House Committee on Ways & Means: Hearing with Commissioner of the Internal Revenue Service, Daniel Werfel
House Committee on Ways & Means
Hearing with Commissioner of the Internal Revenue Service, Daniel Werfel
Thursday, February 15, 2024
Topline
- Republicans raised concerns over the IRS’ Direct File pilot program.
- Democrats pressed Werfel on the IRS’ work to increase fairness in the tax system by ensuring high-income individuals and corporations are paying their fair share.
- Members from both parties inquired about the IRS’ use of Artificial Intelligence and other modernization efforts.
Witnesses
- Daniel Werfel, Commissioner, Internal Revenue Service
Opening Statements
Ways & Means Committee Chair Jason Smith (R-Mo.)
In his opening statement, Smith noted his appreciation for the steps the IRS is taking to implement the bipartisan tax deal, once passed in the Senate. He emphasized the need to ensure that the IRS routes out fraud in the Employee Retention Tax Credit program. Smith also noted that the IRS chose to delay a law that would send tax forms to 44 million Americans for purchases over $600 a year and affirmed that the only solution is to repeal the law. He concluded by highlighting his concerns with the IRS’ spending on the Direct File system, which he noted the American people didn’t ask for.
Ways & Means Committee Ranking Member Richie Neal (D-Mass.)
In his opening statement, Neal discussed the IRS’ recent uptick in taxpayer service. He noted many of the recommendations that would be discussed throughout the hearing came from Commissioner Rettig, a Republican. Neal blasted Republican rate cuts for causing IRS corporate audits to fall by 50%. He concluded by discussing his disappointment that Direct File would not be implemented in time for this tax season.
Testimony
Daniel Werfel, Commissioner, Internal Revenue Service
In his testimony, Werfel explained that the Inflation Reduction Act’s funding for the IRS ensures that taxpayers can easily contact the IRS, while allowing the IRS to identify complex tax returns and address the growing risk of tax scams. He said the IRS is working to reverse the historically low audit rates for large corporations and high-wealth individuals, and noted the IRS’ data security has dramatically improved. Werfel explained that the IRS has a responsibility to protect taxpayers from being overburdened, an issue the agency faced while implementing the $600 threshold for 1099-K reporting.
He discussed how the IRS delayed implementing the 1099-K threshold, noting that it was confusing, and ran the risk of having people pay taxes that they did not owe. Werfel concluded that the IRS is paying close attention to the possible passage of the renewed Child Tax Credit and would be ready to implement it in 6 to 12 weeks after passage.
Question & Answer
1099-K Forms
Rep. Ron Estes (R-Kans.) asked if Werfel was aware of the issues with the 1099 filing portal. Werfel said it’s on his radar. He said the IRS is evaluating the problem to allow the information to be submitted more easily.
Rep. Carol Miller (R-W.V.) asked why the IRS was unable to pass the 1099-K threshold passed in the American Rescue Act. Werfel said the IRS Commissioner has the ability to implement laws in accordance with taxpayer rights, and noted the delay in implementation was recommended by a diverse set of stakeholders in many industries because there is risk.
Miller asked if the IRS would ever be able to comply with the 1099-K threshold. Werfel said they intend to begin implementation next year. He said that his concern is with taxpayer rights and that he does not want taxpayers overpaying their taxes, confused, or bombarded with forms they do not need.
Miller then asked who decided to set a $5,000 threshold for 2024. Werfel explained that the IRS received strong recommendations from a variety of stakeholders, which resulted in a consensus around $5,000 because the models showed this number would ensure that the most revenue was collected while protecting the most taxpayers from unnecessary paperwork.
Miller asked what authority the IRS has to set this threshold. Werfel said that the IRS has an authority under the tax code to administer laws consistent with taxpayer rights and their goal is to implement them on day one but there are a variety of instances throughout history where the IRS, in order to protect taxpayers from undue burden or from potentially being overtaxed, has delayed or ramped implementation. He said that he is not the first commissioner to deal with this tension. Miller then interjected to say that Werfel’s actions are still illegal. Werfel said that it is not illegal to take a step to protect taxpayer rights.
IRS Direct File Pilot Program
Rep. Adrian Smith (R-Nebr.) asked what authority the IRS used to create the e-file pilot program. Werfel said the IRS has the authority to offer taxpayers different approaches to help them file their tax returns. Smith asked if the IRS had the direct authority to create the program. Werfel replied that the IRS has direct authority to help people file their tax returns using different tools.
