[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
                       FULL COMMITTEE HEARING ON 
                        ELECTRONIC PAYMENTS TAX 
                     REPORTING: ANOTHER TAX BURDEN 
                          FOR SMALL BUSINESSES 

=======================================================================

                      COMMITTEE ON SMALL BUSINESS
                 UNITED STATES HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                             June 12, 2008

                               __________

                          Serial Number 110-99

                               __________

         Printed for the use of the Committee on Small Business


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house

                               ----------
                         U.S. GOVERNMENT PRINTING OFFICE 

42-689 PDF                      WASHINGTON : 2008 

For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; 
DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, 
Washington, DC 20402-0001 


































                   HOUSE COMMITTEE ON SMALL BUSINESS

                NYDIA M. VELAZQUEZ, New York, Chairwoman


HEATH SHULER, North Carolina         STEVE CHABOT, Ohio, Ranking Member
CHARLIE GONZALEZ, Texas              ROSCOE BARTLETT, Maryland
RICK LARSEN, Washington              SAM GRAVES, Missouri
RAUL GRIJALVA, Arizona               TODD AKIN, Missouri
MICHAEL MICHAUD, Maine               BILL SHUSTER, Pennsylvania
MELISSA BEAN, Illinois               MARILYN MUSGRAVE, Colorado
HENRY CUELLAR, Texas                 STEVE KING, Iowa
DAN LIPINSKI, Illinois               JEFF FORTENBERRY, Nebraska
GWEN MOORE, Wisconsin                LYNN WESTMORELAND, Georgia
JASON ALTMIRE, Pennsylvania          LOUIE GOHMERT, Texas
BRUCE BRALEY, Iowa                   DAVID DAVIS, Tennessee
YVETTE CLARKE, New York              MARY FALLIN, Oklahoma
BRAD ELLSWORTH, Indiana              VERN BUCHANAN, Florida
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania
BRIAN HIGGINS, New York
MAZIE HIRONO, Hawaii

                  Michael Day, Majority Staff Director

                 Adam Minehardt, Deputy Staff Director

                      Tim Slattery, Chief Counsel

               Kevin Fitzpatrick, Minority Staff Director

                                 ______

                         STANDING SUBCOMMITTEES

                    Subcommittee on Finance and Tax

                   MELISSA BEAN, Illinois, Chairwoman


RAUL GRIJALVA, Arizona               VERN BUCHANAN, Florida, Ranking
MICHAEL MICHAUD, Maine               BILL SHUSTER, Pennsylvania
BRAD ELLSWORTH, Indiana              STEVE KING, Iowa
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania

                                 ______

               Subcommittee on Contracting and Technology

                      BRUCE BRALEY, IOWA, Chairman


HENRY CUELLAR, Texas                 DAVID DAVIS, Tennessee, Ranking
GWEN MOORE, Wisconsin                ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York              SAM GRAVES, Missouri
JOE SESTAK, Pennsylvania             TODD AKIN, Missouri
                                     MARY FALLIN, Oklahoma

        .........................................................

                                  (ii)

  


           Subcommittee on Regulations, Health Care and Trade

                   CHARLES GONZALEZ, Texas, Chairman


RICK LARSEN, Washington              LYNN WESTMORELAND, Georgia, 
DAN LIPINSKI, Illinois               Ranking
MELISSA BEAN, Illinois               BILL SHUSTER, Pennsylvania
GWEN MOORE, Wisconsin                STEVE KING, Iowa
JASON ALTMIRE, Pennsylvania          MARILYN MUSGRAVE, Colorado
JOE SESTAK, Pennsylvania             MARY FALLIN, Oklahoma
                                     VERN BUCHANAN, Florida

                                 ______

            Subcommittee on Rural and Urban Entrepreneurship

                 HEATH SHULER, North Carolina, Chairman


RICK LARSEN, Washington              JEFF FORTENBERRY, Nebraska, 
MICHAEL MICHAUD, Maine               Ranking
GWEN MOORE, Wisconsin                ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York              MARILYN MUSGRAVE, Colorado
BRAD ELLSWORTH, Indiana              DAVID DAVIS, Tennessee
HANK JOHNSON, Georgia

