IRS Launches Free Online Preparation Platform
Free IRS 1040 Preparation Pilot
Program to Launch in January
Many ‘Bread and Butter’ 1040 Clients Will be Lost
MTAP Already in Plans to Help Our Members Adapt
by Jon A. Hayes, MTAP Executive Director
October 19, 2023 – It is now official. The Internal Revenue Service is piloting a new and free online 1040 preparation platform available in 13 states beginning this January. The platform offers taxpayers the option to file their returns directly with the Service at no cost. If successful, the program would expand to a nationwide launch in 2025.The IRS anticipates that several hundred thousand taxpayers across the country will decide to participate in the pilot – called Direct File – which will be limited to individuals and not include businesses.
READ MORE: Taxpayers in 13 states can file income taxes with the IRS for free in 2024
Taxpayers who file a Schedule C, for example, will not be able to participate in the pilot in 2024.Taxpayers in nine states without a state income tax — Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming — may be eligible to participate in the pilot for their federal return, according to an IRS announcement.
The IRS said Arizona, California, Massachusetts and New York have decided to work with the IRS in the Direct File pilot for filing season 2024 to integrate their state taxes into the platform.
The launch has been predicted since the IRS was awarded over $85 billion in federal funding to improve operations and increase its workforce. The Inflation Reduction Act, signed by President Joe Biden in August 2022, mandated that the IRS conduct a feasibility study to determine how the federal government might develop and run a free, direct electronic filing tax system that's open to all consumers.
What are the IRS Goals for the Pilot?
In early briefings, the IRS projected Direct File would allow a taxpayer to log in, see their federal return propagated with information electronically reported to the IRS by employers and other vendors, and the taxpayer would then have to fill in any information not available to the IRS. Once they have completed the return, they simply “submit” it.If the taxpayer owes the IRS, those funds would be electronically withdrawn from their designated bank account.
And if the taxpayer is owed a refund, that refund would be deposited into their account, possibly within minutes of submitting that return.
Actual parameters of the filing system are still being completed, and the IRS will offer more complete information once they have completed the virtual platform.
Instant and Expanding Impact on Professional Tax Preparers
If the pilot program is successful, its expansion nationwide in 2025 as a streamlined and free option to eligible taxpayers will result in paid preparers losing a significant portion of their standard, W-2 based 1040 revenues. This would also include state return preparation revenues as states elect to piggyback their filing requirements onto the federal platform.
It is conceivable that the program could quickly expand in 2026 to include Schedule C filers, with the IRS continually looking to expand it into other tax return areas.
Preparers Must Plan for Lost Revenues …
MTAP is at Work Now to Help You Adapt
Depending on the composition of your tax clientele, the IRS pilot will begin taking “standard return” clients from you as soon as this January and nationwide by the start of 2025. Many industry experts have been warning of this reality since 2022 and have advised professional preparers to target their services to higher-end clients whose returns warrant consistent attention because of the complex U.S. tax code.
Experts believe preparers must also expand into more tax advisory-based services like personal financial management, estates and trusts, tax representation, and business management – services that target higher end clients who will have an increasing need for it AND are more willing to pay for it.Here at the Michigan Tax and Accounting Professionals, we are working with our partners to enhance our major business and 1040 tax seminar programs with targeted education in these areas. We are working to develop “skills development” programs that, upon completion, will help attendees develop skills and systems to increase their revenue potential.
But our work is 100 percent dependent on member support. So expect more communication from us in the coming weeks, especially during our fall seminars, on our plans. More importantly, let us know what you think and how you’re planning to deal with this IRS initiative.
MOST IMPORTANTLY, initiate conversations with your staff and colleagues now about the future of your business and the services you provide. You must ACT because if you wait and REACT it may well be too late to seize opportunity.
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