[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
HEARING WITH COMMISSIONER OF THE
INTERNAL REVENUE SERVICE, DANIEL WERFEL
=======================================================================
HEARING
before the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
SECOND SESSION
__________
FEBRUARY 15, 2024
__________
Serial No. 118-FC20
__________
Printed for the use of the Committee on Ways and Means
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
U.S. GOVERNMENT PUBLISHING OFFICE
55-928 WASHINGTON : 2024
COMMITTEE ON WAYS AND MEANS
JASON SMITH, Missouri, Chairman
VERN BUCHANAN, Florida RICHARD E. NEAL, Massachusetts
ADRIAN SMITH, Nebraska LLOYD DOGGETT, Texas
MIKE KELLY, Pennsylvania MIKE THOMPSON, California
DAVID SCHWEIKERT, Arizona JOHN B. LARSON, Connecticut
DARIN LaHOOD, Illinois EARL BLUMENAUER, Oregon
BRAD WENSTRUP, Ohio BILL PASCRELL, Jr., New Jersey
JODEY ARRINGTON, Texas DANNY DAVIS, Illinois
DREW FERGUSON, Georgia LINDA SANCHEZ, California
RON ESTES, Kansas TERRI SEWELL, Alabama
LLOYD SMUCKER, Pennsylvania SUZAN DelBENE, Washington
KEVIN HERN, Oklahoma JUDY CHU, California
CAROL MILLER, West Virginia GWEN MOORE, Wisconsin
GREG MURPHY, North Carolina DAN KILDEE, Michigan
DAVID KUSTOFF, Tennessee DON BEYER, Virginia
BRIAN FITZPATRICK, Pennsylvania DWIGHT EVANS, Pennsylvania
GREG STEUBE, Florida BRAD SCHNEIDER, Illinois
CLAUDIA TENNEY, New York JIMMY PANETTA, California
MICHELLE FISCHBACH, Minnesota JIMMY GOMEZ, California
BLAKE MOORE, Utah
MICHELLE STEEL, California
BETH VAN DUYNE, Texas
RANDY FEENSTRA, Iowa
NICOLE MALLIOTAKIS, New York
MIKE CAREY, Ohio
Mark Roman, Staff Director
Brandon Casey, Minority Chief Counsel
C O N T E N T S
----------
OPENING STATEMENTS
Page
Hon. Jason Smith, Missouri, Chairman............................. 1
Hon. Richard Neal, Massachusetts, Ranking Member................. 2
Advisory of February 15, 2024 announcing the hearing............. V
WITNESS
Daniel Werfel, Commissioner, Internal Revenue Service............ 4
MEMBER QUESTIONS FOR THE RECORD
Member Questions for the Record to and Responses from Daniel
Werfel, Commissioner, Internal Revenue Service................. 104
PUBLIC SUBMISSIONS FOR THE RECORD
Public Submissions............................................... 186
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
HEARING WITH COMMISSIONER OF THE
INTERNAL REVENUE SERVICE,
DANIEL WERFEL
----------
THURSDAY, FEBRUARY 15, 2024
House of Representatives,
Committee on Ways and Means,
Washington, DC.
The committee met, pursuant to call, at 10:01 a.m. in Room
1100, Longworth House Office Building, Hon. Jason T. Smith
[chairman of the committee] presiding.
Chairman SMITH. The committee will come to order.
Before we begin, I know I speak for everyone here when I
wish our ranking member a belated happy birthday yesterday. And
we are supposed to have some cake later, so we have to
celebrate.
Mr. NEAL. I want a roll call vote on that. [Laughter.]
Chairman SMITH. But a late happy birthday.
Mr. NEAL. Thank you.
Chairman SMITH. We appreciate serving with you, sir.
Thank you, Commissioner Werfel, for appearing before the
Ways and Means Committee a little earlier than usual this year.
We have a lot to go over with you, so I appreciate you
answering the request of our members to come before the
committee early this year.
First, as it pertains to the current 2023 tax filing
season, I want to thank you and your team for the technical
work to ensure the quick and without-delay implementations of
provisions of the Tax Relief for American Families and Workers
Act. We particularly appreciate the steps the agency is taking
right now to be ready to immediately implement the legislation
once the Senate passes the bill and it is signed into law,
especially with regard to adjustments to the Child Tax Credit.
I think we are also largely aligned on the importance of
rooting out fraud in the Employee Retention Tax Credit program.
We look forward to hearing about your efforts not just in
eliminating that fraud, but also making sure that small
businesses across America who filed legitimate claims receive
their credits as soon as possible.
While I am grateful for your partnership in these efforts,
it won't surprise you that I also have a number of concerns
about the Biden Administration's approach to the IRS and about
the IRS's handling of several important issues.
The last time you were before this committee the IRS had
chosen to delay a provision of a law crafted by the Biden
Administration and congressional Democrats that would send tax
forms to 44 million Americans just for engaging in transactions
over $600 in a year. This includes transactions like simply
selling a used couch or a concert ticket through a third-party
payment platform. Once again, the IRS unilaterally chose to
delay implementing the law or sending these forms--this time in
an election year.
To be clear, Republicans are united behind repealing this
terrible policy, and I want to thank Representative Carol
Miller for her leadership on the repeal effort. But the way to
fix this terrible law is to repeal it, not to use the IRS to
shield the Biden Administration from the consequences of its
own policies.
Also, last time you were before this committee, you said
the IRS would not retaliate against whistleblowers. One of the
IRS whistleblowers who has appeared before this committee has
since alleged the IRS retaliated against him for exposing the
truth about the DoJ's preferential treatment of Hunter Biden. I
hope you will share what steps have been taken to protect
whistleblowers.
And just a couple of weeks ago a judge sentenced an IRS
contractor to five years in prison for the greatest theft of
taxpayer information in American history. I think the
Department of Justice woefully, woefully undercharged this
individual, but I am pleased the judge applied the maximum
sentence available to her.
But this story doesn't end with that case. The IRS must be
accountable for allowing this theft to have ever happened and
must ensure that it fixes security vulnerabilities at the
agency. A recent report from the inspector general described
alarming details about how--current IRS security flaws that
demonstrate the problem has not--and has not been resolved. I
hope that you will commit today to address their findings
quickly for the sake of millions of taxpayers.
We have serious questions about numerous other issues, such
as the implementation of an IRS direct file scheme that the
American people didn't ask for, how the IRS is spending its
windfall of $80 billion, and Fantasyland claims about how much
revenue the agency thinks it will generate from increased
audits.
Frankly, more of the IRS's time and resources should be
directed toward improving its customer service for its existing
duties, not spending money and resources on new systems no one
has asked for. Part of that focus should be on deploying new
technology to make the IRS more efficient. Proper use of
technology can help avoid the need to hire thousands and
thousands of new employees.
I want to thank Representative Schweikert for leading the
charge to ensure that the IRS is taking advantage of new
technology to help taxpayers.
Clearly, there is a lot the IRS needs to answer for, and I
look forward to hearing how your agency plans to follow the law
and protect taxpayers moving forward.
Chairman SMITH. I am pleased to recognize Ranking Member
Neal for his opening statement.
Mr. NEAL. Thank you, Chairman. So, we want to welcome the
commissioner back to the Committee on Ways and Means.
As always, it is delightful to have you with us in the
middle of what promises to be another record-breaking filing
season. The dedication of the employees of the Internal Revenue
Service is remarkable. We want to thank them for their
commitment to our taxpayers and fair tax administration--
emphasis on the word fair--and for the swift implementation of
the Inflation Reduction Act.
Last filing season was the first impacted by the Democrats'
multi-year investment from this historic legislation. While
taxpayer service was dramatically improved, it was merely the
consequence of a well-laid, well-funded plan. The results have
been quite remarkable. In this era of service to America's
taxpayers, the IRS beat Secretary Yellen's goal and delivered
an 87 percent quality level of service, 3 million more phone
calls were answered, while wait times were cut from 28 minutes
to 3 minutes. Over 140,000 additional taxpayers were served in
person. The 2022 backlog was eliminated, and many new digital
tools were introduced to make taxpayer experiences even easier.
A reminder to our Republican colleagues: many of the
recommendations that we entertain and discuss this morning came
from Commissioner Rettig, a Republican who worked with all of
us to ensure quality service. We know that expectations have
been increased based on the success that the IRS has had so
far.
It was just last year that we discussed the future of the
IRS's ability to hold the top 1 percent of tax cheats
accountable, and in a matter of months over $500 million has
been recovered from 1,600 wealthy tax avoiders.
Another major victory is taxpayer fairness and a victory
for the IRS. A reminder: If the revenue is not collected in a
fair manner, that means the rest of us pay more.
Yet the biggest threat to the IRS right now is the
extremism of some of our colleagues. From the government
shutdown that looms in just five legislative days to our
colleagues' attempt to gut our investments every chance they
have gotten, not only would this end up costing taxpayers money
and adding to the deficit, but how can you argue with the
success?
I find myself wondering out loud about who wins when the
IRS is starved for its resources. Perhaps our colleagues will
have a chance to answer that this morning.
Under Republican funding cuts, the audit rate on
millionaires fell by more than 70 percent from 2010 to 2019.
Those are numbers from Commissioner Rettig. And the audit rate
on large corporations fell by more than 50 percent. That was a
request from Commissioner Rettig. Workers and their families
pay their fair share, and the American people can count on us
to ensure that wealthy and well-connected people are paying
their fair share, too.
While the promise of direct file draws near and I am
optimistic about some prospects, I am disappointed it wasn't
all ready in time for the public to take advantage of it.
We want to thank the commissioner for his diligence in
being here today. We look forward to continuing work on behalf
of the American people.
Mr. NEAL. And with that I yield back the balance of my
time, Mr. Chairman.
Chairman SMITH. Thank you, Ranking Member Neal.
Today's sole witness is the commissioner of the Internal
Revenue Service, Daniel Werfel.
The committee has received your written statement, and it
will be made part of the formal hearing record.
Commissioner Werfel, you may begin when you are ready.
STATEMENT OF THE HON. DANIEL I. WERFEL,
COMMISSIONER, INTERNAL REVENUE SERVICE
Mr. WERFEL. Chairman Smith, Ranking Member Neal, and
members of the committee, thank you for the opportunity to
testify on the filing season and IRS operations.
I am pleased to report that the 2024 filing season opened
on schedule on January 29 and has gone smoothly so far. Along
with filing season and other day-to-day operations, we continue
to make important progress in our efforts to transform our
agency through implementation of the Inflation Reduction Act.
Using IRA funding, our work is centered on three
fundamental themes: first, ensuring taxpayers can easily
contact the IRS whether in person, on the phone, or online; we
want them to get help navigating complex tax laws and accessing
the credits they deserve; second, identifying the growing
number of taxpayers with complex returns, including certain
wealthy individuals, large corporations, and complex
partnerships who are shielding income to evade their tax
responsibility, we want to collect from them what is owed; and
third, addressing the growing risk of tax scams and schemes by
protecting honest taxpayers from them, we want to root out the
nefarious actors that perpetrate them. These investments allow
us to strengthen the overall effectiveness of IRS operations.
As commissioner, I want people to know that the IRS is on
the side of taxpayers, and we are working to reflect that in
every aspect of our operations while administering the nation's
tax law. The IRS has been working hard to build on the
accomplishments of last year. Our transformation goals for this
filing season include providing an 85 percent level of service
on our main toll-free phone line during the filing season.
On the compliance side, we continue to increase scrutiny on
those who evade taxes. We are working to reverse the
historically low audit rates for large corporations, complex
partnerships, and high-wealth individuals. During the past
year, the IRS has also taken dramatic steps to strengthen our
internal systems, protocols, and procedures by putting in place
numerous improvements to bolster how we protect key systems and
information. Our recent steps, enabled with new funding, have
sharply reduced risks for taxpayers and the tax system.
While taxpayers should rightfully be concerned about recent
reports of the unauthorized access and disclosure that occurred
in the 2017 to 2021 timeframe, the data security environment at
the IRS is dramatically improved today. We have worked
tirelessly this past year to close gaps that allowed this
unfortunate event to transpire. However, there is always more
work to do in this area, and we will continue our laser focus
on strengthening data security.
Another important aspect of our mission is implementing the
tax laws fairly and justly. A key part of this involves making
sure everyone pays the taxes they owe. But we also have a
responsibility to protect taxpayers from being overly burdened
in fulfilling their tax obligations. We work continuously to
balance these two sides of the mission. This is the issue we
faced in implementing the $600 threshold for 1099-K reporting
that Congress passed in 2021.
While it is important for us to have the information
provided under the lower threshold, we must also consider the
burden placed on taxpayers in meeting this requirement. Our
administration of tax laws should be guided by what is best for
taxpayers. In this situation, we delayed imposing the lower
threshold because we realized that immediate implementation
posed a high risk of taxpayers being confused and, given the
complexities of the 1099 reporting, some potentially paying
taxes they didn't actually owe. That is something we take very
seriously, and we will do everything in our power to avoid.
So the IRS is continuing to work to reduce that risk before
imposing the $600 standard for business transactions. We will
continue working this and getting feedback from key groups.
I also want to assure the committee that the IRS is paying
close attention to the potential passage of the Child Tax
Credit legislation. If Congress acts, the IRS is poised to move
quickly to implement it. Building off our experience with
economic impact payments during the pandemic, we may be able to
start implementation as early as 6 to 12 weeks after passage,
depending on the bill's final language. But taxpayers should
not wait for this legislation to file their returns. We will
take care of getting any additional refunds to taxpayers who
have already filed. They won't need to take additional steps.
Chairman Smith, Ranking Member Neal, and members of the
committee, that concludes my statement. I am happy to take your
questions.
[The statement of Mr. Werfel follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman SMITH. Thank you, Commissioner. We will now
proceed to the question-and-answer session.
Commissioner Werfel, as you know, the House-passed the Tax
Relief for American Families and Workers Act included
adjustments to Child Tax Credit. You just briefly touched on
that. I want to ask some additional questions to make the
record reflect appropriately. But the bill passed through this
committee by a vote of 40 to 3, and it received 357 votes on
the House floor. As I mentioned in my opening statement, I
appreciate the work your--you and your team have done to help
ensure that the bill can be implemented as quickly as possible.
I just want to confirm a few details with you.
The overwhelming majority of American taxpayers are
guaranteed to have no adjustment to their tax liability due to
the Child Tax Credit changes in this bill. In fact, can you
confirm that only roughly 10 percent of households will be
affected and will receive just modest adjustments to their tax
refunds?
Mr. WERFEL. Yes. In fact, in looking at the numbers, if you
look at the same eligible population in fiscal year 2022, it
was about 22.5 million people. So that metric that you offered
is in line with our understanding of how it is going to impact
taxpayers going forward.
Chairman SMITH. Thank you. We worked with your team to make
sure the bill did not place a new burden on taxpayers and can
be implemented without delay. Can you confirm that taxpayers do
not need to file amended returns to obtain the adjustments the
bill makes, further speeding things up?
Mr. WERFEL. Yes.
Chairman SMITH. Thank you. There is language in the
legislation requiring the IRS to process any additional returns
without delay. As a matter of fact, that was language we added
during the markup in this room. If the bill is passed by the
Senate and signed into law, how quickly will you be able to
make the Child Tax Credit adjustments for this filing season?
In other words, how long will it take after bill signage
for the IRS to send out any additional refunds?
Mr. WERFEL. Well, we gave you a range of 6 to 12 weeks
required for implementation from the point of enactment. The
reason we give a range is because we need to see the final
language. But I am committed to work diligently to make sure we
are closer to the 6-week end of that range than the 12-week.
Chairman SMITH. I appreciate hearing that, Commissioner. So
just to be clear, we have your commitment that the IRS will
move as quickly as possible.
Mr. WERFEL. It will be a top priority to make sure that
this gets done.
Chairman SMITH. Thank you, sir. In the past, Congress has
asked the IRS to make changes during tax filing season. In
fact, Congress has asked the IRS to make much larger changes
than this bill does, like sending stimulus checks to hundreds
of millions of taxpayers or creating a monthly check-sending
system for the Child Tax Credit on the fly. The number of
taxpayers affected here is a fraction of those affected in
those other programs.
Given that, can you confirm the administrative adjustments
needed to implement the Tax Relief for American Families and
Workers Act are a much lighter lift for the IRS than for those
other programs?
Mr. WERFEL. Yes. And Mr. Chairman, the work that we did to
implement the payments that you referred allowed us to build
additional capacity to make us even more ready for this change.
Chairman SMITH. Thank you, sir. Commissioner Werfel, the
individual who stole and disclosed the tax information of
thousands of Americans has now been punished with a sentence of
five years in prison. While I am glad the judge in the case
sentenced him to the maximum available to her, I was surprised
that the Department of Justice only charged the individual with
one count, one count of unauthorized disclosure, and no other
crimes.
Did you make a recommendation to the Department of Justice
on how to charge in this case?
Mr. WERFEL. No, that is not the role of the IRS
commissioner. We allow and defer to the Department of Justice
on prosecutorial decisions.
Chairman SMITH. Do you think one count of disclosure
matches the crime committed?
Mr. WERFEL. I think that protecting taxpayer information
from unauthorized access is an absolute solemn responsibility
of the IRS, and I also believe that this individual betrayed
the trust. He betrayed his own commitments, he betrayed IRS
employees, and he betrayed the American tax people. And based--
and that type of betrayal should not be tolerated. And based on
what is playing out in court, it is not being tolerated because
this person is being brought to justice and, as I understand
it, is going to spend years in prison.
Chairman SMITH. Five years. Do you think the penalty should
have been higher for this individual?
Mr. WERFEL. I don't have a judgment on that, Mr. Chairman.
I rely on the court and the judicial process to play out, and I
trust that the judicial process will get the right answer.
Chairman SMITH. I was looking at more of the legislative
process of whether Congress should change and increase the
penalties for someone who abuses taxpayer information like this
situation.
I now recognize the ranking member for any questions he
might have.
Mr. NEAL. Thank you, Chairman.
Commissioner, what has the IRS done to restore an element
of fairness to the tax system?
And are there any new compliance pushes that you are aware
of to audit high-income earners and big corporations?
Mr. WERFEL. Yes, thank you for the question.
So what happened in the period before the Inflation
Reduction Act, when IRS funding was low and we weren't making
the appropriate investments, is there is a variety of different
areas we fell behind. And one of the key areas we fell behind
is the ability to assess complex returns.
So, in situations where taxpayers had the means to hire an
army of lawyers or accountants to create a lot of complexity in
their return and potentially shield income, we weren't making
the appropriate investments to track that, assess it, and
collect it. And now we are doing just that. With the Inflation
Reduction Act resources, we are focused on building our
capacity around how to deal with complex returns and how to
make sure there is fairness. Because if you are a taxpayer who
can't afford to hire a lawyer or an accountant to help you
create complexity and shield your income, then you would likely
be very frustrated if those that did have the resources could
do that and evade what they owe. And we have to close that gap,
and we are making really important progress already in closing
that gap.
Mr. NEAL. Thanks. And, Commissioner, let's talk about data
security. I thought your answer in your introductory comments
was on target. You want to talk about data security and the
improvements that have been made in your time as commissioner?
Mr. WERFEL. Yes. I mentioned how important, in the answer
to Mr. Chairman's question, data security is to the IRS. It is
fundamental to what we do in ensuring the public trust.
When I got to the IRS, one of the first things I did in
March of 2023 was pull the team in together and ask, what is
the state of our data security environment? And what I learned
was there were a lot of gaps. And one of the primary causes of
those gaps was lack of investment. The under-funding that had
occurred for many years at the IRS, I said, decreased our
capacity in a variety of different ways, and one of those ways
was to keep pace with investing in the type of technology,
process change, controls to make sure that our environment was
secure.
And we have spent the last year working diligently to close
those gaps, and there is a long laundry list of steps we have
taken to completely, dramatically change our environment, and I
will point out one important one.
The inspector general, in evaluating our security
environment, pointed specifically to a lack of audit trails in
our system so that we can see how data is moving throughout the
organization, and we can track and see if it is moving in an
inappropriate way. I required, and it has now been implemented,
that every sensitive system in the IRS has the very robust
audit trails that the inspector general required.
Again, before the Inflation Reduction Act, we didn't have
the resources to put in the work to close these gaps. And that
is why it is so important that the IRS be funded adequately for
its operations, not just so that we can answer the phone when
people call us, not so that we can keep pace with complex
returns, but we need to invest in our infrastructure and invest
in our data security so events like what happened in 2017 to
2020--that that doesn't happen again.
Mr. NEAL. Yes, I don't understand the logic that sometimes
is offered that, if we cut the IRS, then somehow we are going
to improve compliance. The logic escapes me.
So let me give you some time here. You have got a minute
and 15 seconds to talk about some of the other additions to
your testimony that you might like to offer.
Mr. WERFEL. Absolutely. So I really want to amplify this
point about what a funded IRS means versus what it doesn't. And
we have all the evidence we need in looking at the state of the
IRS before the Inflation Reduction Act was passed versus where
it is today.
And, before the Inflation Reduction Act was passed, our
walk-in centers around the country were closed or understaffed
with lines around the block. And now, just a few years later,
we have opened 50 new walk-in centers. They are fully staffed.
We are extending hours to Saturday for people who can't get to
us during the week, and we are implementing what we call pop-up
walk-in centers going to remote populations. So, if people want
to see us in person, they now can.
A second example is with the phones. We were under-staffed
by thousands of phone assisters because of under-funding. What
did we do with the funding? We hired 5,000 phone assisters, put
them in the call center, and, between before the Inflation
Reduction Act and after, there was a dramatic change in our
ability to answer the phone and help taxpayers with their
questions. And the same is true for digital.
We have a whole generation of taxpayers that is going to
expect, as they should, to be able to do everything they ever
wanted to do with the IRS without calling us, without going
into our walk-in centers. And before we were funded, our
technology tools were stagnant. They weren't being updated in
the way you would see either other tax jurisdictions around the
world or in the financial services sector, in the retail
sector. That is all changing now.
We have work to do, but now every time taxpayers come to be
with the IRS and filling out their taxes or answering a
question when they go to our website each filing season, they
are going to see a new set of tools, new functionality, new
things that they can do without ever calling us or walking into
a walk-in center because we are investing and focusing our
investments on how do we best serve taxpayers.
Mr. NEAL. Thank you.
Thank you, Mr. Chairman.
Chairman SMITH. Thank you. Mr. Buchanan is recognized.
Mr. BUCHANAN. Thank you, Mr. Chairman. I want to thank the
commissioner for being here today.
I chaired the Florida Chamber. We had 130,000 businesses in
the federation across Florida. One of the biggest issues--and I
mentioned this to you a little bit earlier--is dispute
resolution. And I am talking about companies with 50 employees
or less, the cost of hiring accountants, and maybe you have to
get an attorney and go through that whole process. It is very
time consuming. Many times it will put them out of business,
some of them.
But I think it has got a little bit better, but what is
your mindset of where we are at in terms of--it seems like we
want to get a fair deal for the IRS, for the country, but then
resolve as many of these disputes as we can. Some of them claim
they are out there a year, six months, eight months. It ties up
their energy, their time, and their enterprise. And you
mentioned that, you know, the big corporation is one thing, but
small business and individuals, as well, but I am just focused
right now on small business.
Mr. WERFEL. Yes, I really appreciate the question,
Congressman.
I haven't mentioned it yet, but one of the things that
guides me in the job is the taxpayer bill of rights. I have it
framed above my desk. I have it with me today. It is kind of
like--some people carry around their pocket constitution; I
carry around the taxpayer bill of rights because it is so
important that in everything we do we are guided by it.
And one of those rights is the right to speedily resolve
your issues. And I want to make the right investments so that
we are doing that. And that is a multi-pronged set of
solutions. It is, for example, having clearer notices, clearer
guidance. So, if the law is complicated, the IRS is translating
it clearly so there--we never get to a dispute. It is doing
outreach to small businesses with training and webinars. We are
investing to what are your questions and how can we help you.
And then it is hiring more people and working to make sure that
there is no dispute resolution that is taking too long.
Mr. BUCHANAN. I only got a few minutes.
