A group of 21 tax officials from 18 states is urging the Department of Treasury (DOT) to disband the IRS’ new Direct File pilot program, citing potential tax filing problems they said could arise from confusion on the part of taxpayers.
The IRS Direct File program was created to allow taxpayers to file their tax returns in digital format directly with IRS.
“We urge you to terminate Direct File following the current pilot program, as Direct File will create challenges for taxpayers and state treasurers and the costs of Direct File far outweigh any potential benefits it may confer to taxpayers,” the state officials said in a March 25 letter to Treasury Secretary Janet Yellen and IRS Commissioner Danny Werfel.
“Regrettably, Direct File is a solution in search of a problem,” said the state officials.
“Direct File has the potential to do more harm than good for taxpayers,” the state officials said. “It will only enable them to file their federal tax returns. Taxpayers who are unaware that they must separately file state returns will not receive anticipated state refunds this spring.”
“This is significant because many taxpayers who use Direct File are likely to be lower-income and build budgets around anticipated tax refunds,” the state officials said. “Even worse, confused taxpayers who neglect to file their state returns will be at risk of incurring state penalties.”
“Imagine the surprise to the taxpayer who becomes subject to audit by the IRS after having filed through Direct File and having felt assurances that the tax return was prepared properly through the IRS’s own system,” they said.
The state officials also cited a Treasury Inspector General for Tax Administration (TIGTA) report that found faults in an IRS survey to gauge taxpayer interest in a direct file system.
“It led respondents to believe that state returns would be included. This along with responses that likely led to respondents overreporting their agreement with questions, skewed the responses in favor of Direct File,” the officials said.
In addition to allowing direct filing with the IRS, the agency’s Direct File program is being piloted in 13 states.
The March 25 letter is signed by state officials from Alaska, Florida, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Nebraska, North Carolina, Ohio, Oklahoma, South Carolina, South Dakota, Utah, West Virginia, and Wyoming.
The IRS said last October that the 2024 Direct File pilot would include work with 13 states that would allow people to directly file their taxes next year by only using the online tool if they meet certain criteria.
“In this limited pilot for 2024, we’ll be working closely with the states that have agreed to participate in an important test run of the state integration,” Werfel said. “This will help us gather important information about the future direction of the Direct File program.”
Taxpayers in Arizona, California, Massachusetts, and New York – who levy state taxes – would be able to participate in the Direct File pilot since those states entered into memorandums of understanding in September to collaborate with the Direct File pilot.
Taxpayers in nine other states without an income tax – Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming – may also be eligible to participate in the pilot, the IRS said last fall. All states were invited to join the pilot, the agency said.
