The Future of Filing Taxes Explained

Despite nearly every U.S. citizen needing to file their taxes each spring, the U.S. Department of Treasury has never had a way to file your returns directly through the Internal Revenue Service (IRS). In the past, the IRS has had to rely on partnerships with private tax preparers to collect tax information.

That is, until now.

What is Direct File?

Earlier this year, the IRS launched the Direct File pilot, a free tool that allows residents of certain states (including California, Arizona, Nevada, and Washington) to directly file their 2023 federal tax return online. It’s important to note that this tool can only help prepare federal tax returns, state tax returns must be handled separately, and can only currently accept certain types of income, such as:

• W-2 wage income
• SSA-1099 Social Security income
• 1099-G unemployment compensation
• 1099- INT interest income of $1,500 or less

You will be ineligible for Direct File if you receive any income from a business or a type of gig job, claim tax credits such as the Child and Dependent Care Credit, Saver’s Credit, Premium Tax Credit, and if you itemize your deductions.

How do you use Direct File?

First, the IRS needs to make sure that you are eligible to use Direct File, which includes questions on your state of residence, Social Security number/driver’s license/passport, the correct type of income, taking standard deductions, certain types of health insurance, common tax credits, and an IRS account with ID.me.

Once you begin the process, Direct File will ask you a checklist of questions, including categories such as:

• You and your family
• Income
• Deductions and credits
• Your 2023 taxes

Once these steps are done, Direct File will process your return and show you whether you will receive a refund or owe money and how those can be handled. After the payment situation has been handled, you should receive an email that your 2023 federal tax return was accepted and that the process has been completed.

Direct File is currently very limited, with the IRS estimating that only around one-third of Americans should be eligible for the pilot. Hopefully, in coming years, we will see the IRS expand this tool to allow for more complex tax structures to fit people’s unique circumstances. At Fennemore, we will continue to advise our clients on how best to utilize the pilot program as it continues to evolve and receive feedback.