Mr. WERFEL. Yes.
Mr. BUCHANAN. I got a couple of things I want to get
through.
Identity theft----
Mr. WERFEL. Yes.
Mr. BUCHANAN. It was a huge issue. Again, it seems like it
is organized groups and stuff is still out there. Where are we
at with identity theft now? Because I had a lot of people in
our region in Florida where their identity was stolen, the tax
returns were filed on behalf of the thief or whatever, or some
organized group. Where do you--what is your sense of where that
is at?
Mr. WERFEL. Well, it is critical, and it is a top priority.
I mentioned top three things we want to do under the Inflation
Reduction Act, and one is prevent people from being victimized.
And this is a mixed story. I wish it was all good. We have
made significant progress in preventing identity theft, working
with private sector partners in what we call our security
summit. We now prevent 98 percent of identity theft attacks, if
you will. But, in the case where there is a victim, as was
recently pointed out by a taxpayer advocate report, we are not
resolving those issues quick enough. And so it is a priority
going forward that--not only to continue our strong performance
in preventing identity theft, but also when it happens and
there is a victim, to raise our game and make sure that we are
providing that victim assistance in a much more robust way.
Mr. BUCHANAN. Yes, let me ask you one other thing. In terms
of customer service, I know you touched on that, just talking
to accountants and things locally. And it does seem like--I
want to give you a little credit--it seems like things have
gotten a little bit better. But still, they are on the phone
for an over an hour, they are aggravated. You know, being
someone that is in business, you want to take care of those
folks as quickly as you can, at least in terms of answering the
phone, get their questions answered.
And you touched on it in your early testimony, but where is
your sense of where that--we are going to get to a point where
we can answer the phone quicker and try to get them----
Mr. WERFEL. Yes.
Mr. BUCHANAN [continuing]. A little bit more help from a
quicker stance?
Mr. WERFEL. So on our main phone line, which is where most
of the volume comes, we are at an 85 percent level of service.
But there is more to do. There are other phone lines that we
need to continue to work on and improve. And let me give you an
important example of what we are doing.
I don't ever want to hear about someone waiting on the
phone for an hour. That is heartbreaking, frustrating, but it
is also a rallying cry for us. One of the things we have done
this year is we have instituted a call-back option. And what
that means is that--the way we are engineering our call center
now, if your wait time is going to be longer than 15 minutes,
we will introduce into the phone, hey, you can--we can schedule
a call-back option so you can hang up, no longer listen to
elevator music, and we will call you back.
These are the types of improvements--I know this happens in
your everyday life when you are on any other call center in the
retail industry and otherwise, banking industry. We have some
catching up to do. But because we have funding, we can make
these investments. And these are really helpful to taxpayers
because now, if they have got a baby crying or something, they
can hang up and get a call-back option.
Mr. BUCHANAN. Thank you, and I yield back.
Chairman SMITH. Mr. Doggett is recognized.
Mr. DOGGETT. Thank you very much.
And thank you, Commissioner, for the efforts that you and
your team have made to address many of the problems that have
been created over the last decade, prior to the last Congress,
by those who seemed intent on ensuring that IRS would fail by
cutting the budget again and again, and continually attacking
and stirring public dissatisfaction with the IRS.
As I understand your testimony, we have gone from a low of
15 percent satisfaction to 85 percent satisfaction, is that
right?
Mr. WERFEL. That is correct.
Mr. DOGGETT. I remember having not only complaints from
constituents before we provided these funds, but even from CPAs
and tax preparers that had a special line that--kept holding in
the very way you said they are not today. And you could not
have had these successes and your team could not have had these
successes without the additional funding you were provided by
the last Congress. Is that correct?
Mr. WERFEL. That is correct.
Mr. DOGGETT. Of course, the other area that is very
important to me is enforcing our tax laws so that the many
people that are out there that are paying their fair share are
not abused by those who refuse to do so.
And the data that I have seen suggests that audit rates for
large corporations in the decade prior to the last Congress
were cut in half, and that the audit rates for those who earned
over $1 million per year were cut by about 70 percent, that the
top 1 percent was getting away with not paying an estimated
$160 billion in taxes each year.
I know that you reported progress being made on tax
enforcement earlier this year and a significant increase in
revenue as a result. Were the people that you were after, were
they the kind we hear about in some of these campaign speeches
that, you know, just had honest mistakes and left a little off
their return, or were they true tax cheats?
And can you give us some examples?
Mr. WERFEL. Yes. I can't emphasize this enough,
Congressman: Our focus, our priority, and our agenda under the
Inflation Reduction Act is to increase scrutiny for complex
filers, wealthy individuals, large corporations, and complex
partnerships that are evading their tax responsibility. It is
not our intent to increase scrutiny and invest this money on a
new wave of audits for middle and low income. That is not going
to happen under my watch, and we will be able to publicly
report that so that you can hold me accountable for that.
With respect to high wealth, there are a lot of different
things we are doing to start to catch up and close the gap that
has been there for too many years. And one of the things that
we can report immediate results on--because often these
enforcement actions take time. But there are some things we are
doing that should give the American people confidence that we
are using this money smartly and in a way that is creating
fairness, and that is going after millionaires and billionaires
who are delinquent on owed taxes. And this is--this should
frustrate people. These are millionaires and billionaires who
have been assessed a tax due and are delinquent in paying it.
And we have so many honest Americans who pay their taxes on
time, and these millionaires and billionaires are not.
So we have created this high-risk list of 1,600 of these
individuals, and we have started to go get the money back. And,
so far, in the early stages of this effort, we have already
collected a half-a-billion dollars. And that is just scratching
the surface. So that should give you a sense of how much
inequity there is and how much, if we stay on this path, we are
going to be able to close that inequity gap.
Mr. DOGGETT. And, if I understand, to stay on this path you
have indicated that you need about another $800 million this
year.
Mr. WERFEL. Yes, and that is an important point about our
budget. And I will just--if I could just say it briefly, we
are--we have a base budget to fund our ongoing operations, keep
the lights on, and then we have the Inflation Reduction Act,
which is modernizing and helping us build capacities.
Our base budget is insufficient to run the daily train
schedules. And what that means is we have to borrow from the
modernization fund just to keep the lights on. And, if we keep
doing that, we won't modernize. We will keep the lights on, but
we won't build these capacities that are so important to help
taxpayers.
Mr. DOGGETT. And I believe the Treasury, just within the
last two weeks, has estimated that as much as $561 billion
could be collected over the next decade from wealthy and
corporate tax cheats that you are focused on. And yet,
unfortunately, our Republican colleagues on this committee and
elsewhere seem to have no higher priority, as indicated by the
first bill they passed in this Congress and their efforts at
every time we get up to the brink of disaster here, that they
want to cut the very funding you are relying on to see that
these corporate and high-wealth tax cheats are treated the same
way and pay their taxes the way most Americans do.
I just want to thank you for your efforts, and we will do
all we can to resist the efforts to undermine the progress that
you are making.
Chairman SMITH. Mr. Smith is recognized.
Mr. SMITH of Nebraska. Thank you, Mr. Chairman.
Thank you, Commissioner, for being here today. I want to
certainly register the fact that my office continues to receive
input from constituents that they are not getting their
questions answered from the IRS. I realize you are touting an
85 percent efficiency level and that everything is just amazing
at the IRS.
I continue to have concerns that the $80 billion in IRA
funding is not giving us the results, perhaps, that were
promised.
Also, certainly there is a lack of candor, I believe, from
the Administration about how the funds are actually being
utilized. I am particularly troubled that the Administration
continues to implement policies across numerous agencies,
regardless of whether it is legislated authority or not.
Student loan forgiveness, critical mineral agreements, and the
recent changes to the 1099-K requirement from ARPA are all
examples of this kind of executive overreach.
The development of the IRS's direct e-file system also
appears to fit that description. While IRA, the BIL, so-called
Inflation Reduction Act provided $15 million to conduct a study
of direct e-file and enumerated the study's parameters, it
provided funding for only nine months and said nothing about
actually implementing that system. The nine months authorized
for that study have now lapsed, as I am sure you are aware.
Can you tell me explicitly what authority the IRS relied on
to create an entirely new government-run system of filing
taxes, since the law only provided authority to conduct a study
on direct e-file--on the direct e-file system?
And I am not looking for other examples of the IRS helping
people file their taxes. I get that. I want specific language
from the Federal code authorizing the particular pilot.
Mr. WERFEL. Yes, absolutely, Congressman, I appreciate the
question.
So we do have a responsibility and an authority to offer
taxpayers different approaches for how to meet their tax
obligation. I can give you the exact statutory cite for that.
What is critical about the direct file solution is that it is
an option. There is no mandate for anyone to use this solution,
should they choose.
Mr. SMITH of Nebraska. But you are saying there is direct
authority to do so?
Mr. WERFEL. There is direct authority to implement the tax
system in a way that provides tools and solutions for taxpayers
to meet their tax responsibility.
Mr. SMITH of Nebraska. Generically speaking, but----
Mr. WERFEL. Yes, well, paper, electronic, calling us on the
telephone. Not everything is delineated precisely in law.
So, for example, if we create an Adobe version of the tax
form that you can fill in online, we have done that. There is
not a specific legal authority to do that, but there is a legal
description of the commissioner's responsibilities. And one of
those responsibilities is to provide taxpayers with avenues for
how they can meet their tax obligation. And this is just one
avenue. It is not a mandate, it is an option.
Mr. SMITH of Nebraska. Well, I understand that, which--may
not be a mandate, but does not always mean there is the
authority to do so. And I would argue that that is the case
right now. I am specifically troubled by the claim that there
is that authority there when I don't believe that there is.
But let's go back to the topic I have discussed with you
and Secretary Yellen previously on multiple occasions, and that
is audits targeting families earning less than $400,000. I
continue to have concerns that, despite the claims from
Secretary Yellen and others, that the Administration cannot and
will not fulfill its promise about audit targets and also meet
its claims about increased revenue.
Last year you said, in response to a question for the
record, that the IRS is committed to ensuring that none of the
funds provided by the IRA will be used to increase audit rates
for small businesses and households making less than $400,000
annually, ``relative to historical levels,'' and that is a
quote. The phrase ``historical levels'' means something higher
than the current audit rates. Is that accurate?
Mr. WERFEL. No, it is not accurate. We have been public--I
don't think. Let me tell you what the current situation is.
Tax year 2018 will be the base year that we will utilize to
make sure that the audit rate----
Mr. SMITH of Nebraska. Okay.
Mr. WERFEL [continuing]. For those that earn less than
400,000 does----
Mr. SMITH of Nebraska. Okay----
Mr. WERFEL [continuing]. Not exceed that----
Mr. SMITH of Nebraska. Reclaiming my time, because time
is----
Mr. WERFEL. Sorry.
Mr. SMITH of Nebraska [continuing]. Of the essence here, I
would like to learn more about that.
But I would also like to know if the IRS can provide us
with a distributional table for the $561 billion and the $851
billion estimates of revenue generation, and do you know when
we could plan to see that?
Mr. WERFEL. Well, we have a public report on that. So I
would be happy to engage with your staff to understand what are
the specific questions or additional layers of information
beyond the public report.
Mr. SMITH of Nebraska. How did you decide to choose 2018 as
the year to establish the historical rate levels of audits?
Mr. WERFEL. Well, in large measure because it is a
historically low rate, and we wanted to assure the taxpaying
community that the Inflation Reduction Act would not be used to
increase the audit rate among middle and low income. And so we
chose 2018 as a historic low rate to provide additional
assurances. And we wanted to be specific so that we can be
transparent and hold me to account and the IRS to account
because each year we publish our audit rate in our data book.
So you can go into our data book right now and see exactly
what the audit rate is for 2018. And then, when we finish with
tax year 2023 and the audit rates are complete, you will say,
oh, let me see, did they meet their mandate? And it should be
all public.
Mr. SMITH of Nebraska. Okay. You mentioned earlier that you
have generated about $500 million--half-a-billion, I think, in
your words--of revenue from about 1,600 targeted taxpayers.
That would be, on average, just over $300,000 per taxpayer. How
many resources, the dollar figure of the IRS, taxpayer dollars
do you think it would take on average to reach that level?
Mr. WERFEL. I would have to get back to you on a specific,
but it certainly has a very positive ROI in general, and this
is something that the Congressional Budget Office has publicly
reported, that in general we returned $6 for every $1 invested.
So, on average, you should expect about a one-to-six ratio. So
we spent a sixth of those resources to get the job done.
Mr. SMITH of Nebraska. Thank you.
Mr. WERFEL. On average.
Mr. SMITH of Nebraska. Thank you.
Chairman SMITH. Thank you.
Mr. Thompson.
Mr. THOMPSON. Thank you, Mr. Chairman.
Commissioner, thank you for being here. First,
congratulations for the work the IRS has done over the past
several months.
As the ranking member, Chairman [sic] Neal mentioned,
Democrats on this committee made an historic investment in the
IRS last year when we passed the Inflation Reduction Act. Since
then, I can tell you I have heard from my staff in all three of
my district offices how well they are working with the IRS.
They have contact with your office hundreds, if not thousands,
of times a year. And they tell me that the IRS is noticeably,
significantly smoother than they have ever been before. You are
responding faster. Your responses are better. People answer the
phones. My staff find the taxpayer advocates to be reliable and
helpful partners as we try and work with our constituents.
I have personally worked with you and with your team on
specific issues, and I want to thank you. I have always found
you to be helpful and your team to be professional and very
well prepared.
Unfortunately, the majority seems to think that the IRS
budget is a slush fund to pay for every program that they want
to pass and put into law, and I have lost track of how many
times they have tried to use the IRS budget to offset spending,
despite reams of evidence proving that IRS cuts actually
increase the deficit. I believe the only reason to work to cut
the IRS budget is to either make consumer services worse or to
make cheating on your taxes easier.
I understand people don't like paying taxes, but this is
how we fund our civilized society and the many programs that
our constituents care about. So, while we can disagree about
tax policy, on the specifics, we ought to all agree that--on a
bipartisan basis, that people should follow the law and pay the
taxes that they owe.
Commissioner, when IRS funding is cut, what happens to our
deficit?
Mr. WERFEL. It goes up. In fact, for every $100 million
taken from the IRS, the deficit grows by 600 million over 10
years, and that is because----
Mr. THOMPSON. Six hundred million.
Mr. WERFEL. Six hundred million.
Mr. THOMPSON. Increase in our deficit.
Mr. WERFEL. For every 100 million cut----
Mr. THOMPSON. Right.
Mr. WERFEL [continuing]. It is a $600 million increase in
our deficit.
Mr. THOMPSON. So, when the IRS funding is cut, is it harder
or is it easier for people to cheat on their taxes?
Mr. WERFEL. It is easier. And let me just--if I can go
through, $100 million, what that buys you at the IRS, 700
audits of high-income taxpayers, millionaires and billionaires;
200 audits of complex partnerships; 100 audits of large
corporations; 32,000 collection cases of wealthy individuals;
and on and on. And that is just from the 100 million. So
clearly, it has an impact.
Mr. THOMPSON. Thank you. One thing that hopefully we can
agree on on both sides of the dais is modernization. Can you
talk a little bit more about how you have used Inflation
Reduction Act investments to modernize?
Mr. WERFEL. Yes, absolutely. There is--you know, one of the
things that inspires me, Congressman, is before the Inflation
Reduction Act there was a famous picture in the Washington Post
of our cafeteria in Austin, Texas filled with unreviewed
returns in paper. That cafeteria is now clean, people are
eating in it rather than us storing tax returns. That is
because we are aggressively digitizing and scanning all of our
paper as part of our initiative to go paperless.
This is important not because it is more efficient and more
secure, but it means that we are going to process more quickly.
And one of the things that is going on due to our modernization
is we have significantly reduced the ongoing backlog of returns
and correspondences.
Mr. THOMPSON. Thank you. I would like to just take a moment
to talk about the investment in climate change in the IRA. This
was the biggest investment in climate work in the history of
our country. How would you describe the rollout so far, and how
would you characterize the uptake on tax credits like EV or
solar credits?
Mr. WERFEL. Yes, we have had a successful launch. In
January, we launched our portal, our IT solution that allows
those that are eligible for credits related to the
manufacturing and the transactions associated with electronic
vehicles. And, like any new solution, there are certain things
that we could do to make it better and improve the customer
experience. But overall, it has been robust participation, and
the system has performed as expected.
Mr. THOMPSON. Thank you.
I yield back.
Chairman SMITH. Mr. Kelly.
Mr. KELLY. Thank you, Mr. Chairman, and thank you for
conducting the hearing today.
Mr. Werfel, it is good to see you again.
Mr. WERFEL. Good to see you.
Mr. KELLY. I think some of the questions revolve around
this. We do telephone town halls, and we did one a little bit
over a week ago. And, when we do IRS town halls, it just seems
like we can't be on the phone long enough. And the IRS provides
people, and the taxpayer advocate is there on the phone with
us.
But I don't think there is anything more complicated than
what we are talking about today when it comes to the IRS, and
the rules, and how it works, and who is paying fairly, and who
is taking advantage, and it goes back and forth. I wish we
could just get to a situation of is this a program, is this an
agency that runs in the best interest of the people who fund it
and the same people who fund everything else in our government?
And that is hard-working American taxpayers.
I have got to tell you, from a standpoint of formerly being
in the private sector, and have--while I was present, I was not
in the operation at the time of going through the early days of
the pandemic. And one of the things that came out, which was a
really good idea, was the Employee Retention Tax Credit
program.
However, we continue to look at programs and we tend to
look at hold-ups in it. My son runs our business, and I talk to
him on the phone about it quite a bit. He said, ``I think the
biggest thing would have been had employers been able to get
some help or some counsel on how that was working, or how it
was supposed to work, how they could do that.'' But we look
back on it now and we are trying to find out what is going on
with that program?
And, while there is all kind of different figures floating
around about what it has cost, I would just caution people to
say, you know, any time we say it costs the government, we keep
in mind that it actually then gave taxpayers a break on what
comes out of their wallet, knowing that they provide every
single penny, either with their wages or by cosigning a loan to
fund this incredible operation.
So, when it comes to the IRS right now, and ensuring that
small businesses receive their ERTCs, how--what is the
oversight in that, and how can you help us with that? Because I
have a number of friends, and I met with our former
representative, Billy Long, the other day, who is concerned for
a lot of the people that he still works with--is the fact that
there is confusion on what quarter is being funded, and what is
the timeline, and what is ending, and what is still in
operation. And where should we go from here?
Mr. WERFEL. Well, first of all, I appreciate the question
and the way you worded it, because--how you can help.
One of the things I have learned early in my tenure here at
the IRS is that we can't do this alone. Implementing the tax
system is a partnership. It is a partnership with IRS and tax
professionals, tax payers, Congress.
The ERC is an incredibly complicated program. It was
critical and played a critical role. We issued 3.6 million ERCs
to date, and it was an economic lifeline for people that that
needed it.
What happened is the further we got away from the period of
eligibility--because the demonstrated loss that you have in
order to claim eligibility ended on December 31, 2021. The
further we got away from it, the more aggressive promoters and
marketers started, in my opinion, taking advantage of honest
small businesses and getting them to believe that they were
eligible for a credit they truly weren't eligible for.
So 18 months, 19 months, 20 months after that period of
eligibility, the number of ERC credits coming in to the IRS was
actually increasing 50,000 a week, 60,000 a week, 70,000 a
week. And we started to realize that there were so many
ineligible claims in what was coming in, it was getting harder
and harder to separate what is ineligible from eligible. And
that is why we issued the moratorium in September of 2023,
because we wanted to slow the flow of these credits coming in,
and make sure that we were not paying out fraudulent claims.
And so what we announced is we are going to have to slow
the process down to protect taxpayers--not just taxpayers'--the
financial bottom line, taxpayers don't want us spending out
fraudulent claims,--but also protect small businesses who may
have been taken advantage by these aggressive promoters.
Mr. KELLY. Well, I appreciate that, but the guidance is the
key to all these things as we go through it, and these are very
complicated issues. But there are people who filed believing
that this was going to be taken care of. And it is--you are on
hold, you are on hold, you are on hold, and you don't know. It
makes it very difficult for people then to actually file their
claims at the end of every year.
Just one thing, cover it real quickly. The direct file
program. So we have had people in the private sector running
this, and I think we have had great success with it. Why did
the IRS get involved in this?
Mr. WERFEL. Yes.
Mr. KELLY. And what is it that we are trying to achieve?
And listen, you are down to one second. I don't expect an
answer that quickly. But if you could get back to me on that--
--
Mr. WERFEL. Absolutely.
Mr. KELLY. because I think it is a legitimate question of
if we have all these available already through the private
sector, and we are talking about being--money being well spent,
well, I think it is already there for people. I don't
understand what role the IRS would have in that. And I
question--
Mr. WERFEL. I am happy to--
Mr. KELLY. I don't question the fact that you think you
could help. It is already there.
Mr. KELLY. Thank you. I yield back, sir.
Chairman SMITH. Thank you.
Mr. Pascrell.
Mr. PASCRELL. Good morning, Mr. Chairman. A lovely day in
the neighborhood. [Laughter.]
Mr. PASCRELL. Commissioner Werfel, you have been a breath
of fresh air to me. We had some problems with the last guy who
sat in your seat. Welcome back.
After years of chaos, a very new day at the IRS. Last
month--you already talked about it--the IRS announced it had
recovered $485 million from only 1,600 millionaires. The
question of fairness in the tax system is at hand. We all have
different opinions about it. But I believe--or else I wouldn't
say it--I believe that you are there to oversee fairness.
The guy next door to me, where I live in my house in New
Jersey, if he doesn't pay his property taxes and the guy on the
next block from us doesn't pay his property taxes, people
understand now that we are going to have to pay higher property
taxes unless some other kind of revenue was found. It is tax
fairness. Pay what you are supposed to pay, and people will
complain less.
People believe many times, Mr. Werfel, Commissioner, that
they are being shafted when it comes to figuring out tax
policy. And I think you and I have an obligation to address
that day in and day out. The tip of the iceberg. Last week, we
learned that we will recover at least $560 billion from rich
tax cheats after the next decade.
So you have been portrayed--the group, the agency you work
for, has been portrayed as, oh, they are coming after you. See,
create fear that you are the bad guys. And Lincoln dealt with
that during the Civil War very honestly. If money was going to
be used for the war, how would the towns throughout the
America, you know, build their roads, their hospitals, their
schools et cetera, et cetera? That is why we have a big
argument over SALT.
I hear from my own neighbors you are now answering our
calls. Refund checks are going out faster. These successes are
because of, I think, your leadership and because of historic
funding passed by Democrats, mostly, to make the IRS work for
regular Americans. Wow.
I remind everyone every single Republican in Congress voted
against the Inflation Reduction Act and against funding for the
IRS to do its job. I mean, the facts are the facts. As Tom
Suozzi would say, the facts are the facts. Members of the other
side have made IRS funding their white whale to be harpooned at
any cost. They have clawed back one quarter of the historic
funding. Like the shark in Jaws, they want another bite. The
Congressional Budget Office has estimated that that funding
that I believe Republicans stole away will cost the American
people double, nearly 400 billion--nearly $40 billion, excuse
me.
So I have a question for you. Millionaires and billionaires
need to pay their fair share. I think everybody will agree up
here. I think; I am not sure. What is the IRS doing to audit
high-net-wealth individuals and tax cheats?
Mr. WERFEL. Congressman, it is where we are focused, and we
are taking multiple different steps.
First of all, we are hiring additional accountants,
auditors, and where they are being deployed. And where we are
shifting our audit workforce is to make sure that we are
focusing efforts on high-wealth individuals, because that is
where we think we have a growing problem of tax evasion, and we
need to address it.
We are deploying technology differently. We are using
analytics and AI to better understand how money moves in these
very complicated arrangements. You know, whole--you know,
companies with subsidiaries and subsidiaries to those
subsidiaries, money moving across international jurisdictions,
understating their profits in the U.S., doing all of these
things that are difficult to track. And we are investing in
subject matter, expertise, people, technology, analytics, all
so that we can catch up and make this fair because we should be
able to have equal ability to assess the guy down the street's
taxes as your taxes.
