The Internal Revenue Service (IRS) announced that there are 24 states participating in the Direct File program for the 2025 Filing Season. This opens the Direct File option to an estimated 30 million taxpayers.

The IRS reports that the average American spends $270 and 13 hours of time to file taxes. The Direct File program allows free online filing for basic returns. This can save each individual hundreds of dollars and hours of time.

Secretary of the Treasury, Janet Yellen, noted, "By doubling the number of participating states and expanding eligibility, Direct File has the potential to save Americans tens of millions of dollars in filing fees in the upcoming filing season."

During Filing Season 2025, Direct File will be available in Alaska, Arizona, California, Connecticut, Florida, Idaho, Kansas, Maine, Maryland, Massachusetts, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Oregon, Pennsylvania, South Dakota, Tennessee, Texas, Washington, Wisconsin and Wyoming.

The Direct File software is available to cover simple tax situations. It is also available in Spanish and works on a smartphone. The Direct File program is designed to show taxpayers the calculations involved to reduce errors and ensure they receive the maximum refund. The IRS notes this is similar to tax programs in other countries that offer a free online filing option.

In Filing Season 2024, the Direct File pilot program in 12 states served 140,000 taxpayers. Approximately 90% of these taxpayers rated their experience as "excellent" or "above average" in a survey of 11,000 users. Most were able to file their taxes in one hour or less.

With 24 states offering Direct File in Filing Season 2025, approximately 62% of Americans will be in states offering the program. While the program will cover additional types of income, credits and deductions, only 30 million taxpayers will be able to use the new program.

There are several specific categories of individuals who will be able to use the program. It is available for individuals with W-2 income who claim the Earned Income Tax Credit or Child Tax Credit. It will also allow the filer to have student loan interest or Social Security income. The new program will include the Credit for Other Dependents, the Child and Dependent Care Credit, the Premium Tax Credit, the Retirement Savings Contribution Credit and the deduction for Health Savings Accounts.

The IRS also promises enhanced customer service support. The previous filing season involved IRS customer service representatives who handled 38,600 visits. The average taxpayer’s wait time was less than one minute and most calls lasted an average of nine minutes. 90% of the individuals who used Direct File customer support rated their experience as "above average" or “excellent."

There will be a new chat bot in 2025 to help individuals determine whether they are eligible for the program. There will be support in English and Spanish. Taxpayers may also request a call back from an IRS customer service representative.

Editor's Note: The IRS Direct File program is moving forward with two major challenges. First, the new version will attempt to cover more complicated federal tax returns. Second, there are more links to state systems. Many states with an income tax are developing a state filing system. The initial state versions will also be limited to simple returns. Future versions are likely to cover more complex federal and state tax situations. The IRS expects major growth for the Direct File program over the next several years.

IRS Potentially Missing $42 Billion in ERC Fraud

The Treasury Inspector General for Tax Administration (TIGTA) published a report on October 2 that questioned an Internal Revenue Service (IRS) management decision. To expedite the processing of employee retention credit (ERC) claims, the IRS doubled the threshold amount for a pre-refund examination. The TIGTA report noted this effort to expedite claims could have led to nearly $42 billion worth of claims that were not examined.

The IRS responded by indicating it will review all processed returns for possible improper payments. The IRS noted there were approximately 185,000 tax returns identified by TIGTA. However, the IRS claimed that these did not include "potentially erroneous ERC paid simply because the returns did not meet the referral criteria."

The IRS has implemented at least three different identity theft filters. It states it discovered $487 million in erroneous ERC claims. However, TIGTA pointed out that there were at least 1,000 tax returns with approximately $20 million in potentially improper claims that were processed without the filters.

TIGTA identified 923 entities which were not previously tracked and yet filed improper claims. The IRS agreed these claims were high risk and most should be disallowed.

With the concerns about fraud in ERC claims, Congress and multiple commentators support terminating the program. Senator Mitt Romney (R-UT) introduced the ERTC Repeal Act of 2024. The ERTC Repeal Act would create a retroactive filing deadline of January 31, 2024, for ERC claims.

Multiple organizations and commentators agree that it is time to terminate the program. Garrett Watson of the Tax Foundation stated that a deadline of January 31 "would be a reasonable way to reduce tax fraud while also reducing one source of increasing budget deficits over the past 24 months."

Rachel Snyderman of the Bipartisan Policy Center stated the ERC program "has outlived its purpose in part due to fraudulent and improper claims."

