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Sunday July 14, 2024

Washington News

Washington Hotline

Direct File Growth in 2025

On June 18, Treasury Secretary Janet Yellen and Senate Finance Committee Chair Ron Wyden (D-OR) announced that the State of Oregon will join Direct File in 2025. The Internal Revenue Service (IRS) has invited all 50 states and the District of Columbia to join the program in 2025.

There were 12 states in the Direct File pilot program for 2024. The IRS is now in discussions with multiple additional states to join and offer the tax-filing service in 2025.

The pilot version of Direct File covered W-2 wage income, Social Security income, unemployment compensation and credits such as the child tax credit and the earned income tax credit. It did not cover the child and dependent care credit or the premium tax credit. Future versions of Direct File are expected to offer expanded capabilities.

Secretary Yellen stated, "Oregonians will be able to use Direct File to file their federal returns directly with the IRS for free and then use Oregon's state tax filing tool to quickly and easily file their state returns for free."

Sen. Wyden continued, "This is a good day for Oregon taxpayers who are tired of getting ripped off by the big tax software companies year after year."

The pilot program in 2024 involved 140,000 taxpayers who received $90 million in refunds and saved an estimated $5.6 million in filing costs. The 2025 Direct File expansion is expected to grow as decision-makers in at least 20 other states further discuss it.

The tax preparation industry is opposing expansion of the program. Representative David Ransom of the American Coalition for Taxpayer Rights stated, "We understand that many state officials have serious questions and skepticism regarding the IRS Direct File platform."

There has been previous opposition by the tax-preparation industry to similar programs. In 2005, the State of California's pilot program, CalFile, was designed to protect taxpayers from "paying unnecessary tax-preparation fees" and also faced opposition from the tax preparation industry.

Ayushi Roy is Deputy Director of New America's New Practice Lab and noted, "I think the amount of work it takes for any kind of product team, especially the IRS, to be managing two-plus teams in every single state -- we are talking 100 different groups of people across 50 states, minimum. Just because we can do all 50 states, should the IRS do it?"

Samantha Galvin is a professor of law and director of the federal tax clinic at Loyola University, Chicago. She has represented many low-income taxpayers in IRS proceedings. Galvin notes the Direct File program will be significantly improved if it pre-populated information. This would reduce audits and collection costs.

In a news release, Galvin stated, "A big indicator that prepopulating information is not an impossible feat, and that the IRS is actually willing to do it, happened late in the pilot. Relying on information the IRS already had, a Direct File team was successful in making taxpayers' 2023 tax year adjusted gross income information available through Direct File."

Editor's Note: The IRS is continuing to move forward with Direct File. It is a large undertaking to update the program for complex returns and state income tax returns. However, several states, such as Oregon, have an existing solution that will facilitate Direct File integration.

Published June 21, 2024
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