[Senate Hearing 106-561]
[From the U.S. Government Publishing Office]
S. Hrg. 106-561
IRS RESTRUCTING: A NEW ERA FOR SMALL BUSINESS
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
MAY 23, 2000
Printed for the Committee on Small Business
______
U.S. GOVERNMENT PRINTING OFFICE
65-345 CC WASHINGTON : 2000
_______________________________________________________________________
For sale by the Superintendent of Documents, Congressional Office
U.S. Government Printing Office, Washington, DC 20402
COMMITTEE ON SMALL BUSINESS
ONE HUNDRED SIXTH CONGRESS
----------
CHRISTOPHER S. BOND, Missouri, Chairman
CONRAD BURNS, Montana JOHN F. KERRY, Massachusetts
PAUL COVERDELL, Georgia CARL LEVIN, Michigan
ROBERT F. BENNETT, Utah TOM HARKIN, Iowa
OLYMPIA J. SNOWE, Maine JOSEPH I. LIEBERMAN, Connecticut
MICHAEL ENZI, Wyoming PAUL D. WELLSTONE, Minnesota
PETER G. FITZGERALD, Illinois MAX CLELAND, Georgia
MIKE CRAPO, Idaho MARY LANDRIEU, Louisiana
GEORGE V. VOINOVICH, Ohio JOHN EDWARDS, North Carolina
SPENCER ABRAHAM, Michigan
Emilia DiSanto, Staff Director
Paul Cooksey, Chief Counsel
Patricia R. Forbes, Democratic Staff Director and Chief Counsel
(ii)
C O N T E N T S
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Opening Statements
Page
Bond, The Honorable Christopher S., Chairman, Committee on Small
Business, and a United States Senator from Missouri............ 1
Witness Testimony
Rossotti, The Honorable Charles O., Commissioner, Internal
Revenue Service, Washington, D.C............................... 3
Ashby, Cornelia M., Associate Director, Tax Policy and
Administration Issues, General Government Division, U.S.
General Accounting Office, Washington, D.C., accompanied by
Kirk R. Bayer, Senior Evaluator, Kansas City Field Office, and
James A. Wozny, Assistant Director, Tax Policy and
Administration Issues, General Government Division............. 34
Abalos, Sandra A., President, Abalos & Associates, P.C., Phoenix,
Arizona........................................................ 77
Quick, Roy M., Jr., EA, Principal, Quick Tax & Accounting
Service, St. Louis, Missouri................................... 84
Alphabetical Listing and Appendix Material Submitted
Abalos, Sandra A.
Testimony.................................................... 77
Prepared statement........................................... 79
Ashby, Cornelia M.
Testimony.................................................... 34
Prepared statement and attachment............................ 37
Bond, The Honorable Christopher S.
Opening statement............................................ 1
Post-hearing questions posed to Mr. Rossotti and subsequent
responses.................................................. 101
Coverdell, The Honorable Paul
Prepared statement........................................... 95
Kerry, The Honorable John F.
Prepared statement........................................... 96
Quick, Roy M., Jr.
Testimony.................................................... 84
Prepared statement........................................... 87
Rossotti, The Honorable Charles O.
Testimony.................................................... 3
Prepared statement and attachment............................ 8
Responses to post-hearing questions posed by Senator Bond.... 101
Snowe, The Honorable Olympia J.
Prepared statement........................................... 98
(iii)
IRS RESTRUCTURING: A NEW ERA FOR SMALL BUSINESS
----------
TUESDAY, MAY 23, 2000
United States Senate,
Committee on Small Business,
Washington, D.C.
The Committee met, pursuant to notice, at 10 a.m., in room
SR-428A, Russell Senate Office Building, the Honorable
Christopher S. Bond (Chairman of the Committee) presiding.
Present: Senator Bond.
OPENING STATEMENT OF THE HONORABLE CHRISTOPHER S. BOND,
CHAIRMAN, SENATE COMMITTEE ON SMALL BUSINESS, AND A UNITED
STATES SENATOR FROM MISSOURI
Chairman Bond. Good morning, the Committee on Small
Business is called to order.
My colleague and Ranking Member, Senator Kerry, has another
commitment. His staff informs me that he will be joining us
shortly. But since we said we were going to start at 10, we
will get on with it right now.
As many of you know, this week is Small Business Week, and
I believe it to be very important for the Committee to focus
its attention today on one of the most pervasive and continuing
issues confronting small-business owners, and that is their
interaction with the Internal Revenue Service. Over the past 2
years, the IRS has been taking some major steps to streamline
that interaction, which I hope will take some of the
frustration and fear out of America's entrepreneurs.
Today, the Committee will examine the progress that the IRS
is making on its modernization efforts. In particular, we will
be looking at the new IRS division dedicated to small-business
and self-employed taxpayers in this country. To bring us up to
date on the agency's work in this area, it is my pleasure to
welcome IRS Commissioner Charles Rossotti back to the Committee
this morning. Welcome, Mr. Commissioner.
Nearly 2 years ago, Congress passed sweeping legislation,
with strong support of the Administration and the IRS, to
rebalance the focus of the Internal Revenue Service. Broadly
speaking, the purpose of the 1998 Internal Revenue Service
Restructuring and Reform Act was to transform one of the
Nation's most feared enforcement agencies. Our goal was for the
IRS to become an agency that balances the taxpayers' needs for
outstanding service with the agency's duty to collect tax
revenues in a fair and uniform manner. As a strong supporter of
that legislation, I am pleased that it has allowed Commissioner
Rossotti and his team of senior managers to begin the massive
effort of transforming an agency that had become such a
significant part of the lives of taxpayers, and especially
small-business owners.
A significant part of the IRS' transformation is expected
to occur through the reorganization of the agency into four
operating divisions, each dedicated to the particular needs of
specific groups of taxpayers like small-business owners and the
self-employed. I have asked Commissioner Rossotti to provide us
with a progress report today on the new Small Business/Self-
Employed (SB/SE) Division and the steps the IRS is taking to
reduce the enormous tax filing and reporting burdens that small
businesses face every day.
I also see that the new Commissioner of the SB/SE Division,
Mr. Joe Kehoe, is here with Commissioner Rossotti today. We
welcome him as well. Having tried a little bit of retirement,
he found that it was not nearly as rewarding as being actively
in the fight, and he has got it. I admire a man who makes
irrational decisions like that for the greater public good.
A year ago I also asked the General Accounting Office to
begin an examination of the IRS' plan for the new SB/SE
Division. I am pleased that Cornelia Ashby, Associate Director
of the GAO for Tax Policy and Administrative Issues, is here
this morning to report on the GAO's findings.
I appreciate the extensive work that the GAO has done on
this project, and the periodic briefings that the Committee has
received over the past year. I also appreciate the IRS'
extraordinary cooperation with the GAO on this project. While
the GAO has identified some challenges facing the IRS, I think
the examination that Ms. Ashby and her team have now completed
validates the IRS' plans for the SB/SE division and helps us to
see some of the benefits that the Division will have for small-
business taxpayers.
It is my hope that the new SB/SE Division will contribute
to the overall effort to swing the pendulum back from the
heavy-handed enforcement mentality of yesteryear to one that
recognizes the importance of prompt, courteous, and fair
service by the IRS for America's small-business taxpayers. For
too long, small-business owners and the self-employed have felt
they have been treated like tax cheats simply because they run
a small business.
Commissioner Rossotti and Commissioner Kehoe, I urge you in
the strongest possible terms to ensure that, as the new SB/SE
Division ``stands up'' later this year, that historic bias of
``guilt by virtue of small business'' will have no place in the
new Division's front-line employees or its top management.
