WASHINGTON — A decade ago, in the wake of scandals at the Internal Revenue Service involving improper targeting of conservative groups and lavish spending at conferences, Daniel Werfel, the tax agency’s acting commissioner, faced a grilling from House Republicans.
Pressed by Representative Paul D. Ryan at a 2013 hearing about how the agency could justify its request for an additional $1 billion in funding, Mr. Werfel argued that the I.R.S. had been judiciously paring back its spending and was moving in the right direction.
“If we underfund critical priorities that lead to improved taxpayer service and improved enforcement of the tax code, then we’re leaving dollars on the table for the American people,” Mr. Werfel said, pointing at Mr. Ryan.
On Wednesday, Mr. Werfel will face tough questioning from lawmakers again when he testifies before the Senate Finance Committee, this time as President Biden’s nominee to lead the I.R.S. The confirmation hearing comes at a pivotal moment for the beleaguered agency, which is embarking on an $80 billion modernization project that newly empowered Republicans are giving intense scrutiny.
“While unheralded, effective implementation of our tax system is necessary to fund critical government services,” Mr. Werfel, 51, will say, according to a copy of his prepared remarks.
If confirmed, Mr. Werfel will step into one of the most perilous jobs in Washington. The I.R.S. has for years been at the center of some of the most fraught political battles, with Republicans making it their mission to starve an agency that they have accused of political bias and Democrats relying on it to collect tax revenue to fund their legislative priorities. Criticism has intensified after revelations that the I.R.S. did not perform an audit of former President Donald J. Trump’s tax returns during his first two years in office despite its own policy that all presidential tax filings must be audited.
The $80 billion that was allocated to the I.R.S. as part of the Inflation Reduction Act last year has intensified the scrutiny. When Republicans assumed control of the House this year, they quickly passed legislation to scale back most of the funding, which they falsely warned would be used to hire 87,000 “agents” who would investigate small businesses and the middle class. In fact, many of the hires will fill customer service and technology support roles and replace staff who are expected to retire over the next decade.
President Biden has vowed to veto any such legislation, and the Treasury Department has insisted that the additional resources will be dedicated to improving the agency’s woeful customer service and technology while ensuring that wealthy taxpayers and big corporations pay the taxes that they owe. The I.R.S. is supposed to detail its plans for deploying the money this month, though it remains unclear whether that plan will be released publicly.
Republicans on the Finance Committee are expected to grill Mr. Werfel about the agency’s spending plans, recent leaks of taxpayer information and the Biden administration’s pledge that audit rates will not rise for households that earn less than $400,000. The Treasury Department has said audit rates for those households will not rise “relative to recent years” but has not specified what years that refers to, opening the door to big increases in audit rates above current levels. (Audit rates plunged in recent years as I.R.S. funding declined, but they were far higher a decade ago.)
“To presume this ‘pinky promise’ pledge has lasting impact, one must assume it somehow lasts 10 years, outlives multiple agency heads and does not change overnight without any recourse or accountability,” Senator Michael D. Crapo of Idaho, the top Republican on the committee, wrote in The Washington Examiner this week. “Neither the Treasury Department nor the I.R.S. has determined how to define or uphold this pledge.”
In his opening statement, Mr. Werfel said he would be committed to meeting Ms. Yellen’s directive to not increase audit rates “relative to historic levels” for small businesses and households making under $400,000.
“If I am fortunate enough to be confirmed, the audit and compliance priorities will be focused on enhancing I.R.S. capabilities to ensure America’s highest earners comply with applicable tax laws,” Mr. Werfel will say.
Americans for Tax Reform, a group run by Grover Norquist that promotes lower taxes, has called on lawmakers to question Mr. Werfel about the firearms and ammunition possessed by I.R.S., about the 30 million taxpayer documents that the I.R.S. destroyed in 2021 amid a backlog of filings and about its last-minute decision in December to delay for a year a new tax policy that would have required users of digital wallets and e-commerce platforms to start reporting small transactions.
“Congress passes laws, not the I.R.S.,” Mr. Norquist said. “The key question is whether he or whoever takes this job is willing to commit on a series of challenges that the I.R.S. has had.”
Mr. Werfel is no stranger to the I.R.S. or the cauldron of challenging Washington policy jobs.
President Barack Obama tapped Mr. Werfel in 2013 to temporarily take over the agency after a scandal over its targeting of conservative groups led to the firing of another interim director, Steven T. Miller.
At the time, Mr. Werfel had been working as controller of the Office of Management and Budget, serving as the Obama administration’s point person on the across-the-board spending cuts known as sequestration and making sure government agencies adhered to the law. Before that, he helped carry out the American Recovery and Reinvestment Act, Mr. Obama’s stimulus legislation. Mr. Werfel also worked in the administration of President George W. Bush, helping to oversee compliance with the Emergency Economic Stabilization Act of 2008 in the Office of Financial Stability.
When Mr. Werfel was selected to step into the I.R.S. role in 2013, Joshua Bolten, who had been Mr. Bush’s chief of staff and budget director, praised him for being “not easily intimidated” and “nonpartisan.”
Although he led the I.R.S. for less than a year, Mr. Werfel gained experience parrying with Republican lawmakers who were looking into its aggressive questioning of conservative groups.
After a surge in applications for tax-exempt status from 2010 to 2012, the agency acknowledged, it began singling out terms such as “Tea Party” and “patriot” as a shortcut for determining if organizations were engaging in social welfare, which would qualify them for tax-exempt status, or might be political organizations instead.
That year, Lois Lerner, the director of the I.R.S. division that oversees tax-exempt groups, apologized for making mistakes and exercising poor judgment. Mr. Obama later demanded the resignation of the acting I.R.S. commissioner, Mr. Miller, and said the agency’s actions were “inexcusable.” Ms. Lerner resigned in September 2013.
During a House Oversight Committee hearing in August 2013, Mr. Werfel jousted with Representative Jim Jordan, the Ohio Republican, and pushed back against accusations that he was obstructing the committee’s inquiry and stalling in handing Ms. Lerner’s emails over to it. He insisted that the agency was working through the request while suggesting that the committee had not taken the I.R.S. up on its offer to interview an official who could help with its investigation.
“This is not about obstruction,” Mr. Werfel said. “This is about offering as much information as we can.”
Since leaving the I.R.S. in late 2013, Mr. Werfel has been a managing director and partner at Boston Consulting Group, working on its public-sector team to help governments modernize their agencies.
In the weeks since he was nominated in November, Mr. Werfel has sought the advice of former I.R.S. commissioners, including John Koskinen and Fred T. Goldberg Jr. During a recent dinner together, they discussed how much more fun it could be to run the agency when it was flush with resources and ambitious modernization plans.
Mr. Koskinen suggested, however, that Mr. Werfel might find the job to be even more intense than his brief stint 10 years ago.
“In some ways that was easier — he was dropped in and was doing the best he could,” Mr. Koskinen said. “Once you’re there a while, then everybody really starts yelling at you.”