[Joint House and Senate Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
OVERSIGHT OF THE INTERNAL REVENUE SERVICE
=======================================================================
JOINT HEARING
BEFORE THE
SUBCOMMITTEE ON GOVERNMENT OPERATIONS AND THE FEDERAL WORKFORCE
AND THE
SUBCOMMITTEE ON HEALTH CARE AND FINANCIAL SERVICES
OF THE
COMMITTEE ON OVERSIGHT AND ACCOUNTABILITY
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
__________
OCTOBER 24, 2023
__________
Serial No. 118-71
__________
Printed for the use of the Committee on Oversight and Accountability
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available on: govinfo.gov,
oversight.house.gov or
docs.house.gov
______
U.S. GOVERNMENT PUBLISHING OFFICE
54-068 PDF WASHINGTON : 2023
COMMITTEE ON OVERSIGHT AND ACCOUNTABILITY
JAMES COMER, Kentucky, Chairman
Jim Jordan, Ohio Jamie Raskin, Maryland, Ranking
Mike Turner, Ohio Minority Member
Paul Gosar, Arizona Eleanor Holmes Norton, District of
Virginia Foxx, North Carolina Columbia
Glenn Grothman, Wisconsin Stephen F. Lynch, Massachusetts
Gary Palmer, Alabama Gerald E. Connolly, Virginia
Clay Higgins, Louisiana Raja Krishnamoorthi, Illinois
Pete Sessions, Texas Ro Khanna, California
Andy Biggs, Arizona Kweisi Mfume, Maryland
Nancy Mace, South Carolina Alexandria Ocasio-Cortez, New York
Jake LaTurner, Kansas Katie Porter, California
Pat Fallon, Texas Cori Bush, Missouri
Byron Donalds, Florida Jimmy Gomez, California
Kelly Armstrong, North Dakota Shontel Brown, Ohio
Scott Perry, Pennsylvania Melanie Stansbury, New Mexico
William Timmons, South Carolina Robert Garcia, California
Tim Burchett, Tennessee Maxwell Frost, Florida
Marjorie Taylor Greene, Georgia Summer Lee, Pennsylvania
Lisa McClain, Michigan Greg Casar, Texas
Lauren Boebert, Colorado Jasmine Crockett, Texas
Russell Fry, South Carolina Dan Goldman, New York
Anna Paulina Luna, Florida Jared Moskowitz, Florida
Chuck Edwards, North Carolina Rashida Tlaib, Michigan
Nick Langworthy, New York
Eric Burlison, Missouri
------
Mark Marin, Staff Director
Jessica Donlon, Deputy Staff Director and General Counsel
Bill Womack, Senior Advisor
Alex Rankin, Professional Staff Member
Reagan Dye, Professional Staff Member
Mallory Cogar, Deputy Director of Operations and Chief Clerk
Contact Number: 202-225-5074
Julie Tagen, Minority Staff Director
Contact Number: 202-225-5051
------
Subcommittee on Government Operations and the Federal Workforce
Pete Sessions, Texas, Chairman
Gary Palmer, Alabama Kweisi Mfume, Maryland Ranking
Clay Higgins, Louisiana Minority Member
Andy Biggs, Arizona Eleanor Holmes Norton, District of
Byron Donalds, Florida Columbia
William Timmons, South Carolina Maxwell Frost, Florida
Tim Burchett, Tennessee Greg Casar, Texas
Marjorie Taylor Greene, Georgia Gerald E. Connolly, Virginia
Lauren Boebert, Colorado Melanie Stansbury, New Mexico
Russell Fry, South Carolina Robert Garcia, California
Chuck Edwards, North Carolina Summer Lee, Pennsylvania
Eric Burlison, Missouri Jasmine Crockett, Texas
Rashida Tlaib, Michigan
Subcommittee on Health Care and Financial Services
Lisa McClain, Michigan, Chairwoman
Paul Gosar, Arizona Katie Porter, California Ranking
Virginia Foxx, North Carolina Minority Member
Glenn Grothman, Wisconsin Alexandria Ocasio-Cortez, New York
Russell Fry, South Carolina Jimmy Gomez, California
Anna Paulina Luna, Florida Greg Casar, Texas
Nick Langworthy, New York Summer Lee, Pennsylvania
Eric Burlison, Missouri Jasmine Crockett, Texas
Vacancy Vacancy
C O N T E N T S
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Page
Hearing held on October 24, 2023................................. 1
Witnesses
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Danny Werfel, Commissioner, Internal Revenue Service
Oral Statement................................................... 8
Jessica Lucas-Judy (Minority Witness), Director, Strategic
Issues, Government Accountability Office
Oral Statement................................................... 9
Written opening statements and statements for the witnesses are
available in the U.S. House of Representatives Document
Repository at: docs.house.gov.
Index of Documents
----------
* Press Release, IRS, ``Agency priorities''; submitted by Rep.
Mfume.
* Letter, July 19, 2023, from a coalition to the IRS
commissioner in support of the IRS Free File Program; submitted
by Rep. Mfume.
* Press Release, Treasury Department, ``Filing Season 2003, A
Report Card: IRS Delivered Significantly Improved Customer
Service''; submitted by Rep. Mfume.
* IRS' Strategic Operating Plan, 2023-2031; submitted by Rep.
Mfume.
* Statement, Nina Olson, and accompanying letter, June 21, from
the Center for Taxpayer Rights to Treasury Department and IRS
Commissioner Werfel; submitted by Rep. Mfume.
* Study, Stanford Institute for Economic and Policy Research
Study on the Tax System; submitted by Rep. Lee.
* Statement for the Record; submitted by Rep. Connolly.
Documents listed above are available at: docs.house.gov.
OVERSIGHT OF THE INTERNAL REVENUE SERVICE
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Tuesday, October 24, 2023
U.S. House of Representatives
Subcommittee on Government Operations and the Federal Workforce
and the
Subcommittee on Health Care and Financial Services
Committee on Oversight and Accountability
Washington, D.C.
The Subcommittees met, pursuant to notice, at 2:21 p.m., in
room 2154, Rayburn House Office Building, Hon. Lisa McClain
[Chairwoman of the Subcommittee on Health Care and Financial
Services] presiding.
Present from Committee on Oversight and Accountability
[Subcommittee on Health Care and Financial Services]:
Representatives McClain, Foxx, Grothman, Fry, Porter, Lee, and
Crockett.
Present from the Committee on Oversight and Accountability
[Subcommittee on Government Operations and the Federal
Workforce]: Representatives Sessions, Palmer, Timmons,
Burchett, Fry, Edwards, Mfume, Norton, Frost, Connolly, Garcia,
Lee, and Crockett.
Also present: Representative Raskin.
Mrs. McClain. All right. This joint hearing of the
Subcommittee on Government Operations and the Federal Workforce
and Health Care and Financial Services Committee will come to
order. Welcome, everyone.
Without objection, the Chair may declare a recess at any
time.
I recognize myself for the purpose of making an opening
statement.
First and foremost, thank you all for being here in this
crazy bit of times we are in, but nevertheless, what we are
talking about is extremely important. The IRS has been plagued
really with dysfunction for decades and complexity. The
dysfunction is across the board, from data breaches, leaks, and
identity theft to slow audits, backlogs, and really horrific
customer service, at least from my constituents. Despite years
of congressional oversight and government watchdog warnings,
not a lot has changed.
My colleagues on the other side of the aisle believe that
more money and more power is the solution. In fact, in last
year's Inflation Reduction Act, congressional Democrats dumped
$80 billion into the IRS. With this influx of cash, the IRS
plans to ramp up audits on all Americans. This funding spree
prioritizes enforcement over improving taxpayer services.
Taxpayer services, like processing taxpayer returns, receive a
9-percent funding boost with enforcement receiving a 69-percent
funding boost. The IRS needs stronger leadership, not more
money and not more audits. The IRS needs to work on getting the
American people their money back in a timely fashion, not
auditing the lower-and middle-class Americans. The IRS, in my
opinion, needs to invest in highly skilled experts, not simply
hire more employees, but higher quality, not so much quantity.
Put simply, the IRS just needs to do a better job. There needs
to be consequences for their inaction.
If a private business did what the IRS does on a daily
basis, it would quickly go out of business. If a private
business repeatedly left you on hold for hours, as my
constituents, and actually myself has even experienced, at a
time or did not answer the phone call, it really would go out
of business, and the customer complaints would go through the
roof. If a private business repeatedly left sensitive tax
information unsecured or lost it entirely, it would face
criminal penalties and go out of business. But since the
government is involved, there is no accountability or yet any
accountability that I have seen for its poor performance. And
that is one of the things I would like to talk about is who
owns it, what is the accountability, but also what are we doing
to improve it, right?
So even if we did give more money, what would the solutions
look like, right, because we can sit here and complain, but we
also have to focus on some solutions. Why do we accept this?
Hardworking Americans accept this because they follow the law,
and they know they face consequences, like penalties and fines,
if they do not, and those penalties and fines are their money.
It comes out of their pockets.
If we make a mistake on our tax return returns, it costs
us, right? In contrast, when the IRS makes a mistake, there are
really no consequences, or if there are, I would like to talk
about what those consequences are. Do people lose their job?
Are they put on action plans? Do they get demoted? What are the
consequences? And I really do not think it is too much to ask
to have the Federal agencies play by the same rules as we
expect the American people to play by. I mean, the IRS asks for
more money to fund more mistakes, more data breaches, more
ineptness. It should not be acceptable, and we have to hold our
government agencies to the at least the same standards that we
hold the American people to with their tax dollars.
Instead of doing the job, the IRS is struggling to complete
its basic functions. Instead of processing tax returns in a
timely matter manner, Americans are waiting months and
sometimes years for money that is rightly theirs. And the issue
is, yes, we pay them, you know, interest on that money, but a
lot of the businesses are going to go out of business by the
time they get their rightly deserved money. Instead of serving
taxpayers, the IRS can do something as simple as answering the
phone. Instead of being trustworthy, the IRS carelessly leaves
your sensitive information unsecure and vulnerable to leaks,
fraud, and identity theft. Frankly, the IRS is the perfect
example of bureaucracy failure, and there has not been a lot of
accountability, if any accountability, for it.
We talk about these issues today. We need to remember that
these are real problems that impact real people with real
money, their money. Since I entered Congress, countless
constituents have approached my office asking for help with the
IRS. I have constituents who have filed returns on time in
April and have yet to receive their refunds. When they seek
help from the IRS, they cannot get ahold of anyone on the phone
to even to get an update, and I will cover those a little bit
later, but often they wait hours to reach customer service
representatives only to get disconnected due to an overloaded
switchboard, which you can imagine incenses them, and the
frustration goes through the roof. I have constituents who are
business owners who have outstanding applications for the
employee retention tax credit. One of these cases has been
pending since February. These wait times are unacceptable,
really, for small businesses because they depend on those
dollars, especially through the pandemic. We are here this
afternoon to demand answers and accountability on behalf of the
American people.
Commissioner Werfel, thank you for being here to the
Subcommittee today. I look forward to your fruitful discussion.
I now recognize Ranking Member Mfume for the purpose of
making an opening statement.
Mr. Mfume. Thank you very much, Madam Chair. Good morning,
is it still? Good afternoon. I am living in that other universe
I see. Well welcome, everyone, and thank you very much, Madam
Chair.
Paying one's fair share is an important obligation in what
is known as the American social contract. With an estimated 1.6
or 168 individual taxpayers, in billions, who filed returns
this year alone, processing high returns of volume and higher
returns of paper requires sufficient personnel, modernized
technology, and streamlined systems. A little over a year ago,
President Biden signed the Inflation Reduction Act, or the IRA,
into law. As most of you know, this groundbreaking legislation
reached the IRS at a critical time right before the 2023 tax
filing season, and it delivered $80 billion to the IRS over the
next 10 years. The funds allow the IRS to hire new staff to
modernize all of its technology and to audit wealthy tax cheats
who had been getting away with murder.
[Chart]
Mr. Mfume. The poster board behind me illustrates that this
is a win for low-and middle-class Americans. These IRA-backed
improvements, as you can see, achieved 87-percent peak levels
of performance and service success as a result of their
implementation, 87 percent higher than in any other time. It
was a dramatic increase from the previous tax filing year
alone. IRS answered 6.5 million more calls than last year,
cutting the wait times down by 86 percent, which I think is
phenomenal. It served more than 140,000 additional taxpayers
and cleared the backlog of unprocessed 2022 individual tax
returns with no errors. Now, you got to be doing something
right to have those kind of numbers that are certifiable and
verifiable.
So, these are real and tangible and immediate results that
show that investment in the IRS improves taxpayer services. Do
not take my word for it. The IRS pointed out in a sweeping
release that, by the way, I would ask unanimous consent that it
be entered into the record, showing that the Agency will
continue to prioritize efforts of high-income individuals and
companies without running away, turning a blind eye, or
refusing to do what they should, in fact, do.
Mr. Mfume. So, these are real. As I said before, they are
tangible. They are immediate results that show that investment
in the IRS improves taxpayer services. Unfortunately, after
this year's tax filing season, in the budget negotiations, the
Nation was forced to heed the Republicans' persistent call for
rescinding the IRS funding. There were a lot of boogeyman
stories that took place all over the Floor of the Congress
about what was going to happen to almost virtually scare the
American taxpayer into believing something that was not true.
The reality is the Agency kept its promise, its commitment
to the Nation, and its stated goal of cracking down on
delinquent tax-evading millionaires who had been getting away,
as I said before, with robbery. The Agency kept its commitment.
And so, despite cuts to its funding and the persistent and
dangerous mischaracterizations of IRS agents as sort of an army
of boogeymen waiting to kick in your door and lock you up, we
have got to stop playing games like that. And we have got to
make sure that middle-class Americans know what the facts are,
what the intentions were, and, more importantly, what the goals
have been and the conclusions that bear those goals out have
been.