Small business owners bear incredible burdens when it comes
to compliance with the overly complicated tax code, as the
Committee saw in great detail at our hearing last April on tax
filing and reporting burdens. With such complexity, honest
mistakes will naturally occur, especially for small-business
owners who often cannot afford professional tax assistance.
Those taxpayers need help in avoiding mistakes and
straightening them out when they occur, all in a manner that
treats them as honest, upstanding citizens who are willing to
pay their fair share of the taxes.
Just as the IRS does not want to be judged by its worst
employees, small-business owners do not want to be branded as
criminals simply because of a few dishonest small enterprises.
This is not to say that the IRS should look the other way
when it comes to disreputable taxpayers who are trying to evade
their tax liabilities. The IRS has a dual responsibility, part
of which is to ensure that taxpayers who owe taxes, pay them.
And I strongly support the IRS' efforts to collect taxes due in
a fair and professional manner. We can hardly expect honest
taxpayers to pay their fair share, if others are getting away
with cheating the system.
As one who just went through the annual ritual of paying my
taxes, I sure do not want to see somebody else getting away
with not paying the taxes they owe, when we pay the taxes we
owe.
Finally this morning, I have asked two individuals who
currently serve as informal advisors to the IRS to provide the
Committee with their perspective on the agency's new SB/SE
Division and the steps the IRS is taking to reduce the
compliance burdens on small businesses and the self-employed.
Sandra Abalos is the owner of Abalos & Associates, an
accounting firm in Phoenix, Arizona. This morning, we will be
testing the boundaries of the Senate's technological
advancement by having Ms. Abalos join us from Phoenix via video
conferencing. We look forward to her insights as a member of
the IRS Electronic Tax Administration Advisory Committee on the
new SB/SE Division and the efforts underway to encourage and
improve electronic tax filing.
I should also note that this morning's proceedings are
being broadcast on the Internet via the Committee's web page at
sbc.senate.gov.
Last, but certainly not least, will be Roy Quick, Jr., a
fellow Missourian, a good friend, and a principal in the Quick
Tax & Accounting Services. Mr. Quick is also a member of the
IRS Advisory Council, and he will give us his perspective on
the new SB/SE Division, as well as some of the agency's efforts
to provide taxpayer education in the pre-filing stage in order
to reduce errors and provide better compliance by small-
business taxpayers.
With that, Mr. Commissioner, I know that you have a very
full statement that we will accept for the record, and I ask
now that you summarize your testimony and begin the
proceedings.
STATEMENT OF THE HONORABLE CHARLES O. ROSSOTTI, COMMISSIONER,
INTERNAL REVENUE SERVICE, WASHINGTON, D.C.
Mr. Rossotti. Thank you very much, Mr. Chairman, and thank
you for having me here this morning. I think it is very helpful
for you to have this hearing at this particular point in time,
when we are really at the beginning of what I think is a whole
new era in tax administration with respect to especially the
small business community.
Of course, we are following, we think, the Restructuring
and Reform Act as our road map as we embark on this huge
modernization. We think that as we look across all of the parts
of the taxpayer base that we serve, we really believe that the
opportunities we have to improve service to the small-business
taxpayer are probably some of the best opportunities we have.
Which is another way of saying we have some of the greatest
room for improvement.
We believe that we must help these taxpayers and I would
stress especially almost 800,000 new businesses that startup
every year, to understand what is expected of them and to stay
in compliance from day one.
Very much as you summarized in your opening statement, Mr.
Chairman, we are stressing the balanced approach to doing this
tax administration. We know that the vast majority of small-
business taxpayers do want to comply with their tax
obligations. And we have to help them do that every way we can,
to make it as easy as possible, and especially to prevent
problems before they even occur.
Of course, for that small minority who do refuse to meet
their obligations, they cannot be allowed to unfairly burden
the remainder, and we need to take necessary steps to bring
them into compliance.
What we are trying to do is take a short-term and long-term
approach to this. We know we cannot do everything at once. In
the short term, we are working on new avenues of communication
and new technologies to help provide quality service at
convenient times. I think one of the important things we have
done for hard-pressed small-business owners who do not have a
lot of time, is to open our phone service 24 hours a day, 7
days a week, so that people can communicate with us when it is
convenient for them.
We have also created a CD-ROM that has a great deal of
information that any small-business owner could benefit from.
Chairman Bond. I imagine that is a best seller.
Mr. Rossotti. It is actually a pretty good seller. I think
your staff has copies of this and have been looking at it. Of
course, we have all of this on the web site as well. Our small
business corner on the web site, which I think is very helpful
in terms of being able to assist small businesses since most
small businesses now have some computer capability, gives them
a chance to go to the web site and get what they need.
We are also trying, of course, to make it easier to
actually file and pay taxes. On the quarterly return side,
which is some of the most frequent filings, small businesses
can now do that either by touch tone phone or filing online
directly from their own computer.
Something new for the next filing season, which we think
will be very popular with many self-employed taxpayers and
small businesses, is a checkbox on the form 1040 which will
basically allow people to, just by checking this box, allow
their preparer or the person that prepared their return to
communicate with us without having to file still another
return--another form just to be able to authorize them to do
that. This seems to have gotten a good response and we look
forward to expanding that potentially to other forms after we
test it the first time.
We are also expanding our voluntary tip compliance program,
so that people can now devise their own tip agreements, in
addition to the standard ones that we provide. Any industry
now, where tipping is a customary practice, we think this will
expand what has been already a successful program, to use
voluntary agreements to encourage compliance rather than having
to go in and audit things after the fact.
Those are some short-term things. We know that they only
scratch the surface. We do not, in any way, claim that these
are anywhere close to what we need to do to relieve the burden
and to make ourselves more efficient with small-business
taxpayers. But we think they are some steps.
Now of course, the other big step that we are taking, which
you mentioned in your opening statement as the key focus of
this hearing, is the establishment of four operating divisions
as the primary units of operation in the IRS. One of the most
important of those will be the Small Business and Self-Employed
Division. We are still targeting to get that division
operational officially as of October 1. We have much to do to
make that happen but we are definitely setting that as our
goal.
As you noted, Mr. Kehoe who is here with me today is the
Division Commissioner. And Dale Hart, who is an experienced IRS
executive, also has been sworn in as the Deputy Commissioner.
Just briefly, to outline what we are going to have in this
unit, we will have three major components that actually deal
with taxpayers. I think that, right off the bat, is an
important statement because it is an attempt to be balanced in
the very structure of the division itself.
The first one is our Taxpayer Education and Communication
division, which will have not only a national office but a
field staff that will operate in 86 territory offices
throughout the United States. I will note that one of these
will be in St. Louis, Mr. Chairman. I think that once this
office is fully staffed, it will have about six times as many
staff across the country as we currently have today devoted to
this function. Of course, that is because we have very few
devoted to this function right now.
But in the future, we will have a fully staffed, across the
country set of offices. For example, in St. Louis, we would
expect that they will work very closely with some of the local
offices, the State of Missouri for example, in order to
generate one-stop shopping with the State. We would work
closely with local small business association offices, and
especially something that we are working very hard on, working
with the Small Business Development Centers. They are very
effective educational organizations that already offer many
courses for small businesses, and we want to partner with them.
In addition, the taxpayer education group will pick up the
responsibility that is currently done on sort of a detail,
part-time basis during our filing season to help taxpayers who
have questions, either in our direct field offices or over the
phone. That will also help both taxpayers and also help us
avoid what is today a major problem in that we have our
compliance people, our revenue agents, get off their cases in
order to work on things during the filing season.
So that is a very important and, I think, one of the most
important new initiatives, our Taxpayer Education and
Communications organization.
