Biden IRS Nominee Werfel Pledges No Audit Rate Increase for Households Earning Under $400,000

Acting IRS Commissioner Danny Werfel testifies on Capitol Hill in Washington on June 6, 2013. (Charles Dharapak/AP Photo)

Daniel Werfel, President Joe Biden’s nominee to be the next commissioner of the IRS, told members of the U.S. Senate Finance Committee on Feb. 15 that if confirmed he wouldn’t expand tax audits on businesses and households making less than $400,000 per year.

With $80 billion in additional funds as part of the Inflation Reduction Act, Republican and Democratic lawmakers agreed that restoring the credibility of the tax-collecting agency was paramount under Werfel’s potential leadership.

But there was disagreement on both sides of the increase regarding the methods of achieving this objective.

In recent years, multiple surveys have highlighted Americans’ disapproval and distrust of the IRS and other federal government agencies. In addition, other polls have revealed taxpayers’ concerns that the organization will bolster the number of audits each year.

In the opening testimony at his confirmation hearing, Werfel, who served as the acting IRS commissioner for seven months in 2013, pledged to enhance customer service for American taxpayers, ensure that the nation’s highest earners comply with applicable tax laws, and increase public trust.

“As an IRS alum—more importantly as a taxpayer—I have been concerned about gaps in capacity that have impeded the IRS’s ability to meet its critical mission,” he said. “The result is that hard-working, honest taxpayers who need assistance in meeting their tax obligations are not getting the services they need.”

The IRS building in Washington on Sept. 28, 2020. (Erin Scott/Reuters)

In addition to improving the IRS’s credibility, the lawmakers touched upon a variety of subjects during the hearing, from taxing the service industry to targeting high-income Americans.

Audits

In January, a joint study of economists at Stanford University, the University of Michigan, the University of Chicago, and the Treasury Department found that black taxpayers are as much as 4.7 times more likely to be audited by the IRS than nonblack taxpayers.

A separate Syracuse University study learned that fewer millionaires were the recipients of IRS audits in the fiscal year 2022. Low-income families, however, faced “unbelievably high audit rates.”

Asked by Sen. Ron Wyden (D-Ore.) about the audit selections and disparate effects on the U.S. population, Werfel called it “particularly alarming” for racial minorities, adding that “fairness is an essential element of tax administration.”

Experts say that IRS algorithms could be targeting certain taxpayers based on some tax credits they receive, such as the Earned Income Tax Credit.

Werfel stopped short of diagnosing the problem, but he did commit to bringing the Senate Finance Committee up-to-date within 60 days to report on the underlying reasons behind the issue.

Werfel, who was nominated by President Joe Biden in November 2022, was also asked by Wyden what he intends to do to reduce the audit rates of family-owned small businesses.

Because the directive from Treasury Secretary Janet Yellen is to allocate these new resources to going after high-income taxpayers, Werfel believes there will be an immediate “rebalancing on the audit footprint.” But he also wants to gather the IRS team to determine if it would be a waste of time and capital to focus on taxpayers that already maintain a high percentage of compliance.

“By that, we can go after more issues where there might be something underlying that’s nefarious, something that relates to advertent cheating or evasion,” he said.

IRS Intentions

The president and Democrats have insisted that the new funding for the IRS won’t be used to expand enforcement practices on Americans earning under $400,000.

But Sen. Mike Crapo (R-Idaho) suggested that there’s much consternation about the tax-collecting agency’s authority to peek into bank accounts for receiving $600 or $10,000 Venmo payments. Although the legislative pursuit has been halted in Congress, Crapo wanted to know if the IRS would expand its ability to look into Americans’ bank accounts if they deposited or spent more than $600 or $10,000.

Werfel, who worked for nearly 16 years at the White House’s Office of Management and Budget, assured lawmakers that he’s a “rule follower” and that he would only employ measures that are consistent with IRS directives.

In December 2022, the IRS announced that it would delay the implementation of tax reporting changes for 1099-K forms on PayPal, Venmo, and other third-party platform business payments. Doug O’Donnell, the acting IRS commissioner, said in a statement that the postponement would “reduce confusion” in the 2023 tax filing season and facilitate “clarity” for taxpayers and industry professionals.

As part of the American Rescue Plan, the annual threshold for these transactions was reduced from $20,000 and 200 transactions to $600, regardless of the number of transactions.

Meanwhile, the IRS recently proposed a new reporting system for service industry workers who receive tips. The program would monitor point-of-sale data offered by employers to ensure that these employees, like waiters, hairdressers, and gig economy workers, are paying taxes on the tips they receive.

Critics have asserted that this defies the White House’s promise not to use the new funding to go after Americans making under $400,000 per year.

“This is going after waiters and waitresses. That’s how I read this,” Sen. John Barrasso (R-Wyo.) said during the hearing. “So this is the big, big difference in terms of what I hear from the chairman of the committee and what I see happening and hearing from people in Wyoming.”

Sen. Marsha Blackburn (R-Tenn.) also expressed concern during the hearing that the initiative would contradict the administration’s promise only to target individuals earning more than $400,000.

Asked if barbers, waitstaff, and delivery personnel would have to endure increased scrutiny, Werfel noted that if the IRS is successful moving forward, then these occupations would “see only impacts in service improvements ... versus an increase in any audit rates.”

“If I am fortunate enough to be confirmed, the audit and compliance priorities will be focused on enhancing the IRS’s capabilities to ensure that America’s highest earners comply with applicable tax laws,” Werfel said at the hearing.

“If poor people are more likely to be audited than the wealthy, that is something I think potentially degrades public trust and needs to be addressed within the tax system.”