IRS Direct File

[Yardley CPA]

I wonder if the system will also offer a 1040-X option?    

IRS free tax filing pilot: Taxpayers in 13 states will have access next year to Direct File 

WashingtonCNN — 

The Internal Revenue Service is moving ahead with a plan to build its own free tax filing program, known as Direct File, announcing Tuesday that a pilot version will be available to some taxpayers in 13 states next year.

Armed with an influx of new money approved by Democrats last year, the IRS is conducting a major overhaul of its operations – despite continued threats from Republicans to cut future funding and even abolish the agency altogether.

Eventually, the IRS tax filing system could serve as an alternative to private tax preparation companies like H&R Block and Intuit’s TurboTax.

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But for now, the online pilot program will be very limited in scope. Only taxpayers in those 13 states with specific, eligible tax situations will be able to participate.

The IRS anticipates that at least several hundred thousand taxpayers will decide to participate in the pilot.

IRS cannot find millions of backup tax records, watchdog says

Critics of Direct File, including H&R Block and Intuit, argue that a government-run system will likely provide a worse taxpayer experience than what is currently available and that the federal tax collector should not also play the role of tax preparer.

“I can’t stress enough that Direct File, if pursued further after the pilot, would be just another choice taxpayers have to help them prepare their tax returns,” IRS Commissioner Danny Werfel said on a call with reporters Tuesday.

Taxpayers would still be able to use a tax professional, commercial tax software or the existing Free File program, which is provided by seven different private companies.

The Direct File pilot program will help the IRS determine whether it’s feasible to offer a government-run tax filing system to more taxpayers in the future.

Who will be eligible for the pilot program?

Some taxpayers in Arizona, California, Massachusetts and New York will be eligible for the pilot program during the 2024 tax season that will launch in January. The states have opted to integrate their state taxes with the federal Direct File system.

The Direct File pilot will cover only individual federal tax returns. But once a federal return is filed, taxpayers will be guided to a state-supported tool that they can use to file their state tax return.

Taxpayers in nine other states that do not levy a state income tax – Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming – may also be eligible to participate in the pilot.

Washington has also opted to integrate the state’s application for the Working Families Tax Credit with the federal Direct File system so that taxpayers are connected with the state form after filing their federal return.

But not every taxpayer in the 13 participating states will be allowed to use Direct File next year. Eligibility will be limited to taxpayers with certain kinds of income that claim specific kinds of credits and deductions.

The IRS has not finalized the exact tax situations that will be compatible with the pilot program next year. But Werfel expects those with wages reported on a Form W-2 and who claim tax credits like the Earned Income Tax Credit and the Child Tax Credit will be covered.

Overhaul at the IRS

The IRS has seen years of reduced funding, resulting in a decrease in both staffing levels and audit rates. But thanks to the Democrats’ Inflation Reduction Act, a sweeping federal spending package that passed Congress in 2022, the agency is set to receive a steady stream of long-term funding to help crack down on tax cheats and transform its operations.

The IRS says the money has already helped it improve taxpayer services. In the 2023 filing season, it answered 3 million more calls and cut phone wait times to three minutes from 28 minutes compared with the year before.

The IRS has also put a plan in motion to digitize all paper-filed tax returns by 2025. The move is expected to cut processing times in half and speed up refunds by four weeks.

The Inflation Reduction Act included a provision to deliver $80 billion to the IRS over 10 years, but Republicans have raised questions about whether the investment would lead to increased audits for average Americans. Earlier this year, Republican lawmakers were able to reclaim $20 billion of the funding in a bipartisan deal to address the debt ceiling.

The White House argued that the cut won’t fundamentally change what the IRS can do over the next few years. Biden administration officials have also repeatedly said that taxpayers earning less than $400,000 a year won’t face an increase in audits due to the new funding.

[BulldogTom]

My biggest question is "Will this system process EITC?"   If so, what proof of eligibility will the site require?   I can just see this as a scam in the making, just like the ERC debacle.  

I am not mad at the concept, I think there is merit to what they are trying to accomplish.   For a single W2 earner with a standard deduction I think this is a good solution.   But, if the site will process refundable credits, I worry that the IRS will not be able to handle the volume of claims.