The second major component will be our customer account
services. Actually, it will be the part of the organization
that probably most taxpayers will most interact with, because
this will be the one to which you actually send in your
returns, and get refunds and payments, and deal with the normal
kinds of transactions that take place every day in any business
operation.
I think the key thing here is that once we get this fully
established, we will then have account representatives who will
be dedicated and specialized to deal with small-business and
self-employed taxpayers. So they will be more capable, we hope,
in fact I am certain, will be more specialized in understanding
particular problems that occur with small businesses who
interact with us more frequently, of course, than the
individual taxpayer who sends in their return once a year.
Their job will be to make that process, which is actually
the most frequent interaction process, as smooth as possible.
Of course, the third component will be our compliance
organization, which will have a full field organization, as
well as phone and other resources, to perform the traditional
functions of examining returns and collecting overdue accounts,
which is a very important function. But they will also assist
in the overall strategy of developing voluntary compliance to
its maximum.
Finally, one of our goals in the compliance area, which
will take some new technology to enable, but which over time I
think has tremendous potential. When we do intervene with the
taxpayer we want to do it as quickly as possible after we find
a problem. Oftentimes, in collection from small businesses, the
problem is not that the customer will not pay, it is that they
cannot pay because we have gotten to them so late, by that time
the money is gone or they have just gotten into an intractable
problem.
So one of our key goals in compliance is to speed
everything up, so that if we are going to talk to a taxpayer
about a problem, let us do it as quickly as possible, get it
resolved, and get in and out. That is what we hear as one of
the main things that our taxpayers tell us, and it is just
common sense.
Those are kind of the main outlines of where we are going.
I believe that if we can sustain this program, Mr. Chairman, we
really can, I think, be more effective on both of the missions
that you have mentioned in your statement, to provide quality
service to all of the compliant taxpayers, which are the
majority of them, and also to ensure fairness in the system by
enforcing compliance where that is required.
We do need some resources, and I have to mention that our
fiscal year 2001 budget is still up for consideration. Frankly,
it is very important that we get that budget so that we will
have the resources to staff some of these things that I have
mentioned, and also to invest in the technology that we think
is really critical in order to improve service, especially in
the account area, which is where most of our small-business
taxpayers really interact with us most of the time.
So with the support of Congress, in committees like your
Committee and our other committees, which I am very happy to
say so far has been very positive, at least so far this year, I
think we can continue this tremendous transformation. And I
think in the next year to 2 years really begin to seriously
deliver on our commitments to improving the way tax
administration works for all taxpayers, but especially for
small-business and self-employed taxpayers.
Thank you very much, Mr. Chairman.
[The prepared statement of Mr. Rossotti follows:]
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Chairman Bond. Thank you very much, Mr. Commissioner. Those
are very encouraging words, and we commend you for the
direction you are taking.
Before I turn to questions, though, I want to close the
loop on a project that you were kind enough to help us initiate
at the Committee's hearing last April on small business tax
filing and recordkeeping burdens. After that hearing, as you
recall, we posted on the Committee's web page the ``IRS
Paperwork Unpopularity Poll.'' For the past year, we have
collected input from small-business owners on the IRS forms,
instructions, and publications, letters and notices most in
need of revision.
This morning, I am pleased to present you with the results
of that poll. May I have the envelope, please? I always wanted
to do that.
Mr. Rossotti. I cannot wait to see what is coming out of
that envelope.
Chairman Bond. We have preserved the anonymity of each
participant. We are providing you with the complete documents
and the votes cast on each type. Without reviewing the entire
report, let me announce the winners.
The five most unpopular IRS forms are: No. 1, Form 1040,
the U.S. Individual Income Tax Return. No surprise.
No. 2, Form 941, the Employer's Quarterly Federal Tax
Return. No. 3, Form 4562, Depreciation and Amortization. No. 4,
Form 940, the Employer's Annual Federal Unemployment Tax
Return. And No. 5, Form 1065, U.S. Partnership Return of
Income.
To give you a flavor of how candid the comments were, let
me just quote from two of our participants regarding the
depreciation and amortization, Form 4562. One participant
wrote:
I have a degree in accounting with honors from the
University of Texas . . . and I have to read the rules on
depreciation at least three times every year, and then just
pray that I'm interpreting them correctly.
And on Form 941, the Employer's Quarterly Federal Tax
Return, a participant noted:
Way too confusing for anyone without a degree or a CPA.
Trying to figure out if I have a credit or owe money is
difficult. My monthly liability and my quarterly liability is
always just a few cents different. It's a lot of useless
paperwork to find I've overpaid by 12 cents.
He has the same problem I have with my checkbook.
Commissioner, your willingness to examine these forms and
documents is a testament to the IRS' overall efforts to provide
greater service to America's taxpayers. It is an important step
forward in reducing tax filing and recordkeeping burdens that
small business and the self-employed encounter every day. I
look forward to working with you to reduce the filing and
compliance burdens.
I thank you very much for participating with us in that
poll.
Mr. Rossotti. Thank you very much, Mr. Chairman. We have it
right here and we will be looking at these comments very
carefully. Of course, I think getting rid of the 1040 may be a
little beyond our capacity.
Chairman Bond. I do not think anybody asked to get rid of
it, but perhaps some of the comments can help translate it into
readily understandable language.
Let me turn now to a series of questions. First, in your
testimony you described the SB/SE Division's Taxpayer Education
and Communication component. How will you assess whether these
efforts are getting to the taxpayers, as opposed to the tax
preparer, and whether they are effective?
Mr. Rossotti. I think that one of the techniques that we
have begun to use on evaluating all of our programs, and we
will most definitely use it for these programs, the simplest
way is just to ask the customer. In other words, survey the
taxpayers on a regular basis. We are already doing this on many
of our programs, and we are actually not only serving them but
we are actually building this into the performance measures for
our managers in our whole organization.
Although we have not gotten this unit established yet, I
feel sure that we will do that. We have some pilot projects
that have been very interesting in different parts of the
country that we are going to build on, and we have already been
doing some surveying of the participants.
A lot of times what you find, especially with the new
business owners, is that they have a trade or a skill. I was
out in California last week, and we have a program out there
that is a good prototype I think of what we want to do for
home-health care providers. There is quite a booming industry,
people using people to come into their homes to provide help or
health care for elderly people and others who need care. These
people do have to get licensing, but many times they do not
know anything at all about business or taxes.
Both we and the State of California, in this case, found
out that they were getting behind. We were going in and
auditing them or finding they had not paid something and
shutting down and that was not benefiting anybody. So we
developed this program in the State of California, as part of
the process where they get their licensing to give them
basically a fairly simple 2-hour kind of primer on what needs
to be done to file and pay their taxes.
Then we went back and surveyed them and got very good
responses from the participants in that kind of a program that
say this is really helpful, I did not know anything about this.
It really is a way to keep them where they need to be. So a
very simple method of just simply asking them and seeing if
they have gotten something out of it.
In the longer term, we want to actually measure the effect
on compliance of these activities, which is a more difficult
thing to do, but we will definitely have that as part of our
longer term plan.
Chairman Bond. This Committee has taken a real interest in
the plight of home-health care agencies. Last year we held
hearings on it. The question is whether the Health Care
Financing Administration will eliminate them, execute them
before they can get around to paying their taxes. So I would
say that, in this one area, you are probably not the least
favorite agency of the Federal Government with which the home-
health care providers have to deal.
I am sure, as you talk to home-health care people, you will
encounter some of those questions. I guess, fortunately or
unfortunately, that is not your problem. It is ours, and a
great concern of many members of this Committee and mine.
