Back in May of this year, the Internal Revenue Service (“IRS”) submitted a report to Congress evaluating the feasibility of providing taxpayers with the option of a free, voluntary, IRS-run electronic filing system, commonly referred to as “Direct File.”
The report, required by the Inflation Reduction Act, found that taxpayers were interested in such a tool and that the IRS had the technical capability to deliver it, albeit with sustained budgetary investment and careful management.
As directed by the Treasury Department, the IRS then began working to implement a Direct File pilot program — and it will be available for some taxpayers as soon as the 2024 filing season.
This move by the IRS represents a significant step towards making tax return services more equitable and accessible for taxpayers nationwide. However, there has been pushback against the idea, leaving the tool’s future beyond this pilot program uncertain.
To learn more about the IRS Direct File, who qualifies to use it in the 2024 filing season, and what kinds of arguments are being made against the tool, continue reading below.
The IRS intends the Direct File system to be a government-operated, user-friendly, online tax filing platform that streamlines tax filing, making it more manageable and less time-consuming for individuals and businesses alike.
One key focus of this program is on innovation, particularly in how the IRS procures and implements technology.
In an era when digitization is practically essential to efficiency, this system could also speed up the modernization of IRS systems, enhancing the overall taxpayer experience.
Moreover, the IRS is also trying to gather more information through the Direct File pilot. This involves conducting a comprehensive analysis by an independent third party to understand key areas such as taxpayer satisfaction, cost of implementation, and operational feasibility.
This approach aims to ensure that the system will be developed with a clear understanding of the requirements and potential challenges, thereby increasing its chances of successful implementation and operation.
The cost of implementing such a system is a significant consideration. The IRS estimates that a new Direct Filing system would cost between $64.3 million and $248.9 million a year, depending on the complexity of returns accepted and the number of taxpayers using the system.
Despite the costs, the IRS believes that the potential savings for taxpayers make the Direct File system a worthwhile investment. The agency plans to fund the pilot program and any subsequent full-scale implementation through its budget for systems modernization.
Yes, the IRS Direct File system is a free program.
This initiative is not just about convenience; it’s also about fairness. By offering a free tax filing option, the IRS aims to level the playing field for all taxpayers.
The cost of tax preparation can sometimes be a barrier to filing for low-income individuals. A free system could ensure that everyone, regardless of their income level, has access to the tools they need to file their taxes correctly and efficiently.
What’s more, a government-run system could, theoretically, allow for more transparency and control over the tax filing process. It could potentially reduce the chances of errors or fraud that can sometimes occur with third-party tax preparers.
As of this writing, the IRS has yet to decide precisely who will be eligible for the pilot program. Factors the agency may consider include income thresholds or tax situations.
It’s plausible that the IRS will attempt to make the pilot program accessible to as many taxpayers as possible. However, this could be limited by factors such as the complexity of a taxpayer’s financial situation. For those with incredibly complicated filings, professional accounting services may still be the best option.
The agency has also shown interest in integrating state tax filing into the program, as evidenced by a July letter from IRS Commissioner Danny Werfel to states inviting them to participate in the system. This could potentially broaden the program’s reach and relevance, making it a more comprehensive solution for taxpayers.
Interestingly, there is an existing Free File Program, which the IRS does not provide. However, it is also not widely used. This program, which was started in 2002, comprises services offered by seven private companies. About 70% of taxpayers are eligible to use this program due to making $73,000 a year or less. However, only a small fraction, about 4%, uses it.
The IRS Direct File system could be a step forward in the evolution of such programs, increasing usage and accessibility.
The program is not without its critics.
In fact, the IRS has been met with opposition from several parties, most notably for-profit tax preparation businesses.
These businesses, including industry giants like H&R Block and Intuit, the maker of TurboTax, argue the IRS Direct File would give the IRS an unfair competitive edge. The rationale is that the IRS, as a government body, has access to resources and regulatory advantages that private businesses do not. They also argue that the Direct File system is redundant, given that free options for filing simple returns are already provided by private firms.
These companies have spent millions of dollars lobbying against the Direct File system in an attempt to preserve their market share.
