IRS fights funding cut threat in debt limit showdown

Internal Revenue Service commissioner Daniel Werfel defended the IRS’s budget during congressional testimony Thursday, a day after House Republicans passed a bill that would eliminate much of the extra $80 billion in funding it secured under the Inflation Reduction Act.

“When we had lower resources, it was so frustrating for IRS employees, not just because we couldn’t have the right amount of people on the phone, but also we couldn’t do what we need to do as part of meeting taxpayers where they are and serving them effectively in underserved populations,” said Werfel. “What funding allows us to do is the base of what we’re supposed to do, to be there to answer the phone, but it [also] allows us to lean in and provide a more fulsome service experience. That means meeting taxpayers where they are, allowing them if they want to walk into a walk-in center that is open, staffed and there’s no line outside.” He noted that the IRS has been able to open 16 walk-in centers this tax season.

The IRS and the Treasury Department have also said phone wait times have improved this tax season, down to four minutes this year from 27 minutes last year (see story)

However, some lawmakers disputed those findings. Rep. Mike Thompson, D-California, said his wife had spent three hours on three attempted calls to the IRS last week and didn’t manage to reach a representative. Other lawmakers said their constituents have been continuing to complain about their difficulties.

Werfel noted that despite the extra funding from the Inflation Reduction Act, the IRS’s base budget hasn’t been raised, and he compared it to waiting on a platform for a train to arrive. “What we’re trying to put in our budget is here’s what it takes to make sure that people aren’t waiting too long on the platform and that it doesn’t get too crowded,” he said. “That’s what it takes just to run the train schedule. But we need to modernize because right now, the system that we have is outdated, and when taxpayers go to their favorite airline or their local bank, they engage and see a suite of tools on the call center, on the website, on their smartphones, that they don’t get from the IRS.”

On Wednesday evening, House Republicans passed the Limit, Save, Grow Act, which would eliminate most of the IRS’s increased funding dedicated to ramping up enforcement, as well as many of the green tax credits in last year’s Inflation Reduction Act. The bill passed along party lines and isn’t expected to advance in the Senate, which remains under the control of Democrats. The bill is mostly aimed at reopening negotiations with the Biden administration over the debt limit. House Republicans did agree to preserve some of the tax breaks for biofuels and ethanol to meet demands from GOP lawmakers in the Midwest.

The IRS is likely to keep the extra funding despite the political maneuvering, and the tax credits for other forms of renewable energy aren’t likely to go away either. “I think the pullback on the funding is extremely unlikely to nonexistent, and the same with the energy credits,” said  Bill Smith, national director of tax technical services at CBIZ MHM’s National Tax Office in Washington, D.C. “The House went Republican in the election, but the Senate went further Democratic. Even if it passes, they can’t override a veto. And obviously, it would get vetoed.”

The IRS has already laid out its priorities for how it plans to use the extra $80 billion in funding over 10 years. “We now have a better sense of what the IRS is going to do with the $80 billion, so I don’t see the $80 billion going away,” said Smith. “I think there’ll be some hustling in the budget talks over it, and maybe they get some concessions somewhere else. But I think it’s here to stay, at least for the near term.”

During the hearing, Werfel fended off claims that the IRS would be using the extra $80 billion to ramp up audits on taxpayers who earn less than $400,000. 

“The message that the IRS has for you as the Inflation Reduction Act is going to be focused for you on improving your service,” said Werfel. “That’s where our focus is greatest, and the audit and enforcement efforts will be on these very complex returns for the wealthiest taxpayers, individuals, corporations and partnerships.” 

Werfel also said during a Senate Finance Committee hearing this month that the IRS would be referring back to its 2018 level of audits, as he did during the House Ways and Means Committee hearing on Thursday. 

“There will be no increase in the audit rate from the most recent rate that we have, which is 2018, which is a historically low rate,” said Werfel.

That means most taxpayers and tax professionals won’t need to worry about the odds of an audit increasing. “Most of what everybody wants to know is, are my audit chances going up?” said Smith. “When the commissioner talked to the Senate, he once again reiterated that nobody making under $400,000 is going to get audited at a rate above traditional percentages, which everybody at first was concerned about. But then he clarified that they’ll stick to at least no higher than 2018 numbers, which is the last year where the IRS can’t open audits anymore on taxpayers because the statute [of limitations] has run, and that’s still well below 1%.”

Werfel was also asked about what the IRS was doing about the pause it took on implementing the lowering threshold for filing a Form 1099-K to report third-party transactions to the IRS under the American Rescue Plan Act of 2021, going from $20,000 to $600, and whether it would be helpful for Congress to pass legislation to raise the threshold once again (see story).

“The way in which the law was enacted is extremely complicated, and we’re learning in real time,” said Werfel. “It was complicated for the IRS to administer and it was complicated for employers to determine how to work with third-party pay providers to make it all work. So as you know, we took a pause. In retrospect, we want to get better and better at not having to take pauses and planning better, but this provision turned out to be way more complicated than was anticipated, so anything that can be done to change the dimensions of how complicated it is would be helpful for the way we administer. The question at a broader tax policy, one that is best answered by the Secretary of Treasury, but in terms of the question of would it help with that simplicity of administration? Yes.”