IRS Commissioner Danny Werfel took the hot seat in the House Ways and Means Committee on Thursday morning at a dynamic moment for U.S. tax policy and administration.
New tax legislation being considered in the Senate, a new online public filing program that’s now being tested, new reporting requirements for the self-employed and perennial concerns about the embattled IRS budget and unfairness in the tax system based on race were all subjects up for discussion.
Here’s a rundown of the hearing and what lawmakers wanted to know.
How fast can the IRS implement the tax deal if it passes the Senate?
A bipartisan tax deal that includes business credits and an expansion of the child tax credit (CTC) passed the House in a resounding vote last month and is now under consideration in the Senate.
Werfel said the IRS was paying close attention to the legislation and would be able to process the expanded credits and deductions within a matter of weeks and potentially within the current filing season, which opened at the end of January.
“We may be able to start implementation as early as six to 12 weeks after passage,” he said, adding that the agency could act “closer to the six-week end of that range.”
Democrats have been vocal in their support of the expanded CTC, which some want to see administered in the form of monthly checks as opposed to being given in a lump sum.
“Making payments monthly instead of annual has the power to change the lives of working people all over the country,” Rep. Jimmy Gomez (D-Calif.) said Thursday.
Republicans in the Senate have said the CTC expansion should come with increased work requirements for recipients.
A Democratic aide to the Senate Finance Committee told The Hill on Wednesday that no decisions have been made about a Senate markup for the bill and that the committee’s chair, Sen. Ron Wyden (D-Ore.), is still in talks with Majority Leader Chuck Schumer (D-N.Y.) about the bill’s future.
Businesses are nervous about losing the employee retention tax credit
To pay for the CTC expansion and the tax breaks for businesses, the legislation proposes to end the pandemic-era employee retention tax credit (ERTC), which lawmakers say has become rife with fraud due to aggressive marketing and promotion.
Several lawmakers said Thursday that their constituents are nervous about losing the credit.
“I was contacted by a constituent who tells me that their business is really in imminent jeopardy and will close … if they don’t receive the ERTC funds that they had applied for,” Rep. Brad Wenstrup (R-Ohio) said Thursday.
Wyden told The Hill in January that an IRS whistleblower had said that 95 percent of new employee retention credit claims were “close to fraudulent — were fraudulent.”
Werfel described the ERC program as “incredibly complicated” on Thursday, saying 3.6 million credits had been issued to date.
“There were so many ineligible claims in what was coming in, it was getting harder to separate what’s ineligible from what’s eligible,” he said.
GOP blasts direct file pilot program
Republicans fumed Thursday about the direct file pilot program, a new IRS service currently in a testing phase that offers a public alternative to commercial tax prep software.
“Can you tell me explicitly what authority the IRS relied on to create an entirely new government-run system of filing taxes?” Rep. Adrian Smith (R-Neb.) asked Werfel.
“I don’t think you should be wasting your millions of dollars when the private industry is doing a good job,” Rep. Carol Miller (R-W.Va.) said, referring to an $80 billion funding boost for the IRS over 10 years passed as part of Democrats’ Inflation Reduction Act (IRA).
For years, the IRS maintained a noncompete clause with private software providers through a program called Free File, whereby companies supposedly offered their programs to lower-income tax filers for free.
But deceptive marketing practices that ushered users onto paid-for product platforms have stained the industry, resulting in lawsuits and an order from the Federal Trade Commission (FTC).
“The maker of the popular TurboTax tax filing software, engaged in deceptive advertising in violation of the FTC Act and deceived consumers when it ran ads for ‘free’ tax products and services for which many consumers were ineligible,” the FTC wrote in January.
Intuit was ordered to pay $141 million to reimburse millions of consumers in a multistate settlement issued last year.
How exactly is the IRS being paid for right now?
A quarter of the $80 billion in additional funding for the IRS, meant to modernize the agency and increase audits on rich people and big companies, has been scaled back due to Republican opposition.
But those clawbacks were agreed to in unwritten handshake deals and taken out of the agency’s regular appropriations budget, not the IRA funding itself.
“Our base budget is insufficient to run the daily train schedules,” Werfel said Thursday. “What that means is that we have to borrow from the modernization funding just to keep the lights on. And if we keep doing that, we won’t modernize.”
The IRS has asked for $800 million in appropriations this year, Rep. Lloyd Doggett (D-Tex.) said Thursday, a number confirmed by Werfel.
Asked for clarification on the status of the IRS budget, the Treasury Department did not respond.
Democrats cheer higher revenue projections from IRS funding boost
Only 4.5 percent of the initial $80 billion funding increase for the IRS in the IRA has been spent so far, according to a new report from the Government Accountability Office (GAO).
Even with the remainder of that money up in the air, the Treasury released increased revenue projections for the funding boost earlier this month.
“The IRA as enacted would increase revenue by as much as $561 billion over 2024 – 2034, substantially more than earlier estimates,” the Treasury wrote in a statement. “If the IRA funding is renewed when it runs out, as the administration has proposed, estimated revenues would be as much as $851 billion.”
Democrats hammered this message home on Thursday, taking a dig at Republicans for what they see as budgetary duplicity.
“[Republicans] want to cut the very funding you’re relying on to see that these corporate and high wealth tax cheats are treated the same way and pay their taxes the way most Americans do,” Doggett said.
The annual tax gap for 2021, which is the amount of money due to the government that is not collected, is projected to be $688 billion, according to the latest data from the IRS. One of the largest chunks of uncollected taxes is in individual business income.
Frustration over the 1099-K reporting requirements
Republicans bemoaned the newly lowered threshold for reporting income on third-party payment apps, which was lowered to $600 in the American Rescue Plan but delayed by the IRS.
The threshold is still $20,000 for this tax year but will be lowered to $5,000 next year and then taken down to $600 for the 2025 tax year.
“The continued delay of the 1099-K threshold, and [the] announcement of a new threshold, is an illegal overreach that is not found anywhere in law,” Miller said.
“This looks like you’re blatantly not enforcing the law,” Rep. Kevin Hern (R-Okla.) said.
Some conservative advocacy groups have approved of the IRS delay, saying the reporting threshold is harmful to women.
“Leave it to the IRS to try to fix what Congress broke. The $600 reporting threshold for Venmo, eBay, and Etsy transactions was way too low and will have a devastating impact on women, especially moms,” Patrice Onwuka, director of the Center for Economic Opportunity at Independent Women’s Forum, said in a statement. “To combat elevated inflation—brought on by excessive federal spending—many women are selling used kids’ clothes online.”