Alongside the $369 billion earmarked for energy and climate initiatives and the $64 billion designated for the expansion of the Affordable Care Act, the Inflation Reduction Act of 2022 allocated approximately $80 billion to the Internal Revenue Service IRS. This funding aims to bolster the agency’s enforcement efforts, enhance operational support, and facilitate the modernization of its business systems.
The Inflation Reduction Act (IRA) also designated nearly $3.2 billion for taxpayer services, which faced substantial challenges during the COVID-19 pandemic. A portion of approximately $15 million was assigned to the development of a complimentary e-file program, intended to replace the existing Free File program offered by private providers in recent years.
IRS launches direct file pilot for simplified, no-cost Federal Tax filing in select states
The Internal Revenue Service (IRS) recently unveiled details about a Direct File pilot initiative. This program allows eligible taxpayers from 13 participating states to electronically submit their federal tax returns directly to the IRS at no cost. While all states were invited to partake in the pilot initiative, only four—Arizona, California, Massachusetts, and New York—have agreed to join and are anticipated to adopt the new filing technology by 2024.
Furthermore, residents in nine states without state income taxes—Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming—qualify for participation in the pilot. Washington has expressed interest in collaborating as a partner, particularly concerning the state’s working families tax credit.
IRS Commissioner Danny Werfel emphasized the significance of this advancement, stating, “This marks a crucial stride in the innovative initiative to assess the feasibility of offering taxpayers a new avenue for filing their returns directly with the IRS for free.” Werfel added, “In this limited 2024 pilot, we will collaborate closely with the participating states in a pivotal trial of state integration. This will provide valuable insights into the future trajectory of the Direct File program.”
Initially, Direct File will have limitations based on participating states and will cater to taxpayers with relatively straightforward returns involving uncomplicated income, credits, and deductions. The IRS has specified that individuals utilizing W-2 Forms and claiming tax credits such as the child tax credit and the earned income tax credit will be eligible for Direct File.
While the Direct File pilot is in the finalization stage, the IRS anticipates that taxpayers will be able to submit returns encompassing the following income sources, tax credits, and deductions:
- Income Reporting: W-2 wage income, Social Security and railroad retirement income, unemployment compensation, and interest totaling $1,500 or less.
- Tax CredIts: Earned income tax credit, child tax credit, and credit for other dependents.
- Deductions: Standard deduction, student loan interest, and educator expenses.
The phased pilot program will initially be available in English and Spanish, and Direct File will specifically cover individual federal tax returns during this trial period. State returns will still be required to be completed using conventional channels and filing tools.