And if you're middle and low income, mostly your taxes are
fairly simple, and we have the means and the capacity to assess
it. Where we have lost the capacity is for the complicated
situations. And, when we are underfunded, that gap grows. And
so, as long as I am commissioner and the funding is available,
where I am going to focus is on the gap where the tax returns
are complicated and where the evasion is expanding.
Mr. PASCRELL. Thank you, Mr. Chairman.
Chairman SMITH. Mr. Schweikert.
Mr. SCHWEIKERT. Thank you, Mr. Chairman.
Mr. Commissioner--and forgive me, because I am assembling
some of the numbers right in front of me because, as the
chairman spoke--I have a fixation that the adoption of
technology is the ultimate solution here. It is the solution
for the left that wants more tax receipts, and for those of us
who want a friendlier, more efficient and, you know, effective
IRS.
You before made a comment that, hey, it is six to one, but
I am looking at--and this is even from the preliminary data
from--Representative Pascrell actually asked for a CBO report,
and your press release that you took in 520 million, but I am
looking at your cost. I actually see you--for every dollar it
costs you $10.96. Now, I accept there is capital expenditures
in there, and over time they will be amortized out. But most of
the IRA funding looks like it has gone towards operations and
consultants.
In the conversations you and I have had, my fixation is the
only way you get that--because that is completely opposite than
our discussion before. Right now, costs are actually fairly
high for those additional dollars. The adoption and the
purchase of technology, the use of commercial databases to ping
off to [inaudible] something--should dramatically lower your
cost of collections and make your collections much more
efficient, fair, open.
Tell me the story. Am I off base? Is it we have to hire
armies of people, or is technology my nirvana?
Mr. WERFEL. Well, first of all, I can assure you that
investment in exam and audit has a positive return on
investment.
Mr. SCHWEIKERT. Well, Mr. Commissioner, I am looking at the
CBO's numbers----
Mr. WERFEL. We should----
Mr. SCHWEIKERT [continuing]. And your own press release
numbers.
Mr. WERFEL. We should----
Mr. SCHWEIKERT. And they--I am getting--basic division I am
pretty good at.
Mr. WERFEL. I am happy to----
Mr. SCHWEIKERT. So I would be happy to have----
Mr. WERFEL [continuing]. To walk through the math with you.
Mr. SCHWEIKERT. I would be happy to get your report.
Mr. WERFEL. To answer your question on the technology, it
is essential. The whole effort underway is really about
modernization, and that--it is at every level. Technology is
going to help us process quicker and more efficiently, more
accurately, and more securely. Technology is going to help
taxpayers have an easier time with----
Mr. SCHWEIKERT. So----
Mr. WERFEL. It is going to take them less time to do their
taxes. It is--and hopefully be less expensive.
Mr. SCHWEIKERT. In my--so what can I do, as the person here
on this panel who is absolutely fixated, what do I do to help
you get there?
Mr. WERFEL. Well, first of all, we would appreciate your
peer review of our technology plans. And I know my team has
already briefed your team.
Mr. SCHWEIKERT. Yes.
Mr. WERFEL. But we should regularly----
Mr. SCHWEIKERT. And I have to--and I can't believe I am
saying this--your team has actually been great in communicating
with me.
Mr. WERFEL. That doesn't surprise me, but my point is that
we have a lot of different opportunities to advance technology
at every level: our website, the tools that taxpayers have----
Mr. SCHWEIKERT. The chat for call-ins.
Mr. WERFEL. The chat function, yes.
Mr. SCHWEIKERT. And I wish--at some point I would love you
to talk about your experiment last cycle and the expansion of
that this tax season.
Mr. WERFEL. Yes, we are adding chat functionality, whether
it is automated chat so you are talking to a computer and then
it advances, if the computer can't answer it goes to live chat,
these are just--these are standard activities in the private
sector and in many other public sector call centers. We are
just catching up, and we are catching up because we now have
the funding to modernize versus just keep the lights on.
Mr. SCHWEIKERT. Is there--and, if I am wrong, don't tell
me, everyone else tells me I am wrong--but that adoption of
technology should dramatically change your structural cost of
collections.
Mr. WERFEL. Correct.
Mr. SCHWEIKERT. And that is my hope because, you know, on
our side we fret over the 80 billion, and was that going to be
hiring people or was it going to be hiring efficiencies. And,
you know, for my Democratic colleagues it is going after
wealthy people. But--and I do look forward to your staff
providing me, because you have taken in, in your own press
release, 520 million. And I see a cost from, actually, that
press release and the Pascrell preliminary CBO audit, of 5.7.
The last thing I am going to ask you, just because we get a
lot of inbound on this, on the employer retention----
Mr. WERFEL. Yes.
Mr. SCHWEIKERT. I accept that has been just what it is.
Please, guidance as fast as you can so--whether it be the small
business, whether it even be the promoters, everyone sort of
knows what the rules are, knows what the timing is, and knows
how to close this out. And I know you have to run things by
armies of lawyers and those things. Buy them caffeine. Get it
done.
Mr. WERFEL. Let me just, if I could, we have a special
section on Irs.gov just on ERC, what to look out for, do's and
don'ts, why you might be ineligible. We did a webinar on
February 8 that had 8,000 registered participants, and we are
running an educational series all over the country. We are
doing as--we are doing a lot. We obviously could be doing more,
and so we are willing to, obviously, listen to ideas about how
we get out there and talk to people about this program and make
the entire process clearer.
Mr. SCHWEIKERT. Yes, I think the question is also the
processing time of what is eligible----
Mr. WERFEL. Yes.
Mr. SCHWEIKERT [continuing]. Not eligible, and just when
does it sort of get there.
And with that, Mr. Chairman, thank you.
Chairman SMITH. Thank you.
Mr. Davis.
Mr. DAVIS. Thank you, Mr. Chairman.
First of all, Commissioner, let me welcome and thank you
and the Internal Revenue Services for its outstanding success
in ensuring a fairer tax system in which the wealthy and well-
connected pay their fair share.
I want to make you aware of the outstanding work of the
Chicago taxpayer advocate service. I am grateful for
[inaudible], Katrina Britt, Arlene Merritt, Fred Tavarez, and
the rest of the Chicago team who have used their expertise to
help my constituents. I also thank Robert Chapman with the D.C.
Legislative Affairs team for his assistance.
As you may know, I helped champion many of the key 2021
EITC and CDCTC enhancements like lowering the EITC age to 19
for all workers, or 18 for foster or homeless youth, and giving
working parents up to $8,000 for child care expenses. I would
like to work with you to better understand the patterns and the
use of those credits to inform efforts to restore them.
For example, how many younger workers got the EITC in 2021
who are excluded under current law? Or how many foster homeless
youth used their provisions? Or how many more working parents
benefitted from the refundable CDCTC who would not under
current law?
Do you have any updates you can share with us about who
benefitted and how from the 2021 Earned Income Tax Credit and
CDCTC enhancements compared to other years?
I am proud that I helped to lead the effort to make the
VITA program permanent. I know that the Internal Revenue
Service's IRA Strategic Operating Plan Initiative 1.9 includes
the goal of expanding the coverage and scope of the VITA and
TCE free tax preparation programs. Have any specific strategies
been identified for accomplishing that goal?
And how has the IRS involved VITA and TCE organizations in
developing those strategies?
Mr. WERFEL. Well, thank you for those questions,
Congressman.
On your data question, we have now awareness of that
question, and our research and analytics team is working to get
you an answer as quickly as possible.
I will say--and I will connect your first question to your
second question--we know that there are people eligible for
Earned Income Tax Credit that are not claiming eligibility.
They are not claiming eligibility because they may not know
about it, they might not be claiming eligibility because they
are intimidated by the complexity of the eligibility formula.
They just need help. And so we can do more outreach and working
with community partners to make sure that people are aware of
this benefit and are getting the help they need.
You mentioned our volunteers for both underserved
populations and the elderly. I would love to grow those
programs, working with local communities on what we call
Taxpayer Experience Days, having more and more of those around
the country with an educational campaign around what you may be
eligible for, and then with free help available to sit with you
and walk you through. I have been to one of these volunteer
sites in Baltimore, and it is an amazing experience to witness
these volunteers there with taxpayers who would have not
otherwise gotten the help they needed. And they are just very
appreciative, and the volunteers are passionate about helping
people get the benefits they are eligible for.
Mr. DAVIS. Thank you very much, and I look forward to
working with you.
I yield back, Mr. Chairman.
Chairman SMITH. Thank you.
Mr. LaHood.
Mr. LaHOOD. Thank you, Mr. Chairman.
I want to thank you, Commissioner Werfel, for being here
today and for your service.
I am the chair of our Subcommittee on Work and Welfare that
oversees a number of different Federal programs. One of those
is child support. And I want to focus my questions on child
support enforcement. And, as you know, the CSE program works
with the IRS on collecting child support for non-custodial
parents to help children and families to get the money that
they deserve through your program, which is the Federal Tax
Refund Offset program. This is a vital source of income for
millions of families across the country.
In my home state of Illinois, 44,000 families and children
depend on and receive $65 million through the Federal Tax
Refund Offset program. To service these families--participate
in this program, many states--42 states in particular--rely on
the Federal tax information through third-party contractors.
And that is the way it has been done since 2004.
A year ago, without consultation to Congress and without
giving us an opportunity to work with you on that, the IRS made
the decision abruptly to change this policy, and this has
caused a shift. Now all states and CSE programs that use
contractors will be in non-compliance as of October.
So we did a bipartisan hearing in November. And across the
board, people were frustrated. They were extremely--you know,
there were lots of questions on why the IRS did this, and why
they are putting states in jeopardy on this. I will give you an
example. The Illinois administrator of child support services,
Bryan Tribble, testified right where you are at to our
subcommittee that this policy change by the IRS will cost
Illinois hundreds of millions of dollars to implement new
systems and hire employees.
And furthermore, if states are unable to come into
compliance in time by this October, their entire CSE program
could be in jeopardy of losing Federal matching funds,
resulting in millions of families and children losing their
child support payments.
So what I am trying to figure out, Commissioner--and I
would love your explanation on it--why this was done without
consultation to Congress to put an equitable solution in place
and possibly legislation to remedy this; and why was this
sudden change done.
If you can--and by the way, the stress and anxiety this is
putting these 42 states through is immense.
Mr. WERFEL. Yes, I appreciate the question. And this was an
issue that was brought to my attention very early in my tenure
back in March of 2023. And I, like you, had a lot of questions
about the policy itself, and why we had issued it, and I
immediately engaged with the Department of Health and Human
Services, who runs the child support program, to understand
what the IRS could do to reset the expectation across states,
contractors, and others.
At this moment, that policy announcement is paused. We are
not moving forward. And now we have the opportunity to do the
very engagement that you are suggesting. So we have told HHS
that we are going to take more time to make sure that the--that
we have heard from stakeholders appropriately before we
finalize any such policy.
Mr. LaHOOD. So just to clarify, the pause that you just
referenced, does that affect the October 24 deadline?
Mr. WERFEL. I believe it does, but I want to get back to
you with more specifics.
Mr. LaHOOD. Well, that is, obviously, very important----
Mr. WERFEL. Very important, yes.
Mr. LaHOOD [continuing]. As people are coming into
compliance. I mean, do you have an estimate of how much this
will cost states to come into compliance with this new policy?
Mr. WERFEL. I don't have it at my fingertips, but this is
why it is so important to get this right.
Mr. LaHOOD. I mean, and just another issue that is part of
the collateral damage is there are 60 federally-recognized
Native American tribes that also fall into this category, too.
And they are in a much more tougher position because of some of
the financial and economic issues there because of this IRS
policy. And so they are in jeopardy of losing access to
critical child support enforcement tools, those tribes. So I
want to mention that to you, and this needs to take--needs to
be a priority for you and your department.
Mr. WERFEL. Yes. I want to make this commitment to the
extent--and I need to go back to the office and make sure that
I have the details. We did pause. To the extent it is intending
to go back in October of 2024, as you mentioned, I want to talk
to you about the implications of that, and I am happy to
revisit that with you to make sure we are getting all the right
data and feedback before we move forward.
Mr. LaHOOD. I look forward to it, thank you.
Mr. WERFEL. Thank you.
Chairman SMITH. Ms. Sanchez.
Ms. SANCHEZ. Thank you, Mr. Chairman.
And thank you, Mr. Werfel, for testifying today. I want to
join my colleagues in recognizing the hard work that the IRS
employees, the taxpayer advocate service, and other Federal
workers put in every day to help American workers, seniors, and
families file their tax returns and claim the Federal benefits
that they have all earned.
I also appreciate that many Members of Congress share
Democratic tax-writers' commitment to specifically improving
the Child Tax Credit. Most of us recognize that the CTC is one
of the most powerful tools for fighting poverty in this
country, but we can all agree that the devil is in the details
where that is concerned.
Unfortunately, my colleagues on the other side of the dais
disagree with congressional Democrats on how generous relief
for working families should be. But as a mom and a legislator,
I am going to continue to fight to ensure that our nation's tax
code benefits all households with children, and that means even
parents or caregivers who don't even earn enough to owe and pay
Federal income taxes, I believe that they also deserve some
financial relief.
I was disappointed when my Republican tax-writing
colleagues killed the good faith amendment that Mr. Davis and I
offered on the Wyden-Smith tax bill just a few weeks ago. Our
amendment would have strengthened the bill by restoring full
refundability for the Child Tax Credit.
We have all seen data showing that millions of children
across the U.S. could benefit from even a modest expansion of
the Child Tax Credit, and I am specifically looking out for
those families who earn so little that they can't claim this
tax relief at all, even though they are raising children.
Commissioner, I want to thank you again for answering our
questions today, and I want to talk a little bit about
something that was raised earlier about the deadbeat
millionaires and billionaires who are cheating on their taxes
and evading their responsibility to pay their fair share.
I would say that I don't think anybody loves paying their
taxes, but I think people do it if they feel like the system is
fair and everybody pays their fair share. What would happen if
middle-income and low-income Americans didn't pay their taxes
or cheated on their taxes at the same rate that these
millionaires and billionaires did? What would happen?
Mr. WERFEL. Well, I mean, the deficit would grow. I mean,
the IRS--and you are right, paying your taxes isn't the--isn't
your favorite activity of the year, for sure. But we fund
virtually the entire government through those tax collections.
And, in order to have a functioning government, whether you
want that government big or small, the IRS needs to function
effectively.
And there needs to be equity in our tax system. Otherwise,
people will lose trust, and trust is what our tax system is
built on.
Ms. SANCHEZ. Now, when you say the revenues you get fund
government, that means our defense, our national defense,
correct?
Mr. WERFEL. It is everything that the government does:
keeping our skies safe, so your air traffic controllers; your
food safe when you go to the restaurant, and you have
confidence that your children are eating food that is not going
to make them sick. That is all government funding, and that is
all made possible if we have a functioning tax system.
Ms. SANCHEZ. Now, if the IRS could collect what these
deadbeat millionaires and billionaires and huge corporations
actually owe, might we be able to pay for the Child Tax Credit
to be expanded, or perhaps even fully refundable?
Mr. WERFEL. There is absolutely money being left on the
table in terms of what is owed versus what is paid. And this is
particularly an area of focus for high-wealth taxpayers and
complicated situations.
And as I mentioned, when I arrived at the IRS my question
was, what are the gaps we need to close? Where are the gaps
most problematic? And one of them was during our period of
under-funding we had lost pace with keeping up with these
complex returns, and the risk of evasion had grown.
Ms. SANCHEZ. So, if we could get these complex tax filers
to pay their fair share, which I am assuming are a lot of these
big corporations that have different subsidiaries and different
companies and they move the money around, and these
millionaires and billionaires that have sophisticated
accountants and tax attorneys that could help them evade taxes,
if we could collect what they owe, we could potentially expand
or even make the Child Tax Credit fully refundable so that kids
and babies who go to bed hungry every night in this country
would be lifted out of that hunger and lifted out of that
poverty?
Mr. WERFEL. I leave it to the wisdom of Congress to decide
how to use the money. I just want to make sure that tax returns
are complete, accurate, and what is owed is what is paid.
Ms. SANCHEZ. I appreciate your testimony today, and I thank
you for your answers.
And I yield back.
Chairman SMITH. Thank you.
Mr. Hern.
Mr. HERN. Thank you, Mr. Chairman, for holding this
important hearing today.
Mr. Werfel, last November two Democrat Senators in press
releases bragged about the pressure they put on you and the IRS
to delay implementation of the new 1099-K threshold that passed
in the partisan American Rescue Plan. Both of these Senators
previously voted in favor of the change. The Democrat Senators
also bragged about the IRS decision to change the threshold to
$5,000, which it would seem to not have the authority to do so.
With all due respect, Mr. Werfel, and I know you are in a
tough job, but this looks like you are blatantly not enforcing
the law and are also unilaterally changing the law because
Senate Democrats in the current Administration are having
second thoughts about just how terrible this policy is that has
been enacted. It is my job to provide oversight on this, and
the American people do not trust this Administration. And why
would they, when this Administration does not enforce a law
that passed through a Democrat-controlled Congress and was
signed by a Democrat President? Now that we are in an election
year, President Biden's Administration refuses to implement the
law, and unilaterally changed the law in favor--because the law
on the books is politically unfavorable and punitive to the
average American.
My colleagues will touch on this, have touched on this for
you, but I want to ask you a question regarding the direct e-
file program that has just been recently implemented. Isn't it
true that private sectors provide free return preparation
services outside of the government free file program?
Mr. WERFEL. Yes.
Mr. HERN. How many--what is that estimate of how many they
have done, based on your data?
Mr. WERFEL. I don't know the exact number, but the free
file program has been one of the central staples of how we
provide free help to taxpayers.
Mr. HERN. But it is--when you say it is free, we are
actually having to fund that from your side, right? I mean, you
don't--you are not--you don't have this just technology-driven,
it is not AI-driven. It is driven with people in your office,
offices that are actually administering this, that are----
Mr. WERFEL. You are talking about the free file program or
the direct file program? So the free file----
Mr. HERN. The free file. So the----
Mr. WERFEL. Yes.
Mr. HERN. Yes.
Mr. WERFEL. Well, we work with the Free File Alliance.
These are commercial software providers that have signed on to
help provide a path for eligible taxpayers to use their product
for free to file their taxes. That is something--and, you know,
there is resources that the IRS does to ensure that partnership
is as successful as possible.
Mr. HERN. So on the direct e-file program that you are
doing----
Mr. WERFEL. Yes.
Mr. HERN [continuing]. You are competing directly with
those corporations.
Mr. WERFEL. I don't see it as a competition. I see it as
another option for taxpayers.
Mr. HERN. So you are saying that these services are
provided by corporations free, and others that are doing
business. So we have it there. And so when you say it is free
to the American people, you are saying you are providing these
services internally. It doesn't cost you anything? There is no
taxpayer dollars used in your organization for administrative
costs to do this?
Mr. WERFEL. No, there is a cost, and we have been public
about what the potential and--cost would be.
The goal is to provide taxpayers with options and to help
the taxpayers pick the solution for filing taxes that is best
for them. Some will file in paper. We encourage them to file
electronically. Some will hire an accountant. Some will go to
the commercial software and pay. Some will go to the commercial
software and try to work that in--for free.
And what we heard from taxpayers, and we heard it pretty
loudly, was that there was an interest in having an option
where they could file directly with the IRS for free, and we
wanted to test----
Mr. HERN. But----
Mr. WERFEL [continuing]. Whether that option was viable,
and that is what----
Mr. HERN. Mr. Werfel, with all due respect, isn't that the
sort of the old phrase that Ronald Reagan used, ``We are from
the government, we are just here to help?'' I mean, it is not
free.
I mean, listen, we have given you billions of dollars. This
is not free, for you to provide this service to the American
people when--I know it might be shocking, but from the data we
have gotten from these commercial companies that you have
described, some were 29 million tax returns have been filed
through the direct--for the free file program that they have
out there, and so I just--or the direct e-file program, rather.
I just want to make sure that, you know, again, everybody
thinks if the government does it, it is free. It is not free if
the government provides these services. It is costing taxpayer
dollars to provide that.
Mr. WERFEL. Yes. So here is how I would answer that. I
would change the President Reagan statement a little bit. We
are from the government, and here is an option. And if you
don't want to use the option, you don't need to.
And we are just piloting it this year, a small-scale pilot.
So what is going to happen is we will evaluate. What was the
cost? What was the experience? Is there a demand for taxpayers?
Do taxpayers want the IRS to provide this option?
Mr. HERN. Yes, Mr. Werfel, with all due respect, you know,
I have only been up here five-and-a-half years, and this is the
age-old thought--and this is long before you got into
government and I got into government--everybody wants to talk
about the Federal Government having money that it really
doesn't. It has taxpayer dollars that funds our government. I
think we would agree with that.
So we are using--I think it ought to be described--it is
not free, it is funded by other taxpayers. And them, as well,
if they are using the service, if they qualify, my guess is--I
don't know what the criteria is, but my guess is to qualify for
that program is that they are probably not paying taxes, and it
is a refundable credit that they are getting in many cases. But
I am just saying it is not free, and we should say it is paid
for by taxpayer dollars.
And, you know, this misnomer that we get government
services for free is just not true. It is disingenuous.
I yield back.
Chairman SMITH. Ms. Sewell.
Ms. SEWELL. Thank you, Mr. Chairman.
And thank you, Commissioner, for being here today so that
we can talk about the very important relationship between
taxpayers and the IRS.
Tax seasons can be very stressful for millions of American
families and small businesses, and I am happy that we are
taking important steps today to highlight tax filing
experiences that have resulted in a more sensible, fair, and
more efficient process.
The road to this point has been a long one. The IRS has had
their work cut out for them, with a very long list of major
implementation issues over the last decade. But today I am glad
to hear that the IRS, through the passage of the Inflation
Reduction Act, is improving its interactions with the public.
Last year, in this very same setting, you and I were able
to discuss the well-documented reports over the last few filing
seasons that recipients of the Earned Income Tax Credit faced
significantly higher audit rates than other taxpayers. These
findings were discussed in detail, and I appreciate our
colloquy.
EITC audits are more heavily concentrated in the southeast
of the United States, including many of the counties that I
represent in Alabama's rural and underserved black belt. In
fact, Greene County, Alabama in my district was among the 10
most audited counties in the country for EITC recipients. And I
venture to guess that the median income for a family of 4 in
Greene County is less than $30,000 a year.
Since our conversation last year, you penned a letter to
Congress in September of 2023 mentioning the administration of
additional steps and an initial round of changes that have been
made regarding the audit process for EITC. I do believe
accountability is a direct result of transparency. And with
that, the opportunity to ask you whether or not this initial
round of changes that you highlighted in the letter to Congress
has resulted in less audits on underserved communities.
Mr. WERFEL. It will. I want to start by saying it is--you
know, there are certain solemn responsibilities that the IRS
has that we have to meet our mission. We have to meet our
mission in a way that avoids disparate impact. And, in this
case, there was evidence that our audits in Earned Income Tax
Credit was having a disparate impact on Black taxpayers. And we
have to first acknowledge it, and now we have to fix it.
And one of the significant things that that independent
study reported was driving the disparity was the volume of EITC
audits. So one of the key things we have announced is a
significant and dramatic reduction in the number of EITC audits
planned for this coming tax year as a way to address it.
We also are testing changes in the audit selection
algorithm that--we have a hypothesis will remediate the
disparate impact that has been occurring, and it will take a
little bit of time to validate that. We hope to update that,
you know, maybe in the fall, where we have more data to make
sure that we are reporting publicly that the steps we took had
the impact that we wanted it to have.
Ms. SEWELL. Well, I will definitely be awaiting such a
report. I think it is really important that we don't target
certain populations, especially those that are underserved
populations, and for something as important but not often
claimed, like the Earned Income Tax Credit.
So I look forward to working with you in any way I can to
help address this issue. As you rightfully said, it is a--it is
disproportionately affecting African American taxpayers, and it
really is unacceptable in this day and age. So I thank you for
your candor, and I look forward to working with you to see if
we can reduce those numbers.
