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Senate Finance IRS Nomination Hearing

Senate Committee on Finance

Hearing to Consider the Nomination of Daniel I. Werfel to be Commissioner of Internal Revenue

Wednesday, February 15, 2023

Topline

  • Democrats lauded the Inflation Reduction Act’s (IRA) funding for the IRS, arguing it provided the IRS with much needed resources to pursue tax cheating by the wealthy and corporations.
  • Republicans criticized the additional funding for the IRS and accused the Biden Administration of weaponizing the tax code.
  • Werfel pledged to increase transparency, bolster customer service, and improve balanced audits at the IRS.

Witnesses

  • Daniel I. Werfel, Nominee, Commissioner of Internal Revenue

Opening Statements
Chairman Ron Wyden (D-Ore.)

In his opening statement, Wyden said he wanted to highlight three main points related to the IRA. First, Wyden noted Democrats are focused on ending the two-tiered system of enforcement in the tax laws, adding audit rates are much higher for those with modest means. He continued by acknowledging the IRS is now getting the resources it needs to go after tax cheating by the wealthy and corporations. He concluded by maintaining improving technology and staffing up the customer service will serve as a big win for law-abiding families and small businesses.

Wyden noted that although working people and the middle class have a 99% rate of compliance with the tax code, working families who claim the Earned Income Tax Credit are audited far more often than the wealthy. He said a decade of Republican budget cuts gutted the IRS’s ability to do the kind of in-depth enforcement work it takes to make sure corporations and the wealthy are paying what they owe, noting that over the last decade, audit rates of wealthy taxpayers making more than $5 million a year fell by 90 percent. Wyden expressed support for Werfel’s nomination.

Ranking Member Mike Crapo (R-Idaho)

In his opening statement, Crapo discussed how the IRS recently overlooked statutory deadlines for implementing new laws, including third-party network reporting and electric vehicle (EV) tax credits. He said these delays seem conspicuous, given that other recent and complex tax changes, including the amortization of R&D expenses, corporate book minimum tax, and stock buyback excise tax all took effect without necessary guidance.

Crapo said the need for an objective IRS Commissioner is even more imperative given the staggering $80 billion in additional funding that the misnamed ‘Inflation Reduction Act’ just gave the agency. He added it is of particular concern that nearly 60% of the funding will go toward hiring enforcement personnel.

Crapo noted that when he offered an amendment to statutorily protect taxpayers making less than $400,000 from increased audits, only his Republican colleagues stood up in support.

Testimony

Daniel I. Werfel, Nominee, Commissioner of Internal Revenue

In his testimony, Werfel said he was concerned about gaps in capacity that impede the IRS’s ability to meet its critical mission. He added hardworking, honest taxpayers who need assistance in meeting their tax obligations are not getting the service they need. Werfel noted the IRS is ill-equipped to unpack complex returns of high-income taxpayers and large corporations and is unable to close the gap between what these taxpayers owe versus what they pay. He said after the passage of the Inflation Reduction Act, Americans rightfully expect a more modern and higher performing IRS.

Werfel said his audit and compliance priorities will be focused on enhancing IRS capabilities to ensure America’s highest earners comply with applicable tax laws. He added modernizing and dramatically improving taxpayer service, while ensuring that individuals and businesses eligible for tax benefits receive them, will also be priorities. Werfel concluded effective implementation of our tax system is necessary to fund critical government services.

Question & Answer

Audit Footprint

Wyden asked what Werfel would do to ensure the IRS ends the two-tiered enforcement system and audits billionaires at a higher rate than low-income taxpayers who claim the Earned Income Tax Credit. Werfel said there needs to be a balance and noted Secretary Yellen’s directive to balance the audit footprint. He said he would develop a strategy to do so.

Sen. Bob Menendez (D-N.J.) asked if Werfel will address the racial disparities in IRS audits. Werfel said absolutely.

Sen. Thom Tillis (R-N.C.) asked if Werfel agrees that Congress needs to work on something like a consolidated audit trail for the IRS. Werfel said he wants to look at all of the levers.

 Inflation Reduction Act

Crapo asked Werfel to agree to publicly release the Internal Revenue Service’s plan detailing how it will spend the $80 billion from the Inflation Reduction Act (IRA) and to receive public feedback. Werfel said the plan should allow the Committee and the public to follow the money.

Crapo asked Werfel to commit that the enforcement money will not be used against people who make less than $400,000 a year. Werfel said he would.

Sen. John Barrasso (R-Wyo.) asked Werfel if he will be supportive of legislation codifying his promise not to increase audits on Americans making less than $400,000. Werfel said it is not the role of the IRS Commissioner to opine on legislation.

Sen. Elizabeth Warren (D-Mass.) asked if it would be easier or harder for billionaires to cheat on their taxes if the funding from the IRA went away. Werfel said it would make it easier because the IRS wouldn’t have the ability to unpack their complex returns.

Warren asked if the Republican bill to defund the IRS would increase or decrease the deficit. Werfel said it would increase the deficit, while the IRA decreased the deficit.

Sen. Catherine Cortez Masto (R-Nev.) asked Werfel to address the allegations that the IRS intends to hire 87,000 armed agents to increase audits. Werfel said it is patently incorrect and noted the IRS will hire people with the capacity to unpack complex returns.

Tax Code

Sen. Ben Cardin (D-Md.) asked how we can work together to make the tax code more understandable and fairer for small businesses. Werfel said there is more the IRS can do to reach out to small businesses and answer their questions about the tax code. Barrasso said the Biden Administration has weaponized the tax code. Sen. Ron Johnson (R-Wisc.) said we need to simplify the tax code.

Data Security

Sen. Chuck Grassley (R-Iowa) said the IRS needs to do a better job safeguarding taxpayer information. Grassley asked Werfel if he will work to protect taxpayer’s information by addressing the serious vulnerabilities identified in a recent GAO report. Werfel said the most important factor of effective tax implementation is data security.

Sen. John Thune (R-S.D.) asked if Werfel will take steps to prevent information breaches. Werfel said data security will be his number one priority.

Form 1099s

Sen. James Lankford (R-Okla.) asked how the IRS will manage what is actually taxable with the new Form 1099 of $600. Werfel said he will enforce the law but added there is discretion within the law. He said if he sees an opportunity not to include personal transactions, he will take it. Werfel said he wants to build trust with taxpayers.

Sen. Sherrod Brown (D-Ohio) said he wants the IRS to do a better job holding corporations accountable when they cheat on their taxes, and they shouldn’t be spending their limited resources burdening Ohioans who are making simple transactions on third-party platforms.

Brown said the $600 threshold is too low and asked if the IRS would have fewer forms to process and be able to focus its resources more efficiently if the threshold were higher. Werfel said yes.

For more information on this hearing, please click here.

For an archive of past SIFMA hearing coverage, please click here.