                                 ______

              Subcommittee on Investigations and Oversight

                 JASON ALTMIRE, PENNSYLVANIA, Chairman


CHARLIE GONZALEZ, Texas              MARY FALLIN, Oklahoma, Ranking
RAUL GRIJALVA, Arizona               LYNN WESTMORELAND, Georgia

                                 (iii)

  


























                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page

Velazquez, Hon. Nydia M..........................................     1
Chabot, Hon. Steve...............................................     2

                               WITNESSES

Stubna, Ms. Kim, Director of Public Policy, First Data 
  Corporation, Greenwood Village, CO.............................     4
Sohn, Mr. David, Staff Counsel, Center for Democracy and 
  Technology.....................................................     6
McCracken, Mr. Todd, President, National Small Business 
  Association....................................................     7
Darien, Ms. Kristie, Executive Director, National Association for 
  the Self-Employed..............................................     9
Boeding, Mr. Donald, General Manager of Merchant Services, Fifth 
  Third Processing Solutions, Cincinnati, OH.....................    12

                                APPENDIX


Prepared Statements:
Velazquez, Hon. Nydia M..........................................    25
Chabot, Hon. Steve...............................................    27
Stubna, Ms. Kim, Director of Public Policy, First Data 
  Corporation, Greenwood Village, CO.............................    28
Sohn, Mr. David, Staff Counsel, Center for Democracy and 
  Technology.....................................................    34
McCracken, Mr. Todd, President, National Small Business 
  Association....................................................    43
Darien, Ms. Kristie, Executive Director, National Association for 
  the Self-Employed..............................................    51
Boeding, Mr. Donald, General Manager of Merchant Services, Fifth 
  Third Processing Solutions, Cincinnati, OH.....................    56

                                  (v)

  


                  FULL COMMITTEE HEARING ON ELECTRONIC

                  PAYMENTS TAX REPORTING: ANOTHER TAX

                      BURDEN FOR SMALL BUSINESSES

                              ----------                              


                        Thursday, June 12, 2008

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:02 a.m., inRoom 
1539, Longworth House Office Building, Hon. Nydia M. Velazquez 
[Chair of the Committee] Presiding.
    Present: Representatives Velazquez, Hirono, and Chabot.

