A mannequin representing Uncle Sam stands outside Alpha Tax preparation center as the deadline for individual income tax returns approaches, April 10, 2023, in New York.
Last week, with Tax Day right around the corner, the IRS released a highly anticipated strategic operations plan, explaining how the agency intends to operate over the next decade. Flush with $80 billion in additional funding from the Inflation Reduction Act (IRA), Treasury Secretary Janet Yellen ordered the IRS last year to develop a plan on how that money would be spent.
Without permanent leadership at the agency at the time, it failed to produce a report before the six-month deadline Yellen laid out. But a new commissioner has been confirmed, and the report has been released. And it shows a desire to remake the agency into a customer-friendly operation for most filers, with enforcement reserved for a small percentage of those at the top.
One of the first bills House Republicans passed with their slim majority proposed to strip nearly all of the agency’s new $80 billion. House Speaker Kevin McCarthy (R-CA) knows that bill wouldn’t pass in its current form in a Democratic-majority Senate. Still, it signaled that the IRS would be in Congress’s crosshairs, raising the stakes for the planning document.
President Biden’s nominee to lead the IRS, Office of Management and Budget alum and former IRS acting commissioner Daniel Werfel, was an uncontroversial choice. It’s hard to cast an agency head as the face of government overreach when he’s a self-proclaimed “rule follower” who’s worked for the federal government across Republican and Democratic administrations. He was confirmed to lead the IRS with the support of six Republicans and all Democrats except for Sen. Joe Manchin (D-WV).
Werfel, in a memo to Treasury Secretary Yellen, listed five objectives for the agency. The first two are about improving the overall taxpayer customer service experience, by promoting compliance over enforcement for most taxpayers and administering tax benefits more quickly. It promises a future of real-time alerts for information about taxpayer returns, and ways to quickly remedy errors using digital tools. Already, the infusion of funds has led to enhanced customer service, both in person and on the phone.
Other priorities focus on upgrading technological infrastructure at the agency and expanding enforcement of taxpayers with “complex tax filings and high-dollar noncompliance to address the tax gap.” All of these broad objectives, according to Werfel, require attracting, retaining, and empowering “a highly skilled, diverse workforce and develop[ing] a culture that is better equipped to deliver results for taxpayers.” Seven thousand new enforcement agents are expected to be brought in over the next two years, though officials kept the numbers for overall hires more vague.
That all might seem like bureaucratic-speak at first glance. But Werfel’s insistence on changing the agency’s culture matters. When I interviewed former IRS commissioner Charles Rossotti earlier this year, he was critical of outsiders who saw enforcement as the primary measure for IRS success. That kind of thinking, according to Rossotti, allowed Congress to project their worst fears on the agency. Others I spoke with while reporting that story said that a reluctance to stand against congressional backlash allowed the agency to be steamrolled for conservative political ends, thus eroding morale inside the agency.
However you interpret that, running a federal agency is a balancing act. Reading between the lines of Werfel’s letter, it seems he’s taken some lessons from Rossotti. By saying that the agency wants to promote compliance for the vast majority of taxpayers, while shifting enforcement resources toward the most complex tax returns, Werfel is prioritizing enforcement actions for tax returns that could bring the most revenue back for the government, thus shrinking the tax gap. Nothing Werfel could do at the IRS would turn him into a shining star for the Republican Party. But at best, he could report regularly to Congress the agency’s progress, minimizing the perception of the IRS as a rogue agency.
It appears that Werfel anticipates future political pressures from Congress. He says he “can’t overstate” the importance of the agency continuing to receive annual appropriations for operating costs. The entire plan he laid out is premised on receiving appropriations. “Diverting IRA funding to cover base discretionary enforcement needs would lead to more noncompliance, leading to decreased revenue collection and increased deficits,” Werfel wrote.
“It’s really promising to see that the focus in the IRS’s strategic plan is precisely on very large corporations and high-net-worth individuals,” Matt Gardner from the Institute on Taxation and Economic Policy told me over the phone. He added that it’s undeniable these audits require more resources, but in the long run their return on investment shouldn’t “really count as spending money” since they’ve contributed to closing the tax gap far more than low- and middle-income taxpayers.
Other measures that stood out to Gardner included Werfel reiterating that audit rates would not increase for households and small businesses earning up to $400,000 a year, a promise to hold harmless Americans under that threshold which Biden has emphasized in other contexts since he was a presidential candidate. “It’s a nakedly political thing,” Gardner said. That benchmark from the White House could prove troublesome in the long run for Werfel, because of the way income is structured and how that might be affected by enforcement efforts from the IRS.
For example, a rich individual could take no salary and live off borrowed funds without taking capital gains, while engaging in widespread tax avoidance to stay under that $400,000 income level. That could be a type of return the IRS would want to look at, but the Biden-led directive is to leave it alone.
In the February hearing for his nomination, Werfel navigated the question by saying that drastic changes in yearly income could warrant a second look, but nonetheless, that he would not use newly allocated money for enforcement efforts against tax filers earning up to $400,000 a year.
Elsewhere, Gardner was impressed with the document’s meticulous plans on benchmarking progress for its top objectives. Each of the five objectives is broken into several initiatives, which are further split between projects, with accompanying details that would measure success. This layering of smaller iterative goals, from Gardner’s perspective, shows that the IRS is “anticipating the demands of Republican leaders in Congress.”
Tucked inside the 150-page document is a mention of how the IRA required the IRS to “explore” a free direct-file system, presumably geared toward low- and middle-income tax filers. However, the IRS’s own language downplays the significance such a program could have if it were in place.
A working free direct-file system could cut out middlemen tax preparers like TurboTax and H&R Block, who have previously lobbied against the government offering prefiled tax services, and are continuing to do so. Officially, the agency is studying the feasibility of free-file, and that report, with the assistance of the nonprofit New America, is expected in May. From my perspective, it appears that the IRS is first paying attention to increasing its technological capabilities and refining data utilization practices. Whenever a free direct-file system is proposed and not just “explored,” the agency will likely portray it as a natural step, building upon the existing customer service and technological upgrades.
As a whole, the IRS’s operating plan takes into account a lot of the administrative and political concerns I heard from people when I reported “Reanimating the Taxman” earlier this year, before Werfel’s confirmation. So, with a plan circulating, now it’s up to how it’s implemented over the coming years. Adjustments are likely to be made. But as Gardner said, “There’s a lot in here that you can hold a yardstick up to a year from now and say, OK, how did [the IRS] do?”