Mr. WERFEL. Thank you, Congresswoman.
Chairman SMITH. Mr. Smucker.
Mr. SMUCKER. Thank you, Mr. Chairman.
Good morning, Mr. Werfel, Commissioner.
I am actually okay with audits. We want people to pay their
taxes, and there should be a random way of selecting some tax
returns to ensure that there is an incentive for people to
comply.
I do want to, however, get your thinking about some
statements that you made this morning. You have multiple times
talked about high-income earners, you have talked about
millionaires and billionaires, you have talked about complex
tax returns in the same sentence as tax avoidance and tax
evasion. Do you believe that millionaires and billionaires are
all tax cheats?
Mr. WERFEL. I do not.
Mr. SMUCKER. Do you believe that there is a reason for
complex returns, rather--other than to avoid taxes?
Mr. WERFEL. Absolutely, there is.
Mr. SMUCKER. What would be some of those reasons?
Mr. WERFEL. Well, here is my understanding, that CFOs of
major companies, they have a responsibility to their board and
to their shareholders to find the most tax advantaged status.
The concern--and they should.
Mr. SMUCKER. So it would be a problem for you if they took
a legitimate tax deduction?
Mr. WERFEL. Never, no. If their return is accurate and
complete and legitimate, great. But that is not the concern
that we have, that is not the issue.
The issue was that, because the IRS was not auditing at--
our audit rates were anemic because we weren't investing in
keeping pace, that these efforts in certain cases got to
aggressive avoidance and then even evasion. And I can give you
examples of where it is more prolific. And that is really where
we want to focus, where----
Mr. SMUCKER. Well, it is just----
Mr. WERFEL [continuing]. These efforts have been----
Mr. SMUCKER. It is troubling to me when you keep using
those terms in the same sentence, as if all high-income
earners--who, by the way, are paying most of our taxes--are all
looking to avoid taxes, because that is not my experience with
business owners, with corporate leaders. They want to do what
is right. And so, you know, it concerns me.
Going into an audit, you know, everyone is innocent until
proven guilty. And, if your entire organization is taking the
approach that you are taking today, you are actually feeling
that people are guilty before the audit is even done.
Mr. WERFEL. It was not my intention. My intention is to
make sure we are increasing scrutiny on complex returns, where
there is a high risk of evasion.
Mr. SMUCKER. Do you have any information on what percentage
of returns on high-income earners result in no change?
Mr. WERFEL. I can get that information for you. I don't
have that at my fingertips.
Mr. SMUCKER. Do you have any information regarding the
change rate after audits in all income earners' levels?
For instance, you know, we know there has been fraud in
those who received the Child Tax Credit. What percentage of
individuals who have filed for the Child Tax Credit have done
so fraudulently, compared to high-income earners? Do you have
that information?
Mr. WERFEL. I believe we have that and can get that to you.
Mr. SMUCKER. Yes, could you share that with all of us?
And I just--again, I want to caution you. You know, I have
a lot of people who do very well and are proud to be part of
America and proud to pay their taxes. And they don't want to
hear from the IRS commissioner that he thinks that all of them
are cheats. So I would caution you in the language that you
use.
Mr. WERFEL. Well, I would love to go on the record and say
I do not believe all of them are cheats.
Mr. SMUCKER. Thank you.
Mr. WERFEL. But I do get bothered when we see evidence of
evasion----
Mr. SMUCKER. In your testimony you have also characterized
partnerships in the same way. That is deeply disturbing. You
have said increased audits of partnerships is important because
it--apparently in your mind, partnerships for some reason are a
category that is cheating more than others.
Mr. WERFEL. Congressman, what we are trying to do,
actually, is bring our audit rate back to historical norms. It
has been anemic. And I do believe that when we are not doing
the requisite amount of audits, when we are not showing that we
are ready to enforce, that that does increase the risk of
evasion, and that is what we are focused on.
Mr. SMUCKER. I don't--you know, Congressman Sewell just
mentioned targeting specific populations. I think that should
go across the board.
Mr. WERFEL. I agree.
Mr. SMUCKER. I don't want IRS to target any population. I
think in all categories most people want to pay their taxes and
are doing their best to comply with the law. And so I hope----
Mr. WERFEL. I agree with that.
Mr. SMUCKER. I hope what you are doing is a randomized
targeting, a randomized looking at audits or at returns to
ensure that everyone is complying to the best of your [sic]
ability.
Mr. WERFEL. We are looking for spaces where we think
evasion is proliferating and trying to hold people accountable
for what they owe. A lot of--too many of these organizations
are shielding their income. That doesn't mean they all are.
That means that there is more work to do for the IRS to make
sure people are paying what they owe.
Mr. SMUCKER. Thank you. I am out of time.
Chairman SMITH. Thank you.
Mr. Ferguson.
Mr. FERGUSON. Thank you, Mr. Chairman.
And Mr. Werfel, thank you for being here today. I want to
start with doing something that we probably don't do a lot on
this side, and I want to thank you for your help. When you were
here last time you gave us--you gave me your word that, if we
sent some tough cases that had had no movement, that you would
help with those. And thank you for doing that. I have another
long list that I may just send your way, because when you
speak, the rank and file under you seem to move. So I just want
to say thank you for the help on those other cases.
Two things I want to touch on. Number one, the problems in
the Employee Retention Tax Credit have been well documented and
well discussed here today. This committee, in a bipartisan way,
along with the House, passed a pretty significant piece of
legislation the other day. And at the heart of it was dealing
with the Employee Retention Tax Credit. Can you speak to how
important that legislation was into preventing the fraud and
helping the IRS work through the legitimate claims on that? Can
you speak to that, please?
Mr. WERFEL. Yes, I mean, it is--the legislation that is
under consideration, for example, that would prohibit ERC
claims from coming in after a date certain.
And one of the things that impacts our ability to make sure
that we are getting to the eligible claims amongst the
ineligible is the size of the inventory. And the more our
inventory is flooded with ineligible claims--and right now we
are still--like, we--once we issued the moratorium, the influx
of claims dropped in half. But it is still--I think we got 17
to 20,000 last week. So we are still--that inventory is
growing, and it is growing with a lot of ineligibility.
So we are--putting a--helping us pause the incoming at this
point so we can find those that have submitted that are
eligible, we need that help.
Mr. FERGUSON. And so, again, stating that the legislation
that we passed could provide a significant savings to the
American taxpayer----
Mr. WERFEL. Absolutely, I believe that.
Mr. FERGUSON. Thank you for that.
The next item--and my colleague from Pennsylvania, Mr.
Smucker, touched on this, and, as he was talking about it, I
said I think he looked over and looked at my notes--you know,
we talk an awful lot on this committee about--and we debate
going back and forth with these complex corporate tax returns
and high-income earners, but we know that there is a tremendous
amount of fraud in the Earned Income Tax Credit space, Child
Tax Credit space. If you had to look at what you think the
corporate fraud is versus the total dollar amount on the Earned
Income Tax Credit and Child Tax Credit, either through improper
payments or fraud, how do those two numbers compare?
Mr. WERFEL. Well, I actually think they are both important.
I don't have the side-by-side ledger in front of me.
Mr. FERGUSON. Okay, all right, but they are both important.
Mr. WERFEL. Both material.
Mr. FERGUSON. All right. So you have said that you need
money to beef up audits for partnerships, complex tax cases
where evasion is more likely. Right?
Mr. WERFEL. Yes.
Mr. FERGUSON. Okay. How much effort are you putting into--
and would you recommend that we look at reforming the tax
preparer space, and going after the folks that actually are
committing fraud at the lower end of the income spectrum?
Mr. WERFEL. Yes, I----
Mr. FERGUSON. If they are both there--I haven't heard my
colleagues on the other side of the aisle--they have been
railing against corporate America and high-income earners, but
they lack the same religion when it comes to going after people
that cheat the system in the Earned Income Tax Credit space.
Mr. WERFEL. I will tell you, Congressman, what is very
motivating--and I mentioned it in my opening remarks--
protecting honest taxpayers who are being victimized and the
tax system using them to victimize.
So the example that drives me crazy, and I want to make
sure that we address it, is a nefarious preparer who coaxes an
innocent taxpayer in, promises them an Earned Income Tax Credit
quickly, whereas they could get it just as quickly from us, and
then rips them off in some way, shape, or form.
Mr. FERGUSON. Sure, the predatory lending practices that go
along with this are pretty grotesque. And you know, I would
love to work with our colleagues on the other side of the aisle
on a really meaningful piece of bipartisan legislation that
goes after the folks----
Mr. WERFEL. Yes.
Mr. FERGUSON [continuing]. That really are committing the
fraud at the lower end of the spectrum. It is important.
Look, I am sort of like my friend from Pennsylvania here.
We want the IRS to do its job. We believe that audits are
important, and--but they should be fair, and they should be
non-discriminatory, and they should be at both ends of the
spectrum.
Mr. WERFEL. Yes, understood.
Mr. FERGUSON. So with that----
Mr. WERFEL. And that is the first principle we have. We
want--just like with the high income--where there is nefarious
activity, for sure, where there is blatant disregard and
purposeful evasion, for sure. And, at the lower end of the
income bracket, when we have nefarious actors like the one I
just described, that is where I would like to focus, rather
than an audit program that impacts too many honest taxpayers.
With--and I will go back to this--with the right
investments, we can be more surgical.
Mr. FERGUSON. Look, what you just said--excuse me, Mr.
Chairman, I know my time--I am over my time.
But when you--you have got to have a program that is fair
for everybody.
Mr. WERFEL. Right.
Mr. FERGUSON. You talk about just going after the
preparers. You have to also go after the individuals that are
knowingly defrauding the system.
And, with that, Mr. Chairman, my time has expired. Thank
you for the indulgence.
Chairman SMITH. Thank you.
Ms. DelBene.
Ms. DelBENE. Thank you, Mr. Chairman, and thank you,
Commissioner, for being with us today.
After years of neglect through decreased appropriations,
the IRS finally received the influx of resources it needed to
improve and update its operations. In the year and a half since
the Inflation Reduction Act was signed into law, we have seen
the impact of these resources. Some of these successes include
call time responses decreasing from 28 minutes to 3 minutes,
the backlog of 2022 individual returns now cleared, and
launching new digital tools to help taxpayers. Yet,
unfortunately, Republicans want to continue gutting the
agency's funding. So we should be ensuring the IRS has multi-
year, sustained funding to continue building on these
successes.
Mr. Commissioner, I wanted to know if you could speak to
the IRS's enhanced enforcement efforts, and specifically how
the use of AI is helping to identify non-compliant taxpayers.
Mr. WERFEL. Yes, so this--thank you for the question.
And we have to make investments to make sure that we are
precisely finding where the evasion is most problematic, and in
particular in these complex situations--for example, with money
moving across international jurisdictions, money moving into
wholly-owned subsidiaries--it can be tough to find where the
evasion is. And we can invest in AI-powered analytics to really
better understand and increase the likelihood that we are
seeing the evasion and selecting the right cases for audit. And
so that is where these investments are going, into making more
sophisticated models to make sure we are selecting the right
cases and finding the evasion where it is.
Ms. DelBENE. Thank you.
One of the issues I have heard about from my constituents
is about the lack of clarity on IRS notices that are sent to
taxpayers. Often the notices are very complex. They are from
the IRS, so people are very concerned about them. They leave
taxpayers confused about how to resolve the issue.
So what are some of the changes the IRS is implementing to
the notices and letters that are sent to taxpayers?
How can these changes benefit taxpayers----
Mr. WERFEL. Yes.
Ms. DelBENE [continuing]. And how has IRA funding
facilitated these reforms, if it has?
Mr. WERFEL. Yes, I mean, this is such an important piece of
the puzzle.
We have launched what we call the Simple Notice Initiative.
We send about 170 million letters or notices to taxpayers each
year. And, if you look at them, they need a lot of improvement
in terms of their clarity. And we have run a program, we have--
in the last year we took 31 high-volume notices, redesigned
them, you know, and they are significantly better, and we are
getting very positive results on these. And now, heading into
2025, we are now scaling.
And so by next filing season--so when I am sitting here
next year, if we are successful--90 percent of the total volume
of notices will have gone through this effort and be redesigned
and simplified. And we anticipate that is going to be very
beneficial for taxpayers.
In some of the early results that we are seeing, taxpayers
are going to our online tools and using them more than calling
in the call center. That means they are getting faster
responses. So very positive results just from clarifying what
we are asking taxpayers to do in these notices.
Ms. DelBENE. No, hugely important, and so thank you for
that.
Also, Federal and state laws require professionals like
doctors and lawyers to not only obtain licenses or
certifications, but also to pass competency tests. And, while
some tax return preparers must meet licensing requirements,
many tax return preparers do not have minimum competency
requirements, and therefore are not credentialed.
Commissioner, I was wondering how taxpayers who use non-
credentialed preparers are harmed by doing so, and how would
establishing minimum competency standards help protect
taxpayers?
Mr. WERFEL. Yes, this has come up a few times in the
hearing. You know, we do have a risk with preparers that are
not serving their clients well or their customers well. In some
cases, just not providing appropriate and suitable tax advice;
in some cases, actually stealing from them; or, in some cases,
leaving them with a financial mess on their hands. And so more
can be done.
And we have--the Administration has put into the
President's budget previously changes that would allow us to
require more credentialing of these preparers before they would
be able to provide tax advice or preparation services. I think
it is an important thing because people are being victimized.
And, as I said earlier, one step the IRS can take in
partnership with Congress to show that we are on the side of
taxpayers is disrupting those moments of victimization. And
this is an idea and an initiative that could do just that.
Ms. DelBENE. Thank you. My time is expired.
I yield back, Mr. Chairman.
Chairman SMITH. Thank you.
Mr. Estes.
Mr. ESTES. Thank you, Mr. Chairman, and thank you to
Commissioner Werfel for joining us today.
We are 60 days out from Tax Day 2024. The Kansans I
represent are working through their tax season tasks, whether
it is preparing to file their individual tax returns or filing
business forms. I mean, the fact is everybody has to interact
with the IRS. And the agency really should have a customer-
focused prerogative that puts American people first, and not
their own interests within the agency.
I am also concerned about, like my colleagues here, about
some of the inflammatory accusations that certain groups of
Americans are automatically considered to be tax cheats. My
career prior to running for office was looking at how do we
provide good customer service, how do we make business
operations more efficient. And, unfortunately, it seems like a
lot of the D.C. bureaucracies focus more on how to make things
easier to push paper or work from Johnny's desk to Sally's
desk, instead of focusing on how to be more efficient and meet
the needs of American taxpayers and any constituents, and
provide that quality, timely service.
Mr. Commissioner, I am sure this doesn't surprise you, but
my office in Wichita receives calls each year from constituents
who have issues with IRS. I mean, just this month, I received a
letter from a small car dealership in Cheney, Kansas that faced
issues e-filing their 1099 NECs by the January 31 deadline
through the Information Retrieval Intake System, or the IRIS.
Mr. Chairman, I would like to submit this letter from
Lubbers Cars for the record.
Chairman SMITH. Without objection.
[The information follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. ESTES. You know, the comptroller at Lubbers Car told my
office that, while they started in the middle of the month, the
e-filing and IRIS portal continued to crash, causing major
delays and pushing them right up to the deadline.
But the situation was not unique to Lubbers Cars, who
assured me that they have the top-of-the-line high-speed
Internet. They reached out to the Kansas Automobile Dealers
Association, who informed them it was a widespread issue.
Lubbers tried the portal at multiple times during the workday
and evening, with no avail. The CPA indicated that they were
receiving calls, as well. Finally, around 6:00 a.m. on January
31, the deadline, they successfully were able to submit the
required 1099 NECs.
Commissioner, as you know, the next deadline is March 31.
Are you aware of these issues with the IRS portal?
And what are you doing to make sure that this critical tool
is ready for the upcoming heavy usage as more small businesses
file, now that you have got this money to----
Mr. WERFEL. Absolutely.
Mr. ESTES [continuing]. Have these upgraded systems?
Mr. WERFEL. It is a great question, and it is definitely on
my radar screen. It was concerning while it was going on.
This is--you know, we have a lot of different portals,
tools, technology out there. And you know, anyone who is
involved in running these systems will let you know that they
don't always perform perfectly. The key is what your reaction
time, your speed, your troubleshooting is. And when it happens,
do you learn from it so that you prevent that type of mistake
from happening in the future?
And that is what I am trying to instill in the IRS. And so
we were working the problem, are working the problem, made the
necessary adjustments to allow these information returns to be
submitted successfully. We are monitoring it very closely
because of what you said, and I am cautiously optimistic that
the changes and the updates that we made will allow for a much
more stable platform as we get to the busy season.
Mr. ESTES. Well, the Lubbers's comptroller called the IRIS
help desk multiple times and couldn't get through. You said
earlier you have hired 5,000 new call agents to help with that.
And so this letter is just two--less than two weeks ago. And so
have all IRS agencies--employees returned to the office for
five-day work weeks since COVID?
I know the GAO issued a report this fall that high
percentages of offices across all agencies, not just the IRS--
--
Mr. WERFEL. Yes.
Mr. ESTES [continuing]. Had not returned to the office. And
what are you going to do, or what are you doing to help make
sure that taxpayers who are trying to do the right thing can
get through to work with your agents and other employees?
Mr. WERFEL. Yes. So first, to clarify, all IRS employees
are working.
The objective is to make sure that we are getting the
mission done. And, when you tell me that someone didn't get
through on the phone line, I want to learn more about that and
figure out what we need to do.
There is a government-wide standard out there in terms of
where we stand today, what should be the percentage of in-
office work versus remote work. The IRS is generally consistent
with that government-wide standard, but we are constantly
evaluating any steps that we can take----
Mr. ESTES. Sorry to interrupt, but what is that--before I
run out of time, what is that governmental standard for the IRS
for the number of employees----
Mr. WERFEL. Well, the governmental standard is----
Mr. ESTES [continuing]. To be in the office, working?
Mr. WERFEL [continuing]. 50 percent is the government-wide
standard. So----
Mr. ESTES. So 60 percent of employees coming to the
office----
Mr. WERFEL. Everyone is working, it is 50 percent on site
versus 50 percent working in some remote location.
Mr. ESTES. So how can somebody in a remote location be
handling these tax returns? That just seems to me that it is
not doing the job that needs to be done to help service
American constituents.
Mr. WERFEL. Well, I am happy to walk you through in greater
detail, but we have many, many employees on site doing the
exact work that you described. And, you know, in our campuses,
where a lot of our processing of taxes goes, that is where we
have a heavy, heavy presence of IRS employees.
Mr. ESTES. Thank you, and my time has run out.
Mr. Chairman, I will yield back.
Chairman SMITH. Mrs. Miller.
Mrs. MILLER. Thank you, Chairman Smith and Ranking Member
Neal.
And thank you, Commissioner, for agreeing to appear here
today. I have been looking forward to discussing the IRS's
actions with you for some time.
I am extremely concerned that the IRS has been just a
little too focused on following political directions of the
Biden Administration, instead of fulfilling its
congressionally-mandated duties. The continued delay of the
1099-K threshold and announcement of a new threshold is an
illegal overreach that is not found anywhere in law.
Unfortunately, this is just another step in a long string
of illegal and questionably legal actions taken by the IRS and
the Department of Treasury to either willfully ignore the
change or misinterpret the laws that have been passed by
Congress.
Why was the IRS unable to implement the $600 1099-K
threshold passed in the American Rescue Act?
Mr. WERFEL. I am really glad I have an opportunity to
respond to this question, Congresswoman.
I believe the IRS commissioner has the authority to
implement laws in a manner that ensures taxpayer rights. This
means that at times implementation is delayed or ramped up over
time in order to make sure that we are achieving that balance,
that we are implementing the law that was enacted by Congress,
but also abiding by another responsibility we have under the
law, and that is to protect taxpayer rights.
In this situation, this outcome of delay or ramped
implementation was strongly recommended by a diverse set of
stakeholders across the tax industry, commercial industry. From
every direction we were hearing calls to--that there was risk.
What was----
Mrs. MILLER. Well, I can understand why.
Mr. WERFEL. Yes.
Mrs. MILLER. I mean, given the three-year extended delay,
does the IRS believe it will ever be able to comply with this
law?
Mr. WERFEL. We are working with stakeholders on a path that
will get it done. And, in particular, that is why we are
intending to begin implementation next year.
Again, the focus that I have and we have at the IRS is how
do we do this in the best interest of taxpayers. We don't want
taxpayers over paying their taxes. We don't want them confused.
We don't want them bombarded with forms and paper they
shouldn't be receiving. And, if we go forward with
implementation without being able to adequately protect against
that risk, then I am not meeting my legal responsibility as
commissioner to help taxpayers and to help protect their
rights.
Mrs. MILLER. Well, in November of 2023 you announced plans
for a threshold of $5,000 in 2024.
Mr. WERFEL. Yes.
Mrs. MILLER. Who specifically made that decision to set
this new threshold?
Mr. WERFEL. That was a strong recommendation from the
stakeholders we reached out to across a variety of
stakeholders: taxpayers, these companies that are third-party
payment platforms. The reason why there seemed to be consensus
on $5,000 was because that--if you had looked at the analysis
and the model, $5,000 would ensure the most revenue would be
impacted, while also protecting the most taxpayers from
unnecessary paperwork and sending them things that they didn't
actually need.
And so----
Mrs. MILLER. Well, I have to reclaim my time because, I
mean, what authority does the IRS have to set the new
threshold? The authority.
Mr. WERFEL. So we have an authority under the code to
administer laws consistent with taxpayer rights. And so this
happens from time to time. Our goal and our objective is to
implement the laws on day one.
Mrs. MILLER. Yes, because----
Mr. WERFEL. There are many----
Mrs. MILLER [continuing]. We write the laws.
Mr. WERFEL. Yes----
Mrs. MILLER. Congress writes the laws, you don't.
Mr. WERFEL. But there are a variety of examples throughout
history where the IRS, in order to protect taxpayers from undue
burden or from potentially being overtaxed, where we have
either delayed implementation or ramped implementation. This is
not the first time, and I am not the first commissioner that
has confronted this tension----
Mrs. MILLER. But they are still illegal. Your actions are
still illegal.
Mr. WERFEL. It is not illegal to take a step to protect
taxpayer rights.
Mrs. MILLER. Well, anyway, I will move on from this.
Another concerning action I have that the IRS has taken is
the implementation of the so-called Free File program. I mean,
you have got to be kidding me. Nothing is free. Everything the
U.S. Government does is paid by taxpayer dollars, so nothing is
ever free. And I don't think you should be wasting your
millions of dollars when the private industry is doing a good
job.
But I do want to give you credit where credit is due. I
commend the IRS where credit--for the ERTC claims, for
processing them. I understand that the system was devastated by
fraud and abuse, which is why the committee and the House
recently passed the Tax Relief for American Families and
Workers Act in an overwhelmingly bipartisan manner. And I also
want to urge my Senate colleagues to similarly follow suit so
that the IRS can focus on credible ERTC claims so that good
American small businesses can swiftly access the benefits that
have been promised by Congress.
Thank you, sir.
Mr. WERFEL. Thank you, Congresswoman.
Mr. STEUBE [presiding]. The gentlelady yields back. I yield
to Ms. Moore from Wisconsin.
You are recognized.
Ms. MOORE of Wisconsin. Thank you so much, Mr. Chairman,
and thank you, Commissioner, for joining us today.
We have heard a lot of discussion today about the Earned
Income Tax Credit and the audits and perhaps fraud that has
been committed. And you were unable to sort of monetize the
amount of fraud that that was, as compared to corporate fraud
and loss of revenue. I guess we have had estimates that there
is, like, at minimum, close to maybe 600 billion to $1 trillion
worth of lost income from corporations. even though you can't
nail it down to the penny, is that anything close to what you
are experiencing with the Earned Income Tax Credit?
Just a sort of a back-of-the-envelope sort of assessment.
Mr. WERFEL. So we have a tax gap analysis, where we can
evaluate where the differences are between what is paid versus
what is owed. And the last estimate that we provided estimated
a roughly $650 billion a year----
Ms. MOORE of Wisconsin. Yes.
