Senate Committee on Finance: The President’s Fiscal Year 2025 IRS Budget and the IRS 2024 Filing Season

Senate Committee on Finance

The President’s Fiscal Year 2025 IRS Budget and the IRS 2024 Filing Season

Tuesday, April 16, 2024

Topline

Democrats questioned Werfel on the IRS’ efforts to close the tax gap by focusing enforcement efforts on wealthy individuals and large companies. Democrats also lauded the IRS direct file pilot.
Republicans questioned the necessity and efficacy of the IRS direct file pilot, expressing concerns that it would replace private sector options.

Witnesses

The Honorable Daniel Werfel, Commissioner, Internal Revenue Service

Opening Statements

Finance Chair Ron Wyden (D-Ore.)

In his opening statement, Wyden discussed the IRS’ direct file pilot, describing it as a massive success. He noted that while big tax prep companies may have free file programs, they have been caught hiding those options from filers to receive additional payment and can’t be trusted to provide this service. Wyden described the direct file pilot as the kind of public service that the government should provide whenever it can. He complimented the IRS for improving customer service response time and quality and explained that the IRS can provide top-level service when Congress gives it the resources. Wyden discussed the IRS’ work to crack down on enforcement efforts for the hyper wealthy who don’t file their taxes or abuse write-offs for private planes and yachts. He concluded that if Congress cut funding for the IRS, the wealthy would be able to get away with breaking the law while normal people would suffer.

Finance Ranking Member Mike Crapo (R-Idaho)

In his opening statement, Crapo told Werfel that the IRS needs to be more accountable and solicit feedback from relevant stakeholders, including Congress, before acting. He said that while he supports a transformed IRS, continued massive funding is neither a sustainable nor effective solution. Crapo warned that IRS tech modernization funding is set to expire years before modernization can be achieved, and emphasized that while enforcement programs are necessary, they shouldn’t come at the expense of modernization funding. He described the direct file program as unneeded, redundant, and overly costly. Crapo said the IRS could have served significantly more people if the IRS spent the same amount of money it did on the direct file pilot to contract with private tax companies to file tax returns for Americans. He concluded that the IRS needs more oversight and warned that biased data pressures taxpayers and generates government waste.

Testimony

The Honorable Daniel Werfel, Commissioner, Internal Revenue Service

In his testimony, Werfel discussed how the Inflation Reduction Act’s funding led to unprecedented improvements in customer service. He explained how the IRS is increasing its enforcement and compliance efforts, especially for non-filing and high-income individuals. Werfel noted the IRS is using AI and skilled professionals to detect tax evasion. He discussed the need to improve phone service, expand digital services for all taxpayers, further strengthen data security, protect vulnerable groups from scams, and increase access to the Earned Income Tax Credit (EITC). Werfel called for sustained investments in IRS staff, training, and technology. He lauded the FY25 budget for providing increased flexibility and transfer authority and concluded by asking for adequate discretionary funding and complementary long-term mandatory funding.

Question & Answer

IRS Enforcement Efforts

Sen. Mark Warner (D-Va.) noted that better enforcement would help close the tax gap. He asked about the progress made on closing the tax gap, and what metrics Congress could expect to see in the future.

Werfel said the IRS used Inflation Reduction Act funds to close the services gap, and said the agency is focusing enforcement efforts on wealthy individuals who have not filed, millionaires and billionaires with delinquencies who owe federal back taxes, transfer pricing where multinational corporations shield income in the US and move it to a different tax jurisdiction, and large complex partnerships that are particularly sophisticated at shielding their income. Werfel noted these enforcement efforts could lead to $700 billion in returns over the next ten years and emphasized the need for continued funding to sustain enforcement efforts.

Sen. Sheldon Whitehouse (D-R.I.) noted the IRS originally fumbled its handling of 501(c)(4)s and warned that billions of dollars are flowing through these organizations. He said 501(c)(4)s are being abused by people funneling money into Super PACs to avoid limits. Whitehouse said he didn’t see any effort to enforce proper differentiation between 501(c)(3)s and 501(c)(4)s. Werfel said the IRS is doing more to crack down in that space, but noted that it’s a complicated area. He discussed the need to be cautious with scaling enforcement efforts to avoid any perception that the IRS is being politically biased. Whitehouse replied that if the IRS’ goal is to remain beyond reproach instead of enforcing the law, people will continue to break the law. Werfel emphasized the need to enforce the law while maintaining public trust.