To the extent that IRS has collected nearly $160 million in
back taxes from individuals earning over a million dollars
speaks volumes about who they are trying to help and who are
they trying to keep us from being taken advantage by. These
millions of dollars in missing tax payments were not an
accident. It was not manna from Heaven. It was a clear,
deliberate effort to make sure that enforcement was the way it
should be by that Agency and to make sure that tax cheats,
particularly the wealthy, wealthy, wealthy ones, did not have a
safe haven. For example, the IRS identified one individual who
just last month was ordered to pay $15 million in restitution
for falsifying personal expenses as deductible business
expenses. I do not know what kind of neighborhood that person
lives in, but when you can get that kind of fine, it suggests
that you have been getting away with one serious crime and was
caught. These efforts to defraud the Federal Government
included financing of a 51,000-square-foot mansion.
I am glad whoever the hell it was got caught. I really am.
That is the affront and that is the tragedy here, and that is
why we have got to find a way to make sure the IRS protects
middle-income people by going after the high-income abusers.
These sorts of greedy tax cheats exacerbate the $688 billion
tax gap, highlighting the stark contrast between the amount of
money owed and the amount of collected by the IRS on time. In
other words, the more millionaires and billionaires who skirt
around and play around with paying their fair share, the larger
the burden that falls on hardworking, everyday Americans who
pay their fair share every year on time. The IRS reports that
even small declines in taxpayer compliance can cause the Nation
billions of dollars in lost revenue, underscoring the need for
simplicity and efficiency during the tax filing season.
And that is why I co-led, with my colleague here, Ms.
Porter, and with Mr. Connolly of Virginia, the Trust in
Government Act, which directs the Department of Treasury to
expand electronic tax filing and other customer support via
email. We also led the Streamlining IRS Operations Act, which
requires that tax returns filed on paper can be readily
digitized. The IRS heeded that ask in that request by
expanding--not reducing--by expanding its digital scanning
efforts this tax season. So, Congress must continue to ensure
that the IRS has the funding and the resources necessary to
maintain its remarkable progress since IRA became law, progress
that is unheralded in many respects and unnoticed by others who
hide behind these fake characterizations. Make no mistake,
further cuts will hamper the IRS' ability to execute
transformative change.
And so, I urge my colleagues on both sides of the aisle to
preserve IRS funding as we move forward from our current
stalemate and get back to the business of funding the
Government's operations. I want to thank our witnesses,
Commissioner Werfel and Director Lucas-Judy for your
participation in today's hearing, and I am particularly looking
forward to hearing from Commissioner Werfel about the status of
the IRS' upcoming tax filing program, known as Direct File.
We have the duty and the obligation in this Committee to
ensure that the government operates at a top-tier level for all
Americans, and I look forward to discussing, as Members of
Congress, how we can work to support those efforts. I yield
back, Madam Chair.
Mrs. McClain. Thank you. I now recognize Chairman Sessions
for the purpose of making an opening statement.
Mr. Sessions. Chairwoman McClain, thank you very much. I am
sorry to each of you for being late. We have had business in
another part of the complex. Commission Werfel, thank you so
much for being here, and, Ms. Judy, thank you very much.
The opportunity for us to meet today, that we spoke about
yesterday, Commissioner, is one of natural inquiry that this
Committee has. It is about the effectiveness of the Internal
Revenue Service as it relates to their ongoing business that
this Subcommittee believes is very important, but perhaps it
goes into much deeper points, and that is why we are also here
today. We need to make sure that the IRS in its performance
does do its job. As Mr. Mfume says, we need to make sure they
are properly funded. We need to make sure that they treat all
people fairly, not just some that they would choose to. We
believe that there have been reasons why you were brought on
board the first time as Commissioner, Acting Commissioner. We
believe that there are reasons why you are there today, perhaps
a second view at the IRS. There are a lot of things that we
will want to get into.
But perhaps it is most important for me to say this, that I
believe confidence in the IRS is what we are after. I spoke to
you about this yesterday, about the sizing models, about the
professionalism, about their ability to attention to detail for
the American people to be able to get not just a good answer,
but to be able to get through on the phone without having to
wait for hours. The effectiveness of the IRS and ability to get
their job done is important.
We know that the IRS is going to cooperate with us, because
you told me that yesterday, on sensitive matters. You and I
spoke about that you actually did not want to get into actual
information today, and I concurred, but we are going to talk
today to get an idea that you will cooperate. And you will
cooperate fully with us, that you will make sure that the
questions that we ask, while you do not have to go into the
specifics about those, certainly not names, certainly not
times, certainly not about the investigation, but about your
agreement that you will cooperate with this Committee and with
Congress in those regards.
So, we know that you have been given some extra $80
billion. We are going to want to talk about that and the
deployment of that, and how that is going to aid and do the
things that would be necessary. I think it is important that
you know that the IRS touches almost every single American, and
so the information we get back, the things that we hear back
comes at a time that you have got to defend a lot of ground.
I want to thank you for being here today, I want to thank
Mr. Mfume, and I want to thank Chairwoman McClain for allowing
us to start this meeting without me. And, Madam Chairman, I
yield back my time so we can go to opening statements.
Mrs. McClain. I now recognize Ranking Member Porter for the
purpose of making an opening statement.
Ms. Porter. Have you heard of death by a thousand paper
cuts? It is how to get rid of something by suddenly attacking
it over and over until it is finally gone: death by a thousand
cuts. For too many years, Washington politicians have worked to
gut the Internal Revenue Service, and they found creative ways
to cut the IRS time and time again.
How do they do that? Phase one, they start by attacking its
credibility. Look, I know that the Agency that collects our
taxes is not easy to love. Believe me, opportunistic
politicians know that, too. So they go on TV, and they give the
IRS a verbal slash, falsely suggesting to the American people
that the IRS is spying on us, targeting us for our political
beliefs, or going after us to pay more money than we owe. What
a bunch of B.S. But even though those claims lack any evidence,
we might be inclined to believe negative things about an Agency
that collects taxes. Look, even the Bible is not that kind to
tax collectors. These politicians easily succeed in creating
and spreading hostility, making it even easier to slash the IRS
again.
Cue phase two, full-on partisan investigations and attacks
on the hardworking employees of the IRS. Look no further than
the last time the Committee Republicans went hard after the
IRS. Under the Obama Administration, Republicans falsely
claimed the IRS was unfairly targeting conservative
organizations more than progressive organizations applying for
tax exempt status. The IRS spent $20 million and produced 1
million pages of documents in response. Ultimately, Republicans
did not prove anything. They instead used it to justify
diverting resources from IRS customer service, IT, and
enforcement. But that is what opportunistic politicians wanted,
to turn people against the IRS, to divert resources so the
Agency cannot do its job, and then to take one last slash.
That brings us to phase three: budget cuts. When
politicians tell us that our tax collector is after us, no one
wants to fund the collector, and that is exactly what has
happened. Opportunistic politicians have succeeded in cutting
IRS staffing 20 percent lower than it was in 2010, even though
the country has grown by 7 percent since then. The Agency has
been so battered that we will need 52,000 new IRS employees
just to meet the Agency's needs. That is how bad it has gotten,
folks, year after year of politicians taking slashes at the
IRS.
Opportunistic politicians have not succeeded in totally
killing the IRS by a thousand cuts, but the cuts have gotten
deep, and the Agency is badly wounded. Who suffers from all
this? We do. We all suffer. When we need help with our taxes
and no one is available at the IRS to pick up the phone, blame
a politician who slashed the IRS budget. When we want the IRS
to make tax filing easier or work harder to make our
information more secure, but the IRS cannot invest in
technology with adequate cyber security, blame a politician who
slashed the IRS. When we pay our fair share of taxes and just
want the IRS to make sure billionaires do the same, but they do
not have the staff or the resources to do it, blame a
politician who slashed the IRS.
Our current House Republican Majority has too many of these
politicians who love to slash government institutions to their
breaking points. As we sit in yet another Republican-led
hearing to attack the IRS instead of making it work better,
other Republicans are off slashing our entire Congress at the
same time. They have stopped Congress from doing its work
because they have not been able to elect the Speaker of the
House, so we cannot pass any legislation. The most
opportunistic Republicans have spent so long attacking our
government that now Republicans do not even trust each other,
but that is what the opportunists wanted: a weak Congress, a
weak IRS. It is what they call smart government, but in
reality, it is a Federal Government that cannot serve its
people. Right now, the opportunists are creating that reality.
A bipartisan coalition of reasonable Members of Congress can
stop them.
Today, everything that we do and say matters. Before my
colleagues whack the IRS, consider that your whack might be one
of the thousands of cuts over time that weakens our government
and hurts the American people. Instead, we should all use today
to determine what the IRS needs to serve the American people
and how Congress can be an effective partner, that is, if
Republicans ever elect a speaker so we can legislate. I yield
back.
Mrs. McClain. Thank you. I am pleased to welcome our
witnesses for today, Commissioner Danny Werfel and Jessica
Lucas-Judy. Danny Werfel is a Commissioner of the Internal
Revenue Service and Jessica Lucas-Judy is the Director of
Strategy Issues at the Government Accountability Office. We
look forward to hearing what you have to say on today's
important subject.
Pursuant to the Committee Rule 9(g), the witnesses will
please stand and raise their right hands.
Do you solemnly swear or affirm that the testimony that you
are about to give is the truth, the whole truth and nothing but
the truth, so help you God?
[A chorus of ayes.]
Mrs. McClain. Let the record show that the witnesses
answered in the affirmative. Thank you, and you can have a
seat. We appreciate you being here today, and we look forward
to your testimony.
Let me remind the witnesses that we have read your written
statement, and it will appear in full in the hearing record.
Please limit your oral statements to 5 minutes. As a reminder,
please press the button on the microphone in front of you so
that is on, and the Members can hear you. When you begin to
speak, the light in front of you will turn green. After 4
minutes, the light will turn yellow. When the red light comes
on, your 5 minutes have expired, and we would ask that you
please wrap up.
I now recognize Commissioner Werfel for his opening
statement.
STATEMENT OF DANIEL WERFEL
COMMISSIONER
INTERNAL REVENUE SERVICE
Mr. Werfel. Chairman Sessions, Chairwoman McClain, Ranking
Members Mfume and Porter, and Members of the Subcommittees,
thank you for the opportunity to testify on IRS operations.
I am pleased to report the IRS continues to make important
progress in our effort to transform our Agency through
implementation of the Inflation Reduction Act. Using IRA
funding, the IRS has three objectives to help taxpayers and the
Nation: first, ensure taxpayers can easily contact the IRS,
whether in person, on the phone, or online, and get help
navigating complex tax laws and accessing the credits they
deserve; two, identify the growing number of wealthy taxpayers,
including individuals, large corporations, and complex
partnerships, who are shielding income to evade their tax
responsibility and collect from them what is owed; and third,
address the growing risk of tax scams and schemes by protecting
honest taxpayers from them, and root out the nefarious actors
that perpetrate them.
Achieving this ambitious agenda will require that we
rebuild areas in the IRS that have suffered from more than a
decade of underfunding that preceded the Inflation Reduction
Act. A critical change we are making involves providing our IRS
workforce with the right tools, including training, technology,
and smarter processes, so we are ready now and in the future to
meet our core mission of supporting taxpayers and the Nation.
With the IRA funding, we are clearly making a difference. A
good example is phone service. At this point last year, we had
an average level of service on the phones of about 14 percent,
and we answered fewer than 9 million calls. This year, after
hiring more than 5,000 additional phone assisters, our level of
service exceeded 85 percent during the filing season, and we
answered more than 15 million calls. We also improved in-person
service at our Taxpayer Assistance Centers, or TACs. Since the
infusion of IRA funding, we have hired more than 700 new
employees at the TACs, reopened 46 centers, and opened four new
ones. This has allowed us to serve more than 1.6 million people
at our walk-in centers so far this year, which is 18 percent
above last year. We also opened temporary walk-in centers to
serve taxpayers who do not live near an in-person center,
something we did not have the resources to do in the past.
Modernizing our operations is the key to meeting many of
our transformation goals, and we are making progress here as
well. We are using IRA funding to upgrade our information
technology infrastructure and to improve the taxpayer
experience for those who choose to interact with us online. For
example, we added new features to enhance our taxpayer online
accounts, and we recently launched the business tax account,
neither of which we were able to do before the IRA funding.
The transformational changes we are making extend to
enforcement as well. Before the Inflation Reduction Act, the
IRS, for several years, was unable to audit a reasonable
percentage of complex returns of high-dollar groups, especially
wealthy individuals, large corporations, and complex
partnerships, but with IRA funding, we are turning that around.
We are hiring accountants, attorneys, engineers, economists,
and data scientists needed to tackle these complex returns, and
we are already seeing results. For example, in just the last
few months, we have recovered more than $100 million from
closing delinquent tax cases involving millionaires. As part of
these efforts, we recently announced major new initiatives to
step up audits of the largest corporations and partnerships. At
the same time, we have been reevaluating our enforcement
activities in other areas, and we will be reducing
correspondence audits of returns that claim the earned income
tax credit and other refundable credits.
Another important area we are making progress, involves
data security. While IRS has always prioritized protecting our
systems and taxpayer data, IRA funding allows us to invest in
additional controls to secure our systems. This includes adding
new restrictions and limiting access to key data to protect
against insider threats. Our data security posture has been
strengthened to make taxpayer data safer now than ever before.
To ensure transparency, we recently updated, on irs.gov, all of
our latest improvements to data security. We will continue to
do more to ensure that taxpayers and our own systems are
protected.
Chairman Sessions, Chairwoman McClain, Ranking Members
Mfume and Porter, Members of the Subcommittee, that concludes
my statement. I would be happy to take your questions.
Mrs. McClain. Thank you, Mr. Werfel. I now recognize
Jessica Lucas-Judy for her opening statement.