           OPENING STATEMENT OF CHAIRWOMAN VELAZQUEZ

    Chairwoman Velazquez. Good morning. I call this hearing to 
order.
    Among its duties, this Committee is charged with evaluating 
the impact of legislative proposals on this Nation's small 
businesses. That includes policy consequences ranging from 
health care and energy to transportation and taxation.
    The bulk of these proposals are crafted with the best of 
intentions, and this panel has supported many of them. On 
occasions, we also face policies that appear innocuous and may 
have laudable goals but have detrimental impact on small firms. 
Today we will examine one such proposal requiring small-
business tax reporting on credit card receipts.
    A little more than a year ago this Congress, under 
Democratic leadership, wisely reinstated the budget rule known 
as PAYGO. It requires all new spending, including tax cuts, to 
be made revenue-neutral. The restoring of PAYGO signals a firm 
commitment to fiscal responsibility and makes clear that any 
new spending must be paid for. These rules fundamentally change 
the way in which we discuss new proposals. Evaluating 
underlying policies remain key, but PAYGO implications must 
also be considered.
    Today's hearing to examine requiring small-business tax 
reporting on electronic payments is just such a case. The 
proposal has been broached in various forms, and over the past 
year it was even suggested as a means of helping pay for the 
farm bill. Promises of valuable offsets are always tempting, 
but this proposal raises significant technical and financial 
challenges for banks and entrepreneurs alike.
    In today's fast-paced marketplace, electronic payment 
systems are integral to the daily working of the U.S. economy. 
They link merchants, consumers and banks through secure means 
that are both efficient and convenient.
    As we will hear today, the administrative and financial 
burdens associated with the reporting requirements of this 
proposal are indeed significant. They might even be justified 
if the trade-off for small businesses was greater certainty, 
but the opposite is true. The proposal is built on an incorrect 
premise that electronic payments foreshadow profits. The 
reality is quite different for most small businesses. 
Electronic transactions bear little relation to actual income, 
especially when charge-backs, merchant discounts and other fees 
are accounted for. The result is that even careful compliance 
by entrepreneurs could lead to costly IRS audits.
    At a time when data security is being challenged 
constantly, the new reporting requirements also pose serious 
privacy risks for millions of citizens. For many small firms, 
the owner's Social Security number is used by the IRS to track 
the revenue and tax compliance of their business. Under this 
proposal, banks will have to include that same information in 
their reports, which could leave important personal data 
exposed to identity thieves and other criminals.
    Equally troubling is the provision to withhold 28 percent 
of credit card payment reimbursements to enforce compliance. 
Banks will be required to withhold the amount from each 
entrepreneur whose personal information is not collected in 
time. That means if a bank sends out a mass mailing asking 
small-business owners for their Social Security numbers, those 
that do not receive the letter will see 28 percent of their 
credit card revenue withheld. For every $100,000 in credit card 
sales, their business will receive just $72,000. For many 
businesses whose profit margins are between 3 and 5 percent, 
that can mean the difference between making payroll and having 
to permanently close their doors.
    In short, what at first sounds like a promising budget 
offset has very real costs for the Nation's small-business 
