Grassley said Lerner rejected a request by Werfel to resign. One congressional aide said Lerner, a career civil servant, will be on paid leave. The congressional aides spoke on condition of anonymity to describe a personnel matter.
A day earlier, Lerner proclaimed her innocence of any wrongdoing to a House committee, then invoked her Fifth Amendment right against self-incrimination and refused to answer questions.
Republicans have shown no taste for dropping their demands for more answers about the matter, which has become a major political liability for President Barack Obama. Three congressional committees are investigating the episode and the Justice Department has launched a criminal investigation.
"The agency needs to move on to fix the conditions that led to the targeting debacle," Grassley said, adding about Lerner, "She shouldn't be in limbo indefinitely on the taxpayers' dime."
Rep. Sander Levin, D-Mich., said replacing Lerner was a "strong step" for improving the IRS but added, "This and further corrective action are vital in restoring the confidence of the American people."
Lerner oversaw the IRS unit that in early 2010 started subjecting conservative groups seeking tax-exempt status to long-lasting, tough reviews, according to a report by a Treasury inspector general.
That report said Lerner learned of the activity in June 2011. Higher-ranking IRS officials say they didn't learn of the problem until nearly a year later.
Lerner revealed the wrongdoing May 10 in response to a question at a legal conference that IRS officials later conceded they planted in an attempt to get the news out before the inspector general's report was released.
Steven Miller was forced out this week as acting IRS commissioner. Joseph Grant, one of Miller's top deputies, announced last week that he will retire June 3.
All IRS offices will be closed Friday, one of five days the agency plans to be shuttered this year because of mandatory, across-the bard budget cuts that are affecting most government agencies.