STATEMENT OF JESSICA LUCAS-JUDY
DIRECTOR, STRATEGIC ISSUES
GOVERNMENT ACCOUNTABILITY OFFICE
Ms. Lucas-Judy. Thank you. Chairs McClain and Sessions,
Ranking Members Mfume and Porter, Members of the Subcommittees,
thank you for this opportunity to be here today. IRS has laid
out an ambitious vision in its strategic operating plan. My
written statement describes key findings from GAO's prior
reports. I will focus my remarks this afternoon on open
recommendations that will be important as IRS implements its
strategic operating plan. These fall in three key areas:
improving taxpayer services, efficiently processing tax
returns, and protecting sensitive information.
So first, taxpayer service. IRS was late in responding to
more than half its correspondence in 2022, including amended
returns and identity theft documentation. We recommended that
IRS communicate timeframes for resolving its backlog. Delayed
correspondence can prompt taxpayers to write again or to call.
In 2020, we recommended that IRS identify performance goals for
an improved taxpayer experience. Without such information, it
will be challenging to assess progress made toward an improved
taxpayer experience.
IRS' attrition rate for critical filing season staff is
high relative to the Agency's overall attrition. Additionally,
IRS-wide data show the Agency loses about 23 percent of new
recruits within 2 or 3 years. IRS faces challenges hiring
employees and lacks information about where skills gaps exist
and what skills will be needed in the future. In 2019, we
recommended IRS fully implement its workforce planning
initiative. IRS said it intends to do so by March 2024. Full
implementation would provide a comprehensive inventory of IRS'
current workforce that it could use to develop staffing
requirements and address skills gaps. We are continuing to
review all of these issues as part of our review of the 2023
filing season.
The second area I will cover is processing tax returns. In
2018, we recommended that IRS digitize information from paper
returns. To control costs, IRS was transcribing a limited
amount of information from paper into its data bases. IRS
recently announced an initiative to allow taxpayers to
digitally submit all paper returns. By filing season 2025, IRS
aims to digitize all paper-filed returns when received,
consistent with our recommendation.
IRS can also improve electronic filing for businesses. In
2021, we recommended that IRS identify and address the barriers
to e-filing, and in response, IRS identified barriers but has
not taken action to address them due to competing priorities.
Addressing these barriers can help IRS reduce the volume of
more costly paper-based work and improved services to business
filers. Congress can also help to improve return processing by
broadening IRS' authority to correct simple tax return errors.
This could facilitate correct tax payments and help avoid
costly burdensome audits. In addition, Congress could allow IRS
to establish professional requirements for paid tax preparers.
This could increase the accuracy of tax returns that they
prepare and potentially reduce the tax gap.
And then the third area is protecting information. Strong
protections are critical to maintaining public confidence and
avoiding data breaches that expose sensitive information to
fraudsters. As of October 2023, IRS had implemented 85 percent
of the more than 450 recommendations we have previously made in
this area, but others remain open. Increasing oversight of
contractors who access taxpayer information, as we recommended
in August 2023, will help IRS know when contractors are not
meeting their training requirements. Providing guidance to
employees responsible for contractor oversight will give
assurance that those employees will report incidents timely and
accurately. IRS generally agreed with these recommendations and
said it plans to act on them.
IRS also needs to address recommendations related to
internal control over financial reporting that remain
unimplemented following our Fiscal Year 2022 audit of the IRS'
financial statements. And finally, as we reported in January
2023, IRS uses a significant number of outdated or aging
applications, software, and hardware assets. Reliance on these
legacy assets can contribute to security risks, unmet mission
needs, and increased costs. For example, IRS needs to replace
its 60-year-old individual master file, the IMF. That is the
authoritative data source for individual tax account data. IRS
has been working to replace IMF for more than a decade, but
suspended two related initiatives and has unclear timeframes
for completing them. Implementing our recommendations to
establish timeframes for disposing of IMF and other legacy
systems would provide accountability and reduce risk. IRS said
it will document a complete modernization plan. So, in summary,
in refining and carrying out its Inflation Reduction Act
strategic operating plan, IRS should work toward implementing
our open recommendations.
Chairwoman McClain, Chairman Sessions, Ranking Members
Mfume and Porter, Members of the Subcommittees, this completes
my statement, and I look forward to your questions.
Mrs. McClain. Thank you. I now recognize myself for 5
minutes.
I feel like I am watching a ``Dateline'' movie. One side
says everything is going great, and the other side says it is
going horrible, so let me talk about from my district because I
represent the people from my district today. I would like to
begin by just sharing more about the complaints that I have
received in my short time period this year.
I have four constituents who have contacted my office
because they have yet to receive their 2022 tax refunds. Some
have thousands of dollars stuck in limbo as they wait for their
tax refund credits. Others cannot get assistance from the IRS
via phone, despite waiting on hold for hours. They cannot get
updates on their delayed refund status. The phone system really
seems to be an issue. I have constituents who run small
businesses and say they cannot get an answer on just the status
of their employee's return or their tax credit applications.
My office recently helped a constituent who had trouble
with IRS releasing their deceased father's last tax refund.
This refund, which totaled $30,000, was finally released after
my casework team and the Taxpayer Advocate Service intervened,
as well as the accountant. These are just kind of a handful of
the frustration from my constituents. Maybe my office is alone
on this and the people on the other side of the aisle have no
issues, so just interesting. Although these cases are specific
to my constituents, the underlying fact pattern is essentially
the same across the country. It seems like the IRS is not
performing efficiently or effectively.
So, my question is, why can't the IRS provide taxpayers
with quality phone service at least in my district.
Mr. Werfel. Madam Chairwoman, I appreciate the opportunity
to respond. First, I think we did have a tremendously improved
filing season from 2022 to 2023 as a result of the infusion of
Inflation Reduction Act funds. Specifically, we were able to
immediately hire 5,000 new customer service representatives and
put them on the phones. So, for those that called during filing
season, and that is the end of January to mid-April, we were
able to answer 87 percent of those calls with a 3-minute wait
time.
Now, there is more to do, and some of the issues that you
were raising, I was ticking off in my brain different
monetization plans that we have underway. So, for example, if
you file your original tax return electronically and you give
us a bank account that we can automatically debit, for those
taxpayers, on average, you get your refund within 13 days. That
is what we achieved. But if you do not file electronically, now
you are in a paper process, and that----
Mrs. McClain. Which takes longer. I totally understand
that.
Mr. Werfel. And look, American taxpayers should have a
choice. We would love for them to file online, but if they
choose to file on paper----
Mrs. McClain. So is your assumption that they are filing on
paper and if they just moved to the electronic----
Mr. Werfel. I think that would incredibly improve their
odds of getting their refund.
Mrs. McClain. But I am talking about the phone service. So,
whether you file electronically, or whether you filed paper, if
I call you, I still need to get someone on the phone to speak
with. I mean, I just met with a constituent that their
information, or they have been trying to get information from
you since February, they said that they would get an answer by
October 20. Somebody would call him back with the status of
just an answer. It is the 24th, we still have not had an
answer.
Mr. Werfel. I understand.
Mrs. McClain. I mean, this is a small business in our
community. That has to do with customer service.
Mr. Werfel. And let me offer two things that will help.
Mrs. McClain. OK.
Mr. Werfel. Obviously adding more customer service reps,
training them, that is all in process. The second thing that
will help is modernizing our call center.
Mrs. McClain. OK.
Mr. Werfel. Investing in things like more callback options,
like you can sign up, we will call you back, in the queue.
Mrs. McClain. Yes.
Mr. Werfel. It also means more automation. There are
certain things that can be done by pressing buttons versus
waiting for human, and maybe your constituents need the human,
but if other people in the queue can be deflected to
automation----
Mrs. McClain. I got it. And one last point before my time
is up.
Mr. Werfel. I understand. Go ahead.
Mrs. McClain. So, I think what you are saying is if we can
modernize our systems, people would get a return call faster.
Mr. Werfel. Yes, and then----
Mrs. McClain. Directionally. OK.
Mr. Werfel. Absolutely.
Mrs. McClain. If that is the case, then why in the
Inflation Reduction Act is only roughly $7 billion targeted to
system modernization and taxpayer service, and the other, out
of the $80 billion, I mean, if that is the problem, goes to
enforcement and operational support? With that, I will yield
back. Oh, I forgot. The Chair now recognizes the Ranking
Member, Mr. Mfume.
Mr. Mfume. Thank you very much, Madam Chair. Mr.
Commissioner, you do not have an easy job, and it goes without
saying that the more that this Congress can help you do that
job, the better the performance for all Americans. We seem
sometimes to forget that we continue to increase in population
and yet want to decrease the funds that are there to apply
services to those people. So, because we represent all of them,
770,000 in each of our districts, we are going to hear from
time to time from people who, for whatever reason, would want
better service, but am glad to be able to take the good news
back, that things are improving as a result of the Inflation
Reduction Act. And ``improving'' may not even be the right
word. In some cases, they are absolutely astonishing, some of
the peaks that IRS is achieving.
Ms. Lucas-Judy, you said there were three things you
thought should be highlighted: taxpayer service, performance by
the IRS in performance goals, and protection of information,
and you have passed this information along to the Commissioner.
What are your early readings telling you? Does it look like the
IRS is, in fact, trying to find a way to get to those
achievable goals?
Ms. Lucas-Judy. Yes. As you have heard, the performance and
the most recent filing season was significantly better than in
prior years. It does come at a cost, though, because the same
people who are answering the phones are the ones who are
processing returns and correspondence. And so, we think it is
important that there will be a long-term strategy in place for
dealing with issues like that.
Mr. Mfume. Thank you. Thank you. That is good news. At some
point in time we ought to shout good news when it occurs. Madam
Chair, I am going to yield the balance of my time to the
Chairman of the full Committee, the distinguished gentleman
from Maryland, Mr. Raskin.
Mr. Raskin. Congressman Mfume, thank you very much for
that. And thank you for your excellent remarks and for pointing
out that it is only after decades of deliberate understaffing
and underfinancing and political attacks that the IRS has grown
so unresponsive and ineffective and vulnerable to rip-offs by
big corporations and by the wealthiest people. But in the
Inflation Reduction Act that we passed last year, unfortunately
without any Republican support, the Democrats set about to
increase the responsiveness of the IRS to improve the
effectiveness and to advance equity there.
[Chart]
Mr. Raskin. The U.S. tax system has disproportionately
targeted lower-income taxpayers, giving preferential treatment
to the wealthiest filers. When we passed the Inflation
Reduction Act, it provided the IRS with resources to make
certain that billionaires and large corporations would pay
their fair share. Early this year, our Committee held a hearing
to examine GAO's 2023 High Risk List, which highlights the
Federal programs and operations most vulnerable to waste,
fraud, corruption, abuse, and mismanagement. Enforcement of our
Federal tax laws has been on that list since 1990 for the last
33 years. In this year's update, GAO presented startling data
about IRS audit rates for individuals between 2010 and 2019.
Now, the dotted red line shows the audit rate for tax filers
making $5 million a year or more, and you see the dramatic
reduction in audits taking place of the wealthiest American
citizens, less than 1 percent of the American people.
Ms. Lucas-Judy, GAO identified that audit rates decreased
for everyone. In other words, the IRS was much less efficient,
in general, but the dotted red line shows that it declined the
most for people making the most money. Is that right?
Ms. Lucas-Judy. Yes.
Mr. Raskin. OK. What has the Inflation Reduction Act done
to your ability to actually do the audits and to crack down on
tax-cheating schemes?
Mr. Werfel. Well, I will take that question, Mr. Chairman.
I appreciate it. It makes all the difference in the world. I
mean, the emphasis of the Inflation Reduction Act is that if
you are middle or low income, you will receive better service,
but if you are wealthy or a bad actor of any wealth, you will
receive more scrutiny. That is the agenda that we are
undertaking under the Inflation Reduction Act. So, we are using
the funds not to increase audits on middle-and low-income or
small businesses. We are using the funds and are laser focused
on----
Mr. Raskin. Why do some people not want that? Why is there
a whole political lobby trying to undermine the effectiveness
of the IRS?
Mr. Werfel. That is a big question, Mr. Chairman. I have
been in and around the IRS for a long time. I find that we are
often kind of the poster child of government, and when you are
debating big government versus small government, we usually
enter the argument, but I can tell you this. I have been at the
IRS in this role now for 7 months. All I find when I get there
are absolutely dedicated passionate public servants that want
to do the right thing. They are not perfect, they do not always
do it correctly, but they are trying to do the right thing, and
we are rallying around this mission, this three-part mission
that I have outlined.
If you need to reach the IRS, you should be able to reach
the IRS. For the wealthy and bad actors, we are increasing
scrutiny. And third, we are going to help victims of tax scams.
We are going to try to prevent them, and we are going to hold
the perpetrators accountable. That is the agenda, and that is
the focus. And I really want the American people to understand
that a well-funded IRS can achieve great things along those
three areas.
Mr. Raskin. Thank you. I yield back.
Mrs. McClain. Thank you. The Chair now recognizes Mr.
Sessions.
Mr. Sessions. Madam Chairman, thank you very much. I
appreciate the Ranking Member for his questions. With that
said, Mr. Commissioner, yesterday we spoke about the
effectiveness of the IRS, their ability to adapt themselves to
what might be near-term companies that offer wide services, and
how they have adapted themself to technology to the things that
would be necessary to be aware of them offering good customer
service. I also talked to you about, and you and I spent a good
bit of time talking about, questions that you do not want to
answer that are extraneous to that matter, and you heard me
agree with you. So, I am not looking for an answer now, but
want you to know that I have penned a letter today to you that
will be in the mail.
And essentially it goes back to some hearings that we have
held here in our Committee on testimony about IRS agents who
were whistleblowers, and they brought up information that they
had faced retaliation, and I want you to know that I am sending
you a letter. We are going to ask you a series of questions
about that retaliation, about your involvement, about the
Agency. We are going to match up your answers with that, that
we have received in detail from these IRS agents who came into
contact on a regular basis with the Department of Justice,
Department of Treasury, and were overridden on what seemingly
could be described as perhaps an imperfect system, but they
were held back what we also see as political reasons.
