IRS commissioner has a message for Tennesseans this tax season: Claim more refunds
Reforming America’s beleaguered tax system is a daunting task — but that’s Internal Revenue Service Commissioner Danny Werfel’s assignment.
One year after being named the nation’s 50th IRS commissioner in May 2023, Werfel visited The Tennessean to talk about modernizing the long-underfunded agency.
Congress approved nearly $80 billion to upgrade the IRS’s operations in the Inflation Reduction Act of 2022. The funds are meant to improve customer service, technologies and to create a free Direct File system so taxpayers have the option outside free commercial tax-preparation services. Tennessee is one of 12 states that piloted the Direct File system this year.
Werfel’s message: The IRS is working to make it easier to file taxes for free and Tennesseans aren’t taking full advantage of tax refunds available to them.
Almost 20,000 Tennesseans who didn’t file taxes in 2020 are owed refunds and the deadline to file taxes and receive those refunds is April 15. After that, the IRS will keep the funds.
Tennesseans also aren’t taking full advantage of the Earned Income Tax Credit and Employee Retention Credits, he said.
The Inflation Reduction Act of 2022 provided $79.4 billion in funding to the IRS through 2031. But Congress has since clawed back $1.4 billion of those funds amid partisan political debate over whether the funds are being well-spent.
The U.S. Treasury Inspector General for Tax Administration (TIGTA) is monitoring the use of the additional funding. On April 3, TIGTA reported that IRS officials spent $4.4 billion of the new funds in 2023, including $2 billion to cover normal operating expenses and $11.6 million for a new direct electronic filing system.
Here is what Werfel told The Tennessean:
Q: Why are you visiting Tennessee and other states to talk about IRS agency reform?
A: Of the five million filers that we had last year, less than 80,000 filed for free. What it means to file taxes is that in many cases you’re owed money. Not enough people are filing electronically for free.
There are more than 100,000 Tennesseans that are eligible for the Earned Income Tax Credit that are not claiming it. How do we create an environment where underserved and distressed communities can learn and get tax literacy to understand there are benefits and credits that are intended to go to them that they’re not taking advantage of?
It is the mission of the IRS to make sure you pay what you owe and not a penny more, and that you are paid the refunds and credits that you are entitled. We are not an agency that’s incentivized to collect as much money as we can.
Q: Why did the IRS decide to create Direct File?
A: In the late 1990s and early 2000s, there was the start of the digital revolution and all industries started to leverage the internet to move forms online, including government. Legislation was enacted to recognize electronic signatures. The government began to allow more and more government forms to be filed online. Industry moved more quickly than the IRS and produced a version of the online form. As the IRS started making progress and investments to catch up, industry came to the IRS and said: ‘Don’t create an IRS version of the online form, we’ll create a free version.’ Industry formed the Free File Alliance.
Over time, there was mixed feedback around whether this free solution was adequate to get people to free file. There have been controversies and litigation and investigative reports around whether software providers are creating a sufficient avenue for people to get free solutions. So this idea of an IRS-provided free electronic solution has gained steam recently.
Q: What IRS reforms did the Inflation Reduction Act focus on?
A: The Inflation Reduction Act passed in 2022 asked the IRS to study and assess whether there could be an IRS solution. So Direct File was born as part of this effort to understand whether this solution could be provided to taxpayers and improve our overall numbers in terms of the number of people accessing a free version.
From the IRS vantage point, these commercial software providers are valuable partners and the work they do with their customers is critical to the health and success of the tax system. What Direct File is about is an option. It’s an idea that taxpayers should determine the best way to file for them.
Q: What is the average price people pay for commercial tax software providers?
A: We hear ranges from $150 to $600. It really depends, it’s not a flat fee. The software will offer you service upgrades.
Q: How is the new Direct File program going?
A: Under the first version of Direct File this year, it’s focused on simple returns for those who take the standard deduction and some of the simpler credits that are out there. If you have business income, you’re not going to be eligible for Direct File this year. In Tennessee, there’s a million Tennesseans eligible under this approach.
Tens of thousands of Americans and thousands of Tennesseans have filed Direct File so far. We haven’t heard issues and we’re studying it very closely. The state solutions are performing well as well.
Turbo Tax, H&R Block and others all have free versions. It’s just a question of, as a consumer or taxpayer, would you like more choice? Going through the Direct File process is a different journey than going through a commercial provider.
Q: What are the challenges to continuing and expanding Direct File?
A: The product so far is working very well and we’re getting very positive feedback. If we weren’t, I would say the pilot isn’t going as well as we thought. But it is going well and so I’m encouraged. With two weeks to go before filing season, we still don’t have all the data, it would be premature for me to announce that we’re going forward next year and here’s what it’s going to look like.
Q: Is this a political issue?
A: It is a very political issue and that’s part of why it’s so important to have no surprises, to make sure I’m clear with the public in terms of what the path is and that there will be an opportunity to see the results and comment on them. I have received letters from more than a dozen Attorneys General that have told me that we should absolutely be pursing Direct File. And I have letters from a dozen Attorneys General saying you should stop Direct File.
A: What is the state of the agency overall and where are you at in terms of personnel?
Q: It’s important to understand the journey that the IRS is on. Our budget starting in 2010 was cut every year. It ended up being a 25% cut by 2022, so our staff size in 2022 was the same size as the 1970s. During those 10 years, the tax system grew a lot — the gig economy, new currencies, growth of more complicated partnership structures and a lot of changes to the tax law with new requirements. The biggest one is the Affordable Care Act which is executed through the tax system.
All of that going on during budget declines means that you’re falling behind in a lot of different areas. Our walk-in centers around the country were either closed or understaffed with lines around the block and angry taxpayers. Our call centers got really exasperated during the Covid-19 pandemic. Our call centers fell to the lowest performance we’ve ever had. Our technology was stagnant and our audit rates at every level were the lowest they’ve ever been.
What the Inflation Reduction Act sets out to do with these funds is say: ‘Answer the phones. Reopen the walk-in centers. We need a more modern system.’ It was about both bringing back basic operations but also building an IRS of the future.
We have to build an IRS for future taxpayers who are increasingly used to operating in a digital economy. We can’t just continue to be in a paper world. We have to manage the paper backlog.
Q: More than a year after receiving the additional funding, how has the IRS improved?
A: We’ve hired a ton of phone assistants. All our walk-in centers are open and fully staffed. We’ve extended to Saturday hours and created appointment schedules. Our phone lines have the highest numbers of responding calls ever, near 90% response compared to 20% in 2022. We added a call-back option if you have to wait 15 minutes or more. That’s not the most paradigm-shifting change but without funding you can’t reengineer your processes. We also are adding bots and AI into the call centers.
Q: What's next for the IRS?
A: Now that we’re back to par, we have a lot more investment to make in our technology, data, web tools and the security that goes along with that.
Q: Will you increase audits?
A: The Inflation Reduction Act means better service for everyone and more scrutiny for our wealthy, complex filers.
Not only do I have a direct order from my boss Secretary Yellen to focus all Inflation Reduction Act dollars that are used on enfocement on high-wealth complex filers. That is an area where we fell the most behind between 2010 and 2022 because, if you’re a filer and it’s not an overly sophisticated return, we might fall behind but we’re not going to fall too far behind. But imagine you’re a multinational firm selling goods and services in 14 different companies with 14 different tax rates. You made $1 million in the US but the tax rate is better in another country so you present that you only made $100k in the U.S. That’s called transfer pricing and it’s something we fell behind on significantly.
If you’re playing by the rules, you should want the IRS to have this sophistication to hold the right companies accountable.
We have 125,000 people who earn more than $400,000 and who have not filed a tax return since 2017. You might say: 'How can this be?' The reason is we didn’t have the capacity. It’s not just about sending a letter, we have to follow up. If we don’t have resources to follow up, it sets a very bad precedent because there’s no real energy behind these letters to get these done. Now we have the resources and we will be following up with each and every one of them.
Q: Should the typical middle-class family expect more audits?
Their likelihood of an audit has not changed. Our audit rates for small businesses and low and middle-income families is at the lowest it has been in history. We’re holding that audit rate at that low level. There’s no new wave of audits coming for mom-and-pops and middle- and low-income. I have directed the IRS to not do that exact thing.
Q: If you file directly there’s no greater chance of an audit?
A: Absolutely not.
Sandy Mazza can be reached via email at smazza@tennessean.com, by calling 615-726-5962, or on Twitter @SandyMazza.
This article originally appeared on Nashville Tennessean: IRS Commissioner Werfel visits Tennessee to promote new Direct File