Mr. WERFEL [continuing]. In this gap.
Ms. MOORE of Wisconsin. So are you guessing that maybe the
Earned Income Tax Credit fraud--I am sure you can recover all
of it, since it is not very complicated to catch it, an earned
income tax problem. You don't even need a person. Probably the
machine will find that. Am I right or wrong about----
Mr. WERFEL. Well, Congresswoman, for me it is about
priorities.
Ms. MOORE of Wisconsin. Yes, okay, so----
Mr. WERFEL. And what are our priorities within earned
income tax credit program integrity, and what are our
priorities in terms of tax evasion amongst the wealthy, and
that is what I am seeking to establish.
Ms. MOORE of Wisconsin. Okay, so let me go on because I
hadn't really planned to talk about this, it is just that my
colleagues have raised it.
What would you say that the fraud rate for the Earned
Income Tax Credit is, as compared to the low uptake of it, the
numbers of people who deserve it and could use it and don't
apply for it? Yes, what is that number?
Mr. WERFEL. Yes, and again, I don't have the specific fraud
rate.
Ms. MOORE of Wisconsin. Okay.
Mr. WERFEL. It is not something that we measure----
Ms. MOORE of Wisconsin. It is not fraud. I am talking about
the people who don't even----
Mr. WERFEL. Exactly.
Ms. MOORE of Wisconsin [continuing]. Claim it.
Mr. WERFEL. And this is part of the challenge. We believe
that there is a material gap in the number----
Ms. MOORE of Wisconsin. I mean, there is millions of
dollars left on the table----
Mr. WERFEL. Agreed.
Ms. MOORE of Wisconsin [continuing]. I think, that families
and kids need, particularly since we have such a stingy Child
Tax Credit, we have harsh requirements for TANF, and people are
leaving money on the table with the Earned Income Tax Credit.
You know I think--I believe it was my good colleague that
asked you a question about child support. And I think that, in
the absence of an adequate Child Tax Credit and Earned Income
Tax Credit, a low uptake in that, that it is really important
that we do child support tax collections.
And I understand that these contractors have to be 6103
compliant. But we found this problem even with states that
administer the Child Tax Credit for tribes. And so I am
wondering, you know, they are subject to these audits, and I am
wondering how long that is going to go on. It is really hurting
tribal communities, not getting these monies. Can you quickly
comment?
Mr. WERFEL. I want to work with tribal communities
directly. I know that tribal communities face unique challenges
in terms of meeting their tax responsibilities or getting
access to tax benefits. So, if I can learn more about the
specific issue, I will----
Ms. MOORE of Wisconsin. That is right, yes, learn about
sovereignty, and that will help you figure it out.
Let me ask you some questions before my time expires, very
quick questions. I am not asking you to opine on policy, okay?
Mr. WERFEL. Yes.
Ms. MOORE of Wisconsin. I am just asking you to affirm some
things that I think I already know.
This essential government function test, is that an
impediment to tribal nations' use of government bonds? Yes or
no.
Mr. WERFEL. It is something that is more in a policy shop,
but I do believe----
Ms. MOORE of Wisconsin. No, I am just saying----
Mr. WERFEL. This is what we have heard from tribal
communities, and that is why it is important to engage with
them on solutions to the issues----
Ms. MOORE of Wisconsin. So same thing, because they are
going to cut me off, I guarantee you.
The New Market Tax Credit set aside for tribes, the Low-
Income Housing Tax Credits, and, you know, setting aside a
housing tax credit program, would that increase the
effectiveness and administrability of these programs from the
perspective of the IRS?
Mr. WERFEL. It is something that I want to work with and
coordinate with Treasury and the tribal outreach programs that
they do and get back to you on that.
Ms. MOORE of Wisconsin. Well, Commissioner, just let me
join the chairman, the ranking member, all of my colleagues in
thanking you for being here and being very patient. As you can
see, we are all coming back and forth for lunch and bathroom
breaks and everything. So you have been very good.
Mr. WERFEL. Yes----
Ms. MOORE of Wisconsin. And I want to appreciate you for--
--
Mr. WERFEL [continuing]. And Congresswoman, I do now know
that 20 percent of eligible taxpayers don't claim the Earned
Income Tax Credit. So that means one in five. And that is
something we have to address.
Ms. MOORE of Wisconsin. That is a lot of money----
Mr. WERFEL. Yes.
Ms. MOORE of Wisconsin [continuing]. That is left on the
table.
Mr. WERFEL. Absolutely.
Ms. MOORE of Wisconsin. Versus how many frauds that you
find. And of course, you could collect every dime of that
money, because it is not hard to audit an EITC recipient versus
someone who has 500 corporations and billions of dollars.
Thank you for your indulgence, Mr. Chairman.
Mr. STEUBE. I gave you an extra 53 seconds. You just
remember that. [Laughter.]
Ms. MOORE of Wisconsin. I am going to remember that.
Mr. STEUBE. Helping you out. All right, the gentlelady
yields back.
Mr. Murphy from North Carolina, you are recognized for five
minutes.
Mr. MURPHY. Thank you, Mr. Chairman.
And thank you, Commissioner, for coming today. I was just
looking at your CV. I saw you went to Duke and to UNC.
Mr. WERFEL. I did.
Mr. MURPHY. So, if you could answer one question today,
Duke or UNC?
Mr. WERFEL. Duke.
Mr. MURPHY. All right. Well, I got no more to say to you.
[Laughter.]
Mr. MURPHY. No, all right, all right, let's get down to it
actually. So, questions.
California and North Carolina--excuse me, New York have the
most billionaires. And you are saying that is a high rate of
cheating. Have you ever correlated any of them with the--are
they paying the California taxes and the New York taxes?
Mr. WERFEL. I don't have that analysis at my fingertips. We
are focusing----
Mr. MURPHY. No, no, what I am saying is--because we are
talking--you know, we are talking about a lot of folks not
paying their taxes. Look, I am 100 percent people need to pay
their taxes, period. I don't care what income bracket you are
in. But if we are talking about millionaires and billionaires
not paying their fair share, which is what we hear the
President say a lot, those are--the two biggest states are in
California and New York.
So it would be nice to know--you don't have to answer this,
but it would be nice to know, are they doing that for New York
and California?
And are their particular revenue departments going after
them? Fair question.
Mr. WERFEL. It is a fair question. And I would want to
coordinate a response to that after talking to those states.
We are not necessarily focused regionally. We are focused
on the types of evasions----
Mr. MURPHY. I get it.
Mr. WERFEL [continuing]. That corporations are engaged in.
Many of them are maybe operating in California, incorporated in
Delaware. The reality is that----
Mr. MURPHY. Yes.
Mr. WERFEL. The question is the underlying behavior.
Mr. MURPHY. Okay, all right, thanks. Were you aware that
the Biden Administration has said that TikTok is not to be
allowed on government devices?
Mr. WERFEL. I am aware of that, yes.
Mr. MURPHY. All right. So this is just very troubling to
me.
So the office of--the OMB issued guidance on February 27,
2023 that agencies were--how to implement this law. TIGTA found
that 23 devices used by IRS still had access to TikTok. And
this is still troubling. It took the IRS--this thing was
issued--TIGTA issued this to the IRS in May. The IRS did not
take action until August of 2023. Why?
Mr. WERFEL. I am not sure of the facts of that, but that
does seem unacceptable, and I will get to the bottom of it.
Mr. MURPHY. Do you personally believe--I think there are
many Members of Congress, especially over in the Senate,
Democratic Senator--intelligence, Dr.--Senator Warner believes
that TikTok is a security risk to this country.
Mr. WERFEL. Yes----
Mr. MURPHY. I am just saying--this is his words, ``It is
generally considered a risk.'' And I just, to the life of me,
don't understand why these are still on devices.
What really bothers me--we are talking about folks working
from home--is that the bring-your-own-device policy for the IRS
is still not enforcing this ban on TikTok. Can you speak to
that?
Mr. WERFEL. Well, I want to make sure I understand the
TIGTA recommendation and where we are in closing it out, but I
absolutely agree. Whether people are working remotely or
working on site, we have to abide by these security standards,
and any lapse is--cannot be tolerated. So we need to be----
Mr. MURPHY. It took eight months for the IRS to really
update this policy. That is not acceptable. It wouldn't be
acceptable in business. It shouldn't be acceptable in any
government agency.
Let me ask you about the Criminal Investigation Unit and
their access to TikTok, because it seems that they are kind of
trying to get a waiver for this. Are you aware of any of that?
Mr. WERFEL. I am aware of the fact that in certain cases,
when our investigative--our law enforcement division is working
to impede, disrupt, and hold accountable criminal enterprises,
sometimes they have to use tools that--to understand and solve
those crimes. So it is not--it is a kind of an apple and an
orange versus an IRS employee who should not have TikTok on
their device versus a law enforcement official who is using----
Mr. MURPHY. Are you aware of that requisite, of that asking
for this--for the Criminal Investigation Unit to have a waiver?
Mr. WERFEL. I am--I would want to get--before I get into
more detail, I would want to go back and get more detail----
Mr. MURPHY. Would you mind----
Mr. WERFEL. But I am aware of that, yes.
Mr. MURPHY. Yes, would you mind getting back to my office
about that?
Mr. WERFEL. Yes.
Mr. MURPHY. It is Murphy from North Carolina, who is a big
Tar Heel fan. And by the way----
Mr. WERFEL. Yes, I really am going to regret that answer,
right? You know, I just was at UNC speaking, and I feel
affinity there. But it is a long story.
Mr. MURPHY. I am messing with you. I am messing with you.
Just one last question. Artificial intelligence. You know,
this is the gold rush for this country and the world, for that
matter. Bias, absolute bias will be a thing we are going to
have to fight. And I hope that, given the, you know, some of
the biases that have been stated by the Department and some
individuals, that we are going to--that I have your commitment
to do your very, very best that the IRS does not have any
biases when using artificial intelligence and looking at who to
audit, who not to audit, because we saw that. We saw that going
after Republicans before, we saw some real problems with who
were audited. And artificial intelligence is a tool, but it
should not be used as a political weapon in the IRS.
Mr. WERFEL. You have my commitment.
Mr. MURPHY. All right. Thank you, Mr. Chairman, I will
yield back.
Mr. STEUBE. The gentleman yields back next.
Next. Mr. Kustoff, you are recognized for five minutes.
Mr. KUSTOFF. Thank you, Mr. Chairman, and thank you,
Commissioner, for appearing today.
I would like to go back, if I can, please, to the GAO
report that Congressman Estes was asking about. This is the one
dated July 13, 2023. The title of it is, ``Preliminary Results
Show Federal Buildings Remain Underutilized Due to Longstanding
Challenges in Increased Telework.'' If I can, just let me read
maybe two sentences.
``Seventeen of the twenty-four Federal agencies in GAO's
review used an estimated average twenty-five percent or less of
their headquarters building capacity in a three-week sample
period across January, February, and March of twenty-twenty-
three. On the higher range, agencies used an estimated 39 to 49
percent of the capacity of their headquarters on average.''
Do you know, on an average day, Commissioner, how much of
your headquarters building is being used?
Mr. WERFEL. In Washington? I don't have that number at my
fingertips.
Mr. KUSTOFF. Would you say it is less than 50 percent?
Mr. WERFEL. It may be, because the--as I mentioned earlier,
overall, the IRS is roughly in line with the government-wide
standard of 50 percent. So because it is an average, it may be
under.
Mr. KUSTOFF. We have heard different things and questions
today to you from members. Anecdotally, subjectively, what I
what I hear from my staff and from CPAs and practitioners that
have to reach the IRS is that it is a real struggle to get a
hold of somebody. And you talked about earlier some of the
challenges with the phone, the call-back, which I appreciate.
Mr. WERFEL. Yes.
Mr. KUSTOFF. I would contend, respectfully, that not having
employees in the office and having them work remotely presents
challenges not only to your agency, but to the people that have
to interact with it. Would you agree with that?
Mr. WERFEL. I would agree that it depends on what the
function is. There are moments, for example, when, whether it
is a weather event, streets are shut down, we don't want to
lose productivity. So we set people up to be able to work
remotely where they can.
I would also----
Mr. KUSTOFF. I get if there is a weather situation. But, if
we are talking about a day where the weather is fine, wouldn't
it make more sense from a productivity standpoint to have
employees physically present at the IRS than working remotely?
Mr. WERFEL. In some cases, yes. In other cases, it is less
relevant. I can give you examples of where it is highly
relevant.
Mr. KUSTOFF. Well----
Mr. WERFEL. For example, in our taxpayer assistance
centers, those are our walk-in centers, and those are fully
staffed five days a week. Everyone is there at all times.
Also, if you visited--and you are all invited to come to
one of our campus locations--and you will see those campuses
teeming with employees that are opening envelopes and doing
other things to manage the tax system. And those individuals
have to be on site, and they are on site.
Mr. KUSTOFF. Well, Commissioner----
Mr. WERFEL. For me, what I look at is----
Mr. KUSTOFF [continuing]. We have got a number of questions
here about security, and we are all concerned about it.
Mr. WERFEL. Yes.
Mr. KUSTOFF. I know you are you are concerned about it,
whether it is----
Mr. WERFEL. I am.
Mr. KUSTOFF [continuing]. Mr. Littlejohn or whatever, as it
relates to taxpayer information.
From a security standpoint, wouldn't it be safer and more
secure to have taxpayer information accessed at an IRS office
versus an IRS employee's home?
Mr. WERFEL. There are steps that you can take to ensure
appropriate security, whether the tax--whether the employee is
in a SCIF, in a non-SCIF, or remote. And we have to make sure
that we are securing because there may be situations, whether
it is a weather event or otherwise or a pandemic, where we have
to ensure the right level of security, regardless of where the
employee is.
Mr. KUSTOFF. Can I--it is a true statement that IRS
employees, when they are working remotely from home, can access
taxpayer information, right?
Mr. WERFEL. Certain employees, depending on the need, yes.
Mr. KUSTOFF. Nothing to prevent the employee's 19-year-old
son walking behind the screen from taking a screenshot of
whatever is on the screen. Correct?
Mr. WERFEL. That would be a violation of that employee's
responsibility to protect information. There would be
significant consequences for that. And therefore, virtually all
IRS employees are very rigid in how taxpayer information is
handled, whether it is handled on their computer screen in a
remote location or on an IRS site.
Mr. KUSTOFF. But it is true that that situation wouldn't
occur if that employee were in the office, right?
Mr. WERFEL. That--I don't want to engage in hypotheticals,
but that--yes, that doesn't make sense.
Mr. KUSTOFF. That employee's----
Mr. WERFEL. Yes.
Mr. KUSTOFF [continuing]. 19-Year-old son would not be
physically----
Mr. WERFEL. Correct.
Mr. KUSTOFF. Right?
Mr. WERFEL. But there could be a visitor in the building,
and that is why it is so important that, whether you are on
site or you are at home, that you are extraordinarily careful
about who has visibility to information that you only--you are
the only person who should have visibility----
Mr. KUSTOFF. I mean, I can cite other examples, just like I
did about the 19-year-old son in the home. There is no doubt,
though, that situation wouldn't occur if that employee were in
the office, in the IRS office. Correct?
Mr. WERFEL. What I am suggesting is, hypothetically----
Mr. KUSTOFF. Can you----
Mr. WERFEL. I don't want to engage in hypotheticals----
Mr. KUSTOFF. Could you answer yes or no, and then I will
allow you to finish the----
Mr. WERFEL. I feel like it is dangerous to go into
hypotheticals because then someone is going to----
Mr. KUSTOFF. It is not a hypothetical.
Mr. WERFEL [continuing]. Turn around and ask me, what if
someone has a Take Your Daughter to Work Day, and they are
walking through the office? So there are all these situations.
My common denominator, bottom line, is that each employee
must rigidly and relentlessly protect that information from
unauthorized access from any 19-year-old, whether they are
visiting their parent in the office or whether they are at
home.
Mr. KUSTOFF. Let the record show that you were non-
responsive. Thank you, Commissioner.
Mr. WERFEL. Fair enough.
Mr. KUSTOFF. The gentleman yields back, and Mr. Schneider
is recognized for five minutes.
Mr. SCHNEIDER. Thank you, Mr. Chairman.
And thank you, Commissioner Werfel, for joining us today. I
want to start by saying I have appreciated working with you and
your staff, who have been very helpful with us in dealing with
our constituent questions.
Before I go to a question, let me touch briefly on
casework. We have been in touch with your team on a handful of
IRS cases that we have been unable to make headway as we were
hoping. Can I just get a commitment that we will continue to
work on these----
Mr. WERFEL. Absolutely.
Mr. SCHNEIDER [continuing]. To try to get them done?
And I will go back to the previous question--my kids are
now 29 and 30, but--and I worked in a space--before coming to
Congress with a lot of confidential client information. Whether
my kids were visiting me in the office, as they often did, or I
was working at home, as I often did, it was imperative that I
kept that information confidential, and I think what I heard
you saying is that that is the expectation of IRS employees,
that information is----
Mr. WERFEL. Yes.
Mr. SCHNEIDER [continuing]. Kept confidential, irrespective
of where they are, who might be visiting.
Mr. WERFEL. One of the reasons why I was struggling with
the question in the hypothetical is I don't want to signal to
any IRS employee that they can let their guard down, no matter
where they are, whether they are at home, whether they are at
the office. It is absolutely critical that we have rigid
policies and procedures in place to prevent unauthorized
access.
Mr. SCHNEIDER. Right.
Mr. WERFEL. And that is what I really want to emphasize.
Mr. SCHNEIDER. Thank you. I just wanted to make that clear.
I will take another minute. We have talked about the IRA
and the impact it has had, and you have touched on some of the
things. But you know, the handful of things--I will let you
reiterate them, the progress made, there has been discussion up
here saying it is not quite perfect. But I am going to focus on
progress, not perfection. Where is the progress we have made
over the last----
Mr. WERFEL. Yes, things are trending in the right
direction. I don't think there is any way that I will rest and
come up to this table and say we are done. We are not done. And
I want to hear about the taxpayer concerns.
But I also want to recognize the before and after of a
funded tax agency versus a non-funded tax agency. And the
before and after is stark in terms of what we are able to
deliver in terms of taxpayer service. And that means, if we are
funded, our walk-in centers are open, we can have Saturday
hours, we can have special events where we are training people
about how to use their--how to get free assistance, webinars
are in place, all these different resources that we can invest
in, reaching out to taxpayers and helping them meet their tax
responsibility.
Mr. SCHNEIDER. Is the difference of 85 percent of calls
going unanswered and 85 percent of calls now being answered----
Mr. WERFEL. Exactly, exactly. And the other thing that I
haven't had a chance to emphasize as much as I would like to is
the before and after of being funded in terms of what we can
do, too, to protect honest payers against scams and the
perpetrators that are involved in that. And, if we are not
funded, we are on our heels.
The tax system remains complicated, it remains a playground
for scam artists to exploit honest taxpayers, scare them, call
up someone who is elderly, pretend they are the IRS, convince
them to take out their credit card and pay a phantom debt. An
underfunded agency, an underfunded IRS means that that can be
exploited more and more. A funded IRS means we can work to
disrupt those types of scams, we can increase our education, we
can work with local partners, and we can put tools on the web
so that you can either help your elderly parent or that elderly
parent can have access to figure out, is this really the IRS?
These are tools that other tax jurisdictions are putting in
place and we absolutely have to, in order to protect taxpayers
from these risks, put these tools in place. And, if we don't
have the funding, we can't do it. So these are the choices that
we make.
Mr. SCHNEIDER. Thank you. So, if we don't fund and we can't
protect those taxpayers, they are at the short end of the
stick. They are put at risk.
Mr. WERFEL. Exactly.
Mr. SCHNEIDER. At the same time, you have said there is a
$650 billion--estimated $650 billion per-year tax gap, taxes
not being paid. Who really suffers when people cheat on their
taxes, don't pay what they owe?
Mr. WERFEL. It is the people who pay their taxes, because
they are shouldering the broader load for funding the
government and its critical operations.
Mr. SCHNEIDER. So----
Mr. WERFEL. So that is why it is so important to have
equity, and that is why it is important to prioritize our
enforcement efforts for where we think evasion is most
problematic.
And the point that I have been making today is, when I
arrived at the IRS after years of under-funding, I asked the
team, ``Where are we most exposed? Where are the risks the
highest? Where has this under-funding caused the most damage?''
And one of the key areas was our ability to keep pace with
complex tax situations where evasion was a risk.
There are complex tax situations where evasion is not a
risk, and that is a place that we will not focus on. But it is
the place where there is a risk of----
Mr. SCHNEIDER. Yes, and I am at the end of my time, so I
will ask the question--and actually, I would appreciate an
answer in writing--is what is it that makes a complex return?
And why does that complexity increase the likelihood or the
ability of people to avoid paying taxes that are owed?
Mr. WERFEL. Yes.
Mr. SCHNEIDER. And I would like to be able to share that
with----
Mr. WERFEL. Well, just a quick example would be if you are
operating in multiple countries----
Mr. SCHNEIDER. Right.
Mr. WERFEL [continuing]. And they have different tax laws,
and you are shielding your profits in the U.S. to get a lower
tax, when the reality is that your economic activity is in the
U.S., and you actually owe, and you shouldn't be moving and
making it look like to the IRS that your activity is elsewhere
in a more tax-advantaged jurisdiction. That means that those
that are accurately reporting their profits, the companies that
are, are paying a larger share than those that are cheating the
system.
Mr. SCHNEIDER. And it is not just companies, it is wealthy
individuals who are able to shelter money----
Mr. WERFEL. Exactly.
Mr. SCHNEIDER [continuing]. In other jurisdictions.
Mr. WERFEL. And that is what we are trying to close the gap
on.
Mr. SCHNEIDER. All right.
Thank you, and I yield back.
Mr. STEUBE. The gentleman yields back. I yield myself five
minutes.
Mr. WERFEL. Sorry about that.
Mr. STEUBE. Commissioner Werfel----
Mr. WERFEL. Yes, sorry about that, yes.
Mr. STEUBE. No, I am up here. I am normally down there.
Mr. WERFEL. Oh, yes, okay. Oh, it was the chairman. Okay,
got it.
Mr. STEUBE. An IRS consultant named Charles Littlejohn
stole a trove of tax return data, including returns from
President Donald Trump and a host of other prominent American
taxpayers, and released them to multiple media outlets in 2020
and 2021. Last month I was pleased to see that Mr. Littlejohn
received the maximum sentence of five years in Federal prison
for his crime.
In addition to criticizing the Biden Administration's DoJ
for only bringing one criminal count against Mr. Littlejohn,
Judge Ana Reyes told Mr. Littlejohn at his sentencing that his
crusade to violate President Trump's rights was an attack on
our constitutional democracy, and I could not agree more.
What troubles me even more is that the IRS has taken far
too long to implement the corrective actions necessary to
ensure that other American taxpayers do not become victims of a
rogue IRS employee like Mr. Littlejohn.
The Treasury inspector general for tax administration
recently reported that the IRS failed to ensure that all its
sensitive systems provide accurate audit trail logs to monitor
and identify unauthorized access. Essentially, TIGTA is saying
that you did not know when sensitive taxpayer information was
illegally accessed.
I understand Mr. Neal asked you about this, and you said
that you guys have taken corrective actions since that report
came out--what was it, last week, February 6? What specific
actions have you taken, and have you taken all three of the
recommendations that TIGTA made in their report?
Mr. WERFEL. Yes, we have taken a bunch of actions. I will
be very quick, just to kind of give you a flavor of them: we
have reduced the number of users; we have put more robust
encryption in place; we have strengthened our oversight; we
have improved our access logs; we have eliminated more
movable--removable media; we put in place tighter email
controls, new printer controls; and on and on and on.
And on this point--this is such a critical point on the
audit trails in our systems--TIGTA had identified, I think it
was, somewhere between 300 and 400 systems in the IRS that had
sensitive data that didn't have the appropriate audit trails.
I required the team--I think it was almost like my third or
fourth day at the IRS. I said, ``I want audit trails in every
one of those systems consistent with TIGTA's requirements.''
