The IRS is at a crossroads, figuring out how to spend tens of billions in additional funding from the Inflation Reduction Act (IRA), reeling from repeated court rebukes, and preparing to implement a new “free file” pilot program. So it’s no surprise that the U.S. House Ways and Means Committee had plenty to ask IRS Commissioner Daniel Werfel when he appeared for a hearing on the status of IRS operations, upcoming tax changes, and the ongoing filing season.
Here are four main takeaways from the hearing:
Congress Wants Results from Inflation Reduction Act Funding. Several members of Congress on both sides of the aisle took time to comment on the impact of the $80 billion in funding for the IRS that was included in the IRA. The law’s funding for customer service has seen an improvement in service to taxpayers in comparison to its abysmal performance post-pandemic, which was characterized by a phone pick-up rate of below 15 percent and a huge backlog of returns. While the IRS has managed to answer a significantly higher percentage of calls from taxpayers this year, that is in part attributable to far fewer taxpayers attempting to contact the IRS. We have yet to see vast transformations in taxpayer service infrastructure, with Commissioner Werfel mainly highlighting 60 new taxpayer assistance centers and 5,000 new staff to answer taxpayer phone calls.
Some questions rightly focused on technological modernization, which was also addressed by the IRA, as going a long way to improve customer service. Commissioner Werfel acknowledged that modernization efforts remain slow, with the IRS just now catching up to simple advancements like automated chats that have long been used in the private sector. The Commissioner was unable to provide specific timelines for deploying other digitization reforms such as moving to a cloud-based system.
Moving forward, the IRS needs to demonstrate how both customer service and modernization funds from the IRA are being used to help taxpayers. Worryingly, Commissioner Werfel claimed, “Our base budget is insufficient to run the daily train schedules, what that means is we have to borrow from the modernization fund just to keep the lights on.” Redirecting funds away from modernization is the exact opposite of what they should be doing. Furthermore, this should be unnecessary given that the IRA included $25 billion for IRS operations support in comparison to a modest $4 billion for modernization. It is also a telling indicator of IRS priorities that meager modernization funds are being tapped to cover taxpayer service needs before the far larger bucket of new enforcement funding.
Enforcement Remains the IRS Priority. Commissioner Werfel made it clear throughout the hearing that the IRS is focusing its efforts on increasing audits with the help of the IRA’s $45 billion for enforcement, amounting to nearly 57 percent of the total additional funding provided by the law. Werfel said that the IRS is specifically targeting those with complex returns for audits, including high-income earners, corporations, and partnerships. This led to questions among some lawmakers about unfair targeting. Representative Lloyd Smucker (R-PA) called out the Commissioner for his insinuation that all high-income earners are tax cheats, stating that most people want to pay their taxes and are doing their best to comply with the law. When asked by Representative Smucker what percentage of high-income earners’ audited returns result in no change, Commissioner Werfel said “I can get that information for you, I don’t have that.”
The complex returns the Commissioner intends to single out are only necessary as taxpayers try to comply with an enormous tax code, which allows for many legitimate deductions. NTUF estimates that Americans spend an incredible 6.5 billion hours in a year sifting through paperwork to comply with tax laws. As NTUF President Pete Sepp stated to the Senate Finance Committee last year, audits are only one tool in the IRS compliance toolkit. Positive measures such as tax simplification would both increase compliance and reduce the amount of complex returns filed.
The IRS is Bending the Rules on 1099-K and Free File. The IRS is pushing the bounds of what is legal in its implementation of 1099-K filing requirements and its rollout of a “free file” pilot program.
The Inflation Reduction Act made changes to the 1099-K filing threshold, reducing it from 200 transactions or $20,000 in gross transactions annually to merely $600 in gross transactions. This meant that for the 2022 tax year, third-party payment platforms like Venmo and PayPal would have been responsible for sending a 1099-K form to taxpayers and the IRS for each account sending or receiving $600 or more on the platform. Taxpayers receiving non-taxable income, such as resale of used goods or private payments between friends, would then have the responsibility of explaining to the IRS why that transaction should not be considered taxable. NTUF has repeatedly pointed out the tremendous burden this change will have on both taxpayers and the IRS itself as it deals with a mass influx of millions of forms.
The IRS has delayed implementation of the 1099-K change since it became law, providing temporary relief to taxpayers. However, it recently unilaterally decided to enforce a new 1099-K threshold of $5,000 next year, an arbitrary figure with no statutory basis. While the IRS can delay the implementation of a law, it cannot set a new threshold. When asked about the illegal overreach by Representative Carol Miller (R-WV), Werfel claimed to have the authority to implement laws “in a manner that ensures taxpayer rights.”
The IRA also included $15 million for the IRS to conduct a study on the feasibility of a free file program. Typically when Congress asks an agency to conduct a study, the result is a lengthy report. The IRS instead took matters into its own hands and rather than simply studying the implementation of free file, decided to initiate a pilot program wherein eligible filers from a handful of states can file their taxes directly through the IRS. To justify this broad interpretation of Congress’s original mandate, Commissioner Werfel cited his authority to administer the tax system and claimed to simply be providing one additional avenue to do this. Serious taxpayer concerns remain about the impartiality of such a system, and it is worrisome that the IRS is unilaterally taking it upon itself to become the fox guarding the henhouse.
The House and the IRS Are Looking Forward to TRAFWA Passage. Finally, many members of Congress commented on upcoming changes to the Child Tax Credit (CTC) and Employee Retention Tax Credit (ERTC) expected with the passage of the Tax Relief for American Families and Workers Act (TRAFWA) that passed the U.S. House on January 31 and is currently being considered by the Senate.
The CTC changes in the tax bill gained bipartisan support, receiving praise from both Chairman Jason Smith (R-MO) and Ranking Member Richard Neal (D-MA) of the Committee during Commissioner Werfel’s hearing. The bill would keep the CTC amount at its Tax Cuts and Jobs Act level of $2,000 while including an inflation adjustment and increase in the refundable amount, though it would remain well below the level of $3,600 per child implemented through the American Rescue Plan in 2021. When asked by Smith how long it will take for the IRS to send out any additional refunds after the bill’s CTC changes are signed into law, Commissioner Werfel committed to trying to enact changes as soon as possible, in as little as six weeks. The Commissioner also confirmed that taxpayers will not have to file an amended return to receive tax adjustments, as specified in the bill. NTUF has written in the past about the benefits of earned-income credits such as the CTC and Earned Income Tax Credit.
Commissioner Werfel also joined legislators in expressing frustration with the pandemic-era Employee Retention Tax Credit (ERTC) program that continues today, leaving business owners confused and the IRS overburdened. The Commissioner confirmed that TRAFWA’s provision to end employers’ ability to submit new ERTC claims would help reduce the claims backlog, which continues to grow with billions of dollars of new (and if TRAFWA is enacted, ineligible) claims.
Overall, the IRS seems prepared to implement changes in law as seamlessly as possible.