The Senate Finance Committee held a confirmation hearing Wednesday for Daniel Werfel, who has been nominated as the next Internal Revenue Service commissioner. Both Democrats and Republicans appeared likely to approve him, although they had many questions for him, and he also won the backing of the National Association of Tax Professionals.
"We believe Mr. Werfel's priorities will bring the significant change that's needed within the IRS to better serve taxpayers and tax professionals across all walks of life," said NATP executive director Scott Artman in a statement Wednesday.
The NATP, in conjunction with the National Society of Accountants, is also asking for immediate additional guidance from acting IRS commissioner Douglas O'Donnell for tax preparers completing returns for clients claiming the Employee Retention Credit.
"There has been ample guidance for business owners and their employees, but tax professionals have been left with many questions about due diligence when claiming this credit," Artman stated.
On behalf of their members, the NATP and the NSA are asking for specific guidance in these areas:
- What is our due diligence in preparing the affected income tax return when we did not prepare the ERC filings?
- What is our due diligence if we do not agree the client qualified for ERC or discover improper ERC filings?
- What is our responsibility when relying on what the IRS refers to as "third parties," not tax professionals, for ERC filings?
- What questions should our members be asking their clients?
- What is the tax professional's exposure to Circular 230, or even Title 26, tax preparer penalties?
During the confirmation hearing, Werfel committed to improving service at the IRS, implementing long overdue scanning technology, and reporting back to Congress in 60 days on how the IRS is going to change its computer algorithms to address a recent study showing a higher rate of tax audits of Black taxpayers because of the Earned Income Tax Credit, along with earlier studies showing higher audit rates for lower-income taxpayers.
"I start with thinking through what are the elements of effective tax administration, and certainly equity is one of them," said Werfel. "To achieve equity, I think we should look at the audit footprint and see balance. I'm not at the IRS, but if there is an imbalance, that imbalance is concerning, especially if there's a disparate impact on poor people. If poor people are more likely to be audited than the wealthy, that is something that I think potentially degrades public trust and needs to be addressed within the tax system."
"We have to have an understanding of whether our approaches or activities are having disparate impacts on any population," he added when asked about the rates for Black taxpayers. "It's particularly alarming if it's having a disparate impact on racial minorities. Right now, not being at the IRS, I don't yet have a good sense of what the issue is."
He was asked by Senate Finance Committee chairman Ron Wyden, D-Oregon, if he would commit to reporting back to the committee in 60 days on what he finds. "I will absolutely, as soon as I get to the IRS, talk to those individuals that are working this issue and report back to you on what we're finding," he responded.
He was also asked about his plans for implementing long-overdue scanning technology to automate the processing of paper tax returns.
"I think one of the things that motivates me about wanting to be the IRS commissioner is a picture that I think was in The Washington Post months ago," he recalled. "I think it was a cafeteria in Austin with a table full of paper returns. And I thought to myself, when I saw that picture, there are technologies emerging that can potentially rapidly scan them and do so in a way that creates machine readable content that would allow that backlog to be reduced quicker. Since I'm not there, Mr. Chairman, I'm not sure where the IRS is on that. But I think it's a huge priority to enhance scanning, so that we can move out of paper."
Werfel is a former acting commissioner of the IRS who ran the agency for about a year during the Obama administration after the so-called Tea Party targeting scandal of 2013 led to the ouster of several top officials, including the former acting commissioner. He joined from the Office of Management and Budget, where he had been controller through several administrations, and after leaving government, worked at the Boston Consulting Group.
"In 2013, with these lessons now a part of my professional DNA, I was selected to serve as acting commissioner of the IRS," he said in his opening statement. "I witnessed how dedicated and talented IRS civil servants are in fulfilling the critical mission of administering the nation's tax system. Since leaving the IRS, I watched from afar how these employees navigated the challenges of historical underfunding and understaffing while providing economic lifelines to hundreds of millions of families and small businesses during the COVID-19 pandemic. Their 'true north' is their deep belief that the American people need an IRS that provides all taxpayers with world class customer service and implements the Tax Code in a way that is just, fair, equitable and protects the U.S. government's resources."