Those have now been done. We shared that with TIGTA, but TIGTA
didn't have sufficient time to validate that we did everything
we said we did----
Mr. STEUBE. So when was all that completed?
Mr. WERFEL. That was completed by the end of the fiscal
year, so around September 30.
Mr. STEUBE. So all of the three recommendations that----
Mr. WERFEL. Yes.
Mr. STEUBE [continuing]. TIGTA, is that how you responded
to----
Mr. WERFEL. Yes, they are evaluating. We have said we
agree, we are making the changes. We have made the changes,
here they are. And TIGTA is now, ``Thank you, we are going to
evaluate and see if you have done it exactly the way we want
you to do it.''
So they are reexamining whether, for example, our audit
trails are as robust as we believe they are now.
Mr. STEUBE. So they are reexamining. So I am just trying to
understand when--because their report just came out.
Mr. WERFEL. Yes.
Mr. STEUBE. So, like, you have been there a year.
Mr. WERFEL. Yes.
Mr. STEUBE. When did you--and, I mean, this goes back to--
the returns were leaked in 2019, it was published in 2020. Then
Mr. Littlejohn leaked a second batch in 2020 to ProPublica----
Mr. WERFEL. Yes.
Mr. STEUBE [continuing]. Which was published in 2021.
Obviously, you weren't there, so I am not asking you to vie
[sic] for what happened during that period of time. But you
have been there a year.
So is it your testimony today that, since you have been
there, this is obviously happened and you have started taking
corrective actions on these audit trails?
Mr. WERFEL. Yes.
Mr. STEUBE. When has that been complete? Like, is that--you
are telling--your testimony before the committee today is that
is done and complete?
Mr. WERFEL. It is complete. Now, we were getting a peer
review or an oversight review from TIGTA. We said it is--it is
like we have handed in our assignment. We have put in all the
audit trails to the systems that you have identified needed
audit trails, and they are reviewing that to ensure that we
didn't miss any.
Mr. STEUBE. So I want to make it clear to the American
people today. So the three recommendations that were in the
report last week that they made, you are stating under oath
today that those have been made by the IRS, all of the
recommendations in the report.
Mr. WERFEL. We have agreed with all the recommendations. I
am stating for the record that the audit trails recommendation
has been done. I want to double, triple confirm that we are
completed with the other recommendations, but they are all
underway.
Mr. STEUBE. Can you let the committee know?
Mr. WERFEL. Absolutely.
Mr. STEUBE. When can we expect that information?
Mr. WERFEL. I can probably get back to you by tomorrow or
Monday--or Monday is holiday--Tuesday.
Mr. STEUBE. If you could give that to the chair to
disseminate to the committee----
Mr. WERFEL. Absolutely.
Mr. STEUBE. I would appreciate it.
In the 30 seconds I have left----
Mr. WERFEL. Please.
Mr. STEUBE [continuing]. We have--and my district was
decimated by Hurricane Ian. In the tax package we just sent to
the Senate, which obviously isn't going to pass by today, the
extension deadline, all of the people in my district for the
2022 tax year are now going to be forced to, by today, file
their extension and then have to do an amended return. It is my
understanding that it is taking about 20 weeks to process
amended returns.
What assurances can you give all of the Americans in 45
states who have been affected by a natural disaster, who are
now going to have to file an amended return, that it is not
going to take 20 weeks to get their money back from the IRS?
Mr. WERFEL. This is a challenging issue, Mr. Chairman. The
reason it is challenging--and this is not about making excuses,
this is about just sharing the facts--is that our systems,
while we are more modern and effective with original returns,
we are still on outdated systems on amended returns. And it is
more manual. And that is why, if you file an original return
electronically and select direct deposit, we can get your
refund in under 21 days. But if you file an amended return,
that is a paper manual process. It takes a lot longer. And it
is unfortunate.
Mr. STEUBE. Since I gave Ms. Moore a little bit of extra
time, I will take a little extra time.
So what are you guys doing to remediate that? Like, why
does it require a paper return? Is there efforts in place to--
--
Mr. WERFEL. Absolutely, yes. We are doing a bunch of
different things.
First of all, looking at our--leaning out our process to
see if we can close the gap on those 20 weeks, and also taking
the steps to automate our entire infrastructure. This is one of
the reasons why the modernization effort is so important.
We are also doing a lot more scanning of all of these paper
forms, because in a machine-readable format we can move more
quickly.
Mr. STEUBE. Thank you for being here today. My time has
expired. I now would like to recognize Mr. Fitzpatrick for five
minutes.
Mr. FITZPATRICK. Thank you, Mr. Chairman.
Commissioner, thank you for being here today. Sir, as you
are aware, the IRS placed a moratorium on processing of new
Employee Retention Credit claims through the year's end to
allow the IRS to add more safeguards to prevent future abuse
and to protect businesses from predatory tactics.
In my district, I have many businesses that are impacted by
this and are reliant on the ERC. In fact, we have businesses
that say they could not meet their payroll because their ERC
had not been processed. Specifically, my office has constituent
inquiries where businesses are owed in excess of $1 million,
preventing them from meeting their own payroll for their
employees.
It is my understanding that in October of 2023 the IRS
issued a bulk taxpayer assistance order on hundreds of current
cases involving ERC claims, but that was months ago. So could
you just give us an update on where that stands?
Mr. WERFEL. Yes, we are working hard to make sure that we
can separate eligible from ineligible claims in the inventory
that we have.
As I mentioned earlier, it is challenging because we have a
lot of inventory and a lot of ineligibility, and we have to
figure out what is eligible and what is ineligible. We are
making progress. In fact, since we issued the moratorium in
September, we are averaging between 1,000 and 2,000 processing
a week. So we are getting the eligible ones out the door. And I
think, since the moratorium, we are nearing $1 billion of ERCs
issued.
So I think we are meeting our promise to make sure that the
moratorium didn't stop us from processing claims that were
received before the moratorium, but it is challenging because
it is a very complicated program. Eligibility is tough to weed
out from ineligible. But it is a focus point, for sure.
Mr. FITZPATRICK. I want to jump to the direct file system
that the IRS has put in place. This committee has asked many
times before what the costs of that program would be. At least
as far as I am aware, it is still unknown at this point.
First, why did the IRS and Treasury feel it was necessary
to create a direct file system when industry already provides
many of these options for free to taxpayers?
And secondly, could you explain how you concluded and how
the IRS concluded that they were authorized to do this, to
create, maintain, and update a direct file tax preparation
platform?
Mr. WERFEL. Yes. So we have, we believe, a responsibility
and an authority under the law to make the tax filing process
easier and more beneficial for taxpayers.
As an example, if you will allow, I mentioned earlier we
provide a call-back option now. If you call in--and that took
some technology. It wasn't rocket science technology, but we
had to implement technology. We didn't have to go to the Code
and determine was there specific language in the tax code that
says, IRS Commissioner, you have the authority to offer a call-
back option in the call center.
So there is a whole set of different things that we can do
for taxpayers to give them more options. It is not a mandate. I
think it is a much different bar if I were up here saying I, as
IRS commissioner, and mandating something. What we are saying
is it is another option on the menu.
And when we look at all the things we have offered to
taxpayers over the years as the world has changed, we--at one
point it was TeleFile, file your returns on the telephone. Now
it is file electronically. There has always been this desire to
evolve and understand how to meet taxpayers where they are and
give them as many options as possible. And that is what this
is, it is just an option.
Mr. FITZPATRICK. Do we know what the cost of developing and
maintaining this platform is?
Mr. WERFEL. We do. We have--in our public report that we
were required under the Inflation Reduction Act we included a
cost chart that explained the cost and with different
assumptions--if 5 million taxpayers were to use it, if 10
million taxpayers. But this year, this is really just a pilot.
We are still studying it, and it is available in 13 states. It
is going to be a relatively small pilot to assess whether this
is something that actually should be added to the menu.
Mr. FITZPATRICK. Thank you.
I yield back, Mr. Chairman.
Chairman SMITH [presiding]. Mr. Larson.
Mr. LARSON. Thank you, Mr. Chairman.
And thank you, Commissioner. Thank you so much for your
candor. It is always refreshing, given the enormous
responsibility that you have, and just how important revenue is
for the functioning of our government. That is why, of course,
we were very much alarmed when this committee voted to cut 80
billion out of funding to the IRS.
What kind of an impact would a cut like that have,
especially at this time when we are concerned about the Federal
deficit?
What kind of a cut would that have, especially--you have
articulated very well trying to keep pace with all the
technological changes that you are going to, while at the same
time humanizing the IRS through your call centers and the
ability for people to have direct contact with a human being.
Mr. WERFEL. Yes. I mean, between--our budget was cut year
over year between 2010 and 2022. If you add all that up, it is
a 25 percent cut. Our staffing size shrunk to the same size it
was in the 1970s.
But over those same 12 years the tax system grew and got a
lot more complicated, and we have a lot more to do. The tens of
millions of more filers, thousands of changes to the tax codes,
new programs, new activities, and a very different world, you
know, a gig economy where we used to not have a gig economy,
and more globalization, movement of money, new currencies. I
mean, it is just a dramatically different world.
So, when you take those two together, and you under-invest
over a period of 12 years, while at the same time the job to
manage the tax system grows, it is not a good formula. It leads
to under-performance. And what I am trying to emphasize here is
the people that suffer are taxpayers. They suffer because the
tax laws still exist, they still have these responsibilities,
and it is a stressful experience. And, when a problem emerges,
if they can't get clarity from the IRS, if they can't get
through to us, if they can't get their tax issue resolved, it
weighs on them, it is burdensome for them, and it is stressful
for them.
And that is what is so heartbreaking about an underfunded
tax agency. It means that we are not answering the phone. It
means that our walk-in centers are shuttered, and it means that
our digital tools are stagnating. And that is what it means
when you describe let's pull back the IRS funding. It means
that the IRS won't be able to function and help you. If you are
not pulling back the tax laws and the tax responsibilities but
you are pulling back the ability for the IRS to serve
taxpayers, then the ultimate harm is to the taxpayers
themselves.
And that is my impassioned plea to make sure that we don't
harm taxpayers by making it harder for the IRS to help them.
Mr. LARSON. I think you have articulated that very well.
What I am interested in, as well, is because of the
sophistication as we go forward, what is the IRS up against
when you are dealing with major corporations or people with
great wealth?what does it look like inside the IRS when you are
dealing with a battery of attorneys, accountants, and----
Mr. WERFEL. Yes.
Mr. LARSON [continuing]. Consultants that are going up
against government employees?
Mr. WERFEL. It is--well, I start with the volume, right?
When you look at the number of audit personnel we had the day
the Inflation Reduction Act was passed versus the number of the
highest-wealth filers in the United States--and I am not
talking about just above 400,000, I am talking about the
millionaires, the corporations with $250 million in assets. We
break it into cohorts. And the moment the Inflation Reduction
Act was passed, we had 1 auditor for every 150 of the
wealthiest taxpayers in the U.S.
And these tax returns are long and complicated, thousands
of pages, sometimes hundreds of thousands of pages. So I like
people to picture--like, picture that one IRS auditor or
examiner backing in 150 truckloads of paper, saying, ``I will
review all that. That is my job.'' So it is a real volume
challenge.
So we had to hire more personnel, you know, to evaluate
these returns, but also the complicated financial structures,
the introduction of new currencies, the--more movement of money
into international tax jurisdictions, the proliferation of tax
havens, all of it, we have to keep up with it.
Mr. LARSON. Exactly.
Mr. WERFEL. It is an investment that we have to make in our
subject matter expertise. It is investment that we have to make
in our analytics and our predictive modeling, because here is
the other issue. If we don't invest smartly, we just start
pulling audits, we are going to end up pulling audits from
people that are following the laws more regularly, and then
adding burden to them when they are doing what they are
supposed to do.
So precision is actually very important here, and you have
to invest to get that precision.
Mr. LARSON. Mr. Chairman, I think we should do a hearing at
some point, too, on what artificial intelligence means, and
what it will mean to our agencies, especially those that are
guarding our privacy issues, as well.
But thank you----
Mr. WERFEL. Thank you.
Mr. LARSON [continuing]. Commissioner, thank you for your
integrity and your candor.
Chairman SMITH. Mr. Larson, that is a great idea.
So Mr. Arrington.
Mr. ARRINGTON. Thank you, Mr. Chairman.
Commissioner, thanks for being here. A couple things.
One, I would like to have a conversation--we don't have to
do it now--with your team responsible for the donor advisory
fund regulations. I want to understand them better. They may be
right, they may not be. I have concerns about what you all
would think are conflicts of interest that I think the market
would--has already considered and already manages, if you will.
So it is something I would like----
Mr. WERFEL. Yes, you have my commitment on that.
Mr. ARRINGTON. Thank you.
So I am sure you have been briefed about the question I
have, which is the question I asked you a year ago. I think you
have got a lot to keep up with. You did respond in a letter. I
referenced in our conversation a New York Post article that
talked about the number of firearms and munitions that you all
have at the IRS, and the number of armed agents. And it went
through specific numbers: 3,832 handguns, 600 shotguns, 439
rifles, 15 fully automatic weapons. So it was very detailed. I
don't know where they got their information.
And I think an appropriate oversight role for us is to, as
a check and balance, and for the purpose of transparency to the
taxpayers and to the people that we report to in the people's
house, that they ought to have some confirmation of whether or
not those numbers are right or if they are different.
You responded with a letter and said the inventory of guns
and ammunition is consistent with other law enforcement
agencies. I find that an inadequate response. I think if the
American people, who we all work for, ask as a check and as a
point of accountability on agencies with tremendous power--and
with tremendous power, comes, I think, great responsibility and
oversight and accountability--they deserve a specific answer.
What is in the inventory? How many armed IRS agents?
I am not suggesting that there might not be some level of
appropriateness, but just saying we keep up with the same
standards--the same standards of who, the FBI, the ATF, the
Border Patrol?
So I am going to ask you again. Do you have the specifics
of firearms, the number of armed IRS agents, and the inventory
of munitions? I think the American people ought to know that.
And then we can discuss why you have it, and why they exist,
and for what purpose. And again, there may be an appropriate
need.
Mr. WERFEL. Yes, I would love to answer this question.
First of all, I do recall the letter. I believe the letter that
we sent you had a link to a public report that has the
information you requested. If it did not, then we will get you
that public link.
I added the point that it was consistent with other law
enforcement----
Mr. ARRINGTON. Okay----
Mr. WERFEL [continuing]. After providing the data.
If I could, though, I think it is so important, if you
could allow me to just address some myths about IRS and guns.
Mr. ARRINGTON. Please, please.
Mr. WERFEL. First, the vast majority of IRS employees are
unarmed and will never be armed. Most IRS employees are
customer service reps. I like to say they are armed only with
headsets, phone headsets, and are--most of our accountants
armed--all of our accountants armed only with calculators.
Mr. ARRINGTON. And 50 percent of them are at home doing it
instead of in their offices, but that is a different issue.
Mr. WERFEL. Second, the only people in the IRS that would
ever be armed are Federal law enforcement officials who
investigate crimes in the context of very dangerous scenarios:
organized crimes, criminals operating on the dark web,
narcotics trafficking, human trafficking, terror financing,
money laundering. The idea of sending these law enforcement
officials to go execute a search warrant or an arrest warrant
without being armed along with our other law enforcement
colleagues, is not something that would ever be a smart or a
prudent thing to do.
Third--and this is about our inventory, I think it is an
important context--the actual discharge of any weapon by an IRS
law enforcement official is extremely rare. But under Federal
regulations we are required to maintain a minimum amount of
ammunition for training purposes in order for them to be able
to hold a firearm when they are executing a search warrant on a
dangerous criminal.
And so, when you see the ammunition numbers in that public
site, don't assume that that is ammunition that is used by the
IRS ever.
Mr. ARRINGTON. My time----
Mr. WERFEL. It is really just for training.
Mr. ARRINGTON. I have got five seconds left.
Mr. WERFEL. Yes.
Mr. ARRINGTON. I appreciate all that. I will look at that
link.
Mr. WERFEL. Please.
Mr. ARRINGTON. If it is in there, then I may have missed
it.
Mr. WERFEL. Yes.
Mr. ARRINGTON. If it is not in there----
Mr. WERFEL. I will get you the data.
Mr. ARRINGTON. You will get me the specifics----
Mr. WERFEL. Absolutely.
Mr. ARRINGTON [continuing]. So we can share with the
American people----
Mr. WERFEL. Yes.
Mr. ARRINGTON [continuing]. So we can, you know--okay, that
is good. That is all I need. I appreciate it.
Mr. WERFEL. Thank you.
Chairman SMITH. Thank you.
Ms. Tenney.
Ms. TENNEY. Thank you, Mr. Chairman, and I see the ranking
member is up there, too. And thank you both for holding this
hearing.
And thank you, Commissioner. I know this is a long, long
morning and afternoon for you. And I just want to jump into a
couple of quick things.
So Commissioner Werfel, as Israel continues to fight the
war that Hamas started with a vicious attack on civilians on
October 7, 2023, which includes the efforts to recover hostages
that continue to be held underground in Gaza, disturbing
demonstrations have swept through our college campuses and
around our nation and here at home. Many of these
demonstrations have been explicitly anti-Semitic, and some have
called for the death of the Jewish people.
This committee held a hearing in November where we heard
from witnesses that explained how certain groups behind many of
the events calling for violence against the Jewish people are
funded through tax-exempt organizations. Multiple witnesses
raised concerns that tax-exempt groups in the United States
have ties to and may be providing material support to Hamas, a
terrorist organization.
Do you share my concern about the shocking rise of anti-
Semitism on college campuses particularly, and across our
society?
Mr. WERFEL. Well, first, thank you for this question. It is
a tough question and a tough issue. And I do share concerns. I
find calls for hate, I find anti-Semitism, I find Islamophobia
abhorrent, reprehensible, heartbreaking.
As I put on my commissioner hat and run the process of
determining whether an organization is exempt or whether an
organization should be revoked of their exempt status, we have
a process that we run. And what I want to make sure is that we
run that process robustly and effectively to make sure the
right outcome happens.
Ms. TENNEY. Right, I understand that. And also, our--along
with my other Ways and Means colleagues, we sent you a letter
along with Secretary Yellen, as you know----
Mr. WERFEL. Yes.
Ms. TENNEY [continuing]. Asking for a briefing on what the
IRS and the Treasury are doing regarding the funding of anti-
Semitism, and particularly the funding of calls for violence
against Jewish people and using tax-exempt organizations. And I
understand that you are in the process of doing that and
putting a briefing----
Mr. WERFEL. Yes.
Ms. TENNEY [continuing]. Together for us.
Mr. WERFEL. That briefing is happening, yes.
Ms. TENNEY. Which we greatly appreciate. But do you share
our concern that there could be money flowing, particularly
potentially international money that we can't track, flowing
to--tax free for these horrific purposes?
Mr. WERFEL. I want to make sure that exempt organizations
are meeting their responsibility to operate for exempt
purposes. And there are certain activities that could mean that
their exempt purpose or their exempt activities are--should be
revoked. Those typically orient around illegal activity. And
what I want to make sure is that we have a very robust process
in place. We get a lot of referrals. I want to make sure that
we are running those referrals down and having a good
assessment and a good process to figure out what the right
outcome is.
Ms. TENNEY. Well, can you share with us any information
about what the IRS and Treasury are doing about considering
penalties, for example, revoking their tax-exempt status for
these groups that are engaged in this kind of violent conduct?
Obviously, many of these organizations and many of these
so-called grassroots efforts look very astroturf. They have
assets well beyond what they should have or could have possibly
in a spontaneous way. What can we see in terms of taking that
status away?
Mr. WERFEL. I think this is an important moment in time,
Congresswoman, for the IRS, Treasury, and other Federal
agencies to come to this committee and others and lay out
exactly what today's process is, what the current law and
regulations say, and to determine whether we have both a
sufficient framework, and is it being implemented effectively.
And that is a conversation that absolutely needs to happen
right now.
Ms. TENNEY. Thank you. We appreciate that.
And I want to just jump on one other topic that my
colleague, Mr. Fitzpatrick, touched on, and that is I have
serious concerns about the direct file program. And my
constituents fear, and I think rightly so, the IRS being the
judge, jury, and executioner of their personal finances.
Additionally, this program presents a clear conflict of
interest, I believe, for the IRS, who should not be in charge
of preparing taxes while performing other duties
simultaneously, such as audits.
And, as you know, my home state of New York is already
participating in this program, and another concern of mine is
New York taxpayers could struggle to navigate between the two
disparate systems, and ultimately fail to file in the state or
the Federal.
And I don't know--I want to know, what are you doing to--I
know you only have a few seconds left, but what are we doing to
address this issue and this potential problem, especially as we
are seeing issues in New York State?
Mr. WERFEL. So it is--we are certainly not preparing taxes.
This is--I want--you should let your constituents know they are
under no obligation to use this solution if they don't want to
use this solution. We will determine, through this pilot, the
pros and cons of such a solution, and I will be back before
this committee to report on that.
Ms. TENNEY. Thank you. We just want to make sure it doesn't
become a mandate. Thanks so much.
I appreciate your time today, and thank you so much for the
response and also action on this really important issue with
Israel and Hamas. Thank you.
Mr. WERFEL. Thank you.
Chairman SMITH. Mr. Kildee.
Mr. KILDEE. Thank you, Mr. Chairman, for recognizing me and
to you and the ranking member for holding this hearing.
And thank you, Commissioner Werfel, for your testimony. I
just want to start out by thanking you and, if you wouldn't
mind, conveying to your staff my gratitude. And, when I mention
your staff, I don't just mean your senior team that we most
often interact with, but with every one of those IRS employees
in all the field offices around the country who do a really
tough job under difficult circumstances.
In one of my past careers, I was the county treasurer, the
tax collector for my county. And I know that, typically, when
we are interacting with customers who are paying their taxes,
they are not always having their best day. And I know it is a
difficult job, and I just want you to convey my gratitude to
them for the difficult work that they do and the fact that, in
some cases, they have to face, I think, unfair
characterizations from some of the people that I work with here
in this building. And I just want to express to you that I
appreciate their work.
I would also like to thank you for the difficult work that
you did during the pandemic. Your team----
Mr. WERFEL. Absolutely.
Mr. KILDEE [continuing]. Because, obviously, you were not
in that position.
My constituents in Michigan needed help getting in contact
with the IRS just to deal with very simple issues. And I know
we had some struggles there. And I think, thankfully, because
of the investments that we have been able to make with the
leadership of President Biden and congressional Democrats, the
IRS is in a better position, much better prepared to provide
the level of customer service that the American people deserve.
And I know you are continuing to work to improve that, and I
appreciate that very much.
I would also like to acknowledge the steps that you have
taken to make this tax filing season easier for the people I
represent by delaying the lower 1099-K reporting requirement.
This delay will cut red tape for many taxpayers and allow the
IRS to focus on ensuring that those wealthiest individuals that
you have referred to a few times in this hearing and those
largest corporations can no longer avoid paying the taxes that
they owe.
The investments that President Biden and Democrats made
under the Inflation Reduction Act are also helping expand
access to filing, and you have addressed this. I know it has
been raised by a number of members. But as has been mentioned,
this includes expanding the Volunteer Income Tax Assistance and
the Tax Counseling for the Elderly programs, which for years
have helped the working families that I represent get their
taxes filed without having to pay a fee.
I understand the point my colleague makes, but I think the
point that you make is that we don't ask people to pay a fee
for access to those. They are supported by taxpayer dollars,
but not an out-of-pocket fee in the moment that that need is
made. Those programs are operated locally by United Way back
home for me.
Mr. WERFEL. Yes.
Mr. KILDEE. So the VITA and TCE programs are really
important to me. And I wonder, particularly as--helping people
access the benefits that they deserve, the EITC and Child Tax
Credit--and I wonder if you can describe the IRS plan to expand
VITA and TCE, and what effect you think this will have for the
people I represent.
Mr. WERFEL. Yes, I appreciate the question. I think there
is a concerted effort under our modernization plan--we call it
our strategic operating plan--to meet taxpayers where they are
and, in particular, to figure out how we can connect with
vulnerable populations to provide them assistance, often
volunteer assistance, so that they have a better understanding
of their tax obligations, but also what credits they may be
eligible for that they are not receiving.
