Cryptocurrency Taxes In the US: A Beginner's Guide [Updated 2022]
Cryptocurrency Taxes In the US: A Beginner's Guide [Updated 2022] (Photo: Canva)

In a significant move towards modernizing the tax filing process, the Internal Revenue Service (IRS) has announced the launch of its Direct File pilot program for the 2024 tax season. This initiative, which will be available to select taxpayers in 13 states, is part of the IRS's broader effort to overhaul its operations and provide more streamlined services to the public.

The Direct File system is designed to offer taxpayers a free, government-run platform to electronically file their federal tax returns. This initiative is seen as a potential alternative to private tax preparation companies, such as H&R Block and Intuit's TurboTax. However, the scope of the pilot program will be limited initially. Only taxpayers in the participating 13 states with specific tax situations will be eligible to use the Direct File system. Despite this, the IRS anticipates that several hundred thousand taxpayers will opt to participate in the pilot.

The states that have chosen to integrate their tax systems with the federal Direct File program for the 2024 tax season include Arizona, California, Massachusetts, and New York. Once taxpayers in these states file their federal returns through Direct File, they will be directed to state-sponsored tools to complete their state tax filings. Additionally, taxpayers from nine states that do not have a state income tax, including Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming, may also be eligible for the pilot program.

IRS Commissioner Danny Werfel emphasized that the Direct File system is intended to be an additional choice for taxpayers, not a replacement for existing options. Taxpayers will still have the freedom to use tax professionals, commercial tax software, or the current Free File program, which is offered by seven private companies.

However, the introduction of Direct File has not been without its critics. Companies like H&R Block and Intuit argue that a government-run system might not provide the same quality of taxpayer experience as the current private offerings. They also raise concerns about the potential conflict of interest in having the federal tax collector also serve as a tax preparer.

The IRS's move to introduce Direct File comes after years of reduced funding and operational challenges. However, with the passage of the Democrats' Inflation Reduction Act in 2022, the IRS received a significant boost in funding. This has enabled the agency to enhance taxpayer services, reduce phone wait times, and set plans in motion to digitize all paper-filed tax returns by 2025.

Despite the advancements, the IRS's increased funding has been a point of contention among lawmakers. While the Inflation Reduction Act initially allocated $80 billion to the IRS over a decade, Republican concerns about potential increased audits for average Americans led to a $20 billion reduction in the funding.

As the IRS continues its efforts to modernize and improve its services, the Direct File pilot program represents a significant step forward. The success of this initiative could pave the way for a more efficient and user-friendly tax filing experience for millions of Americans in the future.