Next, recent court documents talk about how the IRS
contractors have released information of a number of high-
profile people, and we just want to make sure that you answer
just as you have today about other things that are not going so
well, about the steps that you have taken. GAO will be
interested in that. Others will be interested in that. And even
things like 3 years ago, the New York Times ran a story about
the release of data and information, and we have yet to hear
back of specific information pertinent to that about any
investigation you may have made.
Commissioner, please know this, that we do have problems
with the IRS, and we also know the IRS has their own problems
of trying to stay up with people and to do things. But we
believe that this new money that is coming there should also go
directly to fix the problems of people who are honest
taxpayers, who are trying to get their work done, getting phone
calls that come in, training that is necessary as to where an
answer would be given, to where you strongly identify people.
We talked yesterday about this dot-gov portal that perhaps you
are relying on and how ineffective that is. Billions of
dollars, hundreds of billions of dollars went out to people
that probably should not have received them based upon data
that you were counting on that is fraudulent about those
individuals.
So, I want you to know that we believe that you are under
the gun. We believe you do not have the adequate resources,
that your computer systems are outdated. With that said, we are
also concerned about the integrity of high-value people that
you just spoke about. You spoke about the number of people
making $5 million not paying taxes. Do you not find out until
the end of the year that you are not getting a regular 941,
that you are not receiving the information that you receive?
Why is it that you cannot look at those people who are these
high-value people and make some determination earlier?
Mr. Werfel. Well, we are trying to build the infrastructure
to be able to do it more effectively. It is not one simple
answer. The way in which taxes are evaded, sometimes they are
set up in extremely complicated structures using offshore tax
havens. Sometimes, as mentioned, it is overstating deductions.
It comes in a variety of different forms, and what happened
over the 12 years that predated the IRA is, due to budget cuts
and lack of investment, we lost track. We fell behind. So, for
those taxpayers that can hire an army of lawyers and army of
accountants, we fell behind in terms of keeping pace with the
complex methods they are using, in some cases, to shield their
income, and now we are catching up. And we are catching up by
investing in data scientists, and engineers, and economists,
and subject matter experts that are going to help us now keep
pace and identify at greater specificity and a greater accuracy
where these issues are so we can select the right cases for
audit and bring that those funds that are due back to the
American people.
Mr. Sessions. One last question, and then I will yield back
my time. The gentlewoman, Ms. Lucas-Judy, referred to the
recommendations and that the IRS has afforded themselves of
looking at about 85 percent of the recommendations. Were
recommendations made to you, Ms. Judy, to them about these
high-value accounts, about how you look at that?
Ms. Lucas-Judy. We have recently issued a report on the
Partnership Audit Program and made recommendations that IRS
should improve its audit selection models and also make sure
that it is defining large, complex partnerships and putting in
place measures to assess the effectiveness of the audit
program. Thank you.
Mr. Sessions. And what was their response?
Ms. Lucas-Judy. I believe that they agreed with the
recommendations.
Mr. Sessions. Thank you very much. I yield back my time,
Chairwoman.
Mrs. McClain. Thank you. The Chair now recognizes Mr.
Raskin.
Mr. Raskin. Thank you, Chair McClain, for calling the
hearing, and also Ms. Porter and Mr. Mfume for their thoughtful
remarks today.
Look, the American people want a tax system that is
simpler, fairer, and more responsive, and I wish that we could
have hearings on each of those. I mean, just to take a look at
simplicity, for example. I have lived in foreign countries
where they do not have a multibillion dollar business in H&R
Block. And all of these companies that are trying to help
people understand their taxes, and most people's taxes, you
know, 90 percent of people's taxes could be done in 15 minutes
or 20 minutes, which is what it is like in countries around the
world. We should be having a hearing about why we have a $10-
billion-a-year-plus business in helping people do what the
government should be helping them do instead. But what we have
got is one more hearing to beat up on the IRS as part of the
program to deconstruct the administrative state as Steve Bannon
promised at the beginning of the Trump Administration, and we
are right in the throes of it. One can only regard with
amazement that any member of the Republican Party today would
lecture the Commissioner of the IRS about efficiency or
organization or anything else.
Look at what the Republicans are saying about the
Republicans today on Capitol Hill as we live through all of the
reverberations of the Chaos Caucus. So, ``the world is burning
around us. We are fiddling. We don't have a strategy.'' That is
Representative Steve Womack, Republican from Louisiana. ``We
are fractured,'' says a Member of this Committee,
Representative Anna Luna from Florida. ``It is not a normal
Majority,'' says Representative Tom Cole, Republican of
Oklahoma. Here is Representative Marjorie Taylor Greene talking
about the Republicans: ``This conference is absolutely
broken.'' Here is Kevin McCarthy, who used to be speaker before
he was deposed by the Republicans: ``This is embarrassing for
the Republican Party. It is embarrassing for the Nation.'' Here
is Representative David Joyce from Ohio, who probably sums it
up best: ``We are a party that cannot govern.''
Here is Representative Troy Nehls from Texas: ``We are a
broken conference.'' Representative Tom Emmer said, ``If it
were a family, we would be the most dysfunctional family on the
face of the planet.'' Here is Representative Austin Scott, who
ran briefly for Speaker in the speakership sweepstakes taking
place right now: ``It makes us look like a bunch of idiots''
and Representative Mark Alford from Michigan, another
Republican: ``We are a ship that does not have a rudder right
now.'' So, it would be great if we could actually get a Speaker
of the House and a functioning House of Representatives so we
could deal with these issues.
Now, the implementation of the IRA shows that providing
adequate resources to the IRS dramatically improved services to
our people and the effectiveness of the overall mission. In the
2023 filing season, IRA investments allowed the IRS to create
and adopt digital tools to process tax returns more
efficiently. The Agency greatly improved in-person service,
service over the telephone, and online customer service, but we
know a lot more needs to be done. I have a constituent who came
in to see us in August. He and his wife had filed their taxes
in April. They got their refund from the state of Maryland in 2
weeks. After 5 months and multiple attempts to get the IRS to
send their tax refund, they still could not get it. They
reached out to my office in desperation, and we were able to
work with the Taxpayer Advocate to make it happen. But nobody
should have to go through that experience of bureaucratic
lethargy and frustration like that, but we know that you are
making improvements. It is moving in the right direction, but
you are writing against a background of decades of deliberate
underinvestment.
Well, the IRA is also making an administration tax system
more equitable. You are hiring experts who can audit and
enforce tax laws against big corporations and ultra wealthy
filers who have been able to get away with a lot before that.
Commissioner Werfel, how has the IRA allowed IRS to crack down
on tax cheats? Is the investment the American people have made
paying off in terms of the money we are getting back?
Mr. Werfel. It is, Ranking Member Raskin. It absolutely is,
and we are putting the money to work today to take a variety of
different steps. We are increasing the number of audits on our
largest corporations using analytics that we have invested in
to make sure that we select the right corporations that are the
highest risk of shielding income inappropriately. We have
increased the number of audits on complex partnerships,
something the GAO has pointed out, how anemic our partnership
audit rate is. And again, we are using invested new tools and
analytics to make sure that we are understanding the types of
trends necessary to know where those complex partnerships are
that are actually evading taxes, so we have improved the
efficiency of our audit.
And as mentioned earlier, we have launched an effort to get
back taxes from millionaires and billionaires, and we have
identified 1,600 high-priority targets, if you will, of
millionaires and billionaires, and we have already collected,
in the early months, over $100 million in back taxes. All of
that is IRA money being put to work. And as you mentioned, on
the services side, we have a lot of work to do, building block
by building block. We are making changes to our services to
make that story that you told a thing of the past.
Mr. Raskin. Thank you very much. I yield back, Madam Chair.
Mrs. McClain. Thank you. The Chair now recognizes the
gentleman from Alabama, Mr. Palmer.
Mr. Palmer. I know you keep talking about going after
millionaires and billionaires, but you are also going after
Taylor Swift fans who sold their tickets for over $600. The
previous rule was if someone earned $20,000 and had more than
200 transactions, you did it, but the bill lowered it to $600
regardless of the number of transactions, so it is not just
millionaires and billionaires. You are also going after
auditing small businesses and others. And I just want to point
out something to you. One of your predecessors, John Koskinen,
testified before this Committee in 2015, and he said it would
not be advisable to audit our way out of the tax gap, yet that
is exactly what you are trying to do.
I have a question for you, Commissioner Werfel. If a tax
filer, if a private citizen willfully concealed or manipulated
a tax document, would that be considered a form of tax fraud?
Mr. Werfel. Yes. Based on the way you described, if they
willfully manipulated to misdirect or misreport, that could be
considered tax evasion.
Mr. Palmer. Yes. And the penalty for that could be a fine
up to $250,000 and up to 5 years in prison. Is that correct?
Mr. Werfel. Well, each case differs, but they are----
Mr. Palmer. And for a business, it could be up to $500,000
and 5 years in prison. Let me ask you this. If government
auditors were similarly found to be backdating or manipulating
tax forms of private citizens, would that also be considered a
form of tax fraud?
Mr. Werfel. It is concerning and----
Mr. Palmer. No, no. I asked you a direct question. If a
private citizen altered information on a tax document, whether
it is a date or a signature from a supervisor, it would be
considered tax fraud and it would be prosecuted. It is a
felony. They could have to pay up to $250,000 in fines, and
they could serve up to 5 years in prison. So, what are the
penalties for IRS employees who do the same thing and possibly
jeopardize a private citizen on their tax filing? So, what is
the penalty?
Mr. Werfel. Yes, there should be accountability.
Mr. Palmer. Yes, but what----
Mr. Werfel. It----
Mr. Palmer. No. What is the penalty?
Mr. Werfel. If you will allow me to elaborate, I can
elaborate.
Mr. Palmer. Yes. I do not want a long answer. I want you to
tell me, what is the penalty?
Mr. Werfel. Well, there is no specific penalty. It depends
on the circumstances, and it does expense on the circumstances
with the taxpayers as well.
Mr. Palmer. The Wall Street Journal reported on this. You
are in court right now, Lakepoint II, LLC v. Commissioner. The
Commissioner would be you where you had people who falsified
documents, and that is not the only one. So, did anybody get
fired?
Mr. Werfel. Let me tell you what is going on. When any----
Mr. Palmer. Did anybody get fired?
Mr. Werfel. We are looking into the appropriate personnel.
We are following the right process.
Mr. Palmer. OK. Will anyone get fired? Well, if you find
they did this intentionally, and the documents indicate they
did, because there is an email chain. And maybe, Madam
Chairman, Ms. Chairman, we need to investigate this on behalf
of the taxpayers because I have major concerns about the tax
gap, major concerns. The biggest problem with the Tax Code is
its complexity. We need a simpler tax code. And I think we
would collect more taxes. Rather than audit people, rather than
manipulate tax documents so that somewhere down the line,
somebody who filed a legal, accurate tax return does not face a
tax bill and potentially a penalty because somebody at the IRS
falsified the document. So, there has got to be some penalties.
Mr. Werfel. Yes. I can assure you, Congressman, we are
taking steps to correct the record, to make the taxpayer whole
in any of those situations, and they are extremely limited,
that we are taking all the right steps and all the right
procedures to make sure that that situation is corrected.
Mr. Palmer. Will anybody be fired?
Mr. Werfel. If there is any accountability, we will follow
the right procedures to ensure accountability.
Mr. Palmer. Will anybody be fired? Thank you.
Mr. Werfel. I am not going to comment on an employee
process as to----
Mr. Palmer. If you find out that it was done intentionally
as the evidence indicates, keeping in mind the severity of the
penalties that are imposed on private citizens, the least that
anybody can expect is that someone be dismissed from their job.
And I hate to say that because I hate to fire anybody, the
consequences for their families, but think about the lack of
trust that the American people have in the IRS, and put that
first and foremost. I yield back.
Mrs. McClain. Thank you. The Chair now recognizes Ms.
Norton for 5 minutes.
Ms. Norton. Thank you, Madam Chair, and I appreciate this
hearing.
Mr. Werfel, when the American taxpayers reach out to the
IRS for help with their taxes, a specific filing or
troubleshoot identity theft, they rightfully expect and deserve
prompt and helpful assistance. In the past, the IRS has at
times fallen short of its duty to serve the American people
through timely and accurate responses to taxpayers because of
insufficient funding. But I am really pleased to see that the
IRS markedly improved its customer service in the most recent
tax filing season. Democrats' historic investments in the IRS
through the Inflation Reduction Act have already improved
taxpayer services.
So, Commissioner Werfel, the IRS achieved an 87-percent
level of success answering taxpayer phone calls, exceeding the
ambitious 85 percent success Treasury Secretary Yellen set for
your agency. Is that correct?
Mr. Werfel. That is correct.
Ms. Norton. Commissioner Werfel, the IRS also dramatically
cut the average time that a taxpayer has to wait on hold to
speak to the IRS or to an IRS employee. Is that correct?
Mr. Werfel. That is correct.
Ms. Norton. Commissioner Werfel, for taxpayers who are
unable to reach a live assistance immediately, the IRS expanded
its customer callback option, correct?
Mr. Werfel. Correct.
Ms. Norton. Commissioner Werfel, how was the IRS able to
make these telephone and online customer service improvements?
I understand the IRS expanded in-person service in 50 taxpayer
assistance centers across the country.
Mr. Werfel. That is correct.
Ms. Norton. Commissioner Werfel, what help can IRS
taxpayers expect to receive from one of these taxpayer centers?
In addition to these permanent taxpayer assistance centers, the
IRS started a new initiative, pop-up taxpayer assistance
services, to assist filers in hard-to-reach areas who might
have difficulty getting a permanent location.