With respect to the customer account service of the new SB/
SE Division, do you have some problems with the aging
technological capabilities? You mentioned in your comments the
need for technology. Will it be a hurdle to overcome the
technological gap to provide the kind of customer service
improvements you envision?
Mr. Rossotti. Unfortunately, Mr. Chairman, I have to say it
is a major hurdle, especially in that area. Let me put it this
way, it is an obstacle or a barrier. By that, we do not mean
that we are going to just wait and do nothing until we have
replaced all our technology, because that is not a good
approach. We are trying to do what we can.
But just to give you a couple of examples, one of the
problems we have is with just simply the timing of updating our
files. Somebody calls us in and says I have paid such and such
an amount, and it takes anywhere from--it could take as long as
16 days, because of the way our systems work, to actually get
that transaction updated on what we call our master file.
So in the meantime, it is possible that the person could
get another notice or could call in again. You get this kind of
cycle that is very, very bad. A lot of the times when people,
you probably get complaints from your constituents, every
member virtually does, about this kind of thing. From the
taxpayer's point of view, it seems inexplicable. I have already
called up. I have paid. I have settled this. And then they get
another letter, and then they call up again.
It is simply the fact that we have a 35-year-old system
that takes up to 2\1/2\ weeks. That is a major problem.
Another problem is with the notices. We send out 180
million notices a year. Many of them go to small businesses.
Many of those people complain that they cannot understand what
it is. I got a complaint recently from one of your colleagues,
Senator Domenici, from one of his constituents, where he said
the taxpayer was furious. I got a notice that said he had not
paid by 1 cent and he got a penalty for $286. It looked very
much like that, if you read this notice, like that is exactly
what happened.
Of course, we looked into this, and the reality was the
penalty was not for the 1 cent. The 1 cent had nothing to do
with it. It had to do with some late payments on a previous
filing that just carried over to this notice. But the notice
did not tell him anything about this. So it just looked to him
like that is what the problem was.
And yet, although we are trying to fix some of these
notices, we do not have, in all cases, the data in our system,
in our data base, to be able to actually carry it forward, to
be able to explain fully to the taxpayer what is in these
notices. So it is not just a matter of rewriting them, it is
the underlying computer systems.
These are just two examples. But fundamentally, we have a
tax system, Mr. Chairman, that depends on computer systems that
were, many of the key parts of it, actually designed and built
in the 1960's and 1970's, and we are now in the 21st century.
So we cannot really deliver what is expected appropriately by
the taxpayers.
That, of course, is why we have our whole technology
modernization program which has begun, but which is a long-term
program and which, of course, will require continued funding in
order to be successful.
Chairman Bond. I can sympathize with the fellow that had
the notice. One of my first encounters with the IRS some 35
years ago when I was called in to the office because they
claimed I had not paid the quarterly taxes I owed. I brought in
the canceled check stubs, and I sat down with a gentleman who
had not had his coffee that morning, he was not really awake.
And I said here is our problem. You say I have not paid, but
here is the canceled check that you deposited.
He said let me go talk to my supervisor. So he came back
after 10 minutes, and he said, ``Well, we are willing to
compromise this.'' That is when I lost it. I said, ``No, no,
no, I paid it. We are not compromising anything.''
I hope that that is long gone, but I know that my first
experience set my teeth on edge a bit, so I think that is
important, as well.
In the testimony, you note that the third component of the
SB/SE Division will be a traditional compliance function. As I
indicated, I support that in order to ensure that the system is
fair, the taxes owed are collected. Because of the complexity
of the tax code, however, would you consider implementing a
program under which penalties for first time taxpayer errors in
mitigating circumstances are waived?
Mr. Rossotti. As a matter of fact we do have, of course,
the authority to abate penalties. The most common case where
that occurs is the first time somebody has had to make, for
example, a tax deposit. We actually have a program in effect
right now, which we just fairly recently implemented within the
last couple of years, where we automatically waive the
penalties.
I did find out that we were not, however, until very
recently, notifying the taxpayer that they had this problem and
that we had waived the penalty. So therefore, they were in the
position where they could have done it a second time and gotten
the penalty. This was an interesting finding.
So we have got a system now where we at least send the
taxpayer a letter when that happens to tell them look, you did
not do this and we waived the penalty because obviously it was
your first time, just to let them know what they are supposed
to do the second time. I think that is a better system.
So I agree with you, in many cases, we should do that. As a
matter of fact, we have that program in the case of the tax
deposits program. We certainly would look at that as a key
criteria for abating penalties in any other situation where it
was a first-time filer.
We are not really trying to use penalties to penalize
people, except where it is really a legitimate issue. It is
just part of the tax system. We do have, fortunately, the
authority in most cases to waive the penalties if it is
justified.
Chairman Bond. When can we tell small businesses they could
expect to start seeing some substantive changes in the kind of
assistance the IRS provides and/or the way it provides the
information, as you describe in your testimony?
Mr. Rossotti. Well, I think we could claim that, at a
limited level, it has already begun, it has already happened.
We have not waited until we have the new division started up.
I mention some of the things, that is why I mentioned them
in my testimony. I will not repeat them again, but the 24-hour
phone service, the web site, the other forms of communication.
And I think more generally, just our whole mission, our
more balanced focus of how we want to administer the tax
system, I think has had considerable effect in the way our
employees--which have responded to this very well--deal with
taxpayers. We have had a considerable focus on training and
balance measurement of performance, for example.
So those things have already happened. I think that there
are some other things in the pipeline for next season, next
filing season. I mentioned the checkbox. And we will begin, we
hope, to specialize some of the phone service a little bit
more.
So I think that we have already done some things. We will
have more things next year. I think over the following 2 years,
2001 and 2002, we will have then at least a major part of our
organization in place. Assuming we can get the funding we
requested for the staffing and the technology, we can then put
in place some of these new initiatives that we have requested.
So I think we have seen some improvement already, and I
think there has been some feedback from our taxpayers to that
effect. I hope it will accelerate over the next 2 years.
Chairman Bond. Mr. Commissioner, as I said, there are
several of my fellow Committee members who wanted to come.
Obviously, they have been held up. We will leave the record
open for questions that I have, which we will submit in
writing. We will ask staff to prepare, by the end of this week,
any questions that they have for you.
We very much appreciate your willingness to come and be
with us today. We will be hearing from the GAO next, and
others, but I know your time is very busy so we appreciate your
being with us. Commissioner Kehoe thank you for joining us, as
well as the rest of your staff. We look forward to continuing
to work with you and expect very good things from the SB/SE
Division.
Thank you very much for being with us today.
Mr. Rossotti. Thank you very much, Mr. Chairman.
Chairman Bond. Our next panel is Ms. Cornelia Ashby,
Associate Director for Tax Policy and Administration Issues at
the General Accounting Office. Ms. Ashby, it is a real pleasure
to have you with us.
I am also pleased this morning to release the study that
the GAO undertook at my request on the IRS' efforts to
construct a model that will estimate the tax burdens imposed on
America's taxpayers. This first stage of this model focuses on
taxpayers with wage and investment income and is expected to
assess the pre-filing, filing, and post-filing burdens that
taxpayers encounter.
While this part of the model does not directly affect
small-business owners and the self-employed, it will be the
basis for what we anticipate will be the next stage, a burden
model covering small-business taxpayers.
I applaud the IRS for attempting to update its antiquated
burden-estimation process, and I greatly appreciate the GAO's
review and evaluation of the IRS' efforts as the agency works
toward a model that will accurately assess the enormous tax
compliance burdens borne by small-business owners in America.
With that, Ms. Ashby, we will make your full statement and
this other information part of the record. We thank you for
your excellent assistance, and welcome you here today.
