In addition to the $369 billion allocation for energy and climate programs and the $64 billion Affordable Care Act expansion funding, the Inflation Reduction Act of 2022 also provided nearly $80 billion to the Internal Revenue Service (IRS) to support the agency’s enforcement, operations support and business system modernization objectives.
The IRA also appropriated almost $3.2 billion for taxpayer services, the quality of which took a significant hit during the COVID-19 pandemic. About $15 million was allocated toward building a free e-file program, which will replace the Free File program that has been available through private providers over the past few years.
The IRS recently announced details of a Direct File pilot program, which will enable eligible taxpayers from 13 participating states to electronically file their federal tax return directly with the IRS for free.
All states were invited to join in the pilot program, but only four states, Arizona, California, Massachusetts and New York, have agreed to participate and should be able to use new filing technology in 2024.
Additionally, taxpayers who live in nine states that don’t have state income taxes — Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming — will be eligible to participate in the pilot. Washington has expressed interest in integrating as a partner for the state’s working families tax credit.
“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’ll be working closely with the states that have agreed to participate in an important test run of the state integration,” Werfel added. “This will help us gather important information about the future direction of the Direct File program.”
To start, Direct File will be limited by participating states and to taxpayers with fairly simple returns referencing uncomplicated income, credits and deductions. The IRS has indicated that workers using W-2 Forms and claiming tax credits like the child tax credit and the earned income tax credit will be able to do so though Direct File.
The Direct File pilot is being finalized, but the IRS says it expects taxpayers to be able to file returns containing the following income streams, tax credits and deductions:
- Income reporting: W-2 wage income, Social Security and railroad retirement income, unemployment compensation and interest of $1,500 or less.
- 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 will be offered in English and Spanish to start and Direct File will cover only individual federal tax returns during the pilot. State returns will still needed to be completed using regular outlets and filing tools.
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