Providing Easy and Free State Filing for IRS Direct Filers

Today, the IRS announced additional details about 2024’s groundbreaking Direct File pilot. As we’ve written before, Direct File is a huge step forward in increasing access to the tax system and has the potential to make tax filing easy and free, ensuring that everyone receives the tax benefits they deserve. 

The announcement confirms that Direct File is on the right track—that the tool will launch next year with a focus on low- and middle-income households, ready to serve a significant population of taxpayers. Now more than ever, we are confident in the progress of this exciting project, and eagerly looking forward to 2024.

The announcement also contains some of the first public information about one of the central technical challenges facing Direct File, a challenge we’ve had our eye on for over a year: How will federal Direct File taxpayers file their state returns? If these taxpayers don’t have an easy way to file their state taxes, the federal project will be a partial success at best.

That’s why we’re so excited to announce that we are taking on this challenge in 2024. In partnership with state tax agencies in Arizona and New York, Code for America will create and provide a state e-filing solution for people who use the IRS Direct File tool, laying out a possible model for states to build on as the project moves forward.

The state filing challenge

Tax filing is a two-tiered challenge. Every year, over 150 million American households file a federal income tax return with the IRS. But for about 80% of Americans in more than 40 states, that’s just step one—then there’s a separate return to file with their state department of revenue. (The remaining states, including large ones like Texas and Florida, do not levy personal income taxes.)

State returns are legally separate from federal returns, but in practice the two are closely linked. The majority of state returns start with federal return information and make a series of small adjustments, most of them irrelevant to families with simple tax situations. (The technology is similar, too: In nearly all states, state returns are e-filed through a central IRS-administered system.)

That’s why most taxpayers file their federal and state returns through a single unified experience; doing the returns together saves taxpayers the headache of entering their data twice. An easy and free federal process doesn’t buy taxpayers much if they have to repeat the process—and perhaps pay—to file their state return.

Through our overall work on promoting access to the tax system, our team has known about this issue for a long time. Supporters and opponents alike have long identified the state filing challenge as central to any federal filing reform. We’ve heard about various possible approaches and strategies from advocates and policymakers for the last several years, and since last summer we’ve invested in the issue, talking to state tax administrators, learning about their work, studying projects they have pursued to harmonize federal and state filing, and sharing resources and ideas.

The IRS, too, is deeply aware of the issue’s importance, writing in the Direct File report that “taxpayers expect to be able to file federal, state, and local returns in one place.” The IRS report describes the problem of state filing as one of three principal “operational challenges” that the 2024 pilot is explicitly designed to test, and the one with the most strategic complexity.

Making state filing easy for Direct File users

The solution is built on data portability. The IRS is facilitating state filing by allowing Direct File users to disclose their federal return data to a third-party software provider of their choice.

That’s where Code for America comes in. In New York and Arizona, Direct File users will be able to disclose their Direct File information to our tool. We’ll begin with that data, ask a few additional questions, then e-file the return. We’ll host the software, and taxpayers will be able to use it for free.

If you’ve spent any amount of time with state tax forms, this might seem like a daunting project: there are a lot of lines and options on a state tax form. But, for the taxpayers with lower income and simple tax situations who are the focus of the 2024 pilot, most of these lines and options are irrelevant. By carefully considering the scope of the federal tool and the needs of taxpayers with low income, we are confident most of our clients won’t have to answer more than a few state-specific questions.

As always at Code for America, our product decisions are informed by two key collaborations. First, we will work shoulder to shoulder with our government partners in state tax departments. Our goal is to build a model that works for states in the long term, and that means a project co-led by states—even as we accelerate the technology and resources on behalf of governments.

Our goal is to build a model that works for states in the long term, and that means a project co-led by states—even as we accelerate the technology and resources on behalf of governments.

Second, and most importantly, we design our products for our clients—in this case, families with low income who are likely to use Direct File in 2024. We work with them to understand the barriers they face and the challenges they see. We design the product with these factors in mind, and we test the product with its intended users to learn what is and isn’t working.

Direct File is a new project, and this strategy to support state filing is new, too. We expect to learn a lot from 2024 about how this process works for taxpayers with low income, and we look forward to sharing what we learn so the process can hopefully continue to improve in coming years.

Meanwhile, of course, our state file program will roll out alongside our longstanding virtual Volunteer Income Tax Assistance (VITA) product, GetYourRefund, which, for the fifth straight season, will partner with VITA sites to offer a robust tax filing experience for those who need more hands-on filing assistance.

A smart and strategic scope for 2024

Today’s announcement also provides the first public look at what we can expect from Direct File in 2024. And from our perspective as civic technologists, we like what we see.

Far too often in government, agencies build an entire comprehensive technology solution before making it available to the people it’s meant to serve. Projects languish for years in development, and when they are finally made available, key assumptions have gone untested, causing a whole new round of rebuilding.

The Direct File team is following a more productive path. By launching in January, just eight months after the project was announced, the Direct File team will start quickly learning and iterating based on feedback from taxpayers, and the American people will see their historic investments in the IRS paying off in near real time.

Starting early means starting small, and starting small means being smart about where to start.

Starting early means starting small, and starting small means being smart about where to start. The Direct File team has done that: The initial pilot will cover a strategically limited set of tax situations, addressing the needs of those taxpayers who need Direct File most while reducing complexity for the technical team. The pilot will support taxpayers with income from W-2s, unemployment benefits, Social Security, and limited amounts of interest, and it will allow filers to claim the Earned Income Tax Credit and the Child Tax Credit. This represents a meaningful swath of taxpayers overall, and perhaps half of all taxpayers with low income. The Direct File team is also prioritizing accessibility, allowing taxpayers to request IRS communications in languages other than English, and in alternative media formats.

Similarly, the pilot will support filing in 13 states containing nearly half of the country’s population, with direct integrations to test the state filing approach in several of those—including the two Code for America is partnering with. This, again, represents enough states, enough taxpayers, and enough models to cover a meaningful number of taxpayers, without overwhelming a technical team in the first year.

What’s next

Four months out from the start of the 2024 filing season, the details of the Direct File pilot are coming into focus. We are looking at a pilot year with a tax scope covering a large swath of taxpayers with low or middle income, in a handful of disproportionately large states, modeling a truly free public filing experience for the first time in this country’s history.

We are looking at a pilot year with a tax scope covering a large swath of taxpayers with low or middle income, in a handful of disproportionately large states, modeling a truly free public filing experience for the first time in this country’s history.

Of course, the pilot isn’t the end; it’s just the beginning. Down the road, Direct File will mature and cover additional tax situations, including those that are critical to many taxpayers with high needs. It will expand to additional states, perhaps through Code for America’s own efforts and through those of other players in this space. And, it could—as we have advocated before—expand to incorporate elements of automation and pre-population, leveraging IRS  data to create a truly headache-free tax filing experience.

In the near term, we are excited for this pilot year—and we are thrilled to work closely with our partners in Arizona and New York to be part of this groundbreaking project. 

If you represent a state department of revenue or governor’s office and are interested in working with Code for America in the future on tax filing programs, reach out to Associate Policy Director for Tax Benefits Gabriel Zucker.