STATEMENT OF CORNELIA M. ASHBY, ASSOCIATE DIRECTOR, TAX POLICY
AND ADMINISTRATION ISSUES, GENERAL GOVERNMENT DIVISION, U.S.
GENERAL ACCOUNTING OFFICE, WASHINGTON, D.C.; ACCOMPAINED BY
KIRK R. BOYER, SENIOR EVALUATOR, KANSAS CITY FIELD OFFICE, AND
JAMES A. WOZNY, ASSISTANT DIRECTOR, TAX POLICY AND
ADMINISTRATION ISSUES, GENERAL GOVERNMENT DIVISION
Ms. Ashby. Thank you, Mr. Chairman.
We are pleased to be here today to discuss factors that
have complicated small businesses' efforts to comply with
Federal tax laws and IRS' efforts to provide better service to
this important group of taxpayers. James Wozny and Kirk Boyer
are accompanying me today.
The IRS Restructuring and Reform Act of 1998 required IRS
to place greater emphasis on meeting taxpayers' needs and to
establish new operating units to serve groups of taxpayers with
similar needs. In response, IRS is reorganizing into four
operating divisions. No. 1, the Small Business/Self-Employed
Operating Division will serve small corporations, partnerships,
farmers and other self-employed individuals, a group that we
will refer to as ``small businesses.''
Our remarks are based on results of the two studies that
have been mentioned this morning that the Committee asked us to
do, one on the extent to which the IRS' plans for SB/SE address
factors that have complicated past interactions between small
businesses and the IRS; and another on the IRS' new taxpayer
burden estimation models.
The first study is ongoing and our remarks today are based
on preliminary results. We have completed the second study and
you have just released our report.
In summary, factors that have complicated interactions
between small businesses and the IRS relate to the potential
for non-compliance among small businesses, the way the IRS has
structured its organization and allocated its resources, and
the reluctance of small businesses to go to the IRS for help.
Although the IRS' plans for SB/SE address these complicating
factors, the IRS will face several challenges as it implements
those plans.
First, I will discuss the complicating factors. According
to the IRS, small businesses are more likely than other
taxpayers to have compliance problems. IRS data show, for
example, that small businesses tend to have more collection
cases involving withheld employment taxes than do larger
businesses. Complexity, in combination with the resources
available for dealing with that complexity, may account for
some small business non-compliance.
While small businesses, like larger ones, encounter complex
tax issues and are subject to multiple layers of filing,
reporting, and deposit requirements, they do not always have
the kinds of resources on a continual basis that they need to
understand and deal with those issues and requirements.
Other factors that may contribute to a small business's
potential for non-compliance are cash-flow limitations and the
fact that business income, unlike wage and investment income,
is generally not subject to withholding or some form of third
party reporting.
Because the IRS is organized and allocates its resources
along geographic and functional lines, it is designed to handle
a wide range of issues pertaining to all taxpayers with little
or no focus on specific taxpayer segments, such as small
businesses. As a result, the IRS does not have any easy means
of accessing comprehensive information about small-business
taxpayer accounts. This can inhibit its ability to identify and
resolve tax-compliance problems of small businesses.
Further, the IRS has historically allocated most of its
resources to correcting problems rather than preventing them.
This emphasis is especially problematic for small businesses
that need assistance up front and that, absent help, are at a
high risk of going out of business if problems arise.
The results of our survey of a stratified random sample of
1,000 small businesses representing a study population of
398,105 small businesses nationwide showed that many small
businesses were unaware of key IRS services or knew of the
services but did not use them. Many expressed negative feelings
about their past interactions with the IRS. Small business
owners participating in IRS focus groups indicated that they
had limited familiarity with or use for IRS' products and
services because they relied on tax practitioners.
Small business representatives told us that small
businesses would rather rely on tax practitioners because they
are too busy, they do not trust the IRS, or the IRS' services
are not conveniently offered.
IRS' plans for SB/SE indicate that it will address the
factors we identified as complicating interactions between the
IRS and small businesses by dedicating an operating division to
small businesses, determining the characteristics and needs of
that population, shifting more resources to prevention,
partnering with tax practitioners and other organizations from
which small businesses are likely to seek help, and by
customizing its products and services to meet the needs of
small businesses.
The IRS should be in a better position to provide small
businesses improved customer service. However, it will not be
easy for the IRS to implement its plans for SB/SE. The IRS and
the new division must confront several challenges.
First, SB/SE will serve a large and diverse population, the
members of which can migrate between operating divisions as
their circumstances change from year to year. The diversity of
the small business population will require the SB/SE staff to
specialize in a wide range of tax issues and deal with a wide
range of taxpayer needs.
In addition, SB/SE is expected to do examination and
collection work for other operating divisions. These
responsibilities could stretch the capabilities of management
and staff of SB/SE and dilute its taxpayer focus. Taxpayer
migration also poses a challenge to the taxpayer focus intended
by the reorganization.
Antiquated information systems and a shortage of staff with
needed skills will also challenge SB/SE. Antiquated computer
systems have long hindered the IRS' efforts to manage
operations and serve taxpayers, and improvements are critical
to SB/SE's overall success. A shortage of staff with needed
skills can also adversely affect SB/SE's ability to deliver new
programs and services.
For example, SB/SE intends to improve taxpayer education
and assistance through research and analysis of taxpayer
characteristics and behavior. However, according to the IRS, it
does not have enough employees who possess the requisite skills
such as market research, forecasting, and trend analysis.
SB/SE, like the rest of the IRS, is challenged to develop
an integrated performance management system that creates
incentives for employee behavior that support organizational
goals. Although the IRS has clearly made progress in
implementing new performance measures, it does not have a
measure for voluntary compliance. The absence of such a measure
could hinder SB/SE more than other operating divisions because
the SB/SE population generally has a greater potential for non-
compliance.
A second critical aspect of performance management is an
employee evaluation system that reflects the organization's
mission. The IRS recognizes that, with respect to SB/SE, a
successful blend of customer service and compliance activities
will require not only a substantial shift in employees' skills
and abilities but also a significant change in employees'
attitudes and behavior. A change that is dependent on employees
being able to see a clearer connection between their day-to-day
activities, their performance evaluations, and the overall
organization's goals.
Finally, in closing, let me briefly address another area of
interest to the Committee, the IRS' efforts to estimate
compliance burden on taxpayers. Besides measuring voluntary
compliance, it is also important that the IRS be able to
measure compliance burden. To do that, the IRS is pursuing a
multi-phase strategy. Initially, the IRS is focusing on the
design and implementation of models for estimating the Federal
income tax compliance burden on taxpayers who are served by the
new Wage and Investment Income Operating Division. The
conceptual definition of compliance burden developed for that
group, and the theoretical framework for measuring that burden
are supposed to build the foundation for developing burden
estimates for other taxpayer groups, including small
businesses.
The IRS has begun to implement its strategy by contracting
for the development of two models that, when combined, should
provide more reliable estimates of W&I taxpayers' Federal
income tax compliance burden than current methodology. The
models are also designed to provide the IRS with a greater
capacity to analyze the impact of tax law and administrative
changes on that burden. As with all such modeling, the specific
capabilities and precision of the new models will depend on the
quality of the underlying data.
Mr. Chairman, this concludes my statement. We would be glad
to answer any questions you have.
[The prepared statement of Ms. Ashby follows:]
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Chairman Bond. Thank you very much, Ms. Ashby.
Recognizing that most small businesses use tax preparers
and that there seems to be a reluctance on the part of small
business to go to the IRS for help, what do you think the IRS'
role should be in providing help to small-business taxpayers?