Republicans wanted to know how the IRS would use the $80 billion it's getting from the Inflation Reduction Act for tax enforcement and other priorities, and they disputed recent reports that the IRS had improved its level of service on the phone lines.
"I've been overseeing the IRS for a number of years, and it's really unfortunate, between targeting of particular taxpayers for their political beliefs and the backlog in returns, there's been a significant downward trend in terms of public trust for the IRS institutionally," said Sen. Todd Young, R-Indiana. "And also, in terms of service delivery, I've been seeing all kinds of problems. So I'm hoping you that you're the guy who can help turn all of this around. The IRS is receiving a substantial amount of money, $80 billion, and that's on top of their $12 billion a year typical budget. So we need to make sure that it is used effectively and efficiently. The IRS has had serious transparency issues over the years and the garbage in, garbage out principle has applied to their dashboard of statistics at times. Some recent headlines trumpeted the vast improvements of the IRS's phone service, based upon the IRS so-called level of service statistic. The National Taxpayer Advocate has indicated that this level of service statistic cooks the books, and it's not an accurate reflection of the genuine level of service. It omits the fact that the IRS call volumes are actually down significantly to date as compared to last year, nearly 41% overall. All else being equal, if you have a lower number of phone calls, that will increase the level of service statistic. But what we've actually seen is the IRS has actually answered 200,000 fewer calls to date this year, as compared to last year. So I'm hopeful that you can take a look at that statistic in isolation, but also attend to the other metrics to review performance."
"I don't know that this data is flawed," Werfel responded. "I do know that it's really important that decisions that are made in tax administration or any government agency are analytically robust, that there's an evidence base that guides them, that there's integrity, and the information that's been reported publicly is being used behind closed doors to drive decision making. So if there are questions about the integrity of a particular metric, I will roll up my sleeves and get to the bottom of it."
Sen. Mike Crapo, R-Idaho, asked Werfel to commit to releasing a plan for how he intends to spend the extra funding from the Inflation Reduction Act. "Senator Wyden has been talking to you about getting some details on their growing uncertainty about when or even if the IRS plan for spending the $80 billion will be publicly released," he said. "I understand that you have not been involved in that because you are not the IRS commissioner yet. But you probably will be if your nomination proceeds as it looks like it will. It's a widely shared view that the IRS must release this plan in real time and allow stakeholders to provide feedback. If you are confirmed as the IRS commissioner, would you agree that the plan to spend the $80 billion will be publicly released and that you will allow public feedback from stakeholders and others on it?"
"I agree that the plan that is put together should allow both you this committee and the public to connect the dollars from the inflation Reduction Act to the various activities and investments," said Werfel. "I really want to earn this committee's trust. I think as a former budget tier, I will earn your trust by putting together a very clear plan that articulates where the money is going. And as a former OMB controller, I hope to earn your trust in terms of making sure that those funds are spent wisely. Let's be public about the plans. And let's make sure that we're building trust and the way forward."
Crapo reintroduced a bill Tuesday to prevent the IRS from using its $80 billion infusion of taxpayer dollars from the Inflation Reduction Act to increase audits of taxpayers who earn less than $400,000 per year. Several lawmakers asked the IRS how it would deal with the lowered threshold of $600 for reporting third-party transactions by companies such as Venmo, PayPal, eBay, Airbnb and others on a Form 1099-K under the American Rescue Plan Act, which the IRS decided in December to delay for one year to avoid filing season chaos (see story).
"I'm familiar with the issue in terms of how it's been reported publicly," Werfel responded. "I think when I reflect on these issues that emerged during the filing season, and the IRS then pulls back and says, 'We have to study this,' I would imagine it's because they're getting a lot of feedback that whatever is going on right now is unsustainable. We need to take a moment and reset."
However, he noted that the IRS still needs to follow the law and only has limited discretion to deviate from it.
"What does the law expect us to do? And then to the extent there's discretion in the law to make sure that we're taking all the right reasonable steps, I want to move there," he said. "And then I want to be transparent with the committee. This is what we think are the tensions that we're seeing, and we want that feedback. And if we see opportunities for certain personal transactions to not be included, let's talk about doing that as well. I'm open to a lot of different options. The bottom line is, as always, what will build trust with the taxpayers?"