As Americans prepare to file their income-tax returns, the Internal Revenue Service is preparing for a new leader.
Danny Werfel, who served a stint as acting head of the IRS some 10 years ago before turning to the private sector, has been nominated by the Biden administration as IRS commissioner.
If he gets the job, he faces some difficult tasks — and some tough audiences.
The IRS will receive $80 billion over the next decade thanks to the Inflation Reduction Act, which passed in August without a single Republican vote. Now Republicans control the House of Representatives, and they have already voted to repeal the supplemental IRS funding (a measure that will certainly not pass in the Senate).
Then there are the taxpayers themselves. As the pandemic stretched IRS operations ever thinner, it became increasingly difficult for both regular people and tax professionals to reach the agency by phone. A tax-return-processing backlog ran into the millions.
And as recently as earlier this month, the IRS threw taxpayers a curveball when it said there were questions about whether inflation-relief payments made by states last year would be taxed. The agency addressed the question last week but was criticized for not resolving it before filing season started on Jan. 23.
“As an IRS alum, but more importantly, as a taxpayer, I have been concerned about gaps in capacity that have impeded the IRS’s ability to meet its critical mission,” Werfel said in his opening remarks during a Wednesday confirmation hearing before of the Senate Finance Committee. “The result is that hardworking, honest taxpayers who need assistance in meeting their tax obligations are not getting the services they need.”
As the hearing continued, he repeatedly invoked the need to build trust with lawmakers and the public. “Americans rightly expect a more modern and high-performing IRS,” he said.
Werfel, who served as the agency’s acting commissioner for less than a year in 2013, would replace Charles Rettig, the commissioner appointed by the Trump administration whose term expired in November.
How soon Werfel could move from the hot seat before the Senate to the big seat at the IRS is unclear. Senate confirmation requires a simple majority, which Democrats currently have, with their caucus controlling 51 seats.
Sen. Mike Crapo of Idaho, the committee’s ranking Republican, acknowledged Werfel’s likely confirmation and pointed to the crowd that’s waiting for more details about how the IRS will use its extra money.
“Americans — and their elected representatives — are watching,” he said during the hearing. “Will the IRS be honest and fully and deeply transparent? Will the IRS use best practices, rely on unbiased data and set commonsense goals? Given how the funding was conceived, designed and adopted, I am skeptical, but will look to you, Mr. Werfel, to fill the gap if you are confirmed.”
House Ways and Means Committee Chair Jason Smith, a Republican from Missouri, also said in a statement that Werfel, once confirmed, had better plan “to spend a substantial amount of time” in front of his committee “answering questions about the agency’s actions and activities.”
Here are Werfel’s comments on some key issues for this tax season and beyond.
How will the IRS spend the $80 billion — and who will be informed about it?
The law authorizing the $80 billion in new funding for the IRS divides that money into $45.6 billion for enforcement, $25.3 billion for operations support, $4.7 billion for modernization of business systems and $3.1 billion for taxpayer services.
In August, Treasury Secretary Janet Yellen gave the IRS six months to come up with spending specifics for that $80 billion. But Crapo said there is “growing uncertainty about when or even if” those spending plans will be made public.
“Let’s be public about the plans and let’s make sure that we are building trust on the way forward,” Werfel said. Crapo said he took that statement as a pledge from Werfel to release the spending plans.
The IRS and the Treasury Department did not immediately respond to a request for comment.
How will the agency improve processing of returns and customer service?
Early numbers suggest the IRS is quickly handling the income-tax returns it has received this tax season so far.
IRS filing statistics show the agency has already received more individual income-tax returns and processed a greater share of them than at the same point last year. The agency has processed 88% of the nearly 19 million tax returns it had received by early February. By the same point last year, the IRS had processed 77% of the 16.7 million returns it had received.
The IRS has hired 5,000 customer-service representatives. Sen. Ron Wyden, a Democrat from Oregon and the Finance Committee’s chair, said early statistics showed 90% of calls were getting through to representatives. That’s “a huge improvement,” Wyden said.
But Sen. Chuck Grassley, Republican of Iowa, wanted to know if Werfel would prioritize the $3.1 billion earmarked for customer service over the $45.6 billion for greater enforcement.
“If anything is going to keep me up at night, if I’m fortunate enough to be confirmed, it’s going to be, what are the right efforts we can undertake to increase taxpayer service? Phone calls should be answered, questions should be resolved,” Werfel said.
Werfel added that he would “work to make sure that those $3 billion are spent wisely and with maximum impact in improving the taxpayer experience.”
Will there be more audits — and who will be affected?
A major flash point is the extra IRS funding for audits of corporations and wealthy households.
The Biden administration insists the extra money will not underwrite more audits for households making less than $400,000 — and Werfel said he was committed to that point.
“If I am fortunate enough to be confirmed, the audit and compliance priorities will be focused on enhancing the IRS’s capabilities to ensure that America’s highest earners comply with applicable tax laws,” he said. Later, he added that the tax agency has been “ill equipped to unpack complex and intricate returns of high-income taxpayers.”
But Republicans like Crapo are skeptical of Biden administration assertions that there will be no extra audits for households making less than $400,000, because that’s simply a pledge and not written into the law itself. “Unenforceable edicts are so easily broken,” Crapo said, noting that he unsuccessfully sought a legislative amendment that would have codified the approach.
Beyond the hearing, there are still many questions surrounding additional audits. Some observers note Yellen’s pledge that the Inflation Reduction Act money will not be used to increase the number of audits for households and small businesses earning below $400,000 “relative to historical levels.”
How far back in history is Yellen going, wonders Janet Holtzblatt, a senior fellow at the Tax Policy Center.
“I am committed to Secretary Yellen’s directive on how the audits should move forward under the Inflation Reduction Act,” Werfel said.
“Secretary Yellen’s statement leaves a lot of wiggle room,” Crapo replied. “I want to be sure you know I don’t expect to see wiggle room in this commitment.”
What about that tax-return backlog?
The IRS still had a backlog of 1.84 million unprocessed returns as of early February. That number includes 1.73 million returns that need error correction or other “special handling,” the IRS said. There are also 107,000 paper returns awaiting review.
Werfel said the IRS can handle tax season and cut the backlog by focusing on how to prioritize workloads and figuring out what needs immediate attention.
“One of the big opportunities that exist is putting more technology into the customer-service solution, whether that’s tech solutions in the call center, whether that’s improved digital solutions on the web, or applications or smartphones,” he said.
There’s a “once-in-a-generation opportunity to put in some of these solutions that will benefit all taxpayers,” Werfel said.