Rep. Kevin Hern (R-Okla.) asked if the private sector already provides the same services offered by the IRS’s free file program. Werfel said yes. Hern asked if Congress would have to fund the free file program. Werfel said that the IRS works with the Free File Alliance to provide a path for eligible taxpayers to file their returns.
Hern asked if the direct e-file program puts the IRS in competition with tax corporations. Werfel said he didn’t see it as a competition. Hern asked about the program’s costs. Werfel explained that the IRS wants to ensure that taxpayers have all the resources available to file their returns and had heard from taxpayers that they wanted an option to file for free directly to the IRS. He said that this is a pilot program, and they will evaluate the costs afterwards.
Rep. Mike Kelly (R-Pa.) asked why the IRS implemented the direct file program when the private sector already has the same programs. Werfel said he would get back to him with more details.
Rep. Brian Fitzpatrick (R-Pa.) asked why the IRS created a direct file system when the industry already provides many of those same tools for free. Werfel said the IRS has the authority to make the tax filing process easier and more beneficial for taxpayers. He noted the IRS now has a callback option for its call centers.
Fitzpatrick asked about the cost of developing the program. Werfel said the IRS is still studying the pilot program to assess if it’s something that should be added.
Rep. Claudia Tenney (R-N.Y.) asked what the IRS is doing to address the conflict of interest with the direct file program. Werfel explained that there is no obligation to use this program, and that it’s just a pilot program.
Digital Assets
Rep. Mike Carey (R-Ohio) asked if Werfel was familiar with the proposed rule on tax reporting requirements for digital asset brokers. Werfel confirmed that he was. Carey asked if the IRS was equipped to handle the influx of data from this proposal. Werfel noted we are at an inflection point when it comes to digital currency, and said the IRS needs to have the technology to regulate these currencies.
Carey asked about a realistic timeframe for implementing the requirement for digital asset brokers. Werfel noted the IRS received over 400,000 comments on the proposal and explained that he wants to make sure the agency reviews them before proceeding.
Carey asked why the rule includes a shorter window of compliance for digital asset exchanges. Werfel said he would have to get back to him.
Complex Tax Returns & Increased Audits
Neal asked about the IRS’ efforts to increase fairness in the tax system. Werfel explained that when the IRS wasn’t being funded, they fell behind in their ability to process complex tax returns. He noted the IRS is using Inflation Reduction Act funding to increase its ability to process complex tax returns and ensure that high-income individuals are paying the taxes that they owe. He said that they have invested in technology process changes, and controls which create robust audit trails.
Rep. Lloyd Doggett (D-Texas) asked whether the audit rate for those who earn over $1 million a year was cut in half in the decade prior to the last Congress and the IRS is going after people who made honest mistakes and left a little bit off of their return. Werfel said the IRS’ focus has been to increase scrutiny for complex filers and corporations who are evading their taxes. He said the agency doesn’t want to increase scrutiny for low- and middle-class earners and is starting to close the gap by going after millionaires and billionaires who are not paying their taxes. He said that so far in their effort to collect from delinquent millionaires and billionaires they have collected half of a billion dollars.
Rep. Mike Thompson (D-Calif.) asked if it’s easier for people to cheat on their taxes when the IRS’ funding is cut. Werfel said funding cuts make it easier for larger corporations and wealthy individuals to cheat.
Thompson asked what decreased funding for the IRS means for the U.S. deficit. Werfel said that for every $100 million dollars cut from IRS’ funding, the deficit goes up by $600 million. He said $100 million buys you 700 audits of high-income taxpayers, 200 audits of complex partnerships, 100 audits of large corporations, 32,000 collections cases of high-income individuals, and on-and-on.
Rep. Linda Sanchez (D-Calif.) asked what would happen if middle-income Americans cheated on their taxes at the same rate that millionaires do. Werfel said it would cause the deficit to grow.
Sanchez asked if Congress could pay for an expanded child tax credit if the IRS could collect the full amount that large corporations actually owe. Werfel explained that there’s money being left on the table when discussing taxes owed vs. taxes paid. He added that during the IRS’ period of underfunding, they lost pace with the ability to process complex tax returns.
Rep. Terri Sewell (D-Ala.) asked if there have been fewer audits on underserved communities. Werfel explained that the IRS must meet its mission in a way that does not cause disparate impacts. He noted that the IRS found that its practices had a disparate impact on black taxpayers, specifically the amount of EITC audits which drove the disparity. He said that they are changing the audit system algorithm to combat this disparity.