Sen. Marsha Blackburn (R-Tenn.) questioned the IRS’ decision to use total positive income (TPI), rather than actual or taxable income when determining auditing frequency and other practices. She noted that Congress has not defined TPI and asked how the IRS defined TPI. Werfel said that TPI includes all income. He explained that the IRS is trying to create a bright line by only increasing audit scrutiny for those above $400,000 TPI.

Sen. Ben Cardin (D-Md.) spoke about changes to the way athletes are handled among colleges and whether our tax code is keeping up with those changes. He said he was concerned about the number of nonprofits associated with colleges getting involved with Name Image Likeness (NIL) deals, which could violate their nonprofit status. He asked Werfel to clarify the IRS guidance on NIL deals and enforcement efforts for non-profits that go too far. Werfel noted the IRS issued a memo on the topic that said that organizations that promote and develop NIL deals for student athletes often go beyond non-exempt purposes when that is their primary function. He said the IRS is removing or denying tax-exempt status to organizations that engage in this.

Sen. Bob Casey (D-Pa.) said he was pleased with increased enforcement efforts on wealthy individuals and companies. He asked Werfel what the IRS is doing to ensure that wealthy individuals and large companies are paying their fair share in taxes. Werfel said his marching orders are to ensure that IRA funds are used exclusively for enforcement on very wealthy individuals and complex corporations. He explained the agency’s focus on high-net worth individuals and large businesses will benefit tax paying high-net worth individuals and large businesses because it will ensure all parties are playing by the same rules on a level field.

Sen. Bob Menendez (D-N.J.) asked what the IRS has done and would do to crack down on unscrupulous tax preparers. Werfel said the IRS is conducting awareness campaigns, and noted the proposed budget includes penalties for ghost preparers.

Business Taxes

Sen. James Lankford (R-Okla.) noted ongoing discussions about raising business taxes and spoke to some of the business tax incentives put into law by the Tax Cut and Jobs Act. He noted studies by Ivy league institutions that found that businesses investment had increased as a result of business tax incentives and asked if there has been continued investment in business now, than what we saw years ago. Werfel said he would get back to Lankford after conferring with his Treasury colleagues.

Sen. Ron Johnson (R-Wisc.) asked whether the IRS had taken action to reduce the complexity of the tax code. Johnson also asked whether the tax code is more complicated for individuals or businesses. Werfel said the tax code is more complicated on the business side.

Johnson noted that the business side of the tax code brings in less revenue but is more complicated. He asked whether the business tax code was begging for simplification. Werfel said the IRS advocates for simplicity and effectiveness whenever possible.

Johnson asked Werfel to report back to the Finance Committee on non-partisan, low hanging fruit issues where Congress can simplify the tax code without impacting revenue. Werfel said the IRS tends to conduct reviews on a case-by-case basis but pledged to discuss the possibility of a larger review with his team.

IRS Direct File Pilot

Crapo decried the lack of transparency about the redundancy and wastefulness of the direct file program.

He asked if Werfel believes the IRS has the statutory authority to implement a direct filing program. Werfel said yes, explaining that the IRS has authority under the IRS Code to provide tax filing services. He noted filing services have changed over time to reflect technological evolution.

Sen. Tom Carper (D-Del.) said he looked forward to building on the success of the direct file program. Carper asked whether the IRS planned to continue or expand the direct file program. Werfel said the IRS would start collecting and sharing data as the program ends. He noted the agency wasn’t seeing the overabundant costs that some are suggesting. Werfel said he was looking forward to having a public conversation with stakeholders once that information is out and added that there was a really positive reception and demand for the product.

Carper asked how Congress could support the direct file program and ensure more states are included next year. Werfel discussed the need to ensure the flow of accurate information about the program. He explained that it isn’t a mandatory program, but an option for taxpayers to file directly to the IRS for themselves.

