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IRS announces 13 states where taxpayers could use its Direct File pilot

Details about IRS plans to field its own digital direct file tool during the upcoming filing season are coming into sharper focus, as the agency announced new details about who will be able to participate in its forthcoming pilot on Tuesday. 

Tax filers with relatively simple returns that meet certain income, credit and deduction requirements in 13 participating states may be able to electronically file their federal tax returns with the IRS directly for free in the upcoming 2024 tax season as part of the pilot. 

An IRS official told reporters that the tax agency currently estimates that “several hundred thousand” taxpayers will participate in the pilot, which will open up to progressively larger numbers of filers in phases once it launches. 

The planned pilot won’t help taxpayers prepare state tax returns like many popular online tax prep systems, but four states — Arizona, California, Massachusetts and New York — are integrating state systems so that participating filers in those states will be sent directly from the IRS’ Direct File tool to a state-level tool where they can prepare a state tax return. 

People in nine other states that don’t have a state-level income tax — Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming — may also be able to participate. Washington is also working with the IRS to integrate a tool for a state-level application for its Working Families Tax Credit.

The test of the mobile-friendly, interview-based online service, which will be offered in English and Spanish, comes at the direction of the Treasury Department after the IRS released a Congressionally-mandated report on the feasibility of such a tool in May.

The IRS says that it will be using the pilot to weigh the costs, benefits and challenges for tech, customer support, fraud detection and taxpayer experience associated with the tool, as well as taxpayer interest and internal IRS operations and logistics, as it decides if it will offer the tool long-term.

“This work is imperative to make an evidence-based decision on whether we would move forward with the Direct File option and how we would do it,” IRS Commissioner Danny Werfel said during a call with reporters. “A big part of what we’ll be evaluating is our connectivity to these state solutions, and how does that operate?”

How well that connection between the IRS tool and state taxes works is indeed significant.

The IRS itself cited surveys in its Direct File report showing that over half of taxpayers would opt to continue using free options from tax prep companies if the IRS option doesn’t include state-level returns. Integrating state-level tax returns into the tool is a challenge, though, because the IRS is bound by certain privacy laws limiting the disclosure of return information.

What identity proofing service or services the tax agency will use in the pilot — a high-stakes decision for the agency — remains unclear. The agency has received criticism in the past for its use of facial recognition to verify taxpayers identities online, but also faced internal pushback against efforts to add an alternative, government-backed service, 

An IRS official told Nextgov/FCW that participating taxpayers can expect to use “whatever identity proofing options” are provided by its Secure Access Digital Identity platform when the pilot launches. Taxpayers are currently required to use the vendor for identity proofing, according to an agency webpage on creating IRS accounts.

“The IRS SADI platform continues to be updated and may incorporate new credential service providers that could support the Direct File pilot,” they said. “The IRS takes seriously its obligation to protect taxpayer data and prevent identity theft in all aspects of its work.”

While the IRS is not committing to offering a long-term tool to the American public writ large, the effort is already a pivot from the agency’s decades-long reliance on tax prep companies to provide low-income Americans with free options for tax filing online. Werfel stressed that if the agency does decide to field the Direct File tool long-term, it won’t replace other existing options for taxpayers to file their returns. 

Werfel framed Tuesday’s news as a part of ongoing modernization efforts at the IRS under the Inflation Reduction Act, which mandated the study on Direct File released in May. 

“The IRS has been making remarkable progress in its effort to transform the taxpayer experience,” he said. 

The commissioner also emphasized the iterative process the IRS is using to develop the pilot.

“The pilot is undergoing continuous testing with taxpayers so we can identify and resolve issues,” he said. “The plan is to roll this out in increments that get larger and larger, and that is very consistent with how products like this or software or technology tools are rolled out in jurisdictions and in the private sector. So we’re following a very tried-and-true approach for how to effectively roll out a new solution and make sure that we’re on top of issues as they arise so that we can solve them in real time.”

Editor’s note: This article has been updated to include details about identity proofing provided by the IRS.

source: NextGov