On Wednesday, the U.S. Senate confirmed Danny Werfel to be the new Commissioner of the Internal Revenue Service (IRS). NTU Foundation (NTUF) sends our congratulations to Commissioner Werfel, along with our hopes that we will see action on the IRS's ambitious commitments to taxpayers, lawmakers, and the IRS workforce.
As Commissioner Werfel gets ready to take the helm, we encourage the new Commissioner and his staff to prioritize the following work in the early months of his tenure.
Modernize Aging Systems and Outdated Taxpayer Services
Perhaps the largest impediment to the two most important goals at the IRS – serving taxpayers and enforcing the nation’s tax laws in a fair and impartial manner – is that the IRS lacks the tools, technology, and workforce levels necessary to interact with tens of millions of taxpayers annually in the 21st century. Dozens of tax forms still cannot be electronically filed with the IRS, the “Where’s My Refund” tool fails to provide key return and refund processing information to taxpayers, and the IRS is behind the times in providing taxpayers with digital and online alternatives to the phone lines taxpayers call when they have questions.
Commissioner Werfel demonstrated a strong awareness of these problems in his confirmation hearing at the Senate Finance Committee, and offered several promising ideas and suggestions to bring IRS customer service, filing, and return processing tools into the 21st century. The IRS has an extra $3.18 billion to spend on customer service, $4.75 billion to spend on modernization, and $25.33 billion to spend on operations support over the next decade under the recently enacted Inflation Reduction Act.
We hope Commissioner Werfel and the IRS use that funding to prioritize customer service and modernization projects and move them to the front of the line. An early and disproportionate focus on taxpayer service has reportedly been paying dividends when it comes to customer service and return/refund processing so far in the 2023 filing season. The IRS can build on this work.
Use IRA Resources and Discretionary Funding to Reach More Low-Income Taxpayers
Low-income taxpayers often lack access to tax professionals or tax filing software that middle- and high-income taxpayers enjoy. While the IRS manages a network of Taxpayer Assistance Centers (TACs), Volunteer Income Tax Assistance (VITAs), and Low Income Taxpayer Clinics (LITCs) to serve taxpayers and answer their questions at no charge, TACs and VITAs may still be recovering from COVID closures, and LITCs have a limited scope.
More importantly, Congress has enacted complicated rules for the tax credits most often accessed by low-income taxpayers, including the Earned Income Tax Credit (EITC), the Additional Child Tax Credit (ACTC; i.e., the portion of the CTC that is refundable), and the American Opportunity Tax Credit (AOTC). The complicated rules for claiming these credits are one reason why they suffer from high overpayment rates, regularly over 10 percent for the ACTC, over 23 percent for the EITC, and over 26 percent for the AOTC. The EITC and CTC alone contributed to eight percent ($36 billion per year) of the gross tax gap from 2014 through 2016.
The IRS needs to address these challenges in a way that doesn’t further burden or criminalize low-income taxpayers – some of whom may already struggle to access adequate taxpayer services. While it will be up to Congress to simplify the rules governing some of the refundable tax credits, the IRS can use some of its resources from the IRA and discretionary appropriations to expand access to, taxpayers knowledge of, and services provided by TACs, VITAs, and LITCs.
Our sister organization NTU has also previously called on the IRS “to more closely identify and analyze the causes for taxpayer errors on returns”:
“One GAO recommendation the IRS rejected was the suggestion to more closely identify and analyze the causes for taxpayer errors on returns. IRS disagreed, claiming that they already study internal agency errors on tax returns, whereas GAO countered that the agency’s current work does not account enough for different types of taxpayer errors.
Congress should override the IRS’ disagreement with this key recommendation, and require a multi-year study on the main causes for taxpayer errors while filing. This study could be conducted in collaboration and/or partnership with the Treasury Department, Congress, GAO, and outside stakeholders. The IRS could gain valuable insight from enhancing their dialogue with tax practitioners, especially, including those who work at Taxpayer Assistance Centers (TACs), Low Income Taxpayer Clinics (LITCs), and for- and non-profit tax filing organizations.”
Commissioner Werfel should take a fresh look at this outstanding GAO recommendation.
Commit to Publicizing the Full $80 Billion Spend Plan
One notable omission from Commissioner Werfel’s confirmation hearing was an ironclad commitment to publicize the full IRS spend plan for the $80 billion in supplemental appropriations provided to the IRS in the IRA. Commissioner Werfel agreed with Senators that the public should know how the IRS plans to spend taxpayer funds over the next decade, but did not commit to publicizing the full plan when it is complete.