economy. These unintended consequences are exactly what we must 
keep in mind during the consideration of such proposals. After 
all, even in a PAYGO environment, we cannot afford to focus 
blindly on revenue figures while creating unreasonable costs 
for the small firms that drive economic growth.
    I want to thank all the witnesses in advance for their 
testimony today. The Committee is looking forward to their 
insights on this issue, and we are very pleased that they could 
join us this morning.
    With that, I recognize the ranking member for his opening 
statement.

                OPENING STATEMENT OF MR. CHABOT

    Mr. Chabot. Good morning. And thank you, Madam Chair, for 
holding this hearing on an important topic for small 
businesses, proposals to use electronic payments reporting as a 
way to increase tax compliance.
    I would like to extend a special thanks to each of our 
witnesses who have taken the time to provide this Committee 
with their testimony. I would especially like to welcome fellow 
Cincinnatian, Donald Boeding, who I will be introducing a 
little later.
    The IRS estimates that the United States collects 83.7 
percent of the total taxes due. After adjusting for delinquent 
taxes collected by existing compliance efforts, the IRS 
estimates that 86.3 percent of tax revenues are collected. The 
net uncollected taxes are currently estimated by the IRS 
National Research Program at nearly $290 billion for the tax 
year 2001, the last year for which data is available.
    We all recognize that $290 billion is a significant amount. 
Because of noncompliance, the burden of funding our Nation's 
commitments falls more heavily on responsible taxpayers who 
willingly and accurately pay their taxes. That is most unfair.
    However, many small-business groups and merchant banks have 
serious concerns regarding the proposal to address 
noncompliance through electronic payments reporting. With small 
firms already struggling under the weight of massive paperwork 
burdens, this initiative would add to that burden. Further, 
there is uncertainty over the benefit of this reporting 
requirement.
    I firmly believe that the first and best thing that we 
could do to address noncompliance is to simplify the tax code. 
The code has become a morass of complicated regulations and 
laws that grow increasingly complex.
    For small businesses that are just starting out especially, 
it can be exceptionally difficult to know exactly what to do 
and when to do it. Most small businesses pay their taxes in 
full and on time. However, doing so isn't easy, as the cost of 
compliance and the time spent to understand and interpret the 
tax code can be overwhelming.
    According to a 2001 Small Business Administration Office of 
Advocacy report, small businesses with fewer than 20 employees 
spend over $1,200 per employee to comply with tax paperwork, 
record-keeping and reporting requirements. This is more than 
twice the compliance costs faced by larger firms.
    The IRS should also focus greater attention on education 
and compliance assistance. The IRS implied that roughly $148 
billion of uncollected taxes comes from underreported business 
and self-employment taxes. Expanding efforts to help small 
businesses and the self-employed to prepare their returns 
accurately and on time could improve compliance.
    Unfortunately, there will always be bad actors trying to 
skirt the system. Finding them isn't easy, but we must continue 
to look for and penalize those who deliberately evade paying 
their taxes.
    We have an excellent panel of witnesses here today, as I 
mentioned before, and I look forward to hearing their thoughts. 
And I again want to thank you, Madam Chair, for holding this 
important hearing. And I yield back the balance of my time.

