Daniel Werfel, President Biden’s nominee to be the next IRS commissioner, faced concerns from members of the Senate Finance Committee at his confirmation hearing surrounding the future of the agency and how it plans to allocate its resources.
With the IRS at a historic crossroads as it looks forward toward addressing customer service, operational, and enforcement woes that have plagued the agency for over a decade and throughout the COVID-19 pandemic, Werfel stood in the batter’s box February 15 to handle questions on how the IRS under his leadership would spend the $80 billion approved under the Inflation Reduction Act (PL 117-169) over the next 10 years.
“As an IRS alum, but more importantly as a taxpayer, I have been concerned about gaps in capacity that have impeded the IRS’ ability to meet its critical mission,” said Werfel in his opening testimony at the hearing after describing his experience as acting IRS commissioner in 2013. “The result is that hardworking, honest taxpayers who need assistance in meeting their tax obligations are not getting the service they need. The IRS has also been ill-equipped to unpack complex and intricate returns of high income taxpayers and large corporations and thus has been unable to close the gap between what these taxpayers owe versus what they pay.”
Werfel from the onset of the hearing affirmed his commitment to Treasury Secretary Janet Yellen’s directive that none of the Inflation Reduction Act funding result in a rise in audit rates beyond “historical levels” for individuals and businesses making less than $400,000 per year.
In a prepared statement, Senate Finance Committee Chair Ron Wyden, Democrat of Oregon, reiterated what he called the “two-tiered tax system in America” and what Democrats sought to quash when drafting the inflation bill last year. “One for firefighters, nurses and teachers, whose taxes come straight out of their paychecks,” said Wyden. “Another for billionaires and high-flyers, who to a great extent can pay what they want and when they want.”
Wyden went on to say how the funding is intended to help the IRS “go after tax cheating by the big guys—the wealthy and corporations.” At the same time, Wyden said, the additional appropriation should also boost the agency’s technological capabilities, which will fix tax administration issues across the board, especially direct taxpayer assistance.
The chairman began his questioning of Werfel by asking the prospective commissioner how he would go about eliminating the so-called two-tiered system. That is, what Werfel would do to prevent low-income payers such as earned income tax credit claimants from facing higher scrutiny than billionaires.
“I start with thinking through what are the ingredients of effective tax implantation and certainly equity is one of them … we should be able to look at the audit footprint and see balance,” Werfel answered, saying that there currently is a noticeable absence of balance. “If poor people are more likely to be audited than wealthy, that is something that I think potentially degrades public trust and needs to be addressed with the tax system.”
Wyden followed up by citing a study conducted by Stanford University researchers who found that African American taxpayers are audited 2.9 to 4.7 times the rate of other demographics. Saying that the paper “raises serious questions about discrimination with respect to audit selection,” especially when the IRS intentionally does not ask for racial information, Wyden asked Werfel to, if confirmed, report back within 60 days with clarity on how such discrimination may occur. Werfel agreed and said he will “absolutely” do so after internal conversations.
Ranking Member Mike Crapo, Republican of Utah, asked Werfel directly if the soon-due IRS spending plan for the Inflation Reduction Act funding will be made public and open to outside input. “It’s a widely shared view that the IRS must release this plan in real time and allow stakeholders to provide feedback,” said Crapo.
Appealing to Crapo’s advocation for transparency, Werfel brought up his time as the comptroller of the Office of Management and Budget. “I think as a former budgeteer, I will earn your trust by putting together a very clear plan that articulates where the money is going,” he said in response, also agreeing that the plan should be released to allow the “public to connect the dollars from the [Inflation Reduction Act] to the various activities and investments.”
Crapo in earlier remarks pointed to the breakdown of the funding, to which over half is earmarked for enforcement. “Unease about super-sized IRS enforcement hiring has nothing to do with supporting evasion by ‘wealthy tax cheats,’ but comes from a fear that the IRS will waste untold taxpayer dollars chasing speculative or marginal revenue recoveries, while hardworking Americans and small businesses end up in a dragnet,” he said.
Werfel said he is “looking forward” to working with Crapo to allay his worries of audit agent hirings tasked with ramping up examination of taxpayers making under the $400,000 threshold.
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