IRS nominee says agency won’t increase audits of middle-income filers

President Biden’s nominee to lead the Internal Revenue Service pledged in a Senate confirmation hearing Wednesday not to increase audits on middle- and working-class taxpayers, and to prioritize the agency’s new resources to improve customer service.

The White House tapped Daniel Werfel, a longtime federal budget official who briefly served as acting IRS commissioner in 2013, to lead the tax agency as it receives an additional $80 billion over 10 years to revitalize its operations, increase enforcement on wealthy taxpayers and corporations, and modernize its decades-old information technology infrastructure. The money was approved as part of the Inflation Reduction Act backed by Biden and congressional Democrats.

If the Senate approves Werfel’s nomination, his foremost task would be to decide how to allocate that money. So far, the IRS has hired 5,000 employees to staff its phone lines and introduced new online tools that allow taxpayers to complete more forms and learn about the status of their returns and refunds.

The IRS’s interim leadership - former commissioner Charles Rettig left the service in November - is set to submit a spending plan to Treasury Secretary Janet L. Yellen on Friday. Werfel is not likely to receive a confirmation vote from the Senate until March.

“If confirmed, Mr. Werfel, you must be the change agent we have long been promised,” Sen. Mike Crapo of Idaho, the Senate Finance Committee’s top Republican, said during the hearing.

[IRS says it won’t tax most state inflation relief payments]

Before the Inflation Reduction Act was signed into law last year, the IRS lacked resources for years to improve its most basic IT tax-collection programs as congressional Republicans cut funding for the tax agency.

The tax provisions of the new law have been a lightning rod for conservatives. Congressional Republicans falsely accused the Biden administration of planning to hire 87,000 armed IRS agents, creating such furor among right-wing extremist groups that IRS leaders ordered a security review of the agency’s 600 facilities nationwide.

“The notion of armed agents is incorrect,” Werfel said in sworn testimony. “I certainly would have no intention of making that part of any plan going forward.”

Yellen issued instructions that the funding is not to be used to increase audits of taxpayers making less than $400,000 per year. Werfel added that if confirmed he would abide by that policy.

“I am committed to Secretary Yellen’s directive on how the audits should move forward under the Inflation Reduction Act,” Werfel said.

When Crapo said that Yellen’s guidance “leaves a lot of wiggle room,” Werfel responded, “I’m a rule follower.”

The Biden administration has made tax policy an engine of its pandemic recovery and financial policy operation. The IRS administered massive economic and social programs, including multiple rounds of covid-19 stimulus payments and monthly child tax credit subsidies. The Inflation Reduction Act also created $7,500 tax credits for consumers who purchase American-made electric vehicles, a key policy component of Biden’s climate agenda.

Those new initiatives, combined with the historic lack of resources, experts say, weighed down the tax agency’s customer service apparatus. So far this year, the IRS has reported significant service improvements with its added staffing.

But new Biden-era tax provisions have slowed some new policy rollouts that were originally set to take effect in 2023. On electric vehicle tax credits, the IRS has left in place broad guidelines from the law that include vehicles without the requisite amount of U.S.-made parts, allowing them to remain eligible for the tax break for a longer-than-expected period.

Another one of Biden’s key legislative victories, the American Rescue Plan Act of 2021, required taxpayers to report transactions worth $600 or more that were made through third-party payment apps, such as Venmo and PayPal. The IRS delayed guidance on that question, too, saying it will not apply until the 2023 tax year.

On Friday, the agency declared that state-issued relief payments and tax refunds enacted to combat inflation would not be taxable. Only days earlier, the IRS told taxpayers not to file their returns, creating confusion among tens of millions of Americans across 22 states that received the payments.

“The IRS’s announcement threw our entire filing season into chaos,” Sen. Michael F. Bennet (D-Colo.) said. “That’s an example of the kind of self-inflicted wound that I think makes people believe there’s just a fundamental nonsense of government.”

Werfel responded to similar criticism of the agency by telling lawmakers that he prepared for the hearing by reading daily the “Taxpayer Bill of Rights,” the IRS’s 10-point list of its obligations to filers, and keeping a copy with him during the day.

“I think it goes back to the Taxpayer Bill of Rights, clarity of what is expected,” Werfel said. “Clearly it’s better to have that clarity in advance of the filing season.”