Three Things to Know This Tax Filing Season

The IRS Direct File pilot is currently open to eligible taxpayers here.

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Millions of American families have now received their W-2s for 2023, signaling the start to a new tax filing season. The IRS has set January 29 as the first date that people can file their tax returns for the previous year, and the agency expects as many as 130 million returns over the coming months. Taxpayers should be aware of policy changes that have improved the filing process this year, as well as potential changes that could be enacted after some families have already filed their taxes if Congress passes a package of tax provisions currently under consideration.

1. The IRS is implementing an option for free online filing.

For the first time, many taxpayers will have the option to file their taxes online for free directly with the IRS this year. Recognizing that tax filing is more complicated than necessary, and that millions of families rely on expensive paid tax preparers, Congress and the White House directed the IRS to develop a free direct file program as part of 2022’s Inflation Reduction Act.

The IRS is rolling out a direct file pilot program for taxpayers with relatively simple returns, and it will be available to residents of select states. The first round of eligible taxpayers will primarily be those with normal wage or Social Security income living in states without state income taxes. In four other states – Arizona, California, Massachusetts, and New York – the IRS has partnered with state agencies to offer an option to file state income tax returns.

This program is desperately needed. For decades, the tax prep industry has lobbied to keep tax filing more complicated, forcing millions of families to pay for services that should be offered for free. The result is that Americans pay private companies billions of dollars annually and spend an average of 13 hours filing a single personal income tax return.

Tax prep companies like Intuit (maker of TurboTax) and H&R Block entered into a so-called “Free File Alliance” with the IRS in 2002 and agreed to provide free filing to eligible taxpayers as long as the agency did not do so itself. The tax prep companies then did their best to hide these services on their websites, and even hid the services from Google search results.

Intuit was eventually sued for this practice and settled for $141 million. Just this month, the Federal Trade Commission issued a new ruling to prevent the company from using deceptive marketing to advertise their services as “free” and then push taxpayers into expensive “premium” options.

After leaving the Free File Alliance – curiously suggesting that Americans no longer even need an option to file their taxes for free – Intuit has taken a few desperate stabs at killing the IRS direct file option. ITEP has previously debunked the ridiculous argument from Intuit lobbyists that IRS direct file would be harmful to Black Americans, and despite the company’s claims that the program is too costly to implement, their own financial disclosures show that they receive research tax breaks potentially larger than the entire cost of direct file.

Unfortunately, IRS direct file will not yet be an option for taxpayers with more complicated types of income – including gig economy or business income – or for taxpayers wishing to itemize their deductions. But the changes to the IRS made under the Inflation Reduction Act will still be a win for most taxpayers.

2. This tax filing season should go more smoothly for millions of American households and small businesses.

The Inflation Reduction Act reversed decades of funding cuts to the IRS that had left the agency with outdated computer and business systems and a dwindling workforce. The law provided an additional $80 billion to bring the IRS into the 21^st century and improve tax enforcement on big corporations and on individuals making more than $400,000. At the time (prior to a recission of a quarter of these funds under last year’s debt ceiling agreement), the additional spending on the IRS was estimated to lower budget deficits by more than $120 billion through increased revenue collections on wealthy tax cheats.

The increased funding will do more than just improve the country’s fiscal outlook, though. It will also ease headaches for millions of taxpayers who have spent previous years waiting on the phone with the IRS for hours or waiting on letters for months, sometimes to receive no reply.

Last filing season – the first after the new funding – was one of the smoothest on record. The agency used the additional funding to improve business systems and expand their workforce. The IRS cut phone wait times from an average 27 minutes to just 4 minutes. It answered 2 million more calls and served 100,000 more taxpayers in person. It was also able to clear the enormous backlog from previous seasons.

Unfortunately, conservative lawmakers have repeatedly insisted on additional cuts to the agency despite the recent success. Such cuts would be nonsensical and counterproductive. By all estimates, they would increase the federal deficit and would result in additional wait times for American families and small businesses trying to file their taxes honestly and accurately.

3. Congress could pass last-minute changes affecting millions of taxpayers.

Although tax season officially begins on January 29, lawmakers are contemplating a package of tax changes that would apply retroactively to the 2023 tax year. That package includes expansions of the Child Tax Credit (CTC) and Low-Income Housing Tax Credit as well as an extension of a handful of costly business tax breaks. It is offset by ending new claims of the Employee Retention Credit, a pandemic era policy that has become fraught with fraudulent claims in the past year.

The package was approved through the House’s main tax committee on January 19, and the earliest the full House could vote on it is after the official start to the tax filing season on January 29. The bill would then go to the Senate – where it is unclear if there is enough support – before being sent to the White House, which has signaled that President Biden would sign the legislation.

The CTC expansion could affect millions of low- and middle-income families, particularly those with multiple children. Due to a slew of existing earnings limits on the credit, families with lower incomes cannot receive the full credit and sometimes receive no credit at all. The proposed changes would modify how these families calculate their credit by making the credit phase in faster for families with multiple children.

That may not sound like much, but most kids live in families with multiple children, and under current law, the credit is effectively smaller per child for low-income families with more children. For example, a married couple with four children needs about $45,200 to receive the full credit compared to just $32,200 for a married couple with one child. Under the proposal, a married couple with four children would need $33,200 in earnings compared to $30,200 for a family with one child. This means that if the tax deal is enacted after the start of the filing season, many families may be eligible for a much larger credit than would currently be calculated.

Overall, this tax season will be simpler and less costly, though many families may want to wait and see if Congress acts in the coming weeks to pass additional support for families with children.

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