On Wednesday, Feb. 15, the Senate Committee on Finance held a hearing to consider the nomination of Daniel Werfel to be commissioner of the Internal Revenue Service (IRS). Werfel testified before the committee on the agency’s enforcement and auditing initiatives and assured committee members of a transparent process as the agency determines how to spend funding allocated by the Inflation Reduction Act (IRA) (P.L. 117-169).
Member Opening Statements
Chair Ron Wyden (D-OR) touted what he believes to be the three main benefits of the IRS funding included in the IRA: (1) resources to adjust the audit rates of different income levels, including an increase in audits of wealthy taxpayers; (2) more support for enforcement against large multinational corporations; and (3) resources to improve technology and staffing for customer service. Chair Wyden emphasized that the IRS would not use its resources to target Americans who earn less than $400,000 per year. Ranking Member Mike Crapo (R-ID) emphasized the values to which the IRS commissioner and all IRS employees must adhere, including taxpayers’ rights to be informed, quality service, the opportunity to challenge the position of the IRS and privacy and confidentiality. Ranking Member Crapo criticized the agency for its failure to uphold some of these values more recently. He said that since the IRA lacked necessary accountability measures, the next IRS commissioner will have a responsibility to plan for the new funding, as well as track outcomes and ensure transparency. He also criticized the IRS for its failure to produce regulations in a timely manner, specifically citing guidance concerning third-party network transaction reporting and electric vehicle tax credits.
Key Themes
- IRS Enforcement: Chair Wyden asked if the IRS, under Werfel’s leadership, would audit large partnerships more frequently than low-income taxpayers who claim the Earned Income Tax Credit (EITC). Werfel said that effective tax implementation involved an equitable distribution of audits. He added that any imbalance of enforcement methods that had a disproportionate effect on low-income people degraded public trust in the IRS, and he highlighted his intention to balance the agency’s audit footprint. He committed to providing a report to the committee on whether IRS practices were disproportionately affecting any particular populations, alongside a set of recommendations for addressing those effects within 60 days if confirmed. Chair Wyden also asked how Werfel would reduce audits on small businesses. Werfel highlighted Treasury Secretary Janet Yellen’s directive to focus IRA resources on high-income taxpayers. Ranking Member Crapo asked if Werfel would commit not to utilize IRA enforcement funding against individuals that make under $400,000 a year. Werfel pledged not to expand tax audits on businesses and households making less than $400,000 per year. Ranking Member Crapo asked if Werfel would seek to expand the IRS’ ability to examine the bank accounts of individuals that deposit assets over a certain threshold. Werfel replied that he would only take actions that were consistent with IRS statutory authorities, and he emphasized his commitment to privacy protections. Sen. John Cornyn (R-TX) asked Werfel to commit to collecting all lawful taxes, regardless of a taxpayer’s income bracket. Werfel committed to ensuring that all taxpayers meet their legal responsibilities.
- Adjusting Tax Gap Estimates: Chair Wyden asked if Werfel had plans to release new tax gap projections to account for multinational corporations’ noncompliance, foreign activity and digital assets. Chair Wyden said that current tax gap projections are about $600 billion, though former Commissioner Charles Rettig said it could be as high as $1 trillion. Werfel said that the IRS must recruit experts that can create a more accurate gross tax gap assessment. Werfel said that doing so would allow the agency to collect more revenue from high-income taxpayers and large corporations. Sen. Ron Johnson (R-WI) questioned whether the agency’s promise to close the tax gap with new funding was compatible with the White House’s promise not to target taxpayers earning less than $400,000. Sen. Johnson cited a Joint Community Taxation (JCT) report that said that 78% to 90% of that tax gap is attributable to taxpayers making less than $200,000. As a result, Sen. Johnson questioned whether the agency was going after the wrong group of taxpayers. Werfel said he would work to provide additional public clarity on the composition of the tax gap, which would allow the agency to dedicate enforcement resources based on evidence rather than rhetoric.
- IRA Implementation: Ranking Member Crapo and Sen. Thom Tillis (R-NC) asked if Werfel would commit to releasing a plan for the IRS’ usage of IRA funding to allow for stakeholder feedback. Werfel committed to releasing a public plan on IRA spending in the event of his confirmation. Sens. Chuck Grassley (R-IA) and John Thune (R-SD) asked if Werfel would direct the IRS to review annually the IRA spending report. Werfel said he would work with the committee to determine the frequency of the report. Sen. John Barrasso (R-WY) asked if Werfel would support legislation that codified that commitment. Werfel said it was not an IRS commissioner’s role to support legislation, but he reiterated his commitment to partner with the committee to improve the IRS’ administration of IRA funding. Sen. Elizabeth Warren (D-MA) asked if a legislative repeal of IRS funding provided by the IRA would enable high-income individuals to avoid paying their taxes, as well as increase the federal deficit. Werfel agreed that the repeal of IRA funding would limit the IRS’ ability to investigate tax returns and likely increase the deficit by more than $100 billion.
