The Internal Revenue Service (IRS) has recently launched Direct File, a cost-free tax filing tool, as an alternative to traditionally costly platforms. The tool is currently available in twelve states, including Arizona, California, and New York, but an expansion to include all states is imminent.
The pilot program for Direct File provides taxpayers a user-friendly platform with features including a step-by-step guide, automatic calculations, and scheduling payments. However, despite its convenience, Direct File is still currently an experimental program. Until now, roughly 20,000 individuals have tested it, but there are plans to expand to about 100,000 users in the near future.
The gradual rollout of this tool, allows the IRS to gather valuable feedback and implement improvements accordingly. The ultimate goal of this expansion is to provide a broader understanding of the system’s capabilities and limitations, thus guiding its further development and refinement.
The U.S. Treasury Department estimates that around one third of all federal income tax filings, equivalent to about 19 million taxpayers, could potentially be processed through the Direct File system. This shows the huge potential this tool has for future tax cycles.
Designed to offer the same level of software-based assistance available on paid platforms, Direct File mainly caters for taxpayers with relatively straightforward tax situations. It provides a user-friendly interface with helpful tips and guidance, making tax preparation less daunting for single or joint filers with standard W-2 income and deductions.
However, Direct File does have some notable limitations. For instance, it doesn’t support taxpayers with complex tax situations, those who opt for itemized deductions, or taxpayers with a high income (more than $72,000 AGI). In addition, it cannot handle international addresses, mortgages, the elderly or disabled tax credit, rental real estate, capital gains or losses, household employment taxes, and the Alternative Minimum Tax (AMT). It also does not support amendments or corrections to previously filed returns.
Direct File is intended solely for federal income taxes, requiring users to separately prepare and file their state tax forms. Despite its limitations, this new system still offers an unprecedented tool free-of-charge and information about the Direct File system can be readily accessed online.