Biden’s I.R.S. Nominee Is Grilled About $80 Billion Overhaul

WASHINGTON — Daniel Werfel, President Biden’s nominee to lead the Internal Revenue Service, told lawmakers on Wednesday that the tax agency would not increase audit rates for households earning less than $400,000 per year and that, if confirmed, he would work to ensure that audits were more “equitable” after a report that Black taxpayers had been disproportionately targeted.

Those commitments were presented in response to tough questioning from Senate Republicans during a confirmation hearing for Mr. Werfel, whose nomination comes at a pivotal moment for the beleaguered agency. The I.R.S. is embarking on an $80 billion modernization project that newly empowered Republicans are giving intense scrutiny at a time of concern about the politicization of the agency.

During the hearing before the Senate Finance Committee, Mr. Werfel made clear that he was aligned with the Biden administration’s priorities of ensuring that the wealthiest Americans pay what they owe and that racial discrimination does not play a role in how the tax code is enforced. He insisted that improving taxpayer service and rebuilding the nation’s trust would be his priorities.

“If poor people are more likely to be audited than wealthy, that is something that I think potentially degrades public trust and needs to be addressed within the tax system,” Mr. Werfel said.

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 workers who are expected to retire over the next decade. Mr. Werfel rebutted claims that the new employees would be heavily armed.

“I think the notion of armed agents is incorrect,” he said. “I certainly would have no intention of making that part of any plan going forward.”

Mr. Biden has vowed to veto any legislation to rescind the funding, 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 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. Mr. Werfel said that, if confirmed, he intended to make the agency’s spending plans public.

Republicans on the Finance Committee grilled Mr. Werfel about the agency’s spending plans, recent leaks of taxpayer information and the Biden administration’s pledge that audit rates will not increase 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 above current levels. (Audit rates plunged in recent years as I.R.S. funding declined, but they were far higher a decade ago.)

“Sending the I.R.S. on an unchecked spending binge has no intrinsic value,” said Senator Michael D. Crapo of Idaho, the top Republican on the committee. “Unless there are outsized results to match the gargantuan investment, the I.R.S.’s supplemental billions will simply become another example of government waste.”

In his opening statement, Mr. Werfel said he would meet Treasury Secretary Janet L. 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 said.

Mr. Werfel also faced questions about a study by a team of economists that showed that Black taxpayers were at least three times as likely to be audited by the I.R.S. as other taxpayers, even after accounting for the differences in the types of returns each group is most likely to file. He committed to investigating the matter and reporting back to the committee within 60 days of being confirmed.

“Fairness is an essential element of tax administration,” Mr. Werfel said. “And we have to have an understanding of whether our approaches or activities are having disparate impacts on any population. It’s particularly alarming if it’s having a disparate impact on racial minorities.”

Mr. Werfel is not a stranger to the I.R.S. or defending it during an onslaught of criticism.

A decade ago, after scandals at the agency involving improper targeting of conservative groups and lavish spending at conferences, Mr. Werfel, the agency’s acting commissioner, faced scrutiny from House Republicans.

Pressed by Representative Paul D. Ryan of Wisconsin 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.

President Barack Obama tapped Mr. Werfel in 2013 to temporarily lead 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 the 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, Republican of Ohio, 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.”

Although lawmakers questioned Mr. Werfel vigorously on Wednesday, they also at times expressed appreciation that he was game to take on one of the most thankless jobs in Washington.

“So you thought you were in the fire last time you walked into the I.R.S.,” said Senator James Lankford, Republican of Oklahoma. “You’ve got a lot that’s on your plate this time.”