Senators Question IRS Commissioner on Spending, Budget

The Senate Finance Committee heard from IRS Commissioner Danny Werfel about how the agency spent $80 billion in funding this past year — and why it is requesting even more.

At the April 16 hearing, Werfel touted the IRS’ successes, calling the 2024 tax season “historic.” In his testimony, Werfel emphasized improved customer service, from a reduction in call wait times, to “dramatically expanded service” in walk-in sites, to “new and expanded tools on IRS.gov.” He also noted the positive feedback on the IRS’ new Direct File free tax return filing pilot.

Werfel said funding under the Inflation Reduction Act helped the IRS “make critical inroads on tax evasion.” He noted IRS’ stepped-up compliance efforts targeting high-wealth individuals, which he said resulted in recovery of about $500 million in the last year. And he said IRA funding enabled the agency to hire new staff and open 60 new audits under its Large Corporate Compliance Program.

Werfel said the budget proposal calls for funding to sustain the “right-size customer service workforce” and “new tools.” However, Ranking Member Mike Crapo (R-ID) questioned the IRS’ requested $104 billion budget that he said is eight times the prior level, asking, “when does it end?” Legislators highlighted several priority issues.

Direct File concerns linger.

As the Direct File pilot comes to a close, many legislators questioned whether the expenditures were worthwhile. Crapo and others called out the IRS for “embark[ing] on a redundant government-run tax preparation project, complete with all attendant inefficiencies and conflicts-of-interest.”

Werfel emphasized that the data on the pilot is not yet final, with Massachusetts still filing. He said the expected number of users was 100,000 and that number had been exceeded by April 15, with returns still being filed. He expects to provide a report on the full burden of that program at the end of April.

Data security should be priority.

Crapo noted that it takes almost two years to resolve identity theft cases flagged by taxpayers, and that the agency has a backlog of almost 600,000 cases. During these delays, the IRS, itself, may even take action against taxpayers subject to identity theft by imposing liens or levies, added Crapo.

Werfel replied that strengthening data security is a “top priority” for the IRS. He said the agency was moving to “narrow the risk to as small as it can possibly be” by “closing gaps.” That includes having fewer users, tighter email controls, and more.

The role of AI.

Werfel described how the IRS is now using AI to “spot complexity” and target tax evaders. He referenced the almost $700 billion tax gap, saying AI could help streamline IRS identification of these evaders.

Senator Maggie Hassan (D-NH), however, brought up a counterpoint about AI — its use in tax-related scams. Werfel acknowledged an “increase in IRS impersonation” through “sophisticated behavioral science on what will cause someone to pay a fake tax debt.” He said a priority for the next filing season is creating a “one-stop shop” on IRS.gov for taxpayers where they can receive notices and confirm their validity.

Audit woes.

Senator John Barrasso (R-WY) expressed concern that stepped-up enforcement would mean more small taxpayers getting swept up in audits. Werfel denied this, saying there would be no “new wave of audits for ‘mom and pops'” and that those audit rates would remain unchanged.

Senator Bob Menendez (D-NJ) brought up another concern with audits based on last year’s report of racial discrimination and disproportionate audit rates for those claiming the earned income tax credit. Werfel said his first step after stepping into his role as commissioner was determining the validity of those findings and revising audit selection algorithms and working to avoid racial disparity in tax administration. He promised further update on this effort by fall 2024.