicans have criticized how the IRS pitched Direct File to drum up excitement for the pilot. Specifically at issue is who the IRS picked to serve as an outside analyst tasked with surveying interest in such a program, which Republicans like House Ways and Means Committee Chair Jason Smith of Missouri say was overstated based on a recent report from the Treasury Inspector General for Tax Administration (TIGTA).
A third party was statutorily required for the purposes of a feasibility study by the Inflation Reduction Act (PL 117-169), which appropriated $15 million for the Direct File Task Force. Collectively, this third party was the organization New America and Ariel Jurow Kleiman, Associate Professor of Law at Loyola Law School, Los Angeles. A 72% public interest figure has been used to promote the program since the report was published in May, but TIGTA noted that only 28 percent responded they were “very interested’ in something like Direct File compared to 45 percent who said they were “somewhat interested.”
There was not a “neutral” option in the survey.
“TIGTA’s report further underlines the trust gap between the IRS and American taxpayers,” said Smith in an October 12 release, “but thanks to TIGTA it is now confirmed the agency cooked the books to manipulate the desired outcome and misled American taxpayers in the process.”
Get all the latest tax, accounting, audit, and corporate finance news with Checkpoint Edge. Sign up for a free 7-day trial today.