Child Tax Credit, Direct File in Flux This Season, Explained

The IRS is hitting its stride with the tens of billions of supplemental funding in its back pocket, just as legislation from Congress could add some complications to this year’s filing season that begins Monday.

Like last year, the IRS is planning for high service levels on its telephone lines this year. And taxpayers are getting some reprieve this year thanks to the IRS delay of the reporting requirement for e-commerce platforms—which means millions will receive one less IRS form—and a new government-run tool that would allow some taxpayers to file directly with the IRS at no cost.

But some factors are still in flux. The IRS’s pilot of a free agency-run tax filing tool doesn’t have a public hard start date for when it will become widely available and is being modified leading up to its release. It also will be available only to a limited number taxpayers with simple returns.

Congress also may throw a wrench into the IRS refund machine by enacting a bipartisan tax deal.

With the potential for mid-filing season tax legislation and the fluid nature of the direct file tool launching to private-sector employees in mid-March, some taxpayers may want to hold off on filing until they get more certainty.

1. Will the Direct File tool be ready?

Eligible low- and moderate-income taxpayers with simple returns can take a crack at filing their returns with the IRS’s new free electronic filing tool set to launch this filing season. How this tool fares, the cost, and taxpayer experiences will determine whether it becomes a permanent fixture for taxpayers.

Still in its pilot period, the IRS is first sending invites to state and federal government employees to participate and will phase in a wider group of taxpayers in mid-March. The agency hasn’t named a specific start date. Income types such as wages on a Form W-2 and tax credits such as the earned income tax credit and the child tax credit will be covered by the pilot, though the scope is subject to change, the IRS said.

The 2022 Inflation Reduction Act set aside $15 million and established a task force to study the feasibility of an IRS-run filing tool. Many Democratic lawmakers have long been interested in such a system, but the tax-prep software industry has been pushing against a government-run program, arguing that free-file programs already exist and the IRS shouldn’t be a preparer as well as collector and enforcer.

Only taxpayers in select states will be eligible for the pilot tool. New York, Arizona, Massachusetts, and California partnered with the IRS, and when those taxpayers finish filing their federal returns with the IRS tool, they will have the option to be guided to the state counterpart. Taxpayers in eight states with no income tax—Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming—may also participate.

2. Should you wait for a possible expanded child tax credit?

The child tax credit would become more generous if Congress enacts the $78 billion bipartisan tax deal in the coming weeks, as it is currently written. Legislation during the filing season would disrupt operations at the IRS, though Commissioner Danny Werfel has said the agency is no stranger to changes to the tax code in the middle of filing season. The IRS is arguably more equipped to pivot with the funding from the tax-and-climate law.

National Taxpayer Advocate Erin Collins said she recommended to Congress that they make clear that if the expanded credit passes, the IRS will fix the returns after they are filed so taxpayers don’t have to file amended returns. Depending on how the law is written, refunds could be delayed until fall or winter, she said.

House Ways and Means Committee Republicans noted in a statement Jan. 26 that the legislative text directs the IRS to make adjustments to tax returns “as expeditiously as possible,” and said that the IRS has said it plans to make system adjustments within six weeks of a law’s enactment.

Werfel said the IRS will automatically make adjustments if an expanded credit is enacted and that taxpayers don’t need to wait to file their returns. Still, the uncertainty and prospect of potential delays may cause some taxpayers to hold off.

The IRS has said that its direct file system would be able to adjust in less than a day, though filing with the tool doesn’t mean the taxpayer will get their refunds faster.

3. Does the 1099-K threshold delay matter?

Most taxpayers won’t have to deal with unexpectedly receiving 1099-K forms for the first time. Casual sellers on e-commerce platforms such as Venmo, Cash App, and Etsy are getting relief again this filing season with the delay of the requirement established by a 2021 law that companies send tax forms to customers with business transactions of more than $600. That delay, though, still doesn’t change the taxes they owe on their business transactions this year.

Ahead of this filing season, there was concern that millions of taxpayers would be caught off guard when receiving the 1099-K forms. The difficulty of delineating between business and personal transactions could have caused some taxpayers to receive IRS forms for payments on which they don’t owe taxes.

The 1099-K form—an information return that compiles gross payments made on platforms—helps taxpayers report the income they’ve made over the past year. The IRS announced that it will phase in the requirement for e-commerce platforms to send a copy of the 1099-K to qualifying taxpayers. The threshold is a sharp change from the prior requirement of $20,000 and 200 transactions. Some states also have their own requirements that may be lower than the federal threshold that taxpayers may need to consider.

Lawmakers on both sides of the aisle agree that the threshold should go up. As of now, a threshold increase is left out of the bipartisan tax deal, though some e-commerce companies still hope there is time to include the fix.

Read more:

• IRS Pegs Jan. 29 as Official US Tax Filing 2024 Season Start (1)
• Yellen Touts Improved IRS Customer Service for Tax Season (1)
• Expanded Child Tax Credit Portends Refund Delays, Other IRS Woes
• IRS Simplifying Tax Notices? Why Yes, Nearly 200 of Them.
• Senate GOP Seeks Tweaks After Tax Bill Sails Through House Panel