Treasury Secretary Janet Yellen announced Thursday that the free online tax filing program the IRS piloted this year will be made permanent and expanded in scope.
The online platform, called “Direct File,” will integrate with state tax systems and process a limited number of deductions that it plans to expand further, Treasury Secretary Janet Yellen and IRS Commissioner Danny Wuerfel told reporters.
“We’re making permanent direct file, a new product we piloted this year,” Yellen said while touting the IRS funding boost from the Inflation Control Act.
Woelfel said the size of the expansion has yet to be determined, but that it will gradually scale up over the next few years and focus on “working families” to cover the most common tax situations.
Currently, the system can only process income earned in the form of W2 pay that most U.S. workers are paid, as well as a few credits such as the Child Tax Credit and the Earned Income Tax Credit.
Wurfel cited several tax situations the IRS would like to see incorporated into direct files, including tax deductions for medical expenses and retirement benefits.
“The premium tax credit is available under the Affordable Care Act to people who buy health insurance through the Affordable Care Act marketplaces, and it wasn’t included in this year’s coverage,” Wurfel said.
“There were other refundable tax credits that didn’t qualify. There was retirement income that didn’t qualify,” he added.
Republicans and the private tax preparation software industry have strongly opposed the new program, and House Republicans voted to defund Direct File as soon as they took control of the House in 2023.
“There are also serious questions about whether the IRS has the legal authority to implement such a program without Congressional authorization,” Sen. Mike Crapo (R-Idaho), the ranking member of the Senate Finance Committee, said in a statement last year.
Wurfel on Thursday did not say what types of additional income might be subject to direct reporting, such as investment income, rental property income or independent contractor income reported on a 1099-K.
The process of expanding Direct File begins with determining which states to add beyond the initial 12 offered this year.
“It really depends on how prepared the states are,” Warfel said. “There will be no limit to how many states can participate next year.”
The program’s costs next year could be up to $75 million, as outlined in an annual supplement to the IRS’ strategic operating plan, but Warfel said the IRS “will not significantly exceed” that amount.