How do we do that? First of all, I think it is absolutely
important that we are on the ground. And so we are using new
funding to open more walk-in centers, to extend the hours of
those walk-in centers, to have Saturday hours, to have special
events and Taxpayer Experience Days. In those moments, we can
really promote with other local leaders the presence of this
opportunity to have a volunteer, and then other tax preparers
to know that they can volunteer and be a part of our cadre of
volunteers that are doing such important work.
I had mentioned earlier in the hearing I participated in
one such local event in Baltimore, Maryland, where you had
local leaders, taxpayers, volunteers all talking about the role
of these VITA and TCE individuals in that organization, and the
impact that it is having. And we had taxpayers stand up and
tell their stories and how life-changing it was to get the
help. And we need to do more of that. Local news was there
covering it. That means that we are getting more visibility
into these services.
Simple things that we can do, like, just for example, we
have recently created a new page on our website called Free
Help, where we are trying to highlight and make it as easy as
possible for taxpayers to learn more about these clinics and
these volunteers. So there is a big investment and push to
reach out to communities and make sure that the IRS is there.
And I also mentioned protecting from scams, because it is
typically--what is so heartbreaking about these scams and
schemes is it is very often the vulnerable population that are
exploited, those that get that phone call from someone
pretending to be the IRS, and they don't have an accountant to
call to look into it, and they are scared. And I want an IRS
that can be there for them to help them understand that this is
a scam, and you need to be protected from it. And we want to be
there to do that.
Mr. KILDEE. Well, thank you, Commissioner. I appreciate
your testimony. I appreciate the chairman's indulgence. You
have a tough job. The people at the IRS all have a difficult
job. We have a difficult job, too. But at the end of the day,
we all work for the same people, and I think, if we can
continue to collaborate on ways to improve our service to them,
I think we are all better off.
Mr. WERFEL. Yes, and I don't think I have given enough
credit in this hearing to the amazing workforce the IRS--and
you mentioned it, the work they did during the pandemic was--
you know, I would say for them--they would say it is all in the
brochure of being there when taxpayers need them.
I think there are a lot of myths about the IRS. One that I
learned as soon as I got there, IRS employees care deeply about
serving taxpayers. They are passionate about it, and it is
inspiring me every day.
Mr. KILDEE. Thank you.
And with that, Mr.--I really appreciate the indulgence. I
yield back.
Chairman SMITH. Mrs. Fischbach.
Mrs. FISCHBACH. Thank you, Mr. Chair.
And Commissioner, thank you for being here today. I just
wanted to talk a little bit about a report. And according to a
recently released report from the Treasury inspector general
for tax administration--there are lots of long titles----
Mr. WERFEL. Yes.
Mrs. FISCHBACH [continuing]. Entitled, ``Quarterly Snapshot
with IRS's IRA Spending Through September 30, 2023.'' But
according to that, the IRS has spent 3.5 billion of the IRA
funds.
Of the 3.5 billion of IRA funds expended in fiscal year
2023, approximately 1.6 billion occurred in the fourth quarter
of fiscal year 2023. This includes approximately $464,000
expended in fiscal year 2023 for the direct e-file, and I know
that that has been mentioned before about the e-file return
system.
Now, maybe--so you don't have to look up everything, but
what I really want to know is how the IRS is deciding what to
spend the money on, and why has only 4.5 percent of the funds
been spent, yet the IRS keeps asking for more money?
Mr. WERFEL. Yes, I am glad--well, first of all, here is an
update. We are at 4.7 billion spent to date.
We are spending it, in particular, early on on taxpayer
service, hiring more phone assisters, hiring more live
assisters in our walk-in centers. We are updating our
technology in our call center, adding more voice bots and
automated solutions to our call center. We are purchasing more
scanning, modern scanning equipment, so we are moving
paperless. I mentioned we are simplifying all of our notices,
and we are doing outreach to taxpayers in underserved
populations.
Mrs. FISCHBACH. And so, Commissioner, that is all covered
in that 4.5 percent, or the 4.7----
Mr. WERFEL. Four point five billion, yes. I mean, there are
other things going on, in particular--and I spent a fair amount
of time in this hearing--investing in our infrastructure.
Mrs. FISCHBACH. But are you going to----
Mr. WERFEL. And--yes.
Mrs. FISCHBACH. Are you planning on expanding those IRA
funds on that? Because you keep asking for money, but yet----
Mr. WERFEL. Here is----
Mrs. FISCHBACH [continuing]. Only 4.7 is what I believe----
Mr. WERFEL. Here is the issue, and why we are asking for
money. I mentioned it earlier, but it is really important if
you would allow.
Our base budget, there are two parts of the IRS budget. We
have a base budget to run our day-to-day train schedule, as I
like to say, and then the IRA money, which is all about
modernization, closing gaps, improving taxpayer services. That
base budget is under-funding the cost that it is to run the
nation's tax system on a day-to-day basis.
But we have to keep the lights on, so we borrow from the
modernization fund in order to pay. And, when we borrow from
the modernization fund to keep our lights on, it means we are
not modernizing. We are keeping the lights on, but we are not
modernizing.
So, when I am asking for more money, what I am asking for
for the IRS is fund our base budget, help us keep the lights on
so that we can use those modernization funds to build the tools
that taxpayers want. They want a call center that has a call-
back option. They want a call center that has more voice bot
technology so they can get to--things done more quickly. They
want web functionality that works like their favorite online
bank account so that they can do all their transactions with us
without having to call----
Mrs. FISCHBACH. Commissioner?
Mr. WERFEL. Yes.
Mrs. FISCHBACH. I just wanted--in response to Mr. Kildee's
question----
Mr. WERFEL. Yes.
Mrs. FISCHBACH [continuing]. I believe you mentioned the
strategic operating plan. And maybe, as you go on and on about
all of those things that you are doing, maybe you could help me
understand how that fits in there, and how the spending fits
with the operating plan.
Mr. WERFEL. I am sorry. With the operating plan?
Mrs. FISCHBACH. Well, you mentioned a strategic operating
plan.
Mr. WERFEL. Yes, strategic operating plan, yes. That lays
out our--what I call our public to-do list. And there are
numerous items in there arrayed by various objectives to both
modernize the taxpayer experience, to improve our equity in
enforcement, and, in particular, to make sure that we are
closing the gap on evasion in complex tax situations, and that
we are investing in modern technology so that we avoid
unauthorized accesses in the future.
Mrs. FISCHBACH. All right. Well, and thank you,
Commissioner, and I may follow up with some other questions in
writing, but I do have one last question.
Mr. WERFEL. Please.
Mrs. FISCHBACH. Last year, you responded to a question that
I submitted on the record regarding your agency's ability to
use the funds that Congress has given you to transition to new
technology. Your response noted that--the progress the IRS was
making with the paperless processing initiative.
However, I have recently heard repeatedly from a company
that has been trying to find a solution that would allow them
to submit thousands of forms electronically instead of
submitting these forms in paper copies. Yet, after over a year
of trying to work with your agency, they have continued to
struggle to make meaningful progress on this issue.
And how is the IRS using its funds to proactively
transition to a more efficient and technologically-advanced
system for processing taxpayer information? Because that is not
showing, they----
Mr. WERFEL. I will give you the 10-second answer. By this
filing season, we committed to making every correspondence
response digitally uploadable. We achieved that. By next filing
season, we are moving to the types of returns and forms that
your taxpayer is struggling with. We are making the investments
to make this a reality.
Mrs. FISCHBACH. Okay, and we may end up following up with
that because it--you know, given that they have been trying to
work with the IRS to make things happen, and it has been very
difficult for them, so we may follow up with another letter.
But with that, I yield back, Mr. Chair.
Chairman SMITH. Thank you.
Mr. Wenstrup.
Mr. WENSTRUP. Thank you, Mr. Chairman.
And, Mr. Werfel, thank you for being here today, I
appreciate it. I would like to focus my time today on an issue
brought to me by constituents who are encountering issues with
the Employee Retention Tax Credit.
I do want to say that over the years my IRS advocate to my
office, they have been outstanding. So I do want to applaud
that. Always responsive and helpful. I wish we didn't have to
call as often as we do, but this is what we are talking about,
these issues.
But recently, I was contacted by a constituent who tells me
that their business is really in imminent jeopardy and will
close, go out of business if they don't receive the ERTC funds
that they had applied for. And, while this constituent applied
for the ERTC before the IRS moratorium, the backlog, I
understand, of the ERTC returns that has been created results
in this claim being trapped in limbo. And for him, he sees no
end in sight as far as--and trying as hard as he can.
Another constituent of mine has been waiting nearly two
years. And yet, while the IRS will not process his $14 million
ERTC claim, they will process an intent to levy taxes on his
business. And you can understand the conundrum there.
So it is kind of hard for the IRS to attempt to collect on
this constituent's taxes when the balance would have been wiped
out already if their ERTC claims were processed in a timely
manner.
Mr. WERFEL. Yes.
Mr. WENSTRUP. So one thing is holding the other.
So I understand that this program has become rife with
fraud and abuse, and I agree that enforcement action must be
taken against bad actors, and I sympathize with you there. But
I would like to ask a couple questions about what IRS is doing,
can do to solve the issue for my constituents, and what steps
Congress can take to be helpful, as well. So I will kind of
bundle these three questions, if you will.
What is the status of the IRS's ERTC moratorium?
How many claims are in the pipeline?
And do you have a timeline for those claims filed before
the moratorium?
Mr. WERFEL. Yes. So, first of all, I appreciate you raising
it.
It is important that we understand where there is a
constituent or a taxpayer--in particular, where there is a
potential hardship. They are sitting, they are waiting on an
eligible claim, and they are facing an emerging hardship. That
is why we work with our taxpayer advocate to try to bump up to
the front of the line those that are in more of a crisis
situation, and we have had some success with that. I think
there has been some reference to that here.
Plus, I want to learn more about every--these types of
situations because other taxpayers may be experiencing them,
and maybe there is some scaled solutions we can do.
As I mentioned earlier, we are making slow, steady
progress. Since the moratorium has been issued, we have
approved nearly $1 billion in ERCs. The challenge that we have
is that there is a lot more in the inventory as we are looking
to piece out which are eligible and which are ineligible.
I would expect that by this spring we would have finished
the work necessary to really kind of separate into the right
buckets, and we will be able to lift the moratorium in that
timeframe.
Mr. WENSTRUP. Well, if there is anything that Congress can
do or, in particular, congressional office can do, we would
appreciate that.
And I was wondering if passing the American Families and
Jobs Act would help alleviate the----
Mr. WERFEL. It absolutely would for a variety of different
reasons.
The situation that we have has a lot of unique challenges
in terms of the inventory, ineligibility, incentives that are
being provided to certain promoters that are clogging the
system and harming honest taxpayers. The bill that has been
passed by this committee and the House addresses a lot of that,
and we are appreciative.
Mr. WENSTRUP. Thank you, I yield back.
And again, feel free to reach out to Members of Congress if
there are things we can do on our end or within our district
offices.
Mr. WERFEL. I appreciate that.
Mr. WENSTRUP. I yield back.
Chairman SMITH. Thank you.
Mr. Panetta.
Mr. PANETTA. Thank you, Mr. Chairman.
Mr. PANETTA. Commissioner Werfel, thanks for being here. It
almost seems like you are enjoying answering the questions,
which I think demonstrates that you are pretty good at your
job. So thank you very much, I appreciate it.
As you know, we in Congress provided the IRS with historic
funding to help close that tax gap, the hundreds of billions of
taxes that are owed but not paid. We also provided billions to
modernize the IRS and improve customer service, which has
already reduced call times, as we have talked about today, and
helped more taxpayers and professionals settle tax issues. Now,
thanks to this funding, the IRS has already collected over a
half $1 billion in overdue taxes from delinquent taxpayers.
I want to remind all of my colleagues that tax collection
isn't a tax hike. It is about enforcing the law.
Now, the vast majority of middle-class family constituents
with W-2s and simple incomes pay what they owe, and so should
everybody else at all levels. So thank you, and we are
encouraged by the IRS efforts to recoup unpaid taxes and
improve taxpayer service. So I appreciate your work and your
leadership at this point, Mr. Commissioner.
I want to narrow down my line of questioning to paid
preparer regulations. Suzan DelBene already hit on this, but
let me delve a little bit more into it.
The IRS Taxpayer Advocates Purple Book, which I am sure you
are aware of, has stated that over half of all returns are done
by paid preparers who don't have any credentials to do so. I
have a bipartisan bill, the Taxpayer Protection and Paid
Preparer Proficiency Act--try saying that fast--that would
ensure that paid preparers meet minimum competency standards.
It would exempt credentialed professionals like CPAs and
enrolled agents or preparers that meet minimum standards from
state education councils from any new standards. It is sort of
the--that is the focus of the bill, is on the worst actors, as
you know.
While I know that the IRS would ideally be given full legal
authority to regulate all preparers, would you support a
compromise that mandated minimum competency standards targeted
at those with no credentials at all?
Mr. WERFEL. Yes. Well, I don't have the authority sitting
up here to support a particular legislative provision. I would
have to get with my Treasury colleagues to do that.
As a general principle----
Mr. PANETTA. Please.
Mr. WERFEL [continuing]. We lack authorities today to hold
preparers accountable, whether it is credentialing, whether it
is when they harm taxpayers. And the President's budget each
year has included an array of different legislative changes
that would enhance our ability to crack down on nefarious
actors that are doing these things or to improve the overall
quality of taxpayer service that they--that people get from
private tax professionals.
So, yes, we would love to work with you on the right set of
legislation.
Mr. PANETTA. I appreciate that, thank you.
One of the--I will call it penalties, I guess, as a former
prosecutor I can say this--one of the penalties I think that
the IRS should have is the authority to revoke a preparer tax
identification number, or PTIN, as it is called----
Mr. WERFEL. Yes.
Mr. PANETTA [continuing]. When there has been misconduct.
However, there have been some due process concerns that have
been raised. Would the--do you think you--I guess you can
opine--whether or not the IRS would support a system of due
process for preparers who are facing PTIN revocation?
Mr. WERFEL. Yes, there is--the legislative proposals that I
have mentioned earlier that were in the President's budget last
year have new penalties for when there is an appropriation of a
PTIN and tackles the issue. Whether that president's budget
proposal aligns directly with yours, I am not sure without
getting into the details, but I think it is a great starting
point to have that conversation.
Mr. PANETTA. Thank you. Okay, moving on to tax credits,
obviously we in this committee passed legislation that would
reduce our carbon output by 40 percent by 2030. However, some
of the credits, including those from microgrids, fuel cells,
and linear generators expire at the end of this year. And,
unfortunately, we are still waiting for final guidance on those
credits, and that is leading to some taxpayers and constituents
of mine being reluctant to make investments.
Myself and Representative Tenney, have been pushing to
extend these new energy credits so that they encourage, not
discourage, more clean energy and resilient energy system
deployment. So, in a blatant effort to garner evidence and
support for my bipartisan legislation, does the IRS see greater
utilization in tax credits when they have had clear guidance
for a longer period of time?
Mr. WERFEL. Oh, absolutely, yes.
Mr. PANETTA. Thank you.
I yield back.
Mr. WERFEL. Thank you.
Chairman SMITH. Mrs. Steel.
Mrs. STEEL. Thank you, Commissioner, for being here, and I
really appreciate it that you have been here answering all
these questions.
You know, the United States tax system, IRS--and I know
California, because I came from California tax agency--and plus
all other states, I know their systems are really different
than Justice Department because when taxpayers--as soon as
audit starts, taxpayers are guilty and they have to prove that
they are not guilty.
But, you know, the report from 2023 found that no-change
audits were 13 percent of audits for those making between 100
to $200,000; 25 percent of those making between 1 million to $5
million resulted in no changes; and then 50 percent of audits
making over $10 million result no change.
And then you just mentioned one of the question that you
are--one of your first priority is, like, you are going after
millions and billions, you know, making wealthy individuals--
and your specific mention that about 1,600 people. I just want
to know that you are targeting those people, or they have been
assessed but they are not paying taxes?
Mr. WERFEL. They are--have been assessed a balance due that
is now delinquent.
Mrs. STEEL. So those are----
Mr. WERFEL. Millionaires and billionaires that have a
delinquent tax debt.
Mrs. STEEL [continuing]. All the wealthy individuals that
you are talking about.
Mr. WERFEL. Yes.
Mrs. STEEL. So those are including--not including those no
result. I mean, no changes. You know, when--after they did the
audit. But these----
Mr. WERFEL. No, these are individuals that have had----
Mrs. STEEL [continuing]. Are already audits----
Mr. WERFEL [continuing]. Do have a balance due. It might
not have been after an audit, but there is a balance due that
is now late, and they are not paying unless we go and enforce
that they must pay.
Mrs. STEEL. I am glad that you are not targeting certain
people out there. So thank you.
Mr. WERFEL. Yes.
Mrs. STEEL. And we have spoken extensively about your drive
to increase the number of audits, searching for evasion.
Mr. WERFEL. Yes.
Mrs. STEEL. And that is good. People have to pay taxes if
they owe.
But what steps are you taking to reduce this fishing
expedition, no-change audits that burden taxpayers and cost the
IRS time and money for no result?
Mr. WERFEL. Yes, that is a concern. We want to--we don't
want to have a situation in which we are selecting cases for
audits where we should not have because the tax--we want to
leave those taxpayers alone. They should continue to do what
they are doing, which is filing complete and accurate taxes.
This is about making investments in subject matter
expertise and analytics to make sure that we are selecting the
right cases. And then, when we select them, when we have the
return in front of us, that we can identify where there might
be pockets or systemic evasion. And we have to get better at
it. We have to become more precise. And to do that, it is about
investing, as I said, in subject matter expertise, technology,
analytics, some AI solutions we have already put in place.
Mrs. STEEL. So then let's go back to this. The IRS must
safeguard taxpayer information.
A recent letter you sent Chairman Smith notes that IRS
conducts background checks on employees and contractors.
Mr. WERFEL. Correct.
Mrs. STEEL. But the February 2024 Treasury Inspector
General for Tax Administration Report notes that the IRS did
not always remove contractors' access to sensitive systems when
background investigations were not favorable, especially 19
contractors' most recent background investigations were not
favorable as of July 13, 2023, yet they still retain their
access to one or more sensitive systems because the IRS did not
take an action to suspend or disable the contractors from the
IRS systems, as required.
So why should the fact that the IRS conduct background
checks on employees and contractors serve as comfort if IRS
does not take necessary actions to limit the access of those
who failed background checks?
Mr. WERFEL. Yes, I really appreciate the question, and it
is absolutely critical that only those employees or contractors
who require or are eligible for access have access.
And we are--first of all, with respect to those 19
contractors, we have resolved the issues with those 19
contractors. Issues came up during their routine background
investigations. I can state unequivocally that there is no
evidence that they--that those 19 contractors compromised
sensitive information of any kind.
The other key point is that when we eliminate network
access, there is no more access to sensitive data. And
systemically we have been able to eliminate network access. The
issue is sometimes these employees still appear on a registry,
like a time--like for time keeping. And so it gets confusing.
That individual can't access sensitive data, but they are on
some type of list somewhere. And when TIGTA saw that, they
rightfully called us out: ``These people shouldn't be on this
list.'' But they don't have network access.
That doesn't mean I am resting on any of this. We have to
be as diligent as possible to make sure that only employees
with applicable and timely access can have that access, and we
are working that issue right now.
Mrs. STEEL. Mr. Chairman, I have one more question on IT
modernization following up that question. But, you know, what?
My time is up. So I am going to submit in writing.
Mrs. STEEL. Thank you.
Mr. WERFEL. Thank you.
Chairman SMITH. Thank you.
Ms. Van Duyne.
Ms. VAN DUYNE. Thank you very much, Mr. Chairman. I want to
concur with all of the comments that were made earlier about
the ERTC. And for the sake of argument or for the sake of time,
I don't want to be repetitive, but I published an op-ed piece
that I would ask for unanimous consent to enter into the
record.
Chairman SMITH. Without objection.
[The information follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Ms. VAN DUYNE. So one of the new taxes that is included in
the new tax on chemicals is to fund a new superfund, and I have
introduced legislation to repeal this. The excise taxes were
last imposed and collected in 1995, and there appears to be a
lack of historic knowledge within the Treasury and the IRS as
to the refund and credit process.
I have heard from constituents that the IRS substantially
delays processing refund claims and has initiated audits for
each claim. For tax credit claims we understand the IRS is
denying the credit, requiring payment for the full superfund
tax amount with no credit offset, and assessing penalties and
interest for failure to pay, even though an offset or credit is
allowed by law.
The IRS released proposed regulations on March 21 of last
year, yet to this day the regulations have not been finalized.
When will the rule be made, and what will the agency do to
rectify these problems?
Mr. WERFEL. Congresswoman, I appreciate the question. If
you will allow, I would like to go back and make sure that----
Ms. VAN DUYNE. I don't have a lot--I don't need a history,
I am just wondering when are you going to be able to finalize
the rule, and what are you going to be able to do to----
Mr. WERFEL. I will get back to you with a response on that.
Ms. VAN DUYNE. So we don't----
Mr. WERFEL. I don't have a date.
Ms. VAN DUYNE. It has been over a year, right?
Mr. WERFEL. Yes.
Ms. VAN DUYNE. Okay. We don't have a----
Mr. WERFEL. I will--I want to get back to you with a
specific timeframe.
Ms. VAN DUYNE. Okay. Chairman Smith and the Oversight
Subcommittee Chairman Schweikert wrote a letter on July 25,
2023 requesting a copy of the decision memorandum detailing the
recommendation to destroy 30 million unprocessed, paper-filled
informational returns in March of 2021. The destruction of
these returns raises the question of whether information
reporting should be scaled back to reduce the burden placed on
taxpayers in reporting information that the IRS does not even
use.
We still haven't received a response from you, and the
original response was requested by August 8, 2023. That is
129--I am sorry, 192 days overdue. So, Mr. Werfel, will the IRS
ever provide this documentation voluntarily, or should we
consider other means to obtain it?
Mr. WERFEL. Oh, I apologize. Look, it is very important
that we are responsive to all congressional requests for
documents or information from this committee.
Ms. VAN DUYNE. So it has been 192 days.
Mr. WERFEL. Yes.
Ms. VAN DUYNE. Tell me, will we be seeing that forthcoming,
or do we have to issue a subpoena?
Mr. WERFEL. I will go back and make sure that it is
forthcoming.
Ms. VAN DUYNE. So that is yes.
Mr. WERFEL. Yes.
Ms. VAN DUYNE. Do we have a date on which we can respect to
have--expect to have a response?
Mr. WERFEL. I will get back to you with a firm date.
Ms. VAN DUYNE. Okay, so when will--I am sorry, earlier, the
chairman's questions, it seemed that you dodged some of them on
sentencing of the IRS employee who stole the tax information of
thousands of Americans.
Thankfully, that individual is going to jail, but for a
much shorter period of time than they should. How many
individuals and entities had their information stolen?
Mr. WERFEL. I don't want to quote an exact figure. It is
way too many, but it is in the tens of thousands.
Ms. VAN DUYNE. Do we know for each, for entities and for
individuals?
Mr. WERFEL. We have all the detail. Yes, TIGTA has shared
us the information because we have a responsibility to reach
out to the impacted taxpayers so that they have notice on the
situation.
Ms. VAN DUYNE. So can you get us that information?
Mr. WERFEL. Yes.
Ms. VAN DUYNE. And then have you ever asked ProPublica to
return the stolen information?
Mr. WERFEL. I believe that the Justice Department and TIGTA
have done that.
Ms. VAN DUYNE. Do you know what has happened as a result?
Mr. WERFEL. I don't have up-to-date information on that.
Ms. VAN DUYNE. So, according to the inspector general, for
some sensitive systems the IRS does not have adequate controls
to detect or prevent the unauthorized removal of data by users.
How is it possible that the IRS did not know the quantity of
sensitive data systems under its purview?
Mr. WERFEL. Yes, that was the situation in 2017 when this
unfortunate incident occurred. That is no longer the case.
