IRS Announces Permanent Expansion of Free Online Tax Filing Program

Featured & Cover IRS Announces Permanent Expansion of Free Online Tax Filing Program (1)

The IRS’s trial of a free online tax filing program this year is set to become a permanent fixture, with Treasury Secretary Janet Yellen revealing plans for its expansion. Dubbed “Direct File,” this digital platform will undergo integration with state tax systems and a broadening of its capabilities beyond its current limited deductions processing, as announced by Yellen and IRS Commissioner Danny Werfel.

“We’re making Direct File — the new product we piloted this year — permanent,” affirmed Yellen, citing the increased IRS funding from the Inflation Reduction Act as a contributing factor.

Werfel indicated that while the scale of the expansion remains undecided, it will progressively accommodate a broader range of tax scenarios over the forthcoming years, with a particular focus on those pertinent to “working families.”

Presently, the system can only handle income received in the form of W2 wages, the predominant payment method for most U.S. workers, alongside a select few credits such as the Child Tax Credit and Earned Income Tax Credit. Werfel highlighted various tax scenarios where there was a notable demand for inclusion in Direct File, including health care and retirement tax credits.

“The premium tax credit — under the Affordable Care Act, those that get their health insurance in the affordable care act marketplace and therefore receive a premium tax credit. That was something that was not in our eligibility scope this year,” explained Werfel, adding, “There were other refundable tax credits that were out of scope. There was certain retirement income that was out of scope.”

Senator Ron Wyden, chair of the Senate Finance Committee, lauded the development as “tremendous news for taxpayers all over the country who are tired of getting ripped off by the big tax prep companies that routinely upcharge for unnecessary services, oversell the quality of their products and offer crummy customer service.” Wyden commended Werfel and Secretary Yellen for their approach, noting the careful testing and development of the service before its expansion.

In contrast, Republicans and the private tax preparation software industry have criticized the initiative. House Republicans moved to defund Direct File shortly after assuming control of the lower chamber in 2023. Senate Finance Committee ranking member Mike Crapo expressed concerns about the IRS’s legal authority to implement such a program without congressional authorization in a statement last year.

Thursday’s announcement did not delve into additional types of income that could become eligible for Direct File, such as investment returns, rental property income, or independent contractor income filed on 1099-Ks.

The process of expanding Direct File will commence with the identification of additional states to be included beyond the initial 12 where it was accessible this year.

“It really depends on state readiness,” noted Werfel. “There will be no limit to the number of states that can participate in the coming year.”

The projected cost of the program for the next year could reach up to $75 million, as outlined in the IRS’s strategic operating plan annual supplement, a figure that Werfel assured would not be “significantly or materially exceed.”

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