Mr. Werfel. Yes. We want to meet the taxpayers where they
are. As I mentioned, not every taxpayer can afford an
accountant, and not every taxpayer has the means to travel to a
location where we have a walk-in center. So, we are going to
where the taxpayers are, and we are setting up what we are
calling pop-up walk-in centers where we are being as accessible
as we can to taxpayers that need help. We are having Saturday
hours for taxpayers that cannot make it during the week because
they are working, and we are holding special sessions with low-
income taxpayers to help them with their refundable credit
application so they get it right the first time.
Ms. Norton. Commissioner Werfel, when Democrats enacted the
Inflation Reduction Act, we prioritized the taxpayer
experience. We focused on building an IRS that can meet the
needs of taxpayers. From your testimony, Mr. Werfel, it is
clear that the investment has already helped address the IRS'
longstanding customer service issues, but everyone on this dais
still hears from constituents who have problems getting the
refunds they deserve. So, Commissioner Werfel, Inflation
Reduction Act funding runs through Fiscal Year 2021. Briefly,
what is your vision for how the IRS will serve the Nation in
Fiscal Year 2031, and how do you plan to achieve this vision?
Mr. Werfel. I appreciate that question. The vision is that
taxpayers who need to reach us will be able to reach us
quickly, get their issue resolved because they are either doing
it in an automated way or with an effectively trained IRS
agent, and that the supply is meeting the demand of taxpayer
needs. That means that we have the right sized staff, that we
have the right number of walk-in centers where people want to
meet us in person, that we have the right sized staff in our
call centers, and our call center is modernized with the right,
for example, chat bots, the right callback options, the right
call routing.
So, that we are investing in technology for maximum
efficiency benchmarked against the private sector's best call
centers. And it means that our website is operating on private
sector benchmarks for online banking so that you can go in, and
you never have to talk to a person or walk into a walk-in
center. You can manage everything and see everything you need
and manage your taxes in your online account.
And as I said earlier, brick by brick, we are building
these functionalities. After 12 years of underfunding, we fell
behind. Some of this stuff we can do immediately. Some of this
stuff cannot be rushed. So, as you will see in filing season
2024 that is coming up, there will be new functionality in the
individual online account, new functionality in our new
business online account. There will be new functionality in the
call center, more callback options, more chat bots. Incremental
change every filing season that a taxpayer arrives, they should
see an increasingly better experience versus what the opposite
was before the Inflation Reduction Act and before we had this
funding, where each year it seemed to get worse. Those days are
over as long as we can hold on to that Inflation Reduction Act
funds and make smart investments, and I am accountable to make
sure we are making smart investments.
Ms. Norton. Thank you. I yield back.
Mrs. McClain. Thank you. The Chair now recognizes the
gentlelady from North Carolina, Ms. Foxx.
Ms. Foxx. Thank you, Madam Chair, and I thank our witnesses
for being here today. Commissioner Werfel, can you explain what
the Applicable Federal Rate, or AFR, is?
Mr. Werfel. I think you are referring to the overall tax
rate for the public, if I understand correctly.
Ms. Foxx. Well, the Applicable Federal Rate, as I
understand it, is the minimum interest rate that the Internal
Revenue Service allows for private loans. Is that correct?
Mr. Werfel. I believe you are correct, ma'am.
Ms. Foxx. OK. So, if someone gave his or her family member,
including a brother, a loan, would that person have to charge
an interest rate equal to or higher than the current AFR?
Mr. Werfel. I do not believe they would have to charge an
interest rate. But again, if you are going to walk me into a
hypothetical, I would want to make sure that I am getting it
right and consult with my team, but I do not think they are
required to provide an interest rate. It depends on whether
they are going to treat it as a gift or a loan, and there are a
lot of implications there.
Ms. Foxx. Well, then I have a follow-up. It is my
understanding that there is an AFR and that it is to be
charged. But if the rate is less than the AFR, so if somebody
gives you a loan and they do not charge you an interest rate,
then the loan is technically a gift, which carries certain tax
implications. Is that correct?
Mr. Werfel. Yes.
Ms. Foxx. Yes. You answered yes?
Mr. Werfel. Sorry. Yes.
Ms. Foxx. OK. So, if someone gave his or her family member
a personal loan of, say, $200,000, but an interest rate equal
to or higher than the AFR at the time was not charged, would
that loan then be considered a taxable gift?
Mr. Werfel. Again, you are getting into a hypothetical
where I would want to know a lot of other facts and have kind
of expert accountants with me advising, so I think it is
dangerous for me to say yes or no unequivocally on a fact
pattern where I would probably need a lot more information.
There might be other countervailing factors in play that would
impact the----
Ms. Foxx. Well, now, what kind of countervailing factors
would you hypothesize?
Mr. Werfel. Well, I mean, I am not sure where you are going
with your fact pattern. I do not know----
Ms. Foxx. Well, let us just----
Mr. Werfel [continuing]. The circumstances, whether there--
--
Ms. Foxx. I am just trying to be----
Mr. Werfel [continuing]. Is someone that has been deceased,
the timing of this issue.
Ms. Foxx. Yes. I am just trying to determine if this loan
does not have interest charge to it, then would that be
considered a taxable gift, and other factors may come into
play, but is it a taxable gift?
Mr. Werfel. Yes. And again, I do not know the amount. For
example, there is a----
Ms. Foxx. Well, I used $200,000.
Mr. Werfel. OK. Fair enough. Again, at the risk of walking
through a hypothetical where I do not know the facts, as a
general matter, yes, you are describing a situation that may
have a taxable event.
Ms. Foxx. OK. Great. Glad we were able to establish that.
So next, the so-called Inflation Reduction Act gave the IRS an
additional $80 billion in funding, and you have been talking
about that. I think we can all agree that that is an incredible
amount of money, right? That is a lot of money, isn't it?
Mr. Werfel. It is.
Ms. Foxx. Even in today's way of judging money.
Mr. Werfel. I agree.
Ms. Foxx. So even after Congress trimmed this amount down
to nearly $60 billion in the Fiscal Responsibility Act, how
many new agents does the IRS plan to hire?
Mr. Werfel. So, we are hiring----
Ms. Foxx. Your mic is not on.
Mr. Werfel. We are hiring not just agents, we are hiring
customer service reps, accountants, agents. We have published
our 3-year view of staffing, which I am very confident on
because I can make key assumptions about needs and market
trends.
Ms. Foxx. OK. Well, let me ask you----
Mr. Werfel. So, we are at 90,000 today, and I think over
the next 3 years, we should be over 100,000, but not much over
100,000.
Ms. Foxx. OK. So how many tax enforcement agents out of the
ones that you have planned to hire would there be in that 3-
year plan?
Mr. Werfel. I might have that number on me, Congresswoman.
Ms. Foxx. I am about out of time.
Mr. Werfel. Yes. We should be hiring about 8,000 total, if
I am reading my charts correctly, by the end of 2025.
Ms. Foxx. OK. So, you have previously stated the IRS would
not target taxpayers earning below $400,000 per year. How can
we be sure that the new IRS agents and tax enforcement
resources will not go to targeting middle-class taxpayers and
small businesses?
Mr. Werfel. I appreciate the question. We publish our audit
rates each year, and you can assess those audit rates by income
level. So, it is a very transparent way of being held
accountable that the audit rate for people earning less than
$400,000 will not increase.
Ms. Foxx. So, you are guaranteeing that you will not
increase the number of audits of people making less than
$400,000 a year?
Mr. Werfel. That is my marching order to the IRS, and if we
fall short of that, I will be held accountable for it, but we
will publish those rates.
Ms. Foxx. I noticed before you said your ``marching
orders,'' and a little while ago you said you had control of
the IRS. I am glad to know somebody in Federal Government feels
that he or she has control of some agency, so we will come back
to you with that. I am sure it is going to show up in the
minutes that you are in control. Thank you.
Mr. Werfel. Congresswoman, if you can indulge me, I just
wanted to offer that a mentor of mine, Linda Combs, who is a
constituent of yours, passed away recently.
Ms. Foxx. Yes, sir, I am aware.
Mr. Werfel. Wonderful public servant. I know she looked up
to you as a mentor as well, and I just wanted to thank you for
mentoring her as she mentored me in my career.
Ms. Foxx. Well, what a nice thing for you to say, Mr.
Werfel. Thank you. Linda was a very beloved person.
Mrs. McClain. Thank you. The Chair now recognizes the
gentlelady from California, Ms. Porter.
[Chart]
Ms. Porter. Washington spends a lot of time and energy
scrutinizing how our Nation collects taxes. What do real
Americans care about? They want their filings to be free, low
effort, and mistake free. That is it. They want their filings
to be free, low effort, and mistake free, and they want a good
experience doing it. So, let us cut through the Washington
noise and help people decide what tax filing method can get
them there.
Commissioner Werfel, let us say someone wants to file their
taxes the old-fashioned way, by hand. I used to think that was
fun when I had more free time. Would that be a free way to
file?
Mr. Werfel. It would be.
Ms. Porter. That would be free. I cannot get this marker
off. All right. Yes. So that would be free. All right. How
about low effort?
Mr. Werfel. No.
Ms. Porter. No, it is a lot of work.
Mr. Werfel. Yes.
Ms. Porter. You are going to read a bunch of documents. You
got to try to----
Mr. Werfel. Find----
Ms. Porter [continuing]. Cross reference things.
Mr. Werfel. Yes.
Ms. Porter. Exactly. Do filers who use this method make
minimum mistakes?
Mr. Werfel. No, more mistakes.
Ms. Porter. More mistakes?
Mr. Werfel. Yes.
Ms. Porter. I have made a mistake and had one of your
correction notices. One out of 3, not too good. So, let us look
at tax preparation software. This is a multibillion-dollar
industry, as my colleague, Mr. Raskin, mentioned. Would that be
a free way to file?
Mr. Werfel. Generally, no.
Ms. Porter. Generally, no. They sell you a lot of things
along the way, audit defense and, you know, all these different
programs and the extra help that you can get so that you----
Mr. Werfel. The software itself costs money.
Ms. Porter. Yes. It all costs money. Does that method
involve low effort?
Mr. Werfel. It depends, but it can.
Ms. Porter. Yes, I think usually----
Mr. Werfel. It is easier.
Ms. Porter. Easier. All right. So, let us put a box there.
And how about filers' mistake levels? How are mistakes using
taxpayer prep?
Mr. Werfel. Fewer mistakes because the software catches
your mistakes in real time.
Ms. Porter. Yes. All right. Let us look at accountants. Is
that free?
Mr. Werfel. Definitely not.
Ms. Porter. Definitely not. All right. Does that involve
low effort?
Mr. Werfel. It is a higher effort for the accountant, but
low effort for the taxpayer.
Ms. Porter. Low effort for the taxpayer. We all hear the
stories about people dropping off shoeboxes full of paperwork.
Do they make minimum mistakes?
Mr. Werfel. They do, although I would love to talk to you
about holding them more accountable for some of the things they
do, but they do make fewer mistakes.
Ms. Porter. I would like to talk to you about that, too,
and I noticed that in your testimony, so I will be following
up, all right, but generally, fewer mistakes. All right. And
let us look at IRS Direct File. This is a new option that you
are rolling out in 2024, a pilot program, correct?
Mr. Werfel. Correct.
Ms. Porter. Will this be free?
Mr. Werfel. Yes.
Ms. Porter. Yes. Will this require a minimum amount of
effort?
Mr. Werfel. Yes.
Ms. Porter. Will people have the benefits of eliminating
common mistakes?
Mr. Werfel. Yes, because we are going to follow the same
structure as the tax prep softwares and catch mistakes in
midstream.
Ms. Porter. All right. Three for three. That is what I am
talking about, and so I am glad that some Americans are going
to have this option the next time they file. But Commissioner
Werfel, why is this just now becoming an option for taxpayers?
Mr. Werfel. Well, you know, there is a long story here
where we have tried a variety of different ways to get free
electronic filing for eligible citizens. We have something
called the Free File Alliance. It has had mixed results over
the years where some of the software providers have offered
free solutions, but Congress, in its wisdom, in the Inflation
Reduction Act said to the IRS you need to study a direct
solution. And, you know, frankly, I think it aligns with our
mission to offer taxpayers more options.
I think it is absolutely important as you walk me through
these questions that all of these still should be options for
taxpayers, if they want to do it by hand, if they want to hire
a tax prep software, if they want to go with an accountant, but
should they also have the option to file direct with the IRS?
They do not have to if they do not want to, but should they
have the option? You can make the case that a high-functioning
tax administration agency would offer that option.
Ms. Porter. All right, and it is the one with the best of
the criteria we identified. It is the winner, winner chicken
dinner here. It looks like the best thing. Who could possibly
oppose the IRS doing its job this effectively and making it
free and streamlined and lowering the effort for people to pay
their taxes? Who is on the other side against this?
Mr. Werfel. I think there is a concern that if we issue a
direct file solution, it will be disruptive to the software
industry that point to----
Ms. Porter. Disruptive to the software industry. You mean
these industries right here that are making billions of dollars
off taxpayers to simply assist taxpayers in doing something
that they should be able to do by working directly with our
government?
Mr. Werfel. That is the concern that I have heard
expressed, yes.
Ms. Porter. Does the IRS have any profit incentive?
Mr. Werfel. No.
Ms. Porter. Do tax preps software companies have a profit
incentive?
Mr. Werfel. Yes.
Ms. Porter. Do accountants have a profit incentive?
Mr. Werfel. Yes.
Ms. Porter. The only interest the IRS has is in providing
an option that is free and easy and reduces mistakes for people
to be able to file their taxes. So now lawmakers have a choice:
we can support and invest in the IRS, whose mission is to do
right by the taxpayers and who we can hold accountable for
delivering a free, low-cost, mistake-free option, or we can
stand with special interests, who want to see an
underperforming IRS so that they can profit to the tunes of
billions of dollars off taxpayers. I know where I stand, and I
yield back.