    Chairwoman Velazquez. Thank you.
    I welcome all the witnesses.
    You will have 5 minutes, and you have the timer in front of 
you, with the green, and the red meaning that your time is up.
    Our first witness is Ms. Kim Stubna. Ms. Stubna is the 
director of Public policy for the First Data Corporation, a 
payment-processing company based in Greenwood Village, 
Colorado. First Data is the Nation's leading provider of 
merchant transaction processing services including credit, 
debit, private label, gift, payroll and other payment solutions 
that power millions of small-business transactions each day.
    Welcome.

 STATEMENT OF MS. KIM STUBNA, DIRECTOR OF PUBLIC POLICY, FIRST 
         DATA CORPORATION, GREENWOOD VILLAGE, COLORADO

    Ms. Stubna. Thank you, Madam Chair, members of the 
Committee. Again, I am Kim Stubna, with First Data Corporation.
    I would actually like to focus, really, on three areas 
today: the impact, again, to our Nation's small business, as 
you alluded in your opening statement; the administrative 
burden that others in the payment industry along with First 
Data would be facing; and, really, a solution that we think 
would be a lot more simple.
    But first let me just tell you a little bit more about 
First Data. So, as mentioned, we are a Denver-based payments 
processor. We are a Fortune 500 company. We employ about 29,000 
employees globally. And by "payments processor," what I mean is 
that we facilitate the ability of merchants to accept 
electronic payments of all sorts: credit cards, debit cards, 
stored value, loyalty cards. So when you swipe your credit or 
debit card, say, at a Safeway grocery store, we are the ones 
actually powering that transaction from the point of sale 
through Visa, Master Card, Amex, Discover to the bank and back. 
And we do that for over 4 million merchant locations in this 
country.
    So, again, as you mentioned in your opening statement, we 
are extremely concerned about the backup withholding 
requirement of this proposal. You know, when we actually sign 
up a merchant to do business, we actually ask for the name that 
they are going to be doing business as, their DBA, which a lot 
of times is different than the name that they may have filed 
with the IRS. So, for instance, Dr. Bob Jones, Incorporated may 
be on file with the IRS, but we have on file Jones Foot Clinic. 
So that is going to obviously result in a discrepancy that we 
would have to then institute backup withholding.
    If you figure, conservatively, there may be 10 percent of 
our merchant base that has this discrepancy, that is 400,000 
merchant locations in the United States that we would withhold 
28 percent of their income. And, as you mentioned, in this time 
of economic uncertainty, 28 percent could very well mean them 
having to go out of business.
    From an administrative standpoint, one of the difficulties 
is linking the TIN to transaction information. So, again, when 
First Data signs up a merchant for business, we may accept 
their SSN, we may accept their TIN, do some due diligence. But 
once we actually start transacting for them, they are put into 
a different system. And we actually assign them a unique First 
Data ID. And we do that because of locations. So take something 
like Hallmark Cards. They may have one TIN on file with the 
IRS, but they may have 3,000 locations across the country that 
we are transacting for. So we assign a different ID based on 
each one of those locations so that we can track the 
transactions, look for fraud and things like that.
    On the other end of the spectrum, maybe you have a doctor's 
office where we have one unique ID for that doctor's office 
because of the transactions, but there may be five doctors 
within that office who each have TINs with the IRS.
    So even if we were able to link the two systems from the 
due diligence and the application process to the transaction, 
you still have the issue of reconciling all of those different 
locations, the different IDs, the TINs. So that is obviously an 
administrative burden that would be quite difficult if you look 
at 4 million merchant locations across the country.
    Also, there is an issue about inaccurate data reporting. So 
if you take an example, I go to Safeway, I buy $60 worth of 
groceries, but I decide to get $40 cash back at the point of 
the sale, from a transaction perspective, First Data would 
report to IRS $100. We don't distinguish between the cash back. 
So that information then that we would report to the IRS would 
be biased against Safeway. So now we are put in an adversarial 
relationship with our customer, because we are reporting 
information that is inaccurate, and you expose risk of 
litigation, all those kinds of issues. So, again, from an 
administrative perspective, that is really problematic.
    What we think is actually that there is a much easier 
solution. Why not add a line on the Form 1099 and have 
merchants self-report their number of electronic transactions?
    That, kind of, follows the same rationale that the IRS has 
done in the past. In meetings that we had with them, one of the 
IRS personnel used the example that when they started requiring 
SSNs to be listed for each dependent that was listed, the 
number of people claiming dependents, or at least the number of 
dependents people were claiming, went down.
    So why not at least try self-reporting and see it if it 
meets--you know, we think it would increase some of the 
compliance and at least be much less costly than the current 
proposal.
    So, really, the bottom line is, again, administrative 
nightmare, 4 million merchant locations for First Data, others 
within the payments industry. And, ultimately, I think that it 
would increase the cost of accepting electronic payments. We 
can't bear all of the costs of this proposal on our own. So we 
would pass a portion off to merchants, who would likely pass a 
portion of their costs to consumers. So you are looking at 
increased costs of electronic transactions. And, again, we 
can't ignore the backup withholding issue and the fact that it 
would drive any number of merchants in this country to go out 
of business.
    Thank you.
    [The prepared statement of Ms. Stubna may be found in the 
Appendix on page 25.]

