The voices of Tax Policy Center's researchers and staff
Valentine’s Day might not be too festive for Danny Werfel this year. He’s got what will probably be the most difficult test of his professional life tomorrow—his confirmation hearing to be IRS Commissioner.
The hearing promises to be a doozy, and not only because the IRS is one of the most unpopular government agencies in the United States. This will be the first big IRS hearing since it received an $80 billion boost to its budget in the Inflation Reduction Act. The first vote of the new Republican-led House was to claw back 90 percent of that funding. And filing season is now underway.
To help Werfel (and others) prep, I’ve compiled links to TPC’s writings on topics likely to come up at tomorrow’s hearing.
- Is the IRS hiring 87,000 armed agents to harass and threaten regular taxpayers? That’s the story promoted by many Republicans. The short answer is no.
- Will the IRS use some of the $80 billion to increase audits of middle-class taxpayers? That’s a tricky question. Treasury Secretary Janet Yellen has stated that the newly funded enforcement activities would be targeted to big businesses and taxpayers with income over $400,000. She’s also said that audit rates of other taxpayers would not rise above historic levels. My TPC colleague Howard Gleckman and I asked how far back in history she means.
- Where’s the plan on how the IRS will use the $80 billion budget boost? Sorry, we can’t answer that question yet. On August 17, Yellen instructed the IRS to send her a plan “six months to the date,” which would be this Friday. While we wait for that plan, listen to what three former Commissioners said at a November TPC event about what the plan should include. And read my blog on why it will be important—and challenging—to get performance metrics right.
- How much is the tax gap? Most of the budget boost is targeted to tax enforcement to reduce the tax gap—the difference between what’s legally owed and what the IRS collects. But estimates of the annual tax gap have ranged from about $400 billion to $1 trillion. In a 2022 report, my TPC colleague Steve Rosenthal, New York University law professor Daniel Hemel, and I explained how the tax gap contains substantial gray areas where the law is ambiguous and the IRS’s determination of taxes owed is debatable; we conclude that increases in tax enforcement should be accompanied by reforms to the tax code.
- How does cryptocurrency contribute to the tax gap? A year ago, TPC’s John Buhl provided a succinct explanation of the crypto headache for tax administrators and potential policy solutions. More recently, he explained how the crypto policy landscape has shifted in the post-FTX world.
- How much more taxes will the IRS collect with the additional funds for enforcement? After accounting for the costs of enforcement, the Administration said $400 billion and CBO said about $100 billion. In 2021, I testified before House Ways and Means subcommittees about the uncertainties inherent in estimating the return on investment in the IRS.
- Can closing the IRS’s technology gap help close the tax gap? Congress allocated a portion of the IRS budget to modernize the IRS’s technology infrastructure. Treasury says that those improvements could, among other things, enable the IRS to use machine learning to detect noncompliant taxpayers. At a TPC event in June, experts discussed the pros and cons of machine learning for tax enforcement. To help listeners with the basics, Brookings’ Alex Engler and I prepared this primer, explaining how the IRS could use machine learning, its benefits for tax enforcement, and the challenges—some of which are inherent in the methodology and others specific to the US tax system.
- Did the IRS do the right thing by postponing the new 1099-K reporting requirements? In December, the IRS delayed enforcement of new third-party reporting requirements of payments to gig workers in excess of $600 (down from $20,000). Lillian Hunter explained why the lower reporting threshold would actually help gig workers. And Steve and Daniel questioned whether the IRS had the authority to unilaterally delay implementation.
- Why didn’t the IRS audit Trump’s tax returns? Why did they audit Comey and McCabe’s returns? Excellent questions. Howard Gleckman explained why we need to know what happened (or didn’t happen) with the Trump returns. And our colleague Gene Steuerle wrote how the audits of the former FBI directors bring attention to the need for improvements in the IRS’s compliance research.
- Will Biden’s IRS make it harder for conservative organizations to get tax-exempt status? This question falls into the “you can’t escape the past” category. Werfel served as acting commissioner during an especially difficult time in the IRS’s history. He arrived after the departure of several top IRS officials in the wake of congressional hearings over whether the IRS had targeted conservative groups for special scrutiny. From our archives, this 2013 blog by Howard concluded that the IRS’s handling of the applications for tax-exempt status revealed “big bungling but small scandal.”
Suffice to say, this is not an easy job Werfel is looking to fill. The agency will need a combination of commitment to public service, bravery, and humility to navigate these political challenges and harness the potential of its new funding boost.
Hopefully, those qualities will shine through Werfel’s answers to the Senators’ questions.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.