Mrs. McClain. Thank you. The Chair now recognizes the
gentleman from Minnesota, Mr. Grothman.
Mr. Grothman. I was just explaining to people the other day
how people from other states cannot tell the difference between
Minnesota and Wisconsin. We are just alike. You got to say----
Mrs. McClain. My apologies.
Mr. Grothman. It is OK. It is a nationwide problem. OK. I
was just thinking, in China they invest in power plants, in
education degrees. In America here, we invest in IRS auditors.
A grim sign for the future. Just a general question, say
between 2010 and 2023, about what percentage of returns were
paper and what percent were computer filed? I mean, I take it
every year that the gap shrinks. I am not going to politifact
you.
Mr. Werfel. We are up over 90 percent at this point that
are filed electronically.
Mr. Grothman. And do you know what it was 15 years ago?
Mr. Werfel. It was a lot lower. I think it was closer to 50
percent.
Mr. Grothman. Yes. So, when you go from 50 percent computer
filed to 93 percent or something, you would expect to need less
auditors, wouldn't you? I mean, there would be something wrong
if you computerized to that degree and had the same number of
auditors.
Mr. Werfel. I think it depends on the complexity of the
filing because some of the files that we receive electronically
are thousands of pages long, and we are seeing a spike in the
complexity of large multinational corporations.
Mr. Grothman. OK. I will just rely on common sense. If we
have more computerized returns, we would expect less IRS
auditors. That is why we encourage people to file
electronically, but we will go on to something else.
I have had clients feel that political activity on their
part leads to audits. I do not know whether that is true or
not. We have talked on the Oversight Committee about the
politicization of the FBI. I wonder, have you guys ever done a
study? We do not do it in Wisconsin, but other states, people
register Republican, Democrat. Is your employee pool about 50/
50, or are we tilting too much toward one political belief? Do
you have any idea?
Mr. Werfel. We absolutely do not ask that question. I think
it would be inappropriate for us to ask that of our staff. We
do make it clear that it is fundamental value of the IRS that
politics has no place in our operations or our decision-making.
Mr. Grothman. OK. Next question. We talk about wealthy
people not paying taxes, we got to look into it, and sometimes
they do not pay taxes because of foolish public policy
decisions made by the people up here. I am thinking things like
a tax credit for a fancy electric vehicle or Section 42 tax
credits for wildly wealthy builders. Could you give us an idea
of why wealthy people may not be paying taxes?
Mr. Werfel. I think we see two trends. One is what I will
call very aggressive avoidance, where they are looking for the
best tax advantaged status, but because we have not been on an
appropriate watch, they have pushed too far into the gray area
and need to be pulled back. And the second is intentional:
intentional evasion, moving money into offshore----
Mr. Grothman. You think usually when wealthy people put a
zero at the bottom of their tax return, they did something
wrong?
Mr. Werfel. Certainly not in every case. I would imagine in
most cases, no, but the number----
Mr. Grothman. Well, why do not you look into it or do a
study of people, I do not know, people who would appear to have
a lot of wealth who are not paying taxes and let us know why?
What type of tax----
Mr. Werfel. There have been studies done. I am happy to
share some with you.
Mr. Grothman. Good, good, good, good. Now, the next
question. The Inspector General reports that the IRS
erroneously issued $3.3 million advance child tax credits to
1.5 million ineligible Americans. Can you explain how this
happened, and if you also explain to us why one-for-one tax
credits invite cheating?
Mr. Werfel. Yes. There is always program integrity
challenges with any Federal program where you are outlaying
money to beneficiaries. Unfortunately, there are many who would
look to exploit the complexity of our tax system, either for
their own financial advantage or victimize someone along the
way. It is stealing of credit. It is a problem.
Mr. Grothman. I am sorry. Dollar-for-dollar credits, things
like earned income tax credit, child tax credit, it is so easy
to cheat and make a lot of money, right? Isn't that the problem
with those things?
Mr. Werfel. The one clarification I would offer is that a
large amount of the error is more basic mistakes because of how
complicated it is to apply for it, but there is a part of the
error which is concerning. It is a small part, but it is a
concerning part, which is intentional fraud.
Mr. Grothman. OK. We will go over another one. If they are
not going to stop me. Did the IRS see more child tax credit
claims filed after the American Rescue Plan made an increase in
the child tax credit? Did the number of claims go up?
Mr. Werfel. I am not sure. I would have to get back to you
on that.
Mr. Grothman. OK. Be illuminating if they are. The IRS
reported as of July 31--well, I will turn it back over to my
substitute Chairman here.
Mr. Sessions.
[Presiding.] The distinguished gentleman from Wisconsin
yields back his time. The gentleman from Florida, Mr. Frost, is
recognized for 5 minutes.
Mr. Frost. Thank you, Mr. Chair, and thank you to our
witnesses for being here.
Republicans have spent more than a decade working to
kneecap the IRS through funding cut after funding cut. At the
same time, Congress has tasked the Agency with enforcing one of
the most complex tax codes in the world on a growing population
with increasing wealth inequality. The IRS has struggled for
years to provide the level of service taxpayers deserves,
whether that was processing people's tax refunds in a timely
manner, performing audits against high-risk individuals, or
enforcing tax law against fraudsters and those who made false
business statements in order to get loans. The Agency struggles
with customer service in several ways, but two that I am
especially concerned about are the old IT systems that cannot
digitize IRS forms and then the IT modernization blunders.
Ms. Lucas-Judy, earlier this year, the Government
Accountability Office, GAO, found that the IRS still uses
massively outdated IT systems. How do these systems impact the
taxpayers?
Ms. Lucas-Judy. Well, their legacy IT systems are at the
heart of a lot of IRS operations on customer service side, on
returns processing and accounts management, as well as
enforcement, and so it is very important, and that also has an
effect on accuracy and on speed of processing. So, it is very
important that IRS have be able to implement its plans and
prioritize the different modernization initiatives that it has
in place, and that it be clear about the goals and the
timelines and progress.
Mr. Frost. So, it seems like it also contributes to
security risks, unmet mission needs, and staffing issues, and
increased cost, correct?
Ms. Lucas-Judy. Correct.
Mr. Frost. You know, in May, one of my constituents reached
out because she had waited for more than 6 months for her tax
return which she desperately needed to pay rent. She was told
that it would be 120 days, and then it was 60 days, and then
she had to wait for a letter, and then she got the letter, and
the letter said she would have to wait for a year. The IRS is
operated with more than 600 legacy systems, including the
Individual Master File, a 60-year old system, and the software
written is written in a coding language that they do not even
teach in schools anymore. This is one of the most central
systems for tax processing.
The IRS has set a goal to retire the Individual Master File
between 2027 and 2029. Mr. Commissioner, what is the importance
of the IRS meeting this retirement goal for that system, and
does the IRS have the funding it needs to stay on track with
that really important goal?
Mr. Werfel. Yes, I am really glad. It is such an essential
part of what I have been talking about. I have been mentioning,
like, we are laying the bricks of a foundation to improve
customer service. That Individual Master File is kind of the
engine. It is the infrastructure. So, the example I often give
is if you left here and went to the ATM machine and took out
money, by the time you got home and logged onto your online
bank account, it already knows you took money out, but that is
not true in the IRS. It takes us time to process that
information and move it into an online account, and that old
system that is written on COBOL cannot move or communicate
quickly enough with that online solution.
Not only do we need to do it to move to the cloud and move
to a smarter and more manageable architecture, it is also going
to be more secure. It is a keystone for a lot of the efforts,
and we do have some good news. The good news is in April, so
after this filing season, we are going to turn on that modern
system for the first time, and we are going to run it in
parallel with our legacy system, work out any kinks, and
hopefully get it up and running in filing season 2025. So, we
are making progress.
Do we have enough money? I am glad you asked. We have a
modernization budget. As people have pointed out, it is
currently at $60 billion, and it is very, very large and very,
very impactful. The issue, however, is our base budget, our
annual budget to run the trains every day, and that has been
underfunded and is still underfunded. And in order to run those
trains, we have to borrow from the modernization budget to pay
for the base budget, and as we do that, we raid the
modernization budget and then we might not have enough money.
So, the answer your question is we have enough money. As long
as Congress appropriates our base budget, gives us enough money
to run the daily train schedules, then we have enough money to
get our job done.
Mr. Frost. Mr. Commissioner, how will these efforts that we
have just spoken about improve the 2024 filing season for the
people of Central Florida but also across the entire country?
Mr. Werfel. Well, as I said earlier, my goal is that the
improvements we are making are visible and can be felt by
taxpayers because when they come to us in January to April to
pay their taxes, we are making specific improvements. So, we
are changing things for filing season 2024. For example, we are
replacing old scanner and processing equipment, so we will be
scanning more and processing paper more quickly. We have made
changes to the online accounts, added more functionality to the
individual online accounts. We have updated and are redesigning
our notices so they are easier to read, easier to follow, more
plain language. We are enhancing our outreach on tax scams. All
of that happening in filing season 2024 and then a whole host
of additional incremental improvements in filing season 2025.
The idea is to each year get better and better, and where I
see opportunities to accelerate, I will push for acceleration.
The goal is to do things for taxpayers as quickly as possible,
but as safely as possible.
Mr. Frost. Thank you so much. My constituents cannot afford
to wait a long time to get their tax returns, and I think it is
more that every Member on this Committee be on the same page.
We cannot defund the IRS. We need to modernize it. I also want
to end by thanking all the hardworking Federal employees at the
IRS who are serving their country. Thank you, and I yield back.
Mr. Sessions. The gentleman yields back his time. Thank you
very much. The gentleman from South Carolina, Mr. Fry, is
recognized for 5 minutes.
Mr. Fry. Thank you, Mr. Chairman. Part of the IRS' duty is
to ensure that taxpayers are treated fairly, are informed,
receive quality service, and are ensured the protection of
their privacy and confidentiality. I understand this is an
important role for any agency to play. However, there are
serious instances in which preventative measures failed against
cyberattacks or tax information was mishandled, resulting in
needless and very expensive damages to the American taxpayers.
Since 2010, the GAO has made over 450 recommendations aimed at
strengthening the safeguards for taxpayer information and
access to tax processing systems.
Director, I want to start by asking you, how many open GAO
recommendations are there with the IRS currently?
Ms. Lucas-Judy. Well, as I mentioned in my statement, they
have implemented about 85 percent of the recommendations. There
are others that are still open, and some of the ones that are
key include 40 recommendations from our financial statement
audit related to information systems security.
Mr. Fry. And related to some of those 40, what are most of
them about?
Ms. Lucas-Judy. It is a range of different topics. Some of
them have to do with identifying threats and being sure that it
has systems in place for that, understanding and managing the
risks to systems and the supply chain capabilities. There are
some around protecting information as well as detecting
breaches.
Mr. Fry. How many recommendations have been given to the
IRS since the appointment of Commissioner Werfel?
Ms. Lucas-Judy. That I would have to get back to you on.
Mr. Fry. OK. In July of this year, the GAO sent a letter to
Commissioner Werfel that encouraged Congress to hold hearings
focused on the IRS' progress and withhold funds when
appropriate and/or provide incentives. Director, are you
concerned with the IRS' ability to keep pace with the GAO
recommendations?
Ms. Lucas-Judy. Certainly, it is an ongoing conversation
between GAO and IRS. We do have a rigorous follow-up process,
and we have seen progress, particularly on those
recommendations that we have identified as being related to the
enforcement of tax laws, that high-risk area, and those that
our Agency has designated as priorities. But there are others
that are still remaining open including things about making
sure that it has--excuse me, that it could be able to
communicate information about the correspondence backlog; that
it has a human capital strategy in place, as I mentioned in my
opening remarks; that on the security side, that it is
adequately protecting information; that it has got centralized
monitoring of contractors who have access to taxpayer
information; and that employees who oversee contractors know
how to report if they see a breach.
Mr. Fry. Thank you, Commissioner. Your website states that
the IRS stops ``most fraudulent tax returns.'' When a fraud is
suspected, the IRS will contact you via email with
instructions. How long does it take for the IRS to identify
fraud after a Form 14039 is submitted?
Mr. Werfel. I unfortunately have to answer in this way: it
depends. I mean, sometimes we can see just with what is
submitted. We will run an algorithm, and we will say something
is very, very off, and we will say there is a fraud situation.
Sometimes someone will call with a tip into the tip line.
Sometimes the GAO or the Inspector General will point something
out to us that lets us know there is fraud. So, there are a
variety of different ways in which it manifests itself, so
there is no set time.
Mr. Fry. Are you able to say whether that rate has
increased under your watch or not?
Mr. Werfel. It is too early to tell 7 months in. What I am
trying to do right now is make sure that we are spending our
money smartly on investments to improve fraud detection.
Mr. Fry. Great. Commissioner, taking it to a different tack
here. Has the IRS entered into any MOUs or any other agreement
with the Treasury Department or the CFPB for the purpose of
sharing consumer-level transaction data?
Mr. Werfel. Not that I am aware of. I would have to get
back to you on that.
Mr. Fry. So, you are not aware of any MOUs or other
agreements?
Mr. Werfel. Not at my fingertips. I am not aware of that.
Mr. Fry. When do you think that you could get back to us on
that?
Mr. Werfel. By tomorrow I will let you know.
Mr. Fry. So, by tomorrow. And if there are any MOUs or
other agreements, could you provide copies of those by
tomorrow?
Mr. Werfel. As long as I am authorized to do so, yes.
Mr. Fry. Great.
Mr. Fry. Mr. Chairman, with that I yield back. Thank you.
Mr. Sessions. The gentleman yields back his time. Thank you
very much. We now go to the gentlewoman from Pennsylvania, Ms.
Lee, recognized for 5 minutes.