    Chairwoman Velazquez. Thank you, Ms. Stubna.
    Our next witness, Mr. David Sohn, the staff counsel for the 
Center for Democracy and Technology, a Washington, D.C.-based 
organization with expertise in law, technology and policy that 
seeks practical solutions to enhance free expression on privacy 
and global communications technologies.
    Welcome.

    STATEMENT OF MR. DAVID SOHN, STAFF COUNSEL, CENTER FOR 
                    DEMOCRACY AND TECHNOLOGY

    Mr. Sohn. Thank you, Chairwoman Velazquez, Ranking Member 
Chabot. First let me say thanks for inviting me to participate 
here, on behalf of the Center for Democracy and Technology.
    CDT is a nonprofit public interest group dedicated to 
preserving privacy, civil liberties and other democratic values 
in the digital age. And we have been a leader on privacy and 
closely related data security and data retention issues. So we 
are very happy to be able to offer our views on the privacy and 
security questions raised by the proposal that is the subject 
of today's hearing.
    CDT believes that the proposal could have serious 
consequences for data privacy and data security, particularly 
in the case of small businesses. First, there is the issue 
concerning Social Security numbers of sole proprietors and 
other individuals engaged in small-scale business activity.
    The proposal would require banks and other payment 
processors to keep track of merchants' taxpayer identification 
numbers, or TINs. And for sole proprietors and other individual 
business people, the TIN will often be the individual's Social 
Security number, as Chairwoman Velazquez noted in her opening 
statement. So for these individuals, the proposal will mean 
that their Social Security numbers will be stored and linked to 
further personal information about them in corporate databases 
that today don't keep that information.
    The reason that is significant is that, in the words of the 
President's Identity Theft Task Force, which issued a report 
last year, the Social Security number is "the most valuable 
commodity for an identity thief." And the more parties and the 
more databases where that commodity is held, the greater the 
risk that it could fall into the wrong hands.
    In recent years, we have seen virtually a constant stream 
of high-profile data breaches at institutions of all kinds--
corporations, educational institutions and government agencies. 
And that is why the Federal Government has established a clear 
policy of trying to move away from and reduce the use and 
storage of Social Security numbers.
    Now, to their credit, the merchant banks seem to recognize 
this risk. The standard practice today for banks issuing 
merchant accounts is to discard the merchant's TIN as soon as 
the account is approved. And this is consistent with the widely 
accepted privacy principle called "data minimization." The 
principle is really pretty simple. It just means: Only collect 
the data you really need, and only keep it for as long as you 
need it. Banks are following that principle today regarding 
TINs and Social Security numbers of sole proprietors. And CDT 
does not believe that Congress should force them to abandon 
that kind of sound privacy practice, as this proposal would 
force them to do.
    Second, the proposal may well entail other types of 
expanded data collection from small-business owners. Sometimes 
reporting the aggregate amount of credit card receipts from a 
particular merchant account can paint an incomplete or 
misleading picture. And when that happens, it is easy to 
predict what is going to happen next. There will be pressure to 
provide more detailed information.
    For example, you could have small businesses that share a 
merchant account. Think about flea market sellers who are 
neighbors at the flea market. In these kinds of cases, the 
aggregate amount reported will say little about what the actual 
revenues or profits of those businesses are. So it is likely to 
lead to pressure for the IRS to ask for a more detailed 
breakdown of that information, which would mean significantly 
more tracking by the banks of their merchants' activities than 
occurs today.
    Anyway, the point on this is simply that, before Congress 
adopts any new proposal here on this topic, it really should 
carefully explore the additional types of data collection that 
would likely be demanded as part of any new reporting system.
    The final concern I want to mention is that the proposal 
would set a dangerous precedent. CDT is actually very concerned 
that if this proposal is enacted it could encourage additional 
government efforts to enlist private-sector intermediaries in 
tracking the behavior of their customers.
    For example, if the Federal Government goes this direction, 
it is easy to imagine that State governments might try to 
follow suit and impose tax-reporting obligations of their own. 
Other types of data-retention requirements that have been 
proposed in the past and that could get an unwarranted boost 
here would be proposals to have Internet service providers, for 
example, track the browsing behavior of their entire customer 
base simply because something might someday prove of interest 
to law enforcement.
    CDT objects to those proposals and would hate to see them 
get encouragement from congressional action on this subject.
    So, for all these reasons, CDT believes that this Committee 
and Congress should pay careful attention to the data privacy 
and security concerns that this proposal raises and, in light 
of those concerns, really should put a heavy burden of proof on 
the proponents of the proposal to show that it is effective, 
that it is necessary and that it is better than possible 
alternatives.
    Thanks again for the opportunity to testify.
    [The prepared statement of Mr. Sohn may be found in the 
Appendix on page 27.]

    Chairwoman Velazquez. Thank you, Mr. Sohn.
    Our next witness is Mr. Todd McCracken. Mr. McCracken is 
the president of the National Small Business Association, a 
national, nonprofit organization representing more than 150,000 
of America's small-business companies and entrepreneurs. The 
NSBA is the first and oldest national small-business advocacy 
organization in the United States.
    It is always a pleasure to welcome you.