Ms. VAN DUYNE. So what steps have been made to rectify
that?
Mr. WERFEL. We have invested significant time, energy, and
resources in dramatically changing our data security profile.
We have hardened, basically, our security posture, including
introducing and implementing all the necessary audit trails so
that if this type of activity happened today, the risk of it
succeeding is much, much, much lower, the probability of it
succeeding is much, much lower.
Ms. VAN DUYNE. So, at this point, we can expect that
those--all of those safeguards have been put into--not just
talked about, but have actually been implemented.
Mr. WERFEL. There is a long to-do list, and we have made
our way through most of it, but the to-do list keeps growing
because the risks evolve. But yes, I would say that----
Ms. VAN DUYNE. Do you think the risks involved by having
people work with their own devices and working from home [sic]?
Mr. WERFEL. As I have mentioned earlier, I think the risk
is both when they are in the office, when they are at home.
There is always risk, and that is why we have to constantly
focus on training----
Ms. VAN DUYNE. All right. Thank you----
Mr. WERFEL [continuing]. Controls, et cetera.
Ms. VAN DUYNE [continuing]. And I yield back.
Chairman SMITH. Mr. Feenstra is recognized.
Mr. FEENSTRA. Thank you, Mr. Chairman, and thank you,
Commissioner Werfel, for being here today.
In April, you and I had a great discussion about the
modernization of the computer system at the IRS. We know that
this is a, you know, significant challenge. I think 33 percent
of your applications are still on a legacy system and, you
know, we continue to look at our--create policy--I am thinking
of book tax and stuff like that--are very complicated. So I
just want to update a little bit.
You know, the IRS noted that removing sensitive systems to
a cloud environment will allow IRS to better monitor and use
accessed data. I am just wondering, where are we at on moving
to a cloud system? Can you extrapolate on that?
Mr. WERFEL. Yes, so there are two fundamental--or two main
systems that underlie the IRS infrastructure: the individual
master file and the business master file. So that is where all
the returns, when they come in, that is our transaction record.
We are close on the individual master file. We are months
away--I would say probably April, May, June timeframe--of
moving it into a fully modern environment, which is the final
step----
Mr. FEENSTRA. Yes.
Mr. WERFEL [continuing]. Before it would go to the cloud.
So it is kind of like----
Mr. FEENSTRA. So----
Mr. WERFEL [continuing]. On the to-do list to get it to the
cloud. We have one more step. That will make it cloud ready,
and then it will move to the cloud.
Mr. FEENSTRA. So you are prognosticating here. When could
we be cloud based, do you think?
Mr. WERFEL. I want to get back to you on that. I know that
the next key milestone is in the April/May timeframe. How long
from that point to a cloud environment, I have to get back to
you on that specific----
Mr. FEENSTRA. Okay. And, you know, I think about digitizing
our data and going paperless on a lot of these things. Once we
go to cloud, will we then go paperless?
Mr. WERFEL. We are going paperless in concert with going to
cloud. But yes, my--we have to still allow taxpayers the option
to file on paper if they so choose, but we want to turn--
convert that into machine-readable before it leaves our
mailroom. And that is the--we are both purchasing the scanning
equipment for that and updating our processes to make sure that
we don't have paper anymore throughout the IRS.
Mr. FEENSTRA. Got you, got you. So can you--do you have
metrics that we are trying to follow here saying, all right,
we--and you just sort of mentioned it, right, we are going A,
B----
Mr. WERFEL. Yes.
Mr. FEENSTRA. I mean, that we are trying to meet these
metrics as we move forward.
Mr. WERFEL. Yes. We have the kind of what I call a critical
path with our milestones, absolutely.
Mr. FEENSTRA. Okay. Would you--can you commit to me and the
committee that you can get us that information? Maybe quarterly
statistics on the progression of the various IT projects
underway in the IRS?
I mean, this is sort of the first time we are hearing where
this is going, and I would love to know, all right--you know,
just--again, it is accountability. Hey, you know, this is where
we are at. This is----
Mr. WERFEL. Yes.
Mr. FEENSTRA [continuing]. Where we are at this quarter,
next quarter, and so forth. Can you----
Mr. WERFEL. Yes, I would love to do that. Not only what
path we are on to get to the cloud, but also, as important if
not more important, what does that mean for taxpayers?
Mr. FEENSTRA. Yes.
Mr. WERFEL. What does it mean that we are on the cloud?
Mr. FEENSTRA. Correct.
Mr. WERFEL. I mean, there are a lot of benefits coming when
we get there.
Mr. FEENSTRA. And there is going to be a lot of education.
I mean, I think--and what I think of all these online tax
companies that are doing taxes as we speak right now, I mean,
if it is online I think we could be so much more efficient. I
think it would be--serve the customer so much more. That is why
I am pressing this issue. I just look at customer service in
today's world. When you are on the cloud, there are so many
benefits. And we see that in the private sector. And that is
why I really push this.
And, just finally with that, I mean, what goes along with
this, right, once we get to a cloud-based system, then we can
also do more with AI. We talked about that many--I was talking
about it earlier. Can you discuss how you are using more AI for
assistance in enforcement, and what does that look--how can we
look forward to using that when we get to a cloud system?
Mr. WERFEL. I will start by saying we are being very
careful with our deployment of AI, making sure that we are
following the right ethics and ensuring that, as was mentioned
earlier in this hearing, that no bias would be introduced. So
we are doing it very methodically. Here are a couple of the key
places where we are introducing AI.
First, in our call center so that we are kind of using, for
example, chat bots, so that when you are asking a question----
Mr. FEENSTRA. Okay.
Mr. WERFEL [continuing]. Before you get to a live assister,
they are using language recognition to answer your question,
and then you resolve the question----
Mr. FEENSTRA. Yes.
Mr. WERFEL [continuing]. And then they are done, and they
are done more quickly. So that is one example.
Also--and going back to this point of making sure that we
are selecting the right cases for audit----
Mr. FEENSTRA. Got you.
Mr. WERFEL [continuing]. There is very sophisticated
modeling that uses advanced math, advanced data science that
means that we are more likely to pull a case where there is
evasion versus not. That means the honest taxpayer doesn't get
burdened----
Mr. FEENSTRA. Right.
Mr. WERFEL [continuing]. And that means the dishonest
taxpayer gets accountability.
Mr. FEENSTRA. That sounds great. And again, I am just
pressuring as much as possible to modernize.
I mean, this is--it should be, you know, 20 years in the
coming that this all happens, and hopefully we can get it done
in the next 12 months. Thank you.
And I yield back.
Mr. WERFEL. Thank you.
Chairman SMITH. Mr. Moore is recognized.
Mr. MOORE of Utah. Thank you, Chairman.
Commissioner, thanks for being here. We are getting down to
the lower dais, down to the last little bit. This is where the
real work gets done.
Mr. WERFEL. It is.
Mr. MOORE of Utah. And this is where we actually solve
problems.
Mr. WERFEL. We are just getting started.
Mr. MOORE of Utah. Yes, just getting started.
No, sincerely, I represent Ogden, Utah.
Mr. WERFEL. I know.
Mr. MOORE of Utah. Right, a wonderfully strong workforce
for the IRS. It has been--you know, I have known it my whole
life, and have many colleagues and friends and everybody that
have been there. I visited there as a Member of Congress. I
actually look at my time before Congress, when I was a
management consultant. And I actually wish that I could be
working on this project in that sphere, instead of even in a
congressional role because, to me, it would be very simple.
You have a bipartisan, strong agreement about
modernization. And my colleague from Iowa just spoke a lot to
it, so I won't rehash too much of it, but there is commitment
there. And we should be doubling down and we should be tripling
our efforts to make this happen. And at that point, we then
assess what workforce needs are, right?
And so I opposed the Democrats' bill, IRA, that would have
been a huge expansion. But then, when we pulled it back, we
wanted to keep the focus on the modernization piece. And then
we reassess and we try to go about figuring out where the
workforce needs to be. And that is the way I hope we can
continue forward, realizing--finding the areas of common
ground, because that is the only time you get anything done in
this place is if there is common ground, and we make moves in
the right direction.
For my constituents, this is a pain point for them.
Mr. WERFEL. Yes.
Mr. MOORE of Utah. Your offices, they--we share the same
Federal building. When we reach out, we do a--we have an
excellent relationship. So thank you again for that, and I echo
what my friend from Georgia said.
But this is an area we can actually improve on, and we need
to double down on those efforts. So thanks for the comments you
made on modernization and digitizing and getting us to this
point. Members of this committee, you know, have raised many
important points on that. Can you discuss how the agency is
truly prioritizing these initiatives?
What is immediately--something you are immediately working
on, something that you want to get accomplished that might be a
few months to years down the road, but you could probably--you
know, we could maybe make it happen quicker if you get more
collaboration from us?
I am concerned about the level of attention the IRS has
placed on programs like the direct e-file program, which was
not authorized by Congress. Could you give some--share some
thoughts on that?
Mr. WERFEL. Yes. In terms of--you know, we want to have big
impact for taxpayers that benefit them. And so, you know, I
start with the call center. This is a place where there has
been historic attention. I think a lot of taxpayers end up
coming to the call center hoping for a smooth and better
experience. I think we, that call center, certainly faltered in
the 2022 tax season.
And the changes we can make are not just about hiring
additional phone assistors, it is about modernizing our call
center. Because you look at call centers in other industries
and around--and in other public-sector organizations, there are
both AI and technology solutions that can make the whole
operation operate more smoothly.
And then I go to our web tools. We have online accounts
now, where individuals and businesses can register and have
their own personal account with the IRS. And so think about it
in terms of what that account functionality is today versus
your experience with your online bank account, and we have a
gap. There are certain things you can do with the IRS online
account, but not nearly as much as you can do with your
favorite bank online account. And the goal is to close that
gap.
Now, that is not just about fixing the website. There is
the entire technology infrastructure underneath that also has
to enable a more modern experience for taxpayers. That is where
the focus should be.
I think there should be a bipartisan agreement that we want
to lean in to give taxpayers the tools to make this entire
taxpaying process easier.
Mr. MOORE of Utah. Excellent. I agree, and I believe that
that motivation is there, and we need to double those efforts.
Regarding the Employee Retention Tax Credit, you saw the
tax package that this committee just came together on to pass
in an overwhelming fashion. Can you give me a sense--I have
heard from a lot of small businesses that are anxiously
awaiting for their ERTC claims to be processed. How is the IRS
working with reputable tax preparers in the greater tax
community to ensure that these ERTC payments continue to be
processed, the legitimate ones and everything?
There is a big backlog here.
Mr. WERFEL. There is, there is. I get this question a lot.
Work with your taxpayer, the taxpayer advocate, if you have a
hardship. We are working with the taxpayer advocate to try to
prioritize our significant inventory to those that face the
biggest hardships.
It is an unfortunate situation. The promoters and the
marketers that essentially tricked a lot of small businesses
that weren't eligible into applying have clogged----
Mr. MOORE of Utah. Have clogged the system.
Mr. WERFEL [continuing]. The system, and we are working
through it.
I mentioned we are coming up on nearly $1 billion in ERC
issuances that have occurred since we announced the moratorium,
and most of that is working with the taxpayer advocate and
Congress and others to prioritize those that are the most
urgent because they are hardship cases. That doesn't mean they
are going to get approved, because sometimes we work on it, and
we realize you are actually not eligible. But we are focused on
it, and we are making sure they get resolution.
Mr. MOORE of Utah. I got a request earlier today, so I may
even be calling you myself. Thank you very much.
Mr. WERFEL. Yes.
Chairman SMITH. Thank you, Mr. Moore. I don't believe the
top dais would agree with your inaccurate statements earlier.
Mr. Gomez.
Mr. NEAL. Mr. Chairman.
Chairman SMITH. Yes.
Mr. NEAL. That is unanimous. [Laughter.]
Mr. GOMEZ. Thank you, Mr. Chairman.
And Commissioner Werfel, thank you for being here today. I
call the lower part of the dais the part of the dais that is
closest to the people. So--and I am proud that we are all here
fighting for our constituents.
I want to talk about the Child Tax Credit. In 2021, we saw
child poverty cut by nearly half in a single year, thanks to
the Child Tax Credit. By increasing the credit, making it fully
refundable, and authorizing monthly payments we used the tax
code to deliver relief directly to American families. Three
million children were lifted out of poverty.
But despite our policies giving working and middle-class
Americans more money in their pockets, which all my Republican
colleagues claim is their goal, every Republican Congress let
these vital provisions expire. We did see some progress from
Republicans last month when we passed a bipartisan package to
strengthen the CTC. But ultimately, Republicans refused to
support the provisions that have been proven to dramatically
reduce child poverty, provisions like increasing the maximum
credit and ensuring full refundability to help kids and
families who need the credit the most.
But I want to focus on an equally important but often
overlooked provision that made the CTC so effective: monthly
checks. Parents know kids need diapers, formula, food, clothes,
and they need it not once a year, but they need it every single
day, every single week, and every single month. You can't pay
down your child's hunger once at the end of each year. By
giving families the money they are entitled to in monthly
payments, we boosted monthly income and put their money back in
their pockets. Making payments monthly instead of annually has
the power to change the lives of working people all over the
country. That sounds like something the Republicans should
support if you listen to what they want from the tax code.
Commissioner, given the progress made and lessons learned
in 2021, does the IRS already have much of the infrastructure
and knowledge to quickly roll out advance payments of the Child
Tax Credit if Congress acts?
Mr. WERFEL. It certainly was a beneficial moment for us to
reengineer our systems, update our processes, and go through
the effort and resolve it successfully. I like to say we now
have the muscle memory and should be able to implement
something like that easier than if we were trying it for the
first time.
Mr. GOMEZ. I appreciate that. And one of the things that I
was informed about is that it also wouldn't cost that much. So
it is something that I know would make a difference.
You know, some people say it is only 250 to 500, or even
700 bucks a month, but to working people that is a lot of
money----
Mr. WERFEL. Absolutely.
Mr. GOMEZ [continuing]. That can make a difference when it
comes to making basic ends meet.
Another aspect of making the Child Tax Credit effective is
ensuring that taxpayers claiming the credit are treated
equitably. Last year, I wrote a letter requesting the IRS to
further analyze and report existing data by race and gender to
help us better understand how other historically marginalized
communities may be impacted by racial disparities in the--in
audit selection. I appreciate your leadership announcing that
the IRS is taking meaningful steps to address these
disparities, especially for refundable credits like the EITC
and the CTC.
Commissioner, can you please update us on this work,
including any information about the case selection practices
driving these disparities and steps being taken to address the
disparities I just mentioned?
Mr. WERFEL. Yes. The big takeaways you should have are the
following: one, we are significantly reducing the number of
EITC audits because audit volume was identified in the
independent report as being one of the main drivers of
disparate impact.
Second, we have changed the case selection algorithm with
an intent specifically to reduce the disparities that were
existing in our case selection. We will be able to report in
the fall of 2024 timeframe whether the changes that we made are
having the intended impact of eliminating the disparity.
Furthermore, we now want to work to make sure that we are
constantly evaluating disparate impact in IRS operations, and
we are working on the best way to do that. And, in particular,
it is often important to work with external stakeholders. This
whole issue surfaced by an independent report, so partnering
with various stakeholders who can evaluate the impact of IRS
operations along with us is critical. So strengthening those
partnerships is another part of the plan.
Mr. GOMEZ. Thank you, Commissioner. When Chairman Neal
established the Racial Economic Equity Working Group when we
were in the majority, it is an issue that we feel is important.
Because if Americans feel like the tax system is fair, they are
more likely to comply.
So, with that, I yield back, Mr. Chairman.
Mr. WERFEL. Thank you.
Chairman SMITH. Ms. Malliotakis.
Ms. MALLIOTAKIS. Thank you, Mr. Chairman, and Commissioner,
thank you for your time here today. My colleagues have asked a
wide range of questions and concerns, but today I really want
to talk about the casework in my district office we are faced
with on a regular basis.
First, I want to commend your team of tax advocates. In
particular, George Aggete has worked very closely with my
district office. He is a tremendous asset, does a fantastic
job.
And it is my understanding that the New York delegation has
a total of 1,688 open cases with the IRS, 81 of those being
from my office. The number-one issue my office deals with,
unfortunately, is stolen returns. I believe we have 14 current
cases with the IRS totaling over $1 million in stolen returns,
where criminals have removed and replaced the name and the
address on the check. And theft is made easy by the envelopes
that the Department of Treasury uses, making it blatantly
obviously--obvious that there is a check inside.
The issue worsens when the IRS does not allow those
individuals to then opt for a direct deposit. So a new check
gets issued. And we are in this kind of endless cycle, with one
of my constituents having a check needing to be replaced three
times.
It is also my understanding that the IRS does not allow
direct deposits for amounts over $20,000, or $25,000.
So I understand that these thefts are not solely confined
to IRS checks, but every check issued by the Department of
Treasury. So I just had a few questions on how, you know, we
can possibly work together to rectify this issue.
And what is theft in check--first of all, do you know the
cost of what this is costing the United States taxpayers, the
fact that these checks are being stolen?
Mr. WERFEL. I don't have a metric on that.
I do think you have identified the right set of people to
come together: me--the head of the Bureau of Fiscal Service at
Treasury that operates our payment platforms either sends the
checks or executes the direct deposit, and I do have a lot of
motivation around these open cases.
I mean, I have referenced it a few times, the taxpayer bill
of rights affords the taxpayer quick resolution. And, if they
are waiting and having to receive a check three times, and we
are not meeting that responsibility----
Ms. MALLIOTAKIS. On the issue of tackling theft itself, are
you working with the U.S. Postal Service to try to address this
issue?
Mr. WERFEL. I am not aware that we are, but I want to get
back to you on that.
Ms. MALLIOTAKIS. Okay. And, since the issue is for all
Treasury-issued checks, has anyone discussed the--changing the
envelope to--so it is not so obvious that there is a check
inside?
Mr. WERFEL. As you are sitting here saying this, it is very
intuitive. But I do want to check with the Bureau of Fiscal
Service leadership on this.
Ms. MALLIOTAKIS. What options do you think are available to
constituents that are victims of this tax return theft, other
than getting a reissued paper check?
And is revisiting the direct deposit issue--can you do
this, can you do that, in terms of----
Mr. WERFEL. Yes, I want to look into why that is not----
Ms. MALLIOTAKIS. Yes.
Mr. WERFEL [continuing]. Currently feasible.
Ms. MALLIOTAKIS. Yes, it should be an option, certainly, if
they had the first check stolen and they want to move to direct
deposit.
Mr. WERFEL. Yes.
Ms. MALLIOTAKIS. That should be an option.
And then, if you could, look at the thresholds, if there is
truly a cut-off at $20,000, $25,000, which I had not heard
about prior. So look, I really want to work with you on this
issue.
Mr. WERFEL. Absolutely.
Ms. MALLIOTAKIS. I really hope that you will follow up,
your staff, with my team so we can try to get to the bottom of
this, and maybe there is a follow-up meeting that we can have
with somebody from Treasury to really discuss this. Because, if
it is $1 million that is being stolen from constituents in my
district--there is 435 Members, right? And so, we--that is a
lot of money.
Mr. WERFEL. That is a lot of money.
Ms. MALLIOTAKIS. That is a lot of money, so we want to try
to get to the bottom of this. And unfortunately, there are bad
people in the world that are trying to take advantage of our
constituents and the American taxpayer, and we have got to, I
guess, modernize our system to keep up with this type of fraud.
Mr. WERFEL. It is the smart place to make investments.
Where people are being victimized is the exact place where the
government needs to step in and prevent and be helpful.
Ms. MALLIOTAKIS. Okay. Well, thank you very much for your
time.
Mr. WERFEL. Thank you.
Chairman SMITH. Mr. Carey?
Mr. CAREY. Thank you, Mr. Chairman and the ranking member.
I am reminded of that phrase, ``Where you are now, I once was
then,'' and I do appreciate the comments and the leadership
that is behind me.
I just want to say that because I am number 25 on this dais
here. [Laughter.]
Mr. CAREY. I do want to talk a couple of issues, and I am
going to start with--because I think one is important to the
future of our country, which is digital asset brokers, but then
I also want to talk about what I think is preserving the
history of our country. It is the conversation that you and I
had the last time you were here, Commissioner, which is
historic tax credits and historic preservation easements.
Mr. WERFEL. Yes.
Mr. CAREY. So to give you just a minute to think about
those things, I would also like to echo the comments from my
colleague from Illinois as it relates to child support, because
that October 24 deadline is looming, and I would like--our
office will work with you on that.
I also would like to follow up with the--I heard my
colleague from Georgia say that you were very helpful in some
constituent cases that that he had. I will probably revisit you
with that.
So, with that, Commissioner, I trust you are familiar with
the recent release proposed rule regarding tax reporting
requirements for digital asset brokers.
Mr. WERFEL. Yes, I am.
Mr. CAREY. So then you know that the rule, as finalized, as
currently proposed, the IRS, by their own admissions, will
receive an estimated eight billion information returns from
just this one rule. So, to put that in perspective, for 2022,
the IRS received 5.45 billion information returns, total. With
this new proposed rule, the amount of the reports the IRS will
receive will increase by about 150 percent.
We were talking about the amount of employees you have. Is
the IRS equipped to handle this significant increase in the
data?
Mr. WERFEL. There are a lot of moving pieces on these
issues. We have issued the proposed regulations. We have got
hundreds of thousands of comments and that we are working
through. I feel like we are at an inflection point in terms of
digital currency and how to approach it along a lot of
different perspectives of government, but in particular tax.
We have to be prepared to--whatever the outcome of that
regulatory process is, to have the technology and the process
to execute those regulations fulsomely. So we will only propose
in final regulations things that we have confidence we can
execute on.
Mr. CAREY. And I thank you for that. Personally, I support
amending the rule to ensure that there is parity between the
traditional finance industry. And I understand these rules go
beyond the traditional--what traditional finance requires. If
the rule did create a more level playing field between the two,
the number of reportable transactions would decrease, freeing
up IRS's time to focus on their current mission and not
shifting all through the unnecessary data.
It probably looks like I am not going to get to historic
preservation, but we will follow up in written testimony on
that.
Mr. CAREY. What timeline of implementing the recently
released proposed rule regarding tax reporting requirements and
assets for brokers do you think it would--do you think is a
realistic timeframe?
Mr. WERFEL. The challenge that I have is that I--it is
really my counterparts at Treasury that I co-lead this with.
And so I would want to make sure that we are aligned on the
timeframe.
I think we got over 400,000 comments on the regulation. And
so figuring out--you know, this is a complicated issue, and we
certainly don't want to get out in front before we have given
those comments fair vetting. So I don't have a specific date
for you, but I can work with Treasury to get you one.
Mr. CAREY. And I would appreciate that. Now, it is my
understanding that there is a much shorter window for
compliance than traditional finance brokers, and, to comply
when they were implementing this rule for--the traditional
being 5 years, the digital asset exchanges only got 16 months.
Is there any reason for that?
Mr. WERFEL. I don't at my fingertips have the full
explanation and basis for it, but we will give you the
underlying basis for that.
Mr. CAREY. Well, and I appreciate that again, Mr.
Commissioner.
Given this new industry, it is a new industry with new
technologies and innovation, I would recommend that you
reevaluate the timeline to give the stakeholders enough time to
comply, just as the traditional financial market did.
We are voting, and I will get back with you on the historic
tax credits and historic preservation easements because they
are very important to me, but I do appreciate your time, and it
is good to see you again.
Mr. WERFEL. Thank you.
Mr. CAREY. With that, I yield back.
Chairman SMITH. Thank you.
Thank you, Commissioner Werfel, for appearing before us
today. We look forward to the follow-up answers from the
requests of our members.
Please be advised that members have two weeks to submit
written questions to be answered later in writing. Those
questions and your answers will be made part of the formal
hearing record today.
With that, the committee stands adjourned.
[Whereupon, at 1:50 p.m., the committee was adjourned.]
MEMBER QUESTIONS FOR THE RECORD
=======================================================================
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
PUBLIC SUBMISSIONS FOR THE RECORD
=======================================================================
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
[all]