Ms. Lee. Thank you, Mr. Chair. To get to the core of what a
nation values, all one would need to do is look at what its
government encourages in tax credits and deductions, what it
penalizes, and who it decides to audit. Unfortunately, the
biases and inequities embedded in our institutions in history
pervade much of the present-day United States Tax Code. Earlier
this year, researchers at Stanford Institute for Economic and
Policy Research released a study showing how our tax system
disproportionately targets Black families. These researchers
found that Black taxpayers were nearly three to five times more
likely to be audited than non-Black taxpayers.
Chair, I ask unanimous consent to enter this study into the
record.
Mr. Sessions. Without objection.
Ms. Lee. The shocking thing about this report is that
although IRS does not ask about race when a taxpayer is filing
an individual tax return, IRS' automated selection system
disproportionately selects Black taxpayers for audits. GAO has
been looking into how IRS can better understand how tax
provisions can affect individuals and families differently
based on their race or ethnicity or their sex. Ms. Lucas-Judy,
can you tell me about what the Government Accountability Office
has discovered thus far?
Ms. Lucas-Judy. So, we have ongoing work looking at audit
rates and audit selection and equity in audit issues, and that
is something that we will be issuing a report later this year
or early next year. But as far as the information that is
available to IRS or Treasury or others to be able to look at
the potential disparities by race more broadly, we have
recommended that Congress help facilitate information sharing
between Treasury and Census and others to be able to do studies
on inequities, and also that Treasury consider things other
than imputation models to be able to do some of those studies.
Ms. Lee. Thank you. The racial disparity in audit rates is
unacceptable, especially when IRS has chronically de-
prioritized audits on the wealthiest Americans. The number of
people with incomes of $1 million has jumped 50 percent over
the last decade, yet audits on millionaires has dropped by 92
percent in the last 10 years. And in 2021, a team of academic
economists and IRS researchers found that the top 1 percent of
U.S. income earners fail to report more than 20 percent of
their earnings to the IRS. Ms. Lucas-Judy, GAO is planning to
conduct more audit work on this topic. Is that correct?
Ms. Lucas-Judy. That is correct.
Ms. Lee. Commissioner Werfel, what data and evidence are
you tracking to demonstrate equity as a priority at the IRS?
Mr. Werfel. At first, Congresswoman, I want to acknowledge
how important the question yours is raising.
Mr. Connolly. Mr. Werfel, could you move the mic closer?
Thank you.
Mr. Werfel. First, I want to acknowledge how important your
question is. Second, I want to acknowledge that our approach
for case selection for refundable credits was racially biased,
and we must change it. We have taken the immediate step of
significantly reducing the number of audits of refundable
credits and shifting that emphasis to high-end tax evasion. And
we have also begun making changes to our case selection
algorithms to refundable credits to promote equity against all
demographics, and we stated publicly that we will be providing
updates on how this is playing out. We are working with a
variety of different external stakeholder groups, continuing to
work with the researchers at Stanford. I am very motivated and
very inspired to get this right.
Ms. Lee. Thank you. What would you say makes auditing these
top earners so much more difficult?
Mr. Werfel. Those audits are very complicated. The
financial structures are complicated. They hire lots of outside
consultants, lawyers, accountants. They litigate. These things
take a long time, and unfortunately, as we have been talking
about, in the 12 years that predated the Inflation Reduction
Act, we were not making the appropriate investments to keep up.
Think about how different the world is in 2023 versus 2010 when
our budget cuts started: cryptocurrency, you know, more
international globalization of movement of funds. During that
time, it became easier for wealthy individuals and
organizations to work to shield their income. We have some
catching up to do.
Ms. Lee. Thank you. President Biden issued his first
executive order to direct Federal agencies to examine their
policies and actions and how they may create or perpetuate,
however unintentionally, outcomes that are barriers to equal
opportunity. Commissioner Werfel, I am pleased to see that IRS
is taking this issue seriously. Earlier this year, you wrote a
letter to our Senate colleagues assuring them that you take the
racial tax gap seriously. You have already mentioned some of
the steps that you all have taken, and I appreciate you sharing
that for the record. And I look forward to continuing working
with you and with my colleagues here in Congress to ensure our
tax system is fair and equitable for all Americans, and not
just the wealthy elite. I yield back. Thank you.
Mr. Sessions. The gentlewoman yields back her time. The
distinguished gentleman from Virginia, Mr. Connolly, is
recognized for 5 minutes.
Mr. Connolly. I thank the Chair. Mr. Werfel, welcome back.
Great to see you. Ms. Lucas-Judy, what happened to the IRS
budget between 2011 and 2019?
Ms. Lucas-Judy. Overall, the budget was decreased.
Mr. Connolly. Can you be a little more specific, by a
dollar?
Ms. Lucas-Judy. It went down significantly during that
time. I do not have the numbers in front of me. I apologize.
Mr. Connolly. Commissioner Werfel, perhaps you have that
number?
Mr. Werfel. Yes. In real terms, it went down roughly 20 to
25 percent.
Mr. Connolly. Twenty to 25 percent. Did that have any
relationship at all in terms of the operational performance and
capability of the IRS in that 8-year time period?
Mr. Werfel. It had a significant impact.
Mr. Connolly. Like in auditing?
Mr. Werfel. Every dimension of our operation suffered from
the lack of resources.
Mr. Connolly. Customer service?
Mr. Werfel. Yes.
Mr. Connolly. Processing of refunds?
Mr. Werfel. Yes.
Mr. Connolly. So, Ms. Lucas-Judy, it seems to me if GAO
wants to come here and testify about recommendations and
compliance of the IRS, you want to take cognizance and be more
specific in your awareness of what happened in an 8-year period
and, by the way, all of it generated by this Congress. The very
people who are here complaining about customer service do not
want to mention that many of them or their predecessors voted
for stringent cuts in the IRS, including their ability to
replace legacy systems and IT, including ignoring--in fact,
welcoming--the fact that were fewer audits because their
friends were not audited. And it just seems to me we cannot be
here and pretend history began with this Administration or this
IRS Commissioner.
Mr. Werfel, we have had testimony from your predecessors
about money left on the table, money owed to the Federal
Government in legitimate taxes but not collected because of
this capability problem you described. We have usually used the
figure, it is as high as $450 billion a year. Your immediate
predecessor, appointed by then President Trump, actually said
it could be as high as $1 trillion. What is the number you
operate with in terms of money owed the Federal Government but
not collected every year?
Mr. Werfel. Yes. So, the latest information we have is that
the gap that you are describing is about $540 billion.
Mr. Connolly. OK. Let us take that figure.
Mr. Werfel. OK.
Mr. Connolly. Now, help me with math. You must be good at
math because you are the IRS Commissioner, $540 billion a year,
let us say. Let us take that out, as we often do, times 10
years. What is that number?
Mr. Werfel. Five-point-four trillion.
Mr. Connolly. Could that reduce the deficit significantly?
Mr. Werfel. Yes.
Mr. Connolly. So, you think people who are deficit hawks
might want to, before we talk about raising taxes, just make
sure everyone who owes money to the IRS pays it, and,
therefore, we need the IRS to have that capability. Would that
be a sensible proposition, Ms. Lucas? Ms. Lucas-Judy. Excuse
me.
Ms. Lucas-Judy. Thank you. Now they are recommendations. We
are hoping that IRS can work them into its strategic operating
plan because we think it is important now that it does have the
additional funding that it has now this opportunity to address
some of these longstanding challenges in customer service, in
IT modernization.
Mr. Connolly. GAO does a great job of presenting every year
high-risk categories to Congress, and one of which, by the way,
is legacy systems and IT modernization, which I took up and
worked very closely with the head of GAO to try to address
that. And I think we have gotten pretty high marks to doing
that, although IRS remains a case in point where we have lots
of progress to make. Shouldn't the fact that IRS itself now
estimates it is over $0.5 trillion a year left on the table
uncollected, shouldn't that be a high priority for you and for
us?
Ms. Lucas-Judy. It is definitely a high priority.
Mr. Connolly. A high priority. Well, let me just say,
Commissioner Werfel, I want to work with you, and I hope this
Committee wants to work with you. We can talk about tax cheats,
but every American--if we are going to have voluntary
compliance at the high rate we continue to have in America, it
has got to be perceived as a fair system, that what is asked of
me is also asked of him or her. And we have got to come up with
concrete plans to bring that number down as close to zero as
possible. And I am a Democrat willing to even say every one of
those $540 billion ought to be first used for deficit reduction
because it is money we do not have anyhow, so it is not a zero-
sum game. But we have got to do something about this, and the
reason we have not been able to is because of the deterioration
we consciously allowed and voted for.
And final question. Speaking of resources, was your budget
reduced in the debt ceiling agreement that was achieved a few
months ago?
Mr. Werfel. Yes. The modernization budget was reduced by
$21 billion.
Mr. Connolly. I am sorry. What did you say?
Mr. Werfel. Twenty-one-billion-dollar reduction.
Mr. Connolly. So here we are talking about your ability and
inability and foibles and flaws and mistakes, and we cut your
budget, again, by $21 billion. Is that your testimony?
Mr. Werfel. That is.
Mr. Connolly. I thank the Chair.
Mr. Sessions. The gentleman yields back his time. The
gentlewoman, Ms. Crockett, is recognized for 5 minutes.
Ms. Crockett. Thank you so much. I am going to pick up
right where Representative Connolly left off. Out of curiosity,
do either one of you know the definition of ``insanity?''
Mr. Werfel. I think you are referring to doing the same
thing over and over again and expecting a different result.
Ms. Crockett. OK. That is exactly what I was referring to,
and it sounds like that is what this party is good at, but I
want to talk about the theme of the day. Commissioner, you have
said over and over and over the word ``complicated.'' I was not
keeping a tally, but you said it a lot, so I want to work with
this word a little bit. I have a list of items. I would like
for you to let me know if you believe they are complicated or
not. Tax returns?
Mr. Werfel. Complicated.
Ms. Crockett. Operating the IRS without proper investment?
Mr. Werfel. Complicated.
Ms. Crockett. Recruiting workers in this antagonistic
environment?
Mr. Werfel. Complicated.
Ms. Crockett. Auditing millionaires and billionaires?
Mr. Werfel. Complicated.
Ms. Crockett. OK. So, it sounds like you have got a
complicated job?
Mr. Werfel. I do.
Ms. Crockett. And it also sounds like you have to know
something about math. My colleague brought that up as well. It
sounds like you need to be at least somewhat decent at counting
to be with IRS. Yes, you would agree?
Mr. Werfel. Yes, I agree.
Ms. Crockett. OK. You know, it is so weird because my
colleagues on the other side of the aisle wanted to call this
hearing. This is not our first. It is not our second. I have
actually lost count myself of how many IRS hearings we are
having, and they seemingly feel like they can fix your very
complicated issues, but somehow they are not good at simple
math, simple math that would get them to a Speaker, you know,
right? So, we have been 3 weeks without one.
Let me ask you another question that may be another one of
these when the math ain't mathin' situations. There was a
looming government shutdown a few weeks ago, and interestingly
enough, when I do the math, approximately a little bit more
than 60 percent of the people that sit on this Committee
actually voted to shut us down. Now, out of curiosity for
everyone that claims to care about their constituents, do you
think it is easier or more difficult to operate as the IRS
when, say, there is a shutdown?
Mr. Werfel. It is very disruptive to our operation.
Ms. Crockett. Very disruptive. Let me give you another
number that is very concerning to me. That number is 24.
Twenty-four represents the number of days that we have before
the continuing resolution that 60 percent of, and when I say my
colleagues, I am talking about across the aisle, not on this
side. We were about at 100 percent. Actually, we were 100
percent on this Committee that voted to make sure that the
government did not shut down. But if in 24 days we do not have
a Speaker because they cannot figure out their math and we shut
down, is that going to help you answer more phone calls or less
phone calls?
Mr. Werfel. A lot less.
Ms. Crockett. OK. All right. So, it sounds like we have a
lot of performative politics that is taking place because yet
another number that was mentioned, and I believe you brought
this number up, was $540 billion. You also talked about
appropriations, and I want to be clear about this $540 billion.
This $540 billion is a net number, correct? This is not a net
zero. Like, it is going to cost $540 to go get it, and that is
how much we are going to get. We are talking about netting $540
billion, correct?
Mr. Werfel. It is $540 billion--I would say we are on track
under current course and speed to get about $70 back, so our
hope is we will be at $470, but yes, it is $470 billion, which
is what is owed versus what is paid.
Ms. Crockett. OK. Very good. How is it that the American
people should believe that the Majority party has the ability
to solve your complex issues when, No. 1, they do not pay
attention to history, which was defunding this organization has
not helped their constituents but hurt their constituents, and
let me add to that. The last time I checked, America is
growing. So, you were defunding your organization as we were
ending up with more people, which means that you have more
work, correct?
Mr. Werfel. Correct. More population, more filers, more
changes to the Tax Code, and more complexity in how the economy
operates. 2010 when our budget reduction started, we never
heard of PayPal, Venmo, all these, you know, payment platforms.
The gig economy changes, and it is great, but we have to invest
and be ready to be effective tax administrators as the world
changes. That is why it is important to keep our funding at
pace.
Ms. Crockett. I agree, and as the child of an IRS worker, I
absolutely want to thank you for what you do, and obviously, I
always must send love to my mama. I thank her for what she does
for the American people as well. I will yield back.
Mr. Sessions. The gentlewoman yields back time. The
distinguished gentleman from South Carolina, Mr. Timmons, is
recognized for 5 minutes.
Mr. Timmons. Thank you, Mr. Chairman. It has been over a
month since the House Oversight Committee launched our
impeachment inquiry into the Biden family's domestic
international business dealings to determine whether these
activities compromised U.S. national security and, more
importantly, President Biden's ability to lead. We have
documented over $20 million in payments to Bidens from fees
from Ukraine, from Romania, from China, list goes on. There
have also been many whistleblowers alleging improprieties on
behalf of Federal Government, what seems to be a two-tiered
system of justice.
