IRS Will Pilot Direct File Program For 2024 Tax Season For Taxpayers In Some States

Earlier this year, the IRS got folks talking when it announced it was launching a pilot program for a free direct online tax filing service. Today, the IRS has confirmed that the program is moving forward for the 2024 filing season.

Background

As part of the Inflation Reduction Act, Congress tasked the IRS with delivering a report on, among other things, the cost of developing and running a free direct e-file tax return system, including costs to build and administer each release, with a focus on multi-lingual and mobile-friendly features and safeguards for taxpayer data. The IRS released the report to Congress in May 2023.

According to the report, the IRS spent several months studying how an IRS-run free direct e-file tax return system might work, and that was “is committed to delivering significantly improved services by providing taxpayers with tools, information, and assistance to make it easier to comply with their tax filing obligations.” Most taxpayers surveyed by the agency reported interest in using an IRS-provided tool to prepare and file their taxes. At the time, the IRS indicated it hoped to make that a reality for some taxpayers for the 2024 tax filing season.

In that same month, the House GOP proposed an appropriations bill that would bar the IRS from using funding to develop or provide a free direct-file tax return system without the prior approval of the Committees on Appropriations of the House and the Senate, House Ways and Means Committee, and Senate Finance Committee. The House failed to pass a long-term appropriations bill, and the short-term funding bill did not address the direct-file tax program.

Limited-Scope Pilot

For the next tax filing season – expected to open in January 2024 – the IRS will conduct a limited-scope pilot to further assess customer support and technology needs.

“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 will 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.”

Participating States

Arizona, California, Massachusetts, and New York will work with the IRS in the Direct File pilot for filing season 2024 to integrate their state taxes into the pilot. Taxpayers in states without an income tax – Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, and Wyoming – may also be eligible to participate in the pilot.

According to Werfel, Washington has also chosen to join the integration effort for the state’s application of the Working Families Tax Credit. With Direct File, taxpayers in Washington could file their federal tax return and then be taken to the Washington system to allow taxpayers to claim the state tax credit.

According to the IRS, all states were invited to join the pilot, but not all states were able to join the pilot at this time. Werfel suggested that timing was the main consideration in the decision not to participate at this time.

What this means is that taxpayers in those 13 states may be eligible to participate in the 2024 Direct File pilot. As part of the pilot, taxpayers may e-file their federal tax return directly with the IRS for free. However, Direct File will cover only individual federal tax returns during the pilot – the IRS Direct File will not prepare state returns.

However, once a federal return is completed and filed, Direct File will guide taxpayers who want to file a state return to a state-supported tool that taxpayers can use to prepare and file a stand-alone state tax return. For the pilot in 2024, where taxpayers may have state or local tax obligations, the IRS will limit eligibility to states that are actively partnering with the IRS on the pilot.

Taxpayer eligibility to participate in the pilot will be further limited to taxpayers with certain types of income, credits, and deductions – taxpayers with relatively simple returns. The IRS anticipates specific income types, such as wages on a Form W-2, and important tax credits, like the Earned Income Tax Credit and the Child Tax Credit, will be covered by the Direct File pilot. For example, the premium tax credit, a refundable credit that helps eligible individuals and families cover the premiums for their health insurance purchased through the Health Insurance Marketplace, is considered “out of scope” for this pilot. Taxpayers who file a Schedule C are also not included as part of the initial pilot program.

Test Run

This limited-scale pilot will allow the IRS to evaluate the costs, benefits, and operational challenges associated with providing taxpayers with a Direct File option.

“We have more work in front of us on this project,” Werfel said. “The Direct File pilot is undergoing continuous testing with taxpayers to identify and resolve issues to ensure it is user friendly and easy to understand. We continue to finalize the pilot details and anticipate more changes before we launch for the 2024 tax season. Direct File, if pursued further after the pilot, would be another option eligible taxpayers have to help them prepare their tax returns in addition to existing options such as the use of a tax professional, tax software, Free File or another option. It is consistent with the IRS mission to make sure taxpayers have available options that work the best for their personal situation.”

Details

Eligible taxpayers may participate in the pilot to file their tax year 2023 federal tax return for free, directly with the IRS. Participating in the program is optional.

Importantly, the service will only be available to some eligible taxpayers when the IRS begins accepting tax returns. The IRS says it wants to make sure the program works effectively, so Direct File will first be introduced to a small group of eligible taxpayers in filing season 2024. Those details focusing on the best approach for selecting and notifying the initial batch of eligible taxpayers. An IRS spokesperson said, “Based on current projections, we anticipate that at least several hundred thousand taxpayers across the country will decide to participate in the pilot.”

As the filing season progresses, more eligible taxpayers will be able to access the service to file their 2023 tax returns. Taxpayers who fall outside the pilot’s eligibility limits will be unable to participate in the pilot in 2024.

Direct File will be a mobile-friendly, interview-based service that the IRS claims will work as well on a mobile phone as it does on a laptop, tablet, or desktop computer. The service will be available in English and Spanish.

Other Options

The IRS was careful to note that Direct File does not replace existing filing options. It is, Werfel stressed, “just another choice.” Existing filing options such as tax professionals, free return preparation sites, commercial software, and authorized e-file providers. In addition, Free File, free tax preparation services like VITA and TCE, as well as a paper tax return or Direct File will still be available.

Help

Taxpayers participating in the pilot will have access to help from IRS employees staffing the Direct File customer support function – Werfel says there will be a “dedicated group of employees for questions that come in on Direct File.”

IRS customer service representatives will provide technical support and provide basic clarification of tax law related to the tax scope of Direct File. Questions related to issues other than Direct File will be routed to other IRS customer support, as appropriate.

Evaluation

The purpose of the Direct File pilot is to test the system the IRS has developed, and to learn from that test. This includes testing the technology, customer support, state integration, fraud detection, and the overall taxpayer experience. According to the IRS, the best way to test a new service offering, such as Direct File, is in a limited, controlled environment that will allow the IRS to identify issues and make changes before any potential large-scale launch.

The agency will be evaluating the success of the program on a range of metrics, including customer service satisfaction and whether questions about Direct File were answered by customer service representatives. The agency also intends to monitor the interest in participation as the pilot rolls out.

The IRS will share the results of the pilot with the public when available. More information will be available at IRS.gov/directfile.

This article was written by Kelly Phillips Erb from Forbes and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to [email protected].