NTU Foundation strongly encourages Commissioner Werfel to make the full spending plan public. If there are legal complications that prevent the IRS from making the full plan public, then the Commissioner should make as much of the plan public as possible and submit a classified annex to lawmakers for oversight purposes.
This is the most significant taxpayer investment in the IRS in its history. Prior attempts to reform and modernize the IRS have included much more robust stakeholder engagement and have still fallen short of initial expectations. An early step to ensuring better success with this tranche of funding would be for the IRS to submit its full spending plan to Congress and the public for feedback.
Expand Access to Dispute Resolution
As the IRS embarks on spending an additional $45.64 billion on increasing enforcement activities over the next decade, it is important that taxpayers have robust access to alternative dispute resolution (ADR) mechanisms, which remain underutilized even after our sister organization NTU last testified before Congress on the matter in 2017. However, an encouraging development that made the dispute resolution toolbox more effective is IRS Independent Office of Appeals. This was one core mission of the Taxpayer First Act, which Congress enacted with widespread bipartisan support in 2019.
Unfortunately, recent rulemaking at the IRS has the potential to limit, rather than expand, taxpayer access to the Independent Office of Appeals. NTU recently filed extensive comments with the IRS encouraging modifications to an IRS-proposed rule that would shut some taxpayers out of opportunities for challenging the validity of regulations or sub-regulatory guidance. We believe that, intended or not, the proposed rule from the IRS would at minimum violate the spirit of the Taxpayer First Act’s intent to expand dispute resolution options for taxpayers.
NTU Foundation was and remains concerned about just how the IRS will go about expending $45 billion on increased enforcement activities in the next 10 years. While we support efforts to reduce the tax gap and ensure that taxes owed are taxes paid, we worry that without robust customer service, pre-filing assistance, and access to dispute resolution mechanisms many innocent taxpayers – or taxpayers who made honest mistakes when filing – will be caught in a time-consuming and potentially financially costly enforcement dragnet.
Beware of Mission Creep
Our sister organization NTU warned last year that “lawmakers need to exercise caution before greatly expanding the agency’s mission.” The COVID response bills enacted by Congress from 2019 through 2021 – often but not always on a bipartisan basis – gave the IRS a lot more work to do outside of its core responsibilities. This included the disbursement of hundreds of millions of stimulus checks, the administration of a monthly, advanceable child tax credit (CTC) for the first time, management of a significant and temporary expansion of the Earned Income Tax Credit (EITC) for childless workers, and administration of retroactive tax policies. Like other federal agencies, the IRS struggled with staffing and workflow issues as a result of the pandemic. Congress did not make the job easier by greatly expanding IRS responsibilities.
But the IRS itself, and Commissioner Werfel, should also be wary of mission creep in the years ahead.
In the Inflation Reduction Act, the IRS was tasked with studying the feasibility of return-free tax filing in last year’s IRA. That study is underway, already amid considerable controversy, and is due in mid-May.
As that study process takes place, we hope the IRS undertakes an honest and comprehensive assessment of the proposal that includes the numerous potential pitfalls to expanding the IRS mission beyond the dual mandate of taxpayer service and impartial enforcement. NTU has long warned about the problems associated with return-free filing, including IRS workload constraints, the complexity of the tax system itself, and public trust in the separation between return preparation and administration of tax laws.
Former IRS Commissioners John Koskinen (2013-2017) and David Kautter (Acting; 2017-2018) spoke also about the technical flaws of return-free filing in a panel discussion last year:
“Also important, however, was what both Commissioners agreed should not be prioritized in the IT space: return-free. Their remarks are instructive. Commissioner Koskinen noted that, ‘It’s years down the road because there are other things much more critical.’ He also neatly summed up the challenge of implementing return-free in such a complex tax system: ‘A lot of people, once you get in the middle class, with a lot of deductions and other issues, then you’re probably never going to get a system that automatically does it because you have to have a lot of data that goes behind it.’ For his part, Commissioner Kautter added that in regards to return-free, ‘The IRS needs to get its technology house in order, and until that occurs, I think that it’s unwise.’”
IRS mission creep is a real risk both internally and in the legislative branch right now, and return-free filing is one of the biggest manifestations of this risk. We hope the IRS uses the significant new funding it has received in the IRA to focus first and foremost on making improvements to its core mission.