Sen. Michael Bennet (D-Colo.) said the Department of Education created an absolute disaster with the failed rollout of the reformed FASFA and cited the IRS’ rollout of the direct file program as a model for successful deployment.

Sen. Thom Tillis (R-N.C.) said he hoped the IRS eventually abandons the direct file pilot, noting the private sector options are so much better. He said he was happy with Werfel’s leadership, but that he hoped the free filing tool wasn’t his top priority. Werfel said taxpayers are very vocal about their desire for the program.

Tillis said the IRS could have explored much simpler free file options by working with private companies, rather than creating a thermonuclear reactor. Werfel noted the pilot led to a sustainable increase in the number of people using free file across all platforms, public and private.

Sen. Elizabeth Warren (D-Mass.) noted that a nationwide free direct file program would save taxpayers $23 billion a year, including saved tax prep fees and missed refunds.

Sen. John Barrasso (R-Wyo.) discussed concerns that the IRS direct file program could replace several successful private sector options. He noted the current free file program relies on a partnership with private companies. Barrasso said the IRS spent over $2,000 per taxpayer who participated in the free pilot program and described the situation as a solution in search of a problem.

Barrasso asked Werfel if the IRS can serve taxpayers better than the private sector. Werfel explained that the pilot is not supposed to replace private sector options. He said Barrasso’s data points were not accurate, and noted the agency has not decided on the future of the program.

1099-K Reporting

Sen. Bill Cassidy (R-La.) discussed the IRS’ decision to delay implementing a change to the 1099-K reporting threshold for transactions on third-party payment platforms like Venmo and Paypal. He noted the IRS elected to keep the $20,000 threshold for 2023 and phase in the $5,000 threshold in 2024. Cassidy discussed the Red Tape Reduction Act, which he introduced with Sen. Brown (D-Ohio) to raise the threshold to $10,000 to protect small businesses.

Cassidy asked Werfel about the IRS’ authority to delay the implemented law, and how the IRS decided on a $5,000 threshold for 2024. Werfel said the IRS is required to implement all tax laws in a way that protects all taxpayers’ rights. He explained that can lead the IRS to modify regulations if they risk being overly burdensome or could cause over-taxation. Werfel said the IRS was concerned the 1099-K reporting rule had the potential to be overly burdensome and cause over-taxation. He discussed the agency’s work with third-party payment platforms, who indicated that $5,000 would be the right number to limit burdens on taxpayers while getting more receipts back to the government.

Modernization & Cybersecurity

Sen. Maggie Hassan (D-N.H.) noted that when criminals steal money online and convert it into cryptocurrency, it becomes virtually impossible to recover. She asked how strengthening Know Your Customer requirements could help strengthen cybersecurity and make it easier to recover funds after a cyber-attack. Werfel said the IRS needs a more mature system of regulation and oversight in that area.

Cassidy said he feels like the IRS never achieves its goals for modernization.

Crapo noted the IRS requested more than eight times its budget, and asked when the funding multiplications would stop. Werfel noted the agency’s base budget is about the same it was in 2010, despite the fact that the tax system has significantly changed. He explained the IRS’ modernization budget helps create a new baseline to run the system created by the tax code.

Warren said the IRS started a digital filing pilot in 1986, and asked if anyone argued that that was illegal. Werfel said no. She noted the IRS had a direct deposit pilot in 1987, and asked whether anyone argued that was illegal. Werfel said no. Warren discussed the IRS’ creation of PDF forms for taxpayers to fill out and submit electronically in 2008, and asked whether anyone argued that was illegal. Werfel said no. Warren concluded that the IRS is continuing to modernize and making its services work better for ordinary people.

Employee Retention Tax Credit (ERTC)

Wyden noted that a whistleblower warned him about the avalanche of ERTC fraud. He explained that he proposed a bipartisan bill with House Ways and Means Chair Jason Smith that would restrict the window for ERTC claims. Wyden warned that if Congress doesn’t stop the avalanche of fraud, those claims will clog the system and cost taxpayers billions of dollars. Werfel agreed and cited the IRS’ issuance of a moratorium on those claims last Fall. He explained that while the IRS slowed the inflow of those claims, they’re still coming in. Werfel warned more money will be wasted if Congress doesn’t pass the Smith-Wyden bill.

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