Should tax professionals worry about the new IRS Direct File?
Thinking through the pros and cons for tax professionals of the new IRS program.
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“Never make someone a priority when all you are to them is an option.”
IRS recently announced its new Direct File program. Starting in 2024, a limited number of taxpayers can file their 2023 federal tax returns freely and directly through the IRS website.
The 2022 Inflation Reduction Act included a provision requiring IRS to study the development of such a free, direct filing program. The announcement states the service will be “a mobile-friendly, interview-based service that will work as well on a mobile phone as it does on a laptop, tablet or desktop computer,” available in both English and Spanish.
IRS states several times in the announcement that Direct File will be one of several options available to taxpayers, including working with a tax professional, commercial tax software, or free filing options.
Tax professionals have thoughts and opinions (rightfully) about such a program. I wanted a way to get some of those opinions, but I haven’t had a chance to sit down with any yet. So I asked ChatGPT to simulate a conversation between tax professionals, one skeptical and one supportive, while also explaining how it will work.
So here’s Alex and Taylor discussing the new IRS Direct File program:
Direct File eligibility
Alex: “Hey Taylor, have you heard about this new IRS Direct File pilot? Seems like the IRS is trying to give us a run for our money.”
Taylor: “Oh, I’ve heard. Tax season 2024 is shaping up to be an interesting one!”
Alex: "Ugh, I was really hoping for an uninteresting one! But from what I’ve gathered, it’s pretty limited in scope. It’s only for taxpayers with W2 wages and in certain states.”
Taylor: “Exactly. It’s for those straightforward returns. The IRS is just testing the waters. Remember, only a certain number of taxpayers can even use it during this pilot phase. And as for states with income taxes, only Arizona, California, Massachusetts, and New York have signed on so far. But a few other states that don’t have an income tax are also included.”
Alex: “And supposedly IRS employees will be available to help with technical support and provide basic clarification of tax law. I just hope they can get them trained in time!”
Taylor: “Hopefully that means taxpayers won’t have to ask us to help them with their Direct File!”
Alex: “Hah, we’ll see about that!”
I think ChatGPT did a decent job here! Alex clearly has some healthy skepticism. Taylor is a bit more positive, but not unrealistically so.
To offer some detail, the IRS announcement lists the following limitations on Direct File eligibility:
Income: W-2 wages, Social Security and railroad retirement income, unemployment compensation, and interest of $1,500 or less.
Credits: Earned income tax credit, Child tax credit, and Credit for other dependents. (The announcement did not include the child and dependent care credit, which I hope was an oversight.)
Deductions: Standard deduction, student loan interest, and educator expenses. (The announcement did not include HSA or IRA contributions, which I hope were oversights.)
Potential effect on tax professionals
Alex: “Do you think this could eat into our client base?”
Taylor: “Short term? Maybe a bit. But think about it: many taxpayers need guidance beyond just data entry. Tax planning, strategy, deductions… Direct File won’t replace the value we offer.”
Alex: “Yeah, I appreciate the IRS’s innovative approach. But, I wonder how well it will perform in real-world scenarios.”
Taylor: “It’s a pilot for a reason. They’ll be evaluating tech, customer support, fraud detection, and overall user experience. The 2024 season is essentially a test drive. They want to identify issues and refine the system before potentially going big.”
Taylor is spot on here! Direct File won’t replace the value we offer.
For businesses built around filing lots of cheap returns, Direct File may be a threat.
But for those who provide real value to taxpayers, even those with relatively “simple” financial lives, Direct File could be a blessing. This could motivate new revenue streams built around helping taxpayers plan and strategize without actually filing the return. And that could be a great thing for the profession.
Pros and cons of Direct File
Alex: “I mean, it could be beneficial for those who don’t want to pay for software or professional help. But what’s the catch?”
Taylor: “Well, the main downside is its limited scope. It’s not for business owners, freelancers, or anyone with complex finances. But on the upside, it might streamline the process for those who just have a W2 and nothing else. And it’s not touching state returns. Once the federal return is done, it’ll guide taxpayers to a state-supported tool for their state return. The IRS seems to be treading carefully, ensuring they don’t bite off more than they can chew.”
Alex: “If this pilot is successful, do you see the IRS expanding it?”
Taylor: “It’s possible. But they’ll have to address a lot of nuances and complexities in the tax code. Plus, there’s the tech side of things. Building and maintaining a robust system isn’t a walk in the park.”
Alex: “I guess time will tell. I’m keeping an open mind, but I’m also proud of the bespoke service we offer our clients.”
Taylor: “I couldn’t agree more. Direct File or not, our expertise will always be in demand.”
So what’s your take on IRS Direct File? Let me know your thoughts!
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