Rep. Lloyd Smucker (R-Pa.) asked if complex tax returns exist for reasons other than cheating on taxes.
Werfel that there absolutely is and explained that the issue stems from the fact that the IRS was not auditing and keeping pace, which led to tax evasion. Smucker asked if Werfel considered partnerships to be cheating on taxes. Werfel explained the IRS is trying to bring audit rates back to normal, after they’ve been anemic for a long time.
Rep. John Larson (D-Conn.) asked what the IRS is up against when it comes to major corporations. Werfel explained that the Inflation Reduction Act allowed the IRS to hire more auditors.
Rep. Michelle Steel (R-Calif.) asked if the IRS was targeting and assessing millionaires who are behind on their taxes. Werfel said they have been assessed and found delinquent. He said that are working to get more precise about who they select to audit.
Artificial Intelligence
Rep. Bill Pascrell (D-N.J.) asked about the IRS’ efforts to audit high-net-worth individuals and tax cheats. Werfel said the agency is hiring additional auditors and conducting more audits of high-wealth individuals. He added that they are using analytics and AI to understand how money moves in complex tax returns.
Rep. Randy Feenstra (R-Iowa) asked how the IRS is using AI for enforcement. Werfel said they are being very careful to follow the right ethics with AI and are introducing AI into the IRS call center through the use of chatbots and selecting the right cases for audit.
Rep. Blake Moore (R-Utah) asked what the IRS is working on in terms of modernization for the near-term. Werfel said they are working on immediately modernizing IRS call centers to use AI and other new technologies.
Rep. Greg Murphy (R-N.C.) asked if the IRS is committed to mitigating biases when using AI to conduct audits. Werfel said yes.
Rep. Suzan DelBene (D-Wash.) asked how AI is being used to identify non-compliant taxpayers. Werfel explained that AI is being used in cases where money is moving across borders and into subsidiaries. He explained that the IRS is making more sophisticated models to allow them to find these cases.
Tax Relief for American Families and Workers Act
Chair Smith asked Werfel if he could confirm that only 10% of households would be affected by the Child Tax Credit provision in the bipartisan tax bill. Werfel agreed. Smith then asked Werfel to confirm that taxpayers do not need to file amended tax returns to obtain the adjustments the bill makes. Werfel confirmed that they did not.
Chair Smith asked how quickly the IRS could make adjustments to this year’s tax refunds after the bill becomes law. Werfel said they would be sent out within 6 to 12 weeks.
Chair Smith asked Werfel to confirm that administrative adjustments needed for the child tax credit are a much lighter lift for the IRS than the stimulus checks. Werfel confirmed that they were and said that part of that is because administering the stimulus checks helped build out their processes.
Earned Income Tax Credit (EITC) & Employee Retention Credit (ERC)
Rep. Danny Davis (D-Ill.) asked if Werfel had any updates on who benefitted from the 2021 Earned Income Tax Credit compared to other years. Werfel said the IRS is working with its research team to get an answer as soon as possible. He added that there are people who are eligible for this tax credit who are not claiming it.
Rep. Drew Ferguson (R-Ga.) asked about the amount of corporate fraud within the EITC system.
Werfel said he didn’t have that information in front of him, but it is a material amount.
Rep. Gwen Moore (D-Wisc.) asked how tribal communities can implement the EITC. Werfel said he wants to work with tribal communities directly.
Rep. Jimmy Gomez (D-Calif.) asked for an update on the case selection disparities within the EITC. Werfel said the IRS is reducing the number of ETIC audits overall. He said by the fall of 2024, they will be able to report if their actions were able to reduce the disparity.
Rep. Brad Wenstrup (R-Ohio) asked about the status of the IRS’s ERC moratorium. Werfel said the agency is working with its taxpayer advocate to bump up to the front of the line those who are facing imminent hardship and need the ERC funds. He noted that since the moratorium was enacted, the IRS approved over $1 billion in ERCs. Werfel said the challenge that they have is piecing out which claims are eligible and which are ineligible. He said the IRS anticipates that it can lift the moratorium by the spring.
Rep. Blake Moore (R-Utah) asked how the IRS is working with reputable tax preparers to ensure that ERC payments proceed. Werfel explained that they want to work with taxpayer advocates to rush funds to those facing imminent hardships.
For more information on this meeting, please click here.
For an archive of past SIFMA hearing coverage, please click here.