So, this Committee's investigation is doing the job that
the DOJ, IRS, and FBI were supposed to be doing. We initially
were told there was no communication between President Biden
and Hunter Biden about Hunter's business dealings. That was
later determined to be false. Then we were told President Biden
never communicated with Hunter Biden's business associates.
That was determined to be false. Then we were told that
President Biden did communicate with Hunter Biden's business
associates, but it was only about the weather--that was
probably my favorite one--also later determined to be false.
Then we were told that President Biden may have
communicated with Hunter Biden, Hunter Biden's business
associates, and discussed business on multiple occasions, but
President Biden never received a benefit. He said, ``Show me
the money,'' and we recently have direct evidence of a $200,000
payment from Jim Biden to his brother, Joe, but this is the new
one: that is just a loan repayment. And as the White House
seeks to continue feeding the American people a narrative that
the President has done nothing wrong, perhaps a little advice:
give this Committee the loan documents, show us the interest
rates, and provide evidence that $200,000 was transferred from
President Biden to Jim Biden in the preceding months or years.
Document this alleged offense. And if you can do that, then
help us understand how it is ethical, legal, or at all
appropriate for the President's brother to leverage the
President's influence to get hundreds of thousands of dollars
from a distressed company while dangling a possible bailout for
a Middle Eastern investor.
As the White House tries to show the American people that
the President did nothing wrong, do not forget that the
Oversight Committee has received thousands and thousands of
pages of bank records and fully expect thousands more as we
uncover even more and more nefarious activities. This payment
is the first of what I anticipate will be millions of dollars
to the President.
So now, to Commissioner Werfel, I simply have one question
for you. Do you promise to act in a non-partisan manner, pursue
justice, no matter where it takes you?
Mr. Werfel. I do.
Mr. Timmons. Thank you. But between the Lois Lerner scandal
and multiple whistleblowers alleging improprieties within the
IRS, it seems we have a problem, and we need to restore the
American people's faith in our institutions. The Oversight
Committee is doing the job that the DOJ, IRS, and FBI refused
to do as it relates to Hunter and Jim Biden and possibly
President Biden's activities, and we will continue to move
forward, but we need your help to restore faith in our
institutions. And with that, Mr. Chairman, I yield back.
Mr. Sessions. The gentleman yields back his time. Thank you
very much. The gentleman from California, Mr. Garcia, is
recognized for 5 minutes.
Mr. Garcia. Thank you, Mr. Chairman. Thank you to our
witnesses, Administrator Werfel, I also want to just, if you
can pass along my thanks to everyone at the Agency, especially
the Taxpayer Advocate Service. My team back home has just been
really impressed with working with the team and really
dedicated servants. I know it is not always an easy job.
Just recently, a constituent of mine from the city of
Huntington Park--her name was Maritza--she had reached out
because of identity theft issues, had not received tax returns
in 2021 or 2022. We worked with your office and the Taxpayer
Advocate Service and were able to secure over $16,000 back to
her, and this is a story that we hear over and over again in
our office. And so that would not be possible without the team
of workers that you have, and so I just want to thank you and
remind folks that, yes, this is a hard business, but there are
people working really hard to get folks their earned dollars
back. So, thank you for that.
Now, I am glad that we are having this hearing, and I know
that the IRS obviously oftentimes faces a very difficult task.
But we all know that the work you all do is very necessary, and
we should all want every government agency to be as efficient
as possible and work as effectively as possible. A better IRS
means better customer service, means better refunds. It means a
better economy. I think everyone recognizes this, and
obviously, when Congress passes a law, we should also be
enforcing it. Enforcement is so important. It is something that
I was very focused on when I was Mayor of Long Beach just
before I got here about a year ago and enforcing matters in the
IRS.
Now, I am very glad that Congress and President Biden came
together to fund the IRS Enforcement Division, especially to go
after the very wealthy tax cheats that are very regular and
very regularly are not paying their fair share in this country.
The very rich should pay their fair share. If they do, we can
reduce the deficit and inflation and fund better services that
would all lead to this. And it is also very unfair, of course,
the very rich, billionaires and millionaires cheat on their
taxes and get away with it.
[Chart]
Mr. Garcia. So, I want to just point this out here in this
poster, and I think we have been discussing this a little bit
throughout the hearing. This goes to show you the IRS
enforcement how depleted we have become just over between 2010
and 2018 in the enforcers budget, enforcement personnel, the
overall audit rate. I mean, you see the impact that this can
have on an Agency. Now, Administrator Werfel, can you confirm
that between 2010 and 2020, IRS enforcement funding was cut by
24 percent in inflation-adjusted terms?
Mr. Werfel. That sounds right.
Mr. Garcia. And I know the Majority has made a lot of
comments today, but this has also been a House Majority that
has decided to actively work against the IRS and work against
additional funding, and this chart shows the impact that this
has had. Now, the audit rate for the largest corporations and
millionaires has plummeted, and this is who the Majority, I
believe, is working overtime to protect. It is to protect
billionaires and millionaires who are cheating on their taxes,
not working-class people and middle-class folks. And so, this
chart should be of concern to the Agency, but it certainly
should be a concern to the American public.
Now, Administrator, is it correct also that the tax gap,
which is the amount of taxes that are owed but not paid, comes
to nearly $7 trillion just over the last decade?
Mr. Werfel. Yes.
Mr. Garcia. And more than a quarter of that comes from the
top one percent bracket. Is that right?
Mr. Werfel. I have very specific numbers on that. You know,
for example and what I just mentioned, individuals that earn
more than $500,000 associate with $40 billion of the tax gap,
and that is just from under reporting, and then when you add in
under-payments, it is another $150 billion. So, you are roughly
at about $200 billion for just those individuals who earn more
than $500,000.
Mr. Garcia. Well, thank you for that. Now, the IRS
investments are expected to raise $124 billion. That is because
IRS could not hire the tax experts who can catch wealthy tax
cheats, but now, of course, they can, and we need to be able to
do to do more.
Now, President Biden has promised to grow the economy from
the middle out and the bottom up, not the top down. We need to
take on tax cheats, especially those at the very top. Lowering
the deficit is good. Taxing the very wealthy and the rich is
good. And ensuring that people pay their fair share of what
they owe the government for the basic services that we all
depend on as a country is also very important. I want to thank
all of my colleagues for having this hearing. I want to thank
both of you for your work, and I look forward to continuing
ensuring that the very wealthy in this country pay their fair
share. I yield back.
Mr. Sessions. The gentleman yields back his time.
Commissioner, there was a conversation with a Member about how
the IRS looked at, perhaps identified, but treated people who
may be of color. Do you gain information about people and their
ethnicity or their race?
Mr. Werfel. We do not collect that information, no.
Mr. Sessions. Then why would you have responded that you
look at that and made decisions from that?
Mr. Werfel. That is not my testimony.
Mr. Sessions. What is your testimony?
Mr. Werfel. My testimony is that the research group from
Stanford University, using what is called imputed identifiers
of race because we have no race data in terms of the taxpayers,
identified not a disparate treatment, but a disparate impact,
basically saying that, on average, our audit algorithms are
having the unintended consequence of having Black families at a
higher audit rate than non-Black families. And this is an
analysis where you are not using actual race data. You are
using what is called imputed race data, so we do not collect
race data and we do not plan to.
Mr. Sessions. So, you have made changes as a result of this
information----
Mr. Werfel. Yes. The role is to adjust the approach, and
then working either internally or with external stakeholders,
again using an imputed race methodology, ensure that any
efforts that the IRS is undertaking in audit are fair across
all demographics, not just race.
Mr. Sessions. So, fair, if you are applying the law as it
were, and you did not know whether someone, their ethnicity,
their race, you changed how you look at the law based upon some
consideration.
Mr. Werfel. I think we have a responsibility to do all of
our operations in a non-biased way. There should be no
disparate impact or treatment based on political affiliation,
race, age.
Mr. Sessions. But you were following the law.
Mr. Werfel. Right. And so, in following the law, I think
our responsibility under the law is to make sure that IRS
operations are carried out without a disparate impact on any
particular minority population or political group, and so the
type of study that Stanford did is helpful. It basically gives
us an outside-in perspective and says we have studied it. We do
not have the race information, but we are able to impute race,
and I think the Congresswoman entered the report into evidence,
and so the methodology of how they imputed race is in the
report.
We looked at it and we said, yes, based on this analysis,
we agree that the way we are selecting cases for audit is
having a disparate impact. That would not be consistent with
what we believe our responsibilities under the law are, which
is to implement the tax code as fairly as possible across all
demographics. And so, we are making changes in the hopes that
the next time this is tested, that the disparate impact no
longer exists.
Mr. Sessions. I find it very interesting. Now, we will look
at that because it seems like it is a threshold by which you
would look at people. Is that more generally specifically
correct?
Mr. Werfel. I do not think so. I mean, the first big step
that we took was to just reduce the volume of audits for
refundable credits, not related to any demographic, just a
specific cut in volume because the researchers, and in that
Stanford report that is now in evidence, indicate----
Mr. Sessions. What would that figure be then? You went from
this to what?
Mr. Werfel. I can get you that data.
Mr. Sessions. I am interested in that----
Mr. Werfel. Yes.
Mr. Sessions [continuing]. Because I want to be realistic
that I think you are entitled to set thresholds, and I want to
be realistic about what the numbers are. I do not want us to
find a way to where we might be discriminating or
discriminatory, but I would be interested in what those
threshold numbers were and what you have changed them to.
Mr. Sessions. On behalf of this Subcommittee, as the
Chairman and the Ranking Member, Mfume, we want to thank both
of you for taking time to be with us today. I want to thank you
for taking time to speak with me the other day. I told you that
we would try and be fair. I told you we would probably be
prompt. I did not know that we were going to get off like this,
but I just want you to know that I appreciate what you have
done in taking the time here, and also from the GAO.
Does the distinguished Ranking Member have any comments
that he would like to make? The distinguished gentleman is
recognized.
Mr. Mfume. Thank you very, very much. Mr. Chairman, I want
to thank you for your guidance on this issue as we have spent a
lot of time talking and trying to figure out a bipartisan
method to get us to these hearings so that we could receive
this testimony and have an opportunity to go over it as we both
want to, I think without a doubt, make sure that going forward,
the IRS is more effective, not less effective. And while all
Members here have an opinion, it is really up to this Committee
to set the example. And, Mr. Commissioner, I said before you
have got a tough job. You really, really do. There are no
silver linings, no magical bullets, and nothing else that is
going to set this where we all want it to be on the right
track, except hard work and dogged oversight. We do our
oversight here, and we expect that you will do dogged oversight
in your role.
I can tell you that the last 7 months that you have been
there have been very, very encouraging, and we hope that the
information provided by GAO, which are not touchpoints but
guideposts, will be taken seriously, but not only that, but
reviewed periodically with GAO to find out if in fact things
are indeed working. It is a tough road to hoe, but somebody has
got to do it, and it looks like you are it, sir, because we
recognize we cannot do without the IRS in this country. And
yet, we all know that we want it to be better each and every
year, and one of the ways to do that is to make sure that it is
properly funded to be able to do those sort of things.
It has been on the record for some time now that IRS has
improved customer service to our constituents. We all know it
is not perfect. We still get those phone calls in our offices.
Our staff still have worked for months and months and work at
trying to mildly satisfy and bring about resolution in cases,
but I am glad to report that it is getting better. IRS is
opening both permanent and pop-up taxpayer assistance centers
to help communities, and trust me, sir, those are very, very
needed. A lot of people do not know where to turn. They want to
do the right thing by compliance and complying with the law,
but they just need, in this instance, a helping hand.
So, I, you know, look forward to talking more with the
Chair about this. We really believe that as the oversight body
here, it is our function but, more importantly, our duty to try
to find a way to get answers and to provide the larger American
public with one sense and some sense, that there is continuity
here, but that there is also cooperation here as we try to move
forward.
Mr. Chairman, I have a couple of unanimous consent requests
that I would like to read into the record. I would ask
unanimous consent to enter into the record this letter that is
dated July 19, 2023, from a coalition of more than 200
national, state, and local organizations, and research
organizations, including Texas Area United Way, RAISE Texas,
Unitarian Universalist Fellowship of Hidalgo County, Texas, and
the Michigan League for Public Policy to the IRS commissioner
in support of the IRS Free File Program.
Mr. Sessions. Without objection.
Mr. Mfume. I would also ask unanimous consent to enter into
the record a Treasury Department press release entitled,
``Filing Season 2023, A Report Card: IRS Delivered
Significantly Improved Customer Service,'' and the IRS'
Strategic Operating Plan for 2023 to 2031, which outlines the
organization's plans for implementing the $80 billion coming
from the Inflation Reduction Act.
Mr. Sessions. Without objection.
Mr. Mfume. And finally, Mr. Chairman, I would ask unanimous
consent to enter into the record a statement from former
taxpayer advocate, Nina Olson, and accompanying letter dated
June 21 of this year from the executive director of the Center
for Taxpayer Rights, Nina Olson to the Treasury Department and
IRS Commissioner Werfel regarding the implementation of IRS'
2023 to 2031, Strategic Operating Plan.
Mr. Sessions. Without objection.
Mr. Mfume. Thank you. Mr. Chairman, I yield back.
Mr. Sessions. Thank you very much. Before I end this, I
want to say that Mr. Mfume and I attempt to run this with an
understanding about working with each other in a fair manner,
not only to our Members, but also to the witnesses that we
asked to come and appear. We do expect them to appear. We do
expect them to follow our guidance of working with each other.
But we, when we end this hearing, we want to come down and
shake your hand and thank you for being here.
With that, and without objection, all Members have 5
legislative days within which to submit material and additional
written questions for the witnesses which will be forwarded to
the witnesses.
If there is no further business, without objection, the
Subcommittee stands adjourned.
[Whereupon, at 4:39 p.m., the Subcommittees were
adjourned.]
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