Ms. Ashby. We think, and the IRS in its plans seems to
recognize this, that one avenue to help small businesses is to
go to tax preparers, to use them as a resource, by first of all
making sure the tax preparers understand what the requirements
are and using them and partnering with them in getting the word
to small-business owners and managers.
Chairman Bond. I can see some happy tax preparers. I know
they will be glad for that.
To what extent are there small businesses these days who
still try to do it on their own, and do not use tax preparers?
Ms. Ashby. I will let my colleague, Mr. Boyer, who is more
familiar with the results of our survey, answer, but
overwhelmingly I think we found that most small businesses do
use tax preparers.
Mr. Boyer. Yes, sir. Based on our survey results, we found
that 94 percent of small businesses use tax preparers of one
sort or another. That does lead, as Ms. Ashby said, to a great
challenge of communicating or providing up-front input for the
taxpayers, when so many of them go through tax preparers.
Chairman Bond. I would say that 6 percent is either very
brave and very well-informed, or brave and . . . anyhow.
Ms. Ashby. I wanted to make the point that while there is a
higher-percentage usage of tax preparers to prepare tax
returns, small businesses really need advice at other times
during the year. They lack the availability of continual
resources as they are planning their activities to put
themselves in the best position tax-wise, and as they are doing
the things they need to do during the course of a year to be
prepared for that year-end filing. That is where small
businesses have difficulty.
Chairman Bond. Your testimony mentions several challenges
facing the IRS as it implements its new operating division.
Which of these challenges do you think will be most difficult
to overcome? And how do you see them dealing with those
challenges?
Ms. Ashby. I think the most difficult challenge will be the
computer systems.
Chairman Bond. Getting back to the technology side of it.
Ms. Ashby. Yes, as the Commissioner explained to us. He is
right, the IRS cannot wait until those systems are sufficiently
improved in order to do something. The IRS has to operate with
what it currently has.
But the difficulties involve, for one thing, identifying
who small businesses are in order to be able to look at their
characteristics and assess their needs. Right now, with the two
master files, the individual master file and the business
master file, some small businesses are in one, some are in
another. They are intermingled with other types of taxpayers.
So that, in and of itself, provides difficulty in terms of
doing some of the things that the IRS would like to do in the
future.
And then, as the Commissioner stated, the problem with
delays in posting transactions, and inaccuracies in the records
themselves are a problem throughout the IRS and for anything it
encounters or anything it tries to do.
Chairman Bond. That is very helpful to know. I do not
happen to serve on the Treasury Postal Subcommittee anymore,
but we will be communicating to Chairman Campbell the
information that both you and the Commissioner provided us.
A final question, sort of a broader goal, what do you see,
in addition to the computer issue, as being the principal risk
to the success of the IRS efforts to develop the improved
burden estimation models? Is there anything that they could be
doing that they are not, that could minimize those risks?
Ms. Ashby. I am going to let Mr. Wozny answer that, and I
will just say, as I mentioned in my short statement and as we
state further in our longer official statement, the underlying
data that is the basis for the statistical equations that are
used in the model are the most problematic. But I will let Mr.
Wozny say more.
Mr. Wozny. Right, and the most difficult data to come by
are the information on the burden itself. The IRS, and its
contractor, have decided to try to obtain that data through a
survey. Past efforts have indicated that taxpayers have limited
ability to recall the burdens very precisely.
But the contractor is expert in conducting mail surveys and
they will be trying to increase the response rate and to
provide guidance to taxpayers in order to prompt their memory
on the burdens.
Chairman Bond. I would have to say they probably have the
fisherman's veracity problem, because that 12-inch bass that
you release today is 16 inches long by tomorrow. And next week
you are telling everybody how you threw a 20-inch bass back. So
I can imagine that there are some difficulties in concluding
that.
As I said earlier, we will keep the record open. We may
have some further questions, and I invite my fellow Committee
members and their staffs to submit their questions for the
record by the end of this week. We thank you very much for your
good work. As always, the General Accounting Office is most
helpful to us in obtaining an independent review in order to
confirm or amplify the information that we have received.
Ms. Ashby, Mr. Wozny, Mr. Boyer, thank you very much for
being with us today.
Ms. Ashby. Thank you, Mr. Chairman.
Chairman Bond. Now, Ms. Abalos, can you hear me?
Ms. Abalos. Yes, I can. Can you hear me?
Chairman Bond. Yes, the wonders of modern technology come
through, and we are very pleased that you can be with us today.
We also will have, at the table, Mr. Roy Quick. We thank you
both very much for joining us today, for taking the time to
come and be with us through the means of modern technology.
As I indicated before, we will invite Ms. Abalos to
summarize her testimony, and we will include the full written
testimony in the record. Ms. Abalos, we invite you to make your
comments.
STATEMENT OF SANDRA A. ABALOS, CPA, PRESIDENT, ABALOS &
ASSOCIATES, P.C., PHOENIX, ARIZONA
Ms. Abalos. Thank you so much for providing the opportunity
to give testimony via the teleconference. I did not hear the
opening remarks, but the sound seems to be fine now.
Taxation and all the issues surrounding tax compliance is
one of the difficult aspects of running a small business.
Compliance becomes not an issue of intent, but it becomes an
issue of education, awareness and resources.
Historically, the relationship between the Internal Revenue
Service and the small business community could be likened to
``swimming with the sharks''. This fear factor approach,
however, fosters an ``us against them'' mentality that has
produced really less than desirable results.
I have reviewed the mission and organizational structure of
the Small Business/Self-Employed Operating Division of the IRS
and I must say that I am very encouraged by the concentrated
customer service focus of the SB/SE Operating Division. I think
the IRS is to be commended for their efforts in identifying the
distinct market segments of the taxpaying community and then
developing an organizational structure that will provide
meaningful customer service and support.
I am particularly interested in the organizational segment
named, Taxpayer Education and Communication Organization, the
TEC. This is described as a ``customer-focused organization
that routinely solicits information concerning the needs and
characteristics of its customers and implements programs based
on the information received.'' Within the TEC structure is the
TEC Partnership Management arm that will interface with certain
user groups. The TEC Partnership Management will proactively
partner with Government agencies, small business organizations,
practitioner groups, and other professional and volunteer
organizations.
The ETAAC, Electronic Tax Administration Advisory
Committee, prepares an annual report to Congress, which is
forthcoming. It is due at the end of June. In considering a
strategy to increasing electronic filing participation within
the business community, we included ``Community Alliance
Initiatives'' within the report.
I happened to author this section of the ETAAC report and I
included it in full in my written testimony. The report
describes a formal working relationship between the IRS and the
respective user groups very similar to what is envisioned in
the TEC partnership management initiative.
I had envisioned this working relationship between the
small business community and the IRS before really reviewing
the express directives of the IRS SB/SE Operating Division.
Thus, I was really excited to see this concept in the
structure.
The community alliance initiatives of the ETAAC report
reads in part:
The electronic filing goals established by Congress require
considerable participation from a broad spectrum of taxpayers
and tax practitioners. The simple wage and interest type of
returns account for the majority of electronically filed
returns to date. The future growth and success of electronic
filing will largely depend on the increased participation of
the tax preparer community and the sanction of the small
business community.
The tax preparer community is extremely diverse in tax
practice procedures and in client profiles. For some preparers,
electronic filing provides efficiencies and incentives. For
other preparers, electronic filing presents a burden. There are
tremendous opportunities for tax preparer associations to
provide constructive input, opinion, and direction into
electronic filing process and procedures as they specifically
relate to divergent preparer practices and taxpayer profiles.
