April 19, 2023
IRS Commissioner Daniel Werfel on April 19th called for Congress to pass legislation that would allow the Treasury Secretary to regulate tax preparers.
Werfel’s opening statement when testifying before the Senate Finance Committee:
The proposal would amend Title 31, U.S. Code (Money and Finance) to provide the Secretary with explicit authority to regulate all paid preparers of Federal tax returns, including by establishing mandatory minimum competency standards. The proposal would be effective on the date of enactment.
The Commissioner’s proposal would increase and expand penalties on tax preparers who engage in inappropriate behavior.
Past budgets from President Joe Biden have called for lawmakers to give Treasury oversight power of tax preparers. So far, no such bill has passed Congress.
Given that the current Congress is politically divided, it is unlikely that legislation regulating tax preparers will advance from Capitol Hill and be signed into law.
IRS Preparing Tax Returns:
The Inflation Reduction Act (IRA) gave the IRS $15 million to study whether it should prepare tax returns. Werfel informed the Committee that the study will be completed by mid-May.
“No decision has been made on moving forward with direct file solution,” Werfel said.
Senator Mike Crapo (R-Utah), the Committee’s Ranking Member, was relieved to hear the Commissioner’s response. He also noted that the recently released IRS Strategic Operating Plan (as part of the IRA) includes a segment devoted to an IRS-run tax preparation program.
“Having the IRS acting as tax preparer, tax collector and tax enforcer raises significant conflicts of interest,” Crapo said, adding, “Can we agree that the decision [to have the IRS prepare tax returns] is one that Congress can make, not the IRS independently?”
Werfel hedged, saying “I’m not sure where the legal authorities are.”
Crapo responded: “I encourage you to recognize that Congress has the authority to make this determination.”
Focus of Future Audits:
The IRS will focus its audits on high wealth individuals and businesses.
We will “deliver more effective enforcement of tax laws that apply to high income taxpayers, large corporations, and complex partnerships which do not pay the taxes they legally owe,” Werfel told the Senate Finance Committee.
Roughly $45 billion of the $80 billion that Congress bestowed to the IRS through the IRA goes to enforcement.
Werfel repeated his mantra that the tax agency will not increase audit rates on taxpayers earning $400,000 or less.
From his testimony:
This focus will not be a concern to compliant taxpayers; the emphasis will be on pursuing those who do not follow the tax law. In conducting these enforcement activities, we are committed to following the Treasury Department’s directive not to increase audit rates relative to historical levels for small businesses and households earning $400,000 per year or less… [O]ur compliance efforts will focus on complex issues and high-dollar noncompliance.
Werfel said that current audit rates will be compared to rates from 2018, 2019 tax years.
Senate Finance Chairman Ron Wyden (D-Ore.) hopes that increased audits on wealthier taxpayers will help close the Tax Gap, which is the difference between taxes owed and taxes paid.
“The official estimate says that $540 billion of taxes owed go unpaid each year. Other estimates, even from Donald Trump’s IRS commissioner, say it could be $1 trillion,” he said, adding, “Here’s the bottom line on this issue. You cannot get at the tax gap without focusing on wealthy tax cheats and highly complex businesses like large partnerships.”
Wyden stressed to Werfel that audits should fall on "repeat tax offenders."
The Chairman closed the hearing saying that Werfel will meet with Committee members later this week and he will provide more details on how the IRS will spend the $80 billion from the IRA.
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