Mariam Zuhaib/AP Photo
Daniel Werfel testifies before the Senate Finance Committee during his confirmation hearing to be the Internal Revenue Service Commissioner on Feb. 15, 2023.
On Wednesday, the Senate Finance Committee held a hearing for the nomination of Daniel Werfel to lead the Internal Revenue Service (IRS). Werfel, an Office of Management and Budget and IRS alum, has served under both Democratic and Republican presidents. In 2013, former President Obama chose Werfel to lead the IRS as acting commissioner, and in that capacity he implemented the tax measures of the Affordable Care Act. Under former President Bush, he served in the Office of Financial Stability within the Treasury Department, implementing the 2008 stimulus package.
Last fall, when Congress passed the Inflation Reduction Act, it allocated close to $80 billion for the beleaguered agency. As the Prospect has previously reported, the bulk of that money is geared toward customer service improvements, technological upgrades, refilling attrited staff, and most notably, ramping up enforcement efforts against the largest corporations and richest individual tax filers. The first bill passed by the Republican-led House was an attempt to strip nearly all of that funding (though of course it did not pass the Senate).
When the Senate eventually votes on Werfel’s nomination, it will likely pass as Democrats control the upper chamber. In addition, some Republican senators suggested they would support his nomination too. Still, today’s hearing was a peek into the priorities of both Republican and Democratic lawmakers, as well as the challenges Werfel will face managing his future agency’s relationship with Congress.
At the beginning of the hearing, Chairman Ron Wyden (D-OR) explained that in practice, the United States has a two-tiered tax system. The first is composed of wage earners who pay their tax obligations automatically through a payroll system. Meanwhile, the second is a reserved system for high-income self-employed people, entrepreneurs, and billionaires who often “can pay what they want, when they want to,” Wyden said. “Working people in the middle class today have a 99 percent rate of compliance with the tax code. Yet working families who claim the Earned Income Tax Credit get audited far more than the wealthy folks. It didn’t get that way by accident.”
Next up, Ranking Member Mike Crapo (R-ID) focused his opening remarks on fairness for taxpayer rights. He said: “Americans have time and again seen the IRS fail to meet these obligations.” Then he praised former IRS commissioner Charles Rettig, a Trump appointee who failed to audit the former president for the first two years he was in office. “While I did not always agree with former commissioner Rettig, he was consistent and called the balls and strikes the same for everyone.”
Elsewhere, Crapo questioned the IRS’s need for the $80 billion. “For reference, $80 billion is more than six and a half times the IRS’s typical annual budget… Congress has appropriated the IRS hundreds of billions of dollars in annual funding and tens of billions of dollars in more supplemental funding, with little improvement to show for it.”
Werfel began by highlighting the IRS’s role as a benefits administrator throughout the first years of the COVID-19 pandemic. He then connected that critical nature with the need for improving the customer service experience for taxpayers interacting with the IRS.
Werfel committed to not using the newly allocated money for enforcement against tax filers making under $400,000 a year.
When Wyden asked Werfel about a de facto two-tiered tax system, specifically about recent reports of Black taxpayers being more likely to be audited than others. Werfel responded: “We have to have an understanding of whether our approaches or activities are having disparate impacts on any population.” Then he committed to providing Congress with a report on the source of the racial discrimination and a plan to rectify it.
On closing the tax gap, Werfel said, “I’m not sure that training the current [IRS] workforce will be sufficient. I think we want to hire and bring in experts,” referring to mid-level tax law experts from the private sector.
When the IRA was passed, the Treasury Department ordered the IRS to develop an operational plan for the new $80 billion would be spent over the coming decade. That report is due Friday. Currently, the Treasury Department has not answered whether or not that report will be immediately available to the public. However, Crapo asked Werfel that if he were confirmed as commissioner, would he release the plan for the public. Werfel responded: “As a former budgeteer, I will earn your trust by putting together a very clear plan that articulates where the money is going.” Werfel also committed to not using the newly allocated money for enforcement against tax filers making under $400,000 a year.
Another point of contention were 1099-K forms—specifically, delays in reporting for taxpayers who use financial payment applications like Venmo. Reporting requirements for such services dropped from $20,000 in annual income over the course of more than 200 transactions to $600 a year, regardless of total transaction numbers. In each of these lines of questioning, Werfel adamantly responded that he’s a rule follower. However, adding that “effective tax administration [requires] a bunch of different factors, reducing paperwork burden on the public, but also avoiding unnecessary intrusion.”
Sen. James Lankford (R-OK) brought up another criticism, dismissing the Treasury Department’s boast that the IRS has reached a 93 percent answer rate (up from a dismal 24 percent) for telephone calls by noting that the actual number of calls answered had dropped. While that is strictly true, tax season is still underway. A fuller picture of the customer service upgrades should come later this year after the tax filing deadline and when returns are sent out.
On cybersecurity matters, Werfel promised that under his leadership, the IRS would overhaul its capabilities, rather than fixing security concerns around the edges. When asked by Sen. Chuck Grassley (R-IA) if Werfel would consider moving the IRS’s computing onto cloud computing, he said he would consider the idea.
Sen. Sherrod Brown (D-OH) asked Werfel if he would commit to expanding the IRS’s Volunteer Income Tax Assistance (VITA) program, which primarily helps filers who receive the Earned Income Tax Credit and Child Tax Credit. Werfel agreed.
Near the end of the hearing, Sen. Elizabeth Warren (D-MA) used her speaking time to explain how Republicans have undermined the agency’s ability to function over the last decade in three ways: tax cuts for the wealthiest and largest corporations, slashed funding that’s resulted in less audits for those groups, and lastly, “pretend to care about fiscal responsibility when there’s a Democrat in the White House, so that the Republicans can hold our economy hostage.”
She then asked Werfel if the IRS were stripped of the IRA’s $80 billion in funding, would it deter the agency’s ability to audit the billionaire class. He replied: “If the funding is repealed, we wouldn’t have that lever to increase our ability to unpack those returns.” Next, she asked about the Republicans’ so-called “Fair Tax,” which is a 30 percent national sales tax. Werfel responded by saying that such a tax would open the possibility for rampant tax evasion. “Sales taxes are regressive… A low income person is going to feel that in their wallet more than a high income taxpayer.”