The small business community, on the other hand, is very
sensitive to the change, complexity and cost. A seemingly
simple initiative will emerge as a compliance nightmare within
the small business community. The advance input and endorsement
of the small business community will ensure a successful
program.
When I am sitting in the ETAAC meetings, just as an
example, one of the Committee members said, ``Gosh, the small
business community had a cow with EFTPS. We do not get it.''
Well, had I been on the Committee at that time, I could have
told you exactly what the cow was going to be about and perhaps
prevented some of that from happening.
The TEC Partnership Management Division is the vehicle to
produce such results. The IRS needs to identify and resolve the
barriers to electronic filing during the process development
phase, rather than reacting to an outcry after the program
rolls out.
In our ETAAC meeting of March 1, 2000 we heard from Sherill
Fields regarding the current State of business e-file. The
issues and barriers impeding business e-file, as she presented,
are substantial and material. One of the issues was limited
research has been conducted on business products and customers.
In listening to the well structured presentation on the
business e-file program, I could not help but feel like the IRS
is building a bad field of dreams. I even said that at the
meeting. I told her, you can build it, but they will not come.
Electronic filing will be a success if it is embraced
voluntarily due to ease of use and appropriate user incentives.
Congress established an e-filing goal of 80 percent by the
year 2007. My single request, on behalf of the small business
community, is that the electronic filing be successful as a
viable option and not be made into another Government mandate.
The IRS SB/SE Operating Division mission statement talks
the talk of a new partnership and relationship building with
the small business community. Now they need to walk the walk.
Because done right, electronic filing will flourish.
I sincerely appreciate the opportunity to testify and I
would welcome any questions that you may have.
[The prepared statement of Ms. Abalos follows:]
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Chairman Bond. Thank you very much, Ms. Abalos.
You already answered the first question I was going to ask,
whether the 80 percent should be a goal or a mandate. I have
long taken the position that if this electronic filing is the
best thing since sliced bread, then we ought to be able to sell
it to small business as sliced bread and not make it a mandate.
I will come back to you with questions, but first I want to
have the testimony of our other witness, and we will have an
opportunity for you to listen to his testimony. If you wish to
make any comments on each other's testimony, that always makes
it fun.
Now I will turn to our good friend Roy Quick, EA,
Principal, Quick Tax and Accounting Service of St. Louis,
Missouri. Roy, welcome, glad to have you back
STATEMENT OF ROY M. QUICK, JR., EA, PRINCIPAL, QUICK TAX &
ACCOUNTING SERVICE, ST. LOUIS, MISSOURI
Mr. Quick. Thank you very much, Mr. Chairman.
My name is Roy Quick, I am an enrolled agent and a
principal in Quick Tax & Accounting Service, a private, home-
based tax and accounting service located in St. Louis County,
Missouri. I am also a member of the IRS Commissioner's advisory
Council, or IRSAC, since November of last year. I am pleased to
present this testimony on the IRS modernization effort.
First of all, let me say that I am very glad to see a
change in the way the IRS does business by way of involving
``outsiders'' in the strategic planning process. A few examples
of this are the consulting firm of Booz-Allen & Hamilton, a
contractor to the IRS, invited the White House Conference on
Small Business tax chairs to review the strategic planning
process in the initial phases of the design and modernization.
Commissioner Rossotti has selected seven members of his 15
member advisory council who have small business experience. In
addition to the IRSAC, other specialized advisory councils with
interested stakeholders have been formed, for example the ETAAC
that Sandy serves on.
Two other initiatives that are a sign of the ``new IRS''
are the establishment of ``problem solving days'' and the
Electronic Tax Administration road shows. The problem solving
days bring together representatives from the IRS and taxpayers
with unresolved problems to try and find common solutions.
Also, a representative from the Taxpayer's Advocates Office is
available at these locations to assist taxpayers with still
unresolved problems. At a recent problem solving day in St.
Louis, which was held on a Saturday, the IRS and the Missouri
Department of Revenue joined forces for a one-stop shop.
Electronic Tax Administration road shows that I mentioned
are designed to educate and encourage the practitioner
community to embrace electronic filing. Key elements of these
shows are the availability of national office personnel to
speak on topics of interest to the practitioner community and
also the vendor displays on products that the practitioners
would be able to use.
You have heard from previous witnesses regarding the
different operating divisions, so I will not go into detail
here, except to say that this diverse group of small-business
and self-employed taxpayers will have interaction with the
service during the pre-filing, filing, and post-filing phases.
It is estimated they will have between 4 and 60 contacts per
year.
Taxpayer Education and Communication, or the TEC, will
handle the pre-filing function. The three key functions within
TEC are research and product development, partnership outreach,
and taxpayer education. The strategy behind the establishment
of TEC, which I think is excellent, is to assist taxpayers
initially to avoid or reduce problems and burden in the filing
and post-filing phases. Basically, if you solve a problem on
the front or educate the taxpayer on the front end, you will
not have problems later on.
If this strategy is successful, it should reduce the
overall costs of tax administration. Therefore, it is critical
to the reorganization effort that the TEC be fully staffed and
fully funded as soon as possible.
The IRS has developed two products that should be key in
the delivery of taxpayer education. The first product is the
IRS web site. Taxpayers are able to obtain up to date
information and forms by accessing www.irs.gov on a 24/7 basis.
According to Commissioner Rossotti, there have been over 1
billion hits to this web site. The Service has done a good job
in developing this web site, but the addition of a hypertext
search engine would make it far more useful. With the addition
of this tool, one could search for information on regulations
and forms of a particular topic of interest.
The second product of interest in the taxpayer education is
the small business resource CD that was mentioned earlier. This
computer program covers the life cycle of a small business from
pre-startup to closing a business. The product was developed
jointly by the IRS and the SBA. I understand that it is being
distributed to all the Small Business Development Centers
across the country. The contents of this CD, however, should be
on the IRS web site, as well as in all the public libraries for
access.
This type of partnership or strategic alliance is another
function of TEC. I am encouraged by the effort to work with the
various stakeholder groups. The IRS, practitioner groups, trade
organizations, educational institutions, and other Government
agencies have so much to gain by being partners in tax
administration.
At the same time, the Service is looking to provide
taxpayer education to the small business community, this same
community may not be looking to the Service as the best source
of information. The figure I had was over 80 percent of small
business tax returns are prepared by a tax professional. I was
interested to hear Mr. Boyer's figure this morning, as well.
Chairman Bond. Even better news.
Mr. Quick. For the same reason that I do not fix my own
car, a lot of people do not prepare their own taxes. It is not
the highest and best use of my time. Therefore, outreach to the
professional community and trade groups is essential.
One area of concern in taxpayer education is the ability of
the IRS to educate taxpayers. The Service has many technically
proficient employees, well versed on tax law and procedures,
but these same employees may not possess the necessary skills
to be a good teacher.
I would suggest the possibility of pairing knowledgeable
IRS personnel with trained educators to develop suitable
training materials. It may be necessary to look outside the
Service for adjunct faculty. Sufficient funding needs to be
available to accommodate this reality.
Another area of concern is the ability of the Service to
retrain some of its examination and collection personnel and
their perception of small business. Most earners are very hard
working and law-abiding taxpayers willing to pay their fair
share of taxes but not a penny more. In light of today's
complex tax code, there is a big difference between an honest
mistake and tax fraud. This trust building will take time on
both sides of the table.
In talking with other IRSAC members, there are some
concerns about the intradivisional and cross-divisional
communications. This was a valid complaint in the old IRS. The
design teams are trying to address this issue and I will be
interested to see their results.
It is important to remember that this reorganization is a
work in progress and no doubt there will be a few glitches, as
there are in any private sector corporate reorganization. The
ability of the Service to correct these problems in a timely
manner, and the success of the TEC function, will greatly
enhance the success of the entire process.