  STATEMENT OF MR. TODD McCRACKEN, PRESIDENT, NATIONAL SMALL 
                      BUSINESS ASSOCIATION

    Mr. McCracken. Thank you, Madam Chairwoman. It is good to 
be here. And I appreciate the Committee inviting us to testify 
today. This is quite a crucial issue.
    I would like to ask that my written statement be submitted 
to the record, because I am going to try to narrow my oral 
remarks a little bit. You have a lot of expertise up here--
    Chairwoman Velazquez. Without objection.
    Mr. McCracken. --on some of the more technical questions of 
how the information gets processed and how the money gets 
transferred. So I would like to focus my remarks on some of the 
more practical objections that small businesses have, but also 
the question of whether this, even in a perfect world, would 
really be a solution to the tax gap, you know, as the IRS 
perceives it.
    The bulk of the tax gap, as the IRS has reported, it comes 
from the underreporting of income. And so this clearly is an 
attempt by them to figure out a way to get more of that income 
reported. There are a few problems, I think, with that 
analysis. And one of them is that there is not a lot of 
evidence to suggest that most of the underreporting of income 
comes from credit card transactions. Some evidence suggests 
that there is underreporting of cash transactions and some 
other things like that; not so much on the credit card side of 
things.
    So you begin to at least have to question, well, why is 
this seen to be so important? And we think that one of the 
reasons it is important is for a couple of--actually, there are 
a couple reasons we think it is important for them.
    One is because they think it will enable the agency to do 
some modeling. And that is to say, if your credit card 
transactions are outside the norm for your industry, it will 
send up a flag that maybe there is something funny going on in 
your business and we should come look at what you are doing.
    That is enormously concerning to us because of, again, for 
a couple of reasons. One is because there is a great diversity 
in the small-business community. And just because, you know, an 
average of 60 percent of transactions in a given industry are 
on credit cards and another business seems to have, you know, 
80 or 90 percent of their transactions on credit cards doesn't 
necessarily mean anything is going on that is unusual. It has a 
lot to do with the demographics of the customer base of that 
business, perhaps, a lot to do with the way that person has 
chosen to run their business. It doesn't necessarily mean 
anything funny is going on. But those kinds of businesses, we 
think, are going to become subject to greatly increased audits 
and administrative burdens that come with those audits for no 
real good reason.
    Secondly, the IRS tells us that they want to find non-
audit-based ways of collecting revenue. That doesn't seem to 
fall in that category.
    And then there is a whole raft of concerns that we have 
about what small businesses would have to do to, sort of, 
reconcile their books with the reporting that they get. And we 
have already heard a few of them, but the list goes on. There 
is lots of sharing of credit card processing services amongst 
small businesses. It could be the flea market. It could be the 
doctor's office you have already heard about. But there is a 
lot more that goes on in the economy as well, and that is going 
to have to get sorted out. And it may ultimately mean a lot 
less use of credit cards in the small-business community, which 
provides whole other layers of burden for those small 
companies.
    But there is also the question of reconciling, you know, 
cash versus accrual systems. A business may send out an invoice 
in December for a printing job, for instance, to a customer, 
and it goes on their books as, you know, a receivable that 
year. Well, they may not get paid, and get paid on a credit 
card the next year, and it will get reported as income the next 
year. They have to figure out a way to reconcile those kinds of 
things.
    Lots of businesses take deposits. Well, that is not income 
until you actually take delivery. That deposit could be 
refundable. You don't count that as taxable income until you 
actually purchase it. Yet, a lot of deposits, whether it is for 
a new kitchen or a boat or whatever, are paid on credit cards.
    And so there is just a huge stream of money that flows to 
businesses on credit card transactions that simply isn't 
taxable income. And that is going to have to be sorted out, not 
just by the IRS, but by the business owners themselves.
    So, again, even if all of these technical questions can be 
addressed--and we don't think they can be--but even if they 
could be and the credit card processors could find an easy, 
seamless, lawsuit-free way of providing good data, there are 
still huge obstacles for how this data would actually get used 
by the IRS in any meaningful way to actually increase the 
revenue in a way that makes sense for small companies.
    So we appreciate your having this hearing. And we would 
strongly urge you to do everything you can to convince your 
friends at the Ways and Means Committee and over in the Senate 
in the Finance Committee that this is a particularly bad idea.
    [The prepared statement of Mr. McCracken may be found in 
the Appendix on page 43.]

    Chairwoman Velazquez. Thank you, Mr. McCracken.
    Our next witness is Ms. Kristie Darien. Ms. Darien is the 
executive director for the National Association for the Self-
Employed, the Nation's leading resource for the self-employed 
micro businesses, providing a broad range of benefits and 
support to help the smallest businesses succeed.
    Welcome.