Further, pundits such as The Wall Street Journal Editorial Board have voiced opposition to the IRS becoming the tax filer, preparer, and auditor, worrying that by assuming all of these roles, the agency will create conflicts of interest.
Essentially, the IRS would be checking its own work, which could lead to biased assessments and unchecked errors.
Despite this, information from the agency’s Taxpayer Experience Survey (TES), which surveyed thousands of taxpayers, and findings from an independently conducted survey by the MITRE Corporation seems to suggest that public opinion broadly favors the Direct File system.
Additionally, advocacy groups have launched coalitions to promote the move towards a government-run file program, arguing that it is in the public’s best interest.
It is clear that the next steps for the IRS Direct File system will be shaped not only by its technological feasibility and user acceptance but also by the resolution of these socio-political challenges.
The future of the IRS Direct File system is still uncertain. While the pilot program is set to launch for the 2024 tax season, the full-scale implementation of the system will depend on several variables, including the success of the pilot, taxpayer response, and legislative support.
The IRS’s move to launch a direct tax filing system represents a significant shift in the landscape of tax filing in the United States. While promising, however, the program is still in its early stages. As such, taxpayers can expect further updates and clarifications regarding this innovative initiative.
As the IRS prepares to pilot this program, taxpayers and tax professionals will closely watch its development and impact. Until then, taxpayers are advised to continue using their current tax filing methods and stay updated with the latest developments in the Direct File system.
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Jeff Coyle, CPA, Partner of Rosenberg Chesnov, has been with the firm since 2015. He joined the firm after 20 years of business and accounting experience where he learned the value of accurate reporting, using financial information as a basis for good business decisions and the importance of accounting for management.
He is a diligent financial professional, able to manage the details and turn them into relevant business leading information. He has a strong financial background in construction, technology, consulting services and risk management. He also knows what it takes to create organizations having built teams, grown companies and designed processes for financial analysis and reporting.
His business experience includes:
Creating and preparing financial reporting, budgeting and forecasting.
Planning and preparation of GAAP and other basis financial statements.
Providing insight on financial results and providing advice based on those results.
Jeff also has a long history of helping individuals manage their taxes and plan their finances including:
Income tax planning and strategy.
Filing quarterly and annual taxes.
General financial and planning advice.
Prior to joining the firm in 2015, Jeff was in the private sector where he held senior financial and management positions including Controller and Chief Financial Officer. He has experience across industries, including construction, technology and professional services which gives him a deep understanding of business.
Jeff graduated from Montclair State University, he is a CPA and member of the American Institute of Certified Public Accountants, New York State Society of Certified Public Accountants and New Jersey State Society of Public Accountants.
Jody H. Chesnov, CPA, Managing Partner of Rosenberg Chesnov, has been with the firm since 2004. After a career of public accounting and general management, Jody knows the value of good financials. Clarity, decision making, and strategy all start with the facts – Jody has been revealing the facts and turning them into good business results for more than three decades.
He takes a pragmatic approach to accounting, finance and business. His work has supported many companies on their path to growth, including helping them find investors, manage scaling and overcome hurdles. His experience and passion for business reach beyond accounting and he helps businesses focus on what the numbers mean organizationally, operationally and financially.
He has a particular expertise in early-stage growth companies. His strengths lie in cutting through the noise to come up with useful, out of the box, solutions that support clients in building their businesses and realizing their larger visions.
Prior to joining the firm in 2004, Jody was in the private sector where he held senior financial and management positions including General Manager, Chief Financial Officer and Controller. He has experience across industries, which gives him a deep understanding of business.
Jody graduated with a BBA in Accounting from Baruch College, he is a CPA and member of the American Institute of Certified Public Accountants and New York State Society of Certified Public Accountants.
In addition to delivering above and beyond accounting results, Jody is a member of the NYSCPA’s Emerging Tech Entrepreneurial Committee (ETEC), Private Equity and Venture Capital Committee and Family Office Committee.
He is an angel investor through the Westchester Angels, and has served as an advisor for many startup companies and as a mentor through the Founders Institute.
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