One final message that I would like to suggest to Congress
is that they ensure adequate funding is available for this
reorganization effort, specifically in the information systems
area.
While admittedly, the Service has not always spent
technology dollars wisely in the past, I believe the IRS is on
the right track in upgrading their--for lack of a better word--
mature systems and technology. The installation of new
equipment and the establishment of integrated real-time
information systems will take several years to accomplish.
However, once in place, these systems should enable the IRS to
deliver timely and accurate customer service that the American
people deserve.
Thank you for the opportunity to present this testimony,
and I would be pleased to answer any questions.
[The prepared statement of Mr. Quick follows:]
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Chairman Bond. Thank you very much, Roy. You answered my
second question, about how they can improve the education and
outreach effort by saying they need to get somebody who knows
how to be an educator.
Let me turn back to Ms. Abalos.
Ms. Abalos, are there any barriers that will prevent small
business from electronically filing their taxes? Can you
explain how this electronic filing could be a burden on small
businesses?
Ms. Abalos. This year was the first year that our practice
offered electronic filing for customers. They had two
questions, every time they came around, two questions regarding
electronic filing. What does it cost? And how does it benefit
me?
The answer was it costs more because it takes us more time
to file the return electronically. This year, just to get some
familiarity with the process, I provided that service to my
clients free of additional charge. But then honestly, for our
practice profile, there was no benefit.
A CPA practice does not do the run-of-the-mill H&R Block
type returns where somebody comes in and presents their
information and they sit there and have a return done, sign the
8453 and be off and it is finished. We gather information.
Sometimes there is additional information that comes in. And
when we finish that return and send it out, we want to be
completed with it.
So there was even additional time and correspondence back
and forth with the client and the practitioner in getting the
signed signature forms and so forth.
With the business community, there is even an additional
barrier. This is just an example of where I cannot imagine that
the Internal Revenue Service would understand these kinds of
barriers or identify them because they are not practicing in
the mode we are.
I will give you a perfect example. In filing most of the
business returns, depreciation is a big component of the tax
return, and it is very, very complex. We do not use the
depreciation part of our software. The software package that
would file the returns electronically has a depreciation
component. We do not use that in computing the depreciation for
our business clients.
We have a separate package that is a full-blown
depreciation package that we can use year-round in doing
planning or preparing financial statements and so forth. And
that is how we do the depreciation part or component of the
return.
That prints a physical paper, 4562, which we include with
the paper business return. So just as an example, how would
that work in electronic filing? How would you capture this data
that is on a separate, independent, software package into the
e-file return when we do not do it that way?
So it is just an example of it taking more time and there
not being an offsetting benefit to either the small business
community or the practitioner community. Does that answer the
question?
Chairman Bond. That is a very good point. If it takes
longer and costs more, that is a problem. I can certainly
understand how your clients need to use this information
throughout the year. And unless technologically we can figure
out a way to move from one program into the other, it does
sound like a real burden.
One other question I have, Ms. Abalos. In the
Commissioner's testimony, he notes the IRS has expanded the
online filing program for Form 941, the Employer's Quarterly
Federal Tax Return. Have you had any experience with this
program and its potential benefits or downsides for a small
firm?
Ms. Abalos. Most small businesses do not prepare their own
payroll tax reports. I will tell you that as a CPA
practitioner, and I have probably 200 small business accounts.
I represent a wide array of the small business community. We do
not prepare them anymore, either. I do not even do my own
payroll tax reports.
We have out-sourced that function to a payroll service
provider. No. 1, they do it faster. And again, they do it at
less cost and that provides us with a real benefit.
So the electronic filing of the 941s, I see that as a real
benefit for the payroll service providers like Paychex or ADP,
those are two of the bigger ones here in Arizona. I really do
not see the small business community benefiting from a direct
941 e-file because they are not preparing their 941s to begin
with.
Chairman Bond. Thank you, Ms. Abalos.
Mr. Quick, would you like to comment on any of those items
before we move on to questions?
Mr. Quick. Certainly, Mr. Chairman. We do electronic filing
for all of our clients. The only impediment we have found with
electronic filing is that not all the forms are acceptable.
There are certain forms that some of our clients have that
cannot be filed electronically.
One advantage that we have with the electronic filing is
that returns go in error free. There is an error checking
mechanism to make sure that the returns go in without any
errors. It cross-checks Social Security numbers, which is one
of the prime errors on paper filed returns. It eliminates all
math errors. The Service gets the return error free and the
taxpayer gets an acknowledgement or a receipt that the Service
got their return and they know that it has been accepted.
Our clients, even the ones with balances due, have been
filed electronically and they seem to enjoy it. It does create
some additional data entry for us but we feel that it is worth
it.
Chairman Bond. How would you assess the IRS efforts to
include the Taxpayer Advocate in the new SB/SE Division? And
what has been your experience as a practitioner with the
Advocate?
Mr. Quick. My experience with the Advocate's office has
been excellent. I cannot say enough for Val Oveson and his
staff. The Taxpayer Advocate will have, or there will be a
Taxpayer Advocate's representative in each of the SB/SE
territories.
The one experience we had, which I cannot go into great
detail due to client privacy, but they were able to solve a
long-standing problem in a matter of a day with the service
center.
Chairman Bond. That probably sets a record.
In closing the formal questions, first Mr. Quick, if you
could tell the IRS one thing to do in the new SB/SE Division,
what would be the most important one?
Mr. Quick. My feeling on this, Senator, is that most small-
business owners are law-abiding tax paying citizens and willing
to pay their fair share. I would ask that they be not presumed
guilty by virtue of being small-business owners, and that the
IRS live up to its mission statement.
Chairman Bond. Thank you very much, Mr. Quick.
Ms. Abalos.
Ms. Abalos. I would ask that they formally activate that
TEC Partnership arm and let us help you. We are doing the work
here in the trenches and we can provide constructive input that
will help this process. So before you develop something and
roll it out, take our comments, consider them, and act on them,
just like this directive says.
Chairman Bond. Those are all very worthwhile, very useful
comments. We sincerely appreciate your testimony. We are
delighted to have the practical view from the tax preparers for
small business on how this is working, can work, and should
work.
Before I conclude, once again I want to express my thanks
to Commissioner Rossotti as well as, to Ms. Ashby and her team
at the GAO, and especially our witnesses serving small
business. Your insights and efforts on behalf of small business
are greatly appreciated, and we urge everybody to continue
their hard work for small business and the self-employed.
As we have heard this morning, the IRS' new Small Business/
Self-Employed Division is expected to stand up on October 1 of
this year. I extend my support, encouragement, good wishes, and
sympathy to Joe Kehoe and his deputy, Dale Hart, as they
undertake the enormous task of getting this critically
important division off the ground.
While I think there have been great efforts that have gone
into planning, the real work will begin when the new division
becomes operational. To ensure the IRS improvements in small
business service do not stop in the planning stages, I will be
asking the GAO to undertake a new evaluation of the SB/SE
Division and report back to the Committee next year on the
changes, and I am confident improvements, that the agency has
made for taxpayers in this incredibly important sector of our
economy.
I thank all of our participants. The record will remain
open for 2 weeks for those of you who are watching this, either
here in the room or by means of our web site, we do invite
further comments. I think there have been many good ideas that
have been aired today and we would welcome comments, either
supportive or adding a different perspective, that will enable
us to share with the IRS suggestions that may be most helpful.
With that, I thank all participants.
The hearing is adjourned.
[Whereupon, at 11:17 a.m., the Committee was adjourned.]
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