The Internal Revenue Service announced Tuesday that a pilot version of Direct File, its free tax filing program, will be accessible to some taxpayers in 13 states next year.
On April 7, tourists pass past the Internal Revenue Service headquarters near the National Mall in Washington, DC. (Source: CNN)
Internal Revenue Services Tax Filing System
The Internal Revenue Service is overhauling its operations with fresh money authorized by Democrats last year, amid Republican threats to reduce the budget and abolish the agency. H&R Block and TurboTax may be replaced by the Internal Revenue Services tax filing system. Initially, the online pilot program would be limited. Only taxpayers in those 13 states with appropriate tax situations can participate. The IRS expects several hundred thousand people to join the pilot.
H&R Block and Intuit, Direct File critics, claim that a government-run system will certainly worsen the taxpayer experience and that the federal tax collector should not prepare taxes. On Tuesday, Internal Revenue Services Commissioner Danny Werfel told reporters that he cannot stress enough that Direct File if pushed further after the pilot, would be simply another alternative taxpayers have to assist them in completing their tax returns. If Direct File were to be explored further after the pilot, the IRS Commissioner said he could not stress enough that Direct File would be just another choice. Taxpayers could still utilize a tax expert, commercial tax software, or the Free File program from seven private companies.
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IRS Direct File
The Internal Revenue Service will use the Direct File pilot program to decide if it can offer a government-run tax filing system to more taxpayers. The January 2024 tax season will include the trial program for some Arizona, California, Massachusetts, and New York taxpayers. States link their taxes with federal Direct Files. The Direct File pilot covers solely individual federal tax returns. After filing a federal return, taxpayers will be directed to a state-supported tool to file their state tax returns. The pilot may also include taxpayers in Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming, which do not have state income taxes.
Washington has also integrated its Working Families Tax Credit application with the federal Direct File system to connect taxpayers to the state form after filing their federal return. Next year, only some taxpayers in the 13 participating states can use Direct File. Only taxpayers with particular income and credits and deductions will be eligible. The IRS is still determining which tax scenarios will work with the test program next year. Werfel expects Form W-2 wage earners who claim tax credits like the Earned Income Tax Credit and Child Tax Credit will be covered.
The Internal Revenue Service has had years of decreasing funds, and lowering workforce and audit rates. The Democrats’ 2022 Inflation Reduction Act, a massive government spending bill, will provide the agency with long-term financing to crack down on tax cheats and reform its operations. The IRS claims the funds have improved taxpayer services. It handled 3 million more calls and lowered phone wait times to three minutes from 28 minutes in the 2023 filing season. The IRS plans to digitize all paper tax returns by 2025. The move should cut refund processing delays in half and speed them up by four weeks.
Republicans have questioned if the Inflation Reduction Act’s $80 billion investment in the IRS over 10 years will boost audits of normal Americans. A bipartisan debt ceiling arrangement allowed Republican lawmakers to regain $20 billion earlier this year. The White House claimed the cut won’t significantly impact the IRS’s capabilities in the coming years. The Biden administration has also consistently said that people earning less than $400,000 a year will not be audited due to the extra funds.
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