Adam N. Michel of the Cato Institute indicated the ERTC Repeal Act "is simply good governance and should be adopted immediately." He continued, "There cannot be any employment incentive for taxpayers who submit claims on amended returns upon advice from third-party consultants years after the pandemic ended." In his view, the credit cannot retroactively change employee behavior and, therefore, is of no significant value.

Senator Romney stated, "In a rare moment of widespread agreement in Washington, almost all members of Congress agree that we should eliminate the ERTC – which has been pervaded by fraud and cost nearly 200% more than originally projected."

The initial Joint Committee on Taxation estimate of the ERC cost was $55 billion. The Committee for a Responsible Federal Budget projects that the final cost could be $550 billion, more than ten times the original amount.

Maya MacGuineas of the Committee for a Responsible Federal Budget stated, "With the national debt on course to reach a new record as a share of the economy in just three years, it should be a common-sense measure to repeal this credit, use the savings to reduce the deficit, and save American taxpayers $80 billion over a decade."

Editor's Note: While the January 31 termination date has not yet been enacted, it is rare to have such bipartisan agreement in Washington. Advisors should caution their clients that there is a high probability there will be a retroactive January 31 termination date for the ERC. Advisors are concerned that the scrutiny of the IRS and the level of fraud have caused one year or longer delays on payments of legitimate claims. It is hoped that the IRS will be able to locate the fraudulent ERC claims and commence payments on legitimate claims.

Deadly Hurricane Helene Disaster Relief

Hurricane Helene was the deadliest hurricane to hit the mainland since Hurricane Katrina in 2005. There are an estimated 215 fatalities and several hundred individuals who remain missing. Approximately half of the victims are from North Carolina, while others were from South Carolina and Georgia.

Sheriff Quentin Miller of Buncombe County, North Carolina spoke in a Thursday press briefing. Sheriff Miller attempted to offer encouragement and stated, "We know these are hard times, but please know we are coming. We are coming to get you. We are coming to pick up our people."

Buncombe County was the center of massive devastation. Its main city, Asheville, North Carolina, suffered an extended period of no clean water and no electricity for most residents.

In other areas in the Blue Ridge Mountains, there are thousands of downed trees blocking the roads. The first responders and National Guard troops had to cut their way through massive destruction to reach individuals stranded in rural areas. The power companies also have a colossal task in restoring electrical power and other utilities.

With the devastation from Hurricane Helene, the Federal Emergency Management Agency (FEMA) declared all of Alabama, Georgia, North Carolina and South Carolina as disaster areas. Also included in the declaration were 41 counties in Florida, eight counties in Tennessee and six counties and one city in Virginia. Taxpayers in these FEMA disaster areas were generally given an extension until May 1, 2025. This extension applies to business tax returns and individual returns that were normally due during March or April 2025.

Tax advisors should refer to the specific changes for their state. There are different filing and payment deadlines. The filing and payment beginning date is September 22 in Alabama, September 23 in Florida, September 24 in Georgia, September 25 in North Carolina, South Carolina and Virginia and September 26 in Tennessee.

The May 1, 2025-deadline will generally apply to any individual in the disaster area with a business or personal return due during March or April of 2025. Individuals or businesses with a valid extension for a 2023 federal return may also defer filing, but payments on existing returns are not eligible for additional time because they were due last spring. There are also extensions for quarterly payments normally due on January 15 or April 15, 2025. Some payroll and excise tax returns are also included in the May 1, 2025 deadline.

The IRS urges advisors to go to IRS.gov and view the "Around the Nation” page. There is also a disaster assistance and emergency relief webpage with details on tax relief.

The IRS reminds taxpayers it will automatically extend filing and penalty relief to anyone with an IRS address of record within the disaster area. If a taxpayer is outside the disaster area but has records that are within the area, he or she must call the IRS at 866-562-5227 to qualify for relief.

Many individuals and businesses will receive disaster relief payments from the state or federal government. These amounts are generally excluded from taxation. The disaster payments must be for "reasonable and necessary personal, family, living or funeral expenses, as well as for the repair or rehabilitation of their home, or for the repair or replacement of its contents."

Taxpayers may also wish to take an early disaster distribution from an IRA. This can qualify for a waiver of the 10% early distribution tax.

Applicable Federal Rate of 4.4% for October: Rev. Rul. 2024-21; 2024-41 IRB 1 (16 September 2024)

The IRS has announced the Applicable Federal Rate (AFR) for October of 2024. The AFR under Sec. 7520 for the month of October is 4.4%. The rates for September of 4.8% and August of 5.2% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2024, pooled income funds in existence less than three tax years must use a 3.8% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.”