 STATEMENT OF MS. KRISTIE DARIEN, EXECUTIVE DIRECTOR, NATIONAL 
               ASSOCIATION FOR THE SELF-EMPLOYED

    Ms. Darien. Thank you. I am really happy to be here on 
behalf of our 250,000 member businesses.
    NASE's members are micro-businesses, 10 or less employees, 
and the self-employed that are the segment of the business 
population that repeatedly struggles with complying with our 
complex and ever-changing tax code. And they do so without the 
benefit of professional assistance.
    We feel that any recommendation relating to tax compliance 
must be reasonable and effective. And, unfortunately, we 
believe this recommendation is neither.
    This proposal is likely to have significant unintended 
consequences. The lack of clear details regarding its 
implementation must be addressed to accurately gauge its effect 
on both the microbusiness community and our economy.
    Todd mentioned quite a bit about the use of data, which is 
one of our top concerns, so I will second all of his comments 
in regards to that, particularly our concern of the use of 
industry profiles to make estimations on other types of items 
on the tax return, like cash payments. We think that will be 
riddled with inaccuracies and cause a lot of significant 
difficulties for small business.
    Another area that is ripe for mishandling in regards to 
this proposal is the taxpayer identification number 
verification and the backup withholding process that would be 
required of credit and debit card issuers under this plan. 
These companies would be required to verify the TIN of a 
business, and if that is inaccurate, they would have to backup 
withhold 28 percent of the gross transactions for that 
business.
    Obviously, no specifics have been released to date as to 
how to IRS plans to effectively implement these components. 
There are likely to be inadvertent reporting errors through 
this process, yet there is confusion regarding where a small-
business owner would go to rectify any problems.
    Many sole proprietors, the majority of NASE's membership 
use their Social Security number as their identifier. 
Therefore, we are concerned about privacy and protection of 
personal data under this plan.
    In addition, withholding on gross transactions will create 
a substantial cash-flow problem for the self-employed. In 2007, 
the median gross revenue of an NASE member's business was only 
$62,500, and overwhelmingly their business was the main source 
of household income. Thus, backup withholding could also place 
a severe financial strain on their families.
    Cost is another factor that we must consider. Overall 
implementation of this proposal will require financial and 
human capital resources by both the IRS and the credit and 
debit card companies. We think it is prudent that Congress 
require IRS to prepare a cost-benefit analysis of this plan to 
determine potential costs of administration as it compares to 
projected revenue.
    Moreover, our bigger concern is the credit and debit card 
companies who are more than likely to pass the cost of 
compliance onto their microbusiness merchants in the form of 
higher user fees. NASE member Keith Kaufman own a business in 
Arizona. He receives about 60 percent of his transactions 
through credit and debit cards, and he is significantly worried 
about the additional financial burden on his business in the 
form of higher credit card fees. Because he cannot charge more 
for credit card transactions, he would essentially have to eat 
those fees, and it would affect his bottom line.
    So we strongly encourage Congress to reach out to these 
pertinent companies to determine the ultimate impact on 
consumers before they even think of moving forward on this 
proposal.
    In conclusion, I think there are two key questions that we 
need to ask: Will this proposal increase tax compliance? And 
will Government recoup funds with the implementation of this 
plan?
    The majority of NASE members feel that this recommendation 
will not increase tax compliance. They are quick to point out 
that this proposal will be collecting information that is well-
documented, already likely reported, and would be revealed 
easily upon review. Therefore, the taxpayer who willingly 
underreports would not knowingly choose to exclude credit card 
receipts, since those items show up on bank statements and have 
a paper trail.
    In regards to recovering revenue, the NASE believes that it 
is highly unlikely that this plan will identify any additional 
taxable income. In fact, we think that the majority of the 
revenue collected would be from inaccuracies or mistakes that 
would trigger backup withholding.
    The NASE does not support this recommendation, and we urge 
Congress to look to alternative solutions. In our opinion, 
legislators' true interest in this proposal lies with its 
possible use as an offset for various congressional spending 
priorities. We understand the fiscal climate our government is 
facing. However, you are asking the segment of the economy that 