- Taxpayer Services and Backlogs: Sen. Grassley asked if Werfel would prioritize deploying the $3 billion in IRA funding allocated for improved customer service to address the backlog of paper returns before expanding audits and other enforcement measures. Werfel said that increasing taxpayer services would be a major IRS priority, and he committed to utilize the allocated $3 billion to improve taxpayer experiences. Sen. Mark Warner (D-VA) asked how Werfel would avoid adding to the backlog of tax filings. Werfel said that improved technological modernization of customer service could expedite taxpayer assistance, and he suggested that the IRS could implement best practices from the private sector to establish a series of service benchmarks. Sen. Marsha Blackburn (R-TN) asked if Werfel would commit to exhausting customer service funding before hiring additional IRS agents. Werfel said he could not make that commitment until he was confirmed and gained a fuller understanding of the agency’s internal deliberations. Chair Wyden asked how the IRS would establish a scanning program to address the backlog of 2.6 million tax returns still awaiting processing from last filing season. Werfel said that enabling expanded scanning capabilities and transitioning the agency away from manual return transcription would be a priority under his leadership. Sens. Tom Carper (D-DE), Catherine Cortez Masto (D-NV), Bob Menendez (D-NJ) and Maria Cantwell (D-WA) asked what additional measures Werfel would take to ensure that the IRS was responsive to taxpayers in need of technical assistance. Werfel said he would place additional employees in taxpayer assistance centers and provide enhanced and accessible digital solutions. Sen. Todd Young (R-IN) asked Werfel to provide the committee with a report that outlined how much money the IRS could have saved in fiscal years 2020, 2021 and 2022 if it had been equipped with a functioning digital platform for taxpayer inquiries. Werfel said he would provide the committee a robust estimate if confirmed.
- Small Businesses: Sen. Ben Cardin (D-MD) asked how Werfel would direct the IRS to improve tax code understandability for small businesses. Werfel said the IRS would work to increase the use of navigational and technical assistance programs to improve the tax filing process for working families and small businesses. Specifically, he referenced expansions of current programs, including IRS Taxpayer Assistance Centers and online resources, as well as potential partnerships with intermediaries, tax preparer associations and local chambers of commerce.
- Data Security and Fraud: Sen. Grassley asked if Werfel would commit to addressing information vulnerabilities in IRS cloud systems, which were outlined in reports released by the Government Accountability Office (GAO) and Treasury Inspector General for Tax Administration (TIGTA). Werfel said data security and taxpayer protections were one of the most important aspects of effective tax implementation, and he committed to working with both GAO and TIGTA to implement their recommendations. Sen. Blackburn asked Werfel to commit to providing a timeline for the implementation of data security measures. Werfel committed to providing the committee a data privacy implementation timeline, and he noted that the IRA contained funding specifically to improve data security. Sen. Bill Cassidy (R-LA) asked Werfel if he would consider moving the IRS’ systems to the cloud. Werfel said he would consider the idea but stressed that he would need to evaluate the decision further if confirmed.
- Whistleblower Program: Sen. Grassley said the average processing time for IRS whistleblower claims was 11 years, and he asked how Werfel would improve the IRS Whistleblower Program to decrease fraud and increase tax collection. Werfel committed to examining the statistic provided by the senator and identifying corrective actions.
- Tax Credits: Sen. Michael Bennet (D-CO) asked about the effects of the expanded Child Tax Credit (CTC) that the IRS delivered on a monthly basis for a portion of 2022 during the COVID-19 pandemic. Werfel said that he admired the IRS’ implementation of the CTC, but he stressed that he would position the IRS to distribute credits even more effectively if confirmed. Sen. Sherrod Brown (D-OH) asked Werfel if he would commit to expanding the Volunteer Income Tax Assistance (VITA) program, which helps ensure the accuracy of returns claiming EITC and CTC benefits. Werfel committed to expanding the program.
- Third-Party Payments: Sen. James Lankford (R-OK) asked how the IRS would manage the American Rescue Plan Act (ARPA) provision that requires third-party payment platforms to report gross transaction volumes totaling more than $600. Werfel said he was willing to discuss opportunities to exempt certain personal transactions from disclosure requirements if an exemption policy was legally permissible.
- Political Donations: Sen. Sheldon Whitehouse (D-RI) asked Werfel to direct the IRS to scrutinize political donations through 501(c) organizations. Werfel agreed to investigate the issue.
Next Steps
The Senate Finance Committee will meet in executive session to consider Werfel’s nomination after receiving responses to any questions for the record. If the committee favorably reports his nomination, the full Senate is expected to approve Werfel’s nomination. In January, the House passed a bill to rescind more than $70 billion of new funding for the IRS, highlighting House Republicans’ opposition to the expected use of the new resources by the agency. The legislation is not expected to pass in the Senate. The Senate Committee on Finance will continue to provide oversight of the IRS’ administration of IRA funding.
