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13 states could participate in IRS' 2024 Direct File pilot

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The 2023 filing season officially ended for most U.S. taxpayers on Monday, the Oct. 16 extension deadline.

Now the Internal Revenue Service is looking forward to next year.

The agency today announced that its finalizing a Direct File program that will involve at least four states. Arizona, California, Massachusetts, and New York officials have decided be a part of the 2024 filing program, which will be under total IRS purview rather than in conjunction with the tax software industry as is the current Free File system.

State tax help key: Getting the buy-in of California and New York, home to two of the largest taxpaying populations in the country, is a major accomplishment.

Since the IRS delivered its initial Direct File report in May to Congress, it's been working to develop a pilot, paying special attention to customer support and state taxes. The IRS' eventual ability to deal with state filings as part of the overall federal filing process could make the federally run option more appealing to more taxpayers.

Most states offer their residents direct, but separate, free e-filing options. That's why many state filers still use private sector tax software that takes federal filing data, generally used as the basis for most state returns, and transfers it to those state forms.

That will not happen in the Direct File pilot format. The initial iteration next year will not compete with the commercial software in the state arena. It will cover only individual federal tax returns, and will not prepare state returns.

However, once a taxpayer completes and files a federal return, Direct File will guide taxpayers with state tax obligations to their state-supported tool that they can use to prepare and file a stand-alone state tax return.

And getting taxpayers in participating states to at least consider the IRS federal return prep and filing option is a good start. 

Other possible state partners: For the upcoming 2024 pilot, the IRS will limit eligibility to states that are actively partnering with the IRS on the pilot. Again, they are Arizona, California, Massachusetts, and New York.

But nine states without an income tax on wages — Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — may also be eligible to participate in the pilot. ( I hear you tax-savvy readers. New Hampshire and Washington tax certain capital gains.)

Washington already has chosen to join the Direct File integration effort in connection with the Evergreen State's application of the Working Families Tax Credit.

All states were invited to join the 2024 Direct File effort, said the IRS in its announcement of program. However, not all were in a position to join the pilot "at this time," noted the IRS.

Still, the participation of the 13 states "is a critical step forward for this innovative effort," 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."

That direction is, under the most hopeful outlook, eventual availability to every U.S. taxpayer. But that's a way, a long way, down the road.

Other participation limits: So that it can be sure the program works effectively, the IRS said Direct File will first be introduced to a small group of eligible taxpayers in filing season 2024.

First, as noted earlier, taxpayer eligibility to participate in the Direct File pilot will be limited by the state in which the taxpayer resides.

While specifics are still being finalized and are subject to change, the pilot also will be limited to taxpayers with certain types of income. Basically, that will be those with relatively simple returns.

As far as qualifying income, the Direct Fill will be available for those whose earnings are from —

  • W-2 wages,
  • Social Security and railroad retirement benefits,
  • Unemployment compensation, and
  • Interest of $1,500 or less.

Some popular tax credits also will be covered by the Direct File pilot. Currently, that includes —

  • Earned Income Tax Credit,
  • Child Tax Credit, and
  • Credit for Other Dependents

The tax deductions that will be covered under Direct File include —

  • Standard deduction,
  • Student loan interest, and
  • Educator expenses.

The IRS also says that the pilot will be flexible. As the filing season progresses, more and more eligible taxpayers will be able to access the service to file their 2023 tax returns, according to the agency.

Direct File pilot basics: Direct File will be an interview-based service that will work on mobile devices (phones and tablets), as well on laptop and desktop computers. The pilot service will be available in English and Spanish.

Taxpayers participating in the pilot will have access to help from IRS employees staffing the Direct File customer support function. 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.

One more item in the tax tool box: The IRS reiterated that Direct File is part of the agency's efforts to give taxpayers choices in how they interact with Uncle Sam's tax collector. This includes choices in preparing and filing taxes.

Direct File will not replace existing filing options, noted the agency. Taxpayers will continue to make the ultimate decision as to whether they want to use a tax professional, a commercial software product, Free File, free tax preparation services such as Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE), file a paper tax return, or, for some in 2024, use Direct File.

I'm sure that there will be issues as the agency develops an IRS-run Direct File program. But I'm willing to give the IRS the benefit of the doubt here.

Starting slowly and utilizing the expertise of state tax departments that already run their own free tax prep and filing programs is a good start. The limited scale of the 2024 Direct File pilot will let the IRS evaluate the costs, benefits, and operational challenges before expanding.

And while filing taxes isn't a choice for most of us (we have to do it, or else…), having more options on how to meet that tax compliance requirement is a good idea.

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