The Internal Revenue Service said Tuesday it plans to run a limited pilot test of its free online tax system in 13 states next tax season, but it will only support certain tax credits.
Four states with their own income taxes — Arizona, California, Massachusetts and New York — have opted to participate in the Direct File pilot next tax season and to integrate their state tax systems with the program. Taxpayers in nine other states without an income tax — Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming — might also be eligible to participate in the pilot. In addition, Washington State has elected to participate in the integration effort for its application of the Working Families Tax Credit. All states have been invited to join the pilot, according to the IRS, but not all states were in a position to join the pilot at this time.
In May, the IRS announced plans to begin pilot testing such a system next tax season after conducting a feasibility study authorized by the Inflation Reduction Act (see story).
“The IRS has been making remarkable progress in its effort to transform the taxpayer experience as directed under the inflation Reduction Act,” said IRS Commissioner Danny Werfel during a press conference Tuesday. “As part of these efforts, we have studied whether it makes sense to provide taxpayers with a free direct e-file option for their federal income tax return, commonly referred to as direct file. Since May, as directed by the Treasury, we’ve been developing a limited direct file pilot for taxpayers to use in the upcoming tax filing season.”
He noted that Direct File is an option and not all eligible taxpayers will be able to participate.
“Based on current projections, we anticipate that at least several hundred thousand taxpayers across the country will decide to participate in the pilot,” said an IRS spokesperson.
Taxpayer eligibility to participate in the pilot will be limited by the state the taxpayer resides in and won’t be limited to taxpayers with certain types of income, credits and deductions, that is, taxpayers with relatively simple returns. However, the IRS anticipates specific income types, such as wages on a Form W-2, and major tax credits like the Earned Income Tax Credit and the Child Tax Credit, will be covered by the Direct File pilot, while other types of tax credits, such as the Premium Tax Credit for health insurance under the Affordable Care Act, will not.
“Because this will be limited in scope, not every taxpayer will be able to participate,” said Werfel. “The pilot will not cover all types of income, deductions or credits. At this point, we anticipate that specific income types such as wages on Form W-2 and important tax credits, like the Earned Income Tax Credit and the Child Tax Credit will be covered by the pilot.”
He acknowledged that the IRS still has much more work to do on the project. “Our direct file team continues to finalize the pilot details and we anticipate more improvements before we launch for the 2024 tax season,” said Werfel. “The pilot is undergoing continuous testing with taxpayers so we can identify and resolve issues. We want to ensure we are providing the most user friendly and easy to understand pilot when it is available for eligible taxpayers during the filing season. This work is imperative to make an evidence-based decision on whether we would move forward with the direct file option and how we would do it.”
The project has encountered opposition from the tax software industry, as well as some lawmakers in Congress. A report released this month by the Treasury Inspector General for Tax Administration found that interest from taxpayers in such an option might be “overstated” because of the design of a survey (see story).
Werfel stressed that direct file, if pursued further after the pilot, would be just another choice available to taxpayers to help them prepare their income tax returns. “It would be in addition to existing options, such as the use of a tax professional, commercial tax software, Free File or another option,” he said. “Our work to evaluate the feasibility of direct file is just one of many examples of how we are continuing to transform the IRS, and there is much more to come in our work to improve the taxpayer experience.”
Senate Finance Committee chairman Ron Wyden, D-Oregon, praised the IRS pilot program.
“All Americans deserve a free and easy way to file their taxes directly online with the IRS and I’m glad to hear a pilot is slated to launch in time for next year’s filing season,” he said in a statement. “I look forward to the day when every taxpayer has this option. There is no good reason to coerce taxpayers to pay the big tax software companies for the convenience of filing taxes online, or to require them to disclose confidential tax information to companies who have been turning it over to big tech firms.”
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