New Direct File Tool Pilot Program Will Ease Tax Filing for Many
By Ashley Burnside
During this year’s 2023 tax filing season, the IRS will test a new, free online tax filing tool in 12 states. The Direct File tool promises an important opportunity to make tax filing easier and cheaper and help more tax filers access credits that they are eligible for, like the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC).
The Direct File tool will use easy-to-understand language, be mobile-friendly, and is available in Spanish. Users can save information in the tool and come back to it later, and customer service representatives will be available to help answer questions and to provide technical support.
Funding to evaluate the viability of a Direct File tool implemented by the IRS was provided through the Inflation Reduction Act. After publishing a report summarizing their findings in May 2023, the IRS announced its plans to launch the pilot program in 2024. The pilot will help the agency understand taxpayers’ experiences with using the program and evaluate any customer service and technology needs.
The Scope of the Direct File Pilot Program
This year’s limited, two-phase pilot will give the IRS the opportunity to improve the program as needed. The first phase will only be available to federal government employees, which will allow the IRS to update the software as people begin using it on a smaller scale. After this phase, the Direct File tool will gradually be made available to more members of the public. The agency is hoping to make the tool more widely available by mid-March.
Tax filers can check their eligibility for the Direct File tool on this IRS website. The Direct File tool pilot will be available to tax filers in twelve participating states who have relatively simple returns. Tax filers filing with specific kinds of income will be eligible to participate in the pilot, including those who have W-2 wage income, Social Security and/or railroad retirement income, unemployment compensation, and interest income of $1,500 or less. Tax filers claiming the EITC, CTC, and/or the Credit for Other Dependents and those who have student loan interest and/or educator expenses can participate. Only filers who are taking the standard deduction can participate. Independent contractors who receive 1099s will not be eligible to use the Direct File tool. The tool will be available to filers who use Individual Taxpayer Identification Numbers (ITINs) and meet the other eligibility criteria.
The Direct File tool only covers federal returns. Eight states that will be participating in the pilot do not have a state income tax: Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. (Alaska was previously included in the list of states participating in the pilot program due to the state not having a state income tax, but the state will no longer be participating due to complications with Alaska residents receiving state dividends.) Washington state will direct eligible tax filers who use the Direct File tool to the state program application for the Working Families Tax Credit, which is the state’s EITC.
Arizona, California, Massachusetts, and New York, all of which are participating in the pilot program, do have state income tax. Residents of these states will be able to file state returns through a state-sponsored partner software. Arizona and New York will partner with Code for America to provide a state e-filing tool for people who use the Direct File tool, which will have the option to transfer the data from the federal return into the state return. Tax filers in California will be directed to the state’s existing direct filing system, called CalFile, after they fill out the federal Direct File return. Federal data will not be imported from the Direct File tool, but some California data will be pre-populated. In Massachusetts, filers will use the state’s existing direct filing system, called MassTaxConnect, to file their state return. MassTaxConnect will import information from the Direct File tool into the state return.
Why the Direct File Program is Important
Offering a Direct File tool will promote equity in our tax code by making it easier and cheaper to file taxes, especially for communities that face barriers to filing taxes. Filing taxes can be especially burdensome for people with very low incomes, people of color, immigrants, people who speak English as a second language, and people with disabilities. In addition, research has concluded that people of color face a greater risk of missing out on claiming the EITC. The Direct File tool is one way to promote equity and to reduce barriers to filing taxes and claiming credits.
We Should Promote and Invest in Direct File
Once the pilot program starts, it will be essential that tax assistance clinics and advocates, lawmakers, and media raise awareness of the program and the impact that it is having. People who care about financial equity must help shape the narrative of how Americans view the IRS and the process of filing their taxes each year – the process should not require money for filers with simple returns or take significant time and create headaches. For tax filers who live in the 12 participating states, it’s important to advertise the Direct File program to other community members to ensure that everyone knows that they may be eligible to use this free tool. Finally, lawmakers must continue investing in the IRS to ensure that programs like the Direct File tool become a permanent fixture in our tax filing system.