Advice | IRS Commissioner Werfel talks about Direct File, audits and IRS budget

“Despair has turned to cautious optimism,” National Taxpayer Advocate Erin Collins wrote this year in her report to Congress.

With IRS Commissioner Danny Werfel marking his first anniversary as head of the agency, we sat down for a chat about Direct File, audits and an agency in recovery.

Werfel is the 50th IRS commissioner and seems passionate about improving an agency that, before his appointment, was a hot mess.

Here are some of the issues I discussed with Werfel. (Some answers have been edited for brevity and clarity.)

Background: The discretionary budget for fiscal 2024 is $12.3 billion. For fiscal 2025, it’s also $12.3 billion, including “an additional $104.3 billion in mandatory funding for fiscal years 2026 through 2034 to allow the agency to continue strengthening its taxpayer services, technology and enforcement after other funds have been exhausted,” the IRS said.

It’s hard for Americans to understand how the IRS can’t manage with a budget in the billions. Why do you think the agency needs more money?

It’s definitely not enough money. The analogy I always use is like the train system. How much money does it take to run the train system so that all the trains are kept up to date, so that they work, they’re fixed, they’re on schedule, they’re paying employees, and doing safety checks?

The bigger the train system, the more money you need, the more people you need, the more trains you need, and the more repairs you need.

Our budget is essentially the same as it’s been since around 2011, 2012 and 2013. The same base budget. Think about how different the tax system is today versus [how] it was back then.

Racial disparity in audits of Black taxpayers

Background: Black taxpayers are three to five times as likely to be audited as other taxpayers, according to a report released last year by researchers from Stanford University, the University of Michigan, the University of Chicago and the Treasury Department. Researchers found the cause wasn’t overt racism, but rather computer algorithms the IRS uses to spot-check for fraud on returns claiming the Earned Income Tax Credit, which is designed to help individuals and families whose incomes fall below certain thresholds.

The report came out just as Werfel was preparing for his confirmation. In May 2023, shortly after starting the job, he submitted a letter to the Senate Finance Committee stating that “our initial findings support the conclusion that taxpayers may be audited at higher rates than would be expected given their share of the population.”

What’s the update in ensuring Black taxpayers aren’t being audited more than the average taxpayer?

When I saw that study, I almost felt like a sense of desperation. I wanted to get there to fix it. One of the first things we had to do was acknowledge [the problem]. This study is legitimate. The IRS has a significant problem with its approach to audits . . . where these audits are having a disparate impact on Black taxpayers.

But acknowledgment wasn’t nearly enough. The first order of business was to dramatically reduce the number of audits. Second is to change the underlying math or algorithm that leads to the case selections. We identified the critical changes to the algorithm that will eliminate the disparity. But now we have to test it. Now it’s a monitoring process.

The goal is to issue a report before the end of the calendar year. [The report] is going to basically say that we’ve taken specific interventions to address the disparity.

Background: The Inflation Reduction Act provided funding for a pilot program that allows taxpayers to directly file their returns with the agency. The pilot is only available to those with simple tax situations in 12 states: Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington and Wyoming.

So far, about 60,000 taxpayers have used Direct File. And since its debut in January, taxpayers have claimed more than $30 million in refunds, saving millions in estimated filing fees, according to the IRS.

Are you happy with how Direct File is doing?

I’m very happy with where Direct File is. The product is working, and we are getting positive feedback on it.

Taxpayers are reporting to us that it is easy and that it is reliable. If there is a handoff with the state with income taxes, the handoff is going well. Our state partner solutions are working effectively.

We’ll make a decision, later in the spring, around the future of Direct File and consulting with [Treasury] Secretary [Janet L.] Yellen. If we get to a point of going forward, we would certainly want to expand the number of states.

Homer Simpson and the IRS

Background: The IRS collects about $4.7 trillion in gross revenue and generates about 96 percent of the funding that supports the federal government’s operations.

In a speech at American University earlier this year, Werfel joked, “Why does Homer Simpson not like us?”

He was referring to the iconic character on “The Simpsons” who, during a trip to D.C., booed the IRS.

What do you hope to do with this agency in the time that you are here?

Our goal is not popularity. The goal is to do our jobs most effectively, because we play such a critical role.

I use the analogy of the NFL referee. The referees are going to get booed if they get the call right. They are going to get booed if they get the call wrong.

[At the IRS], we’re going to do instant replay and minimize the number of times we get the call wrong. But we are still going to get booed, and that’s just part of the job.

We have to recognize that it’s in the brochure that the tax collector is not a job that is popular. But I want the American people to see us as having a North Star of trying to get better and better at our job so that the game is as fair as possible.