Senators spar as IRS mulls major shifts to tax-filing

Senate hearing on tax policy and administration this week in the signaled big things afoot in the tax world.

As millions of Americans raced to file their 2022 taxes ahead of Tuesday's deadline, senators sparred over how the IRS plans to spend $80 billion in additional funding — where no less than the future of Western civilization was up for discussion and debate.

The big picture: How the IRS is trying to make tax filing day easier

The concept came up in the context of the study the IRS was commissioned by Democrats’ Inflation Reduction Act (IRA) to do on a free direct e-filing tax return system. A free IRS tax-filing system could theoretically replace many of commercial software programs and automate an often complicated process.

“Republicans and the tax prep lobby have in the past reacted as if this is just going to be pretty much the end of Western civilization,” Senate Finance Committee Chairman Ron Wyden (D-Ore.) said at a Wednesday hearing with IRS Commissioner Danny Werfel.

Wyden stressed that individuals could choose whether or not to use such a system and that any participation in it would be voluntary, implying personal freedom from state control would be kept intact.

Top Senate Finance panel Republican Sen. Mike Crapo (R-Idaho) told Werfel that it was Congress that had the authority to decide what to do with the report, whatever the contents of its findings. The IRS has said it has not yet decided whether it would go ahead with an eventual free e-filing system.

“I encourage you to recognize that Congress has the authority to make this determination,” he said. “I am glad to hear your answer that it’s not a predetermined outcome already.”

But there was a lack of legal clarity about whether Congress or the IRS has the power proceed with the conclusions of the report. Congress has legal authority over the IRS, but the IRS knows how the nuts and bolts of the tax system apply in the real world.

“I’m not sure of where the legal authorities are. Actually, I think it’s a good question to ask in the context of issuing the report,” Werfel said to Crapo.

Senators want answers on audit plans

The discussion is taking place against a backdrop of large-scale operational changes at the IRS enabled by an $80 billion funding boost that will result in the centralization of many auditing and enforcement protocols. This centralization will be amplified by new data and analytics capacity in a technological environment that’s increasingly changing due to artificial intelligence.

This was another point of concern for senators, who referenced a recent report out of Stanford University that found that Black taxpayers can be several times more likely to be audited than non-Black taxpayers.

“The IRS doesn’t collect data on race or ethnicity, and the report suggests that the disparity is attributed to discrimination in the IRS’s computer algorithms that select returns for audit,” Sen. Bob Menendez (D-N.J.) said.

Republicans also pressed Werfel on how he'd enforce the IRS’s pledge not to increase audit rates for people making less than $400,000 a year would be honored. The commissioner said he was taking additional meetings with members of Congress and that he would be providing more information.

"I understand there’s a request for more details and I think the plan that was issued is robust. As you said, it’s dense. Does it answer every question? No," Werfel said.

Measuring the tax gap

Sen. Thom Tillis (R-N.C.) said Wednesday that amid all the new changes taking place at the IRS, data on missing taxes owed the government need to be presented to Congress in an easier-to-understand format in terms of income distribution as a way to better shape laws in the future.

“I really need more information at a more granular level than a trillion dollars, so that I can start applying a rationality test," Tillis said.

At a hearing of the Senate Budget Committee on Tuesday, an even bigger picture discussion on taxes took place on the level of revenue policy as opposed to administration.

The debate encompassed such big picture themes as the taxation of national labor income versus capital income, international tax havens, and the role of dark money in U.S. politics enabled by the Supreme Court ruling in Citizens United, which opened the floodgates of campaign donations.

While multivariate, the debate was largely framed by a Republican agenda to rein in spending and a Democratic priority to curtail the power of elite special interests. It also brought back something called the Gingrich-Edwards tax loophole that allows people with S-corporations to avoid paying into Social Security and Medicare.

“There’s a lot of things in the tax code that anybody can take advantage of. We have the Gingrich-Edwards loophole,” Budget Committee member Sen. Chuck Grassley said.

“Republicans know that Social Security and Medicare are part of the social fabric of America,” Grassley said. “And we’re committe to maintaining them as part of that social fabric.”