Count me as skeptical.   I just see politicians making it easier and easier for EITC fraud on this site over time.

Tom
Longview, TX 

[Yardley CPA]

1 minute ago, BulldogTom said:

 

Count me as skeptical.   I just see politicians making it easier and easier for EITC fraud on this site over time.

Tom
Longview, TX 

I agree, for the taxpayer who has a less complicated return or for those who are familiar with tax provisions and filing, more power to them for using this new system.  With that said, there are so many potential issues and questions, that's why I asked if 1040-X will be available...it more than likely would get used often.  

[kathyc2]

The official release from IRS gives a lot more detail:  https://www.irs.gov/newsroom/irs-advances-innovative-direct-file-project-for-2024-tax-season-free-irs-run-pilot-option-projected-to-be-available-for-eligible-taxpayers-in-13-states

Very limited for first year. I don't see why determining EIC would be any different than Turbo Tax type software determining eligibility. 

I do wonder how they will handle items on W2 that instigate additional forms such as HSA and dependent care benefits. I'm guessing people with these items on W2 will be told they aren't eligible after starting filing.

 

[Catherine]

As long as a taxpayer is fine with lying through their teeth, there will be fraud. Especially with refundable credits, and the less proof required the more fraud there will be. 

[kathyc2]

Why do people think this will be more prone to fraud than the plethora of online software already available??

[BulldogTom]

32 minutes ago, kathyc2 said:

Why do people think this will be more prone to fraud than the plethora of online software already available??

because the government is running it...their track record on putting up websites that work is not great.

Tom
Longview, TX

[Lee B]

7 minutes ago, BulldogTom said:

because the government is running it...their track record on putting up websites that work is not great.

Tom
Longview, TX

This website is being created via contract with one of the large third parties like Accenture.

We have had very similar tax preparation software for years called "MilTax" for Active Duty, National Guard and Reserve members and their families.

It will be exposed to a lot more scrutiny than the "FreeFile" programs like Turbotax, TaxAct , Taxslayer and H & R Block.

Plus it should actually be free, which the FreeFile programs weren't!

[Catherine]

No tax pros asking pesky questions. Just keep adding (or taking away) items until you maximize that refund, baby! Just like with Ttx, and answering questions to make that refund number up in the corner keep going up. Many won't realize it's fraud; they will mistakenly think it's set up not to allow fraud. The ones that know it's fraud will just be glad there is no preparer asking those inconvenient pesky questions they need to lie about.

[kathyc2]

19 hours ago, BulldogTom said:

their track record on putting up websites that work is not great

Healthcare.gov was a disaster the first year.  Since then it runs very smoothly.  

It looks like IRS learned from that and is limiting use to work out the bugs.  

[BulldogTom]

2 minutes ago, kathyc2 said:

Healthcare.gov was a disaster the first year.  Since then it runs very smoothly.  

It looks like IRS learned from that and is limiting use to work out the bugs.  

I hope you are right.   That was the website I was thinking of when I posted my comment.

Tom
Longview, TX

[kathyc2]

2 hours ago, Catherine said:

The ones that know it's fraud will just be glad there is no preparer asking those inconvenient pesky questions they need to lie about.

I was comparing fraud to those that currently use TT type products rather than preparers.  I don't see any reason why it would be more subject to fraud than other software. 

I know of local preparers that play very loosely with rules.  I'm sure we all are aware of preparers like that.

IMO tax fraud is part of our declining values in society.  I'm always amazed at how acquaintances and people on social platforms openly talk about how they work for cash.  It used to be there was shame attached to cheating and people would hide it rather than flaunting.

[Lee B]

If you read about personal tax compliance in other countries like Italy or India, it barely exceeds 50 %

[Sara EA]

How many times have every one of us corrected prior year returns that were self-filed?  Sometimes people bring them to us after they get an IRS notice.  Other times they come to us because of some unusual item in the current tax year but we notice an error when we review their prior year.  Often the errors are in the taxpayer's favor.  I once had clients who took money out of a retirement plan year after year and paid taxes and early-withdrawal penalties.  They had a child in college.  I amended three years of returns and got them back enough so they didn't have to make another withdrawal for tuition that year.  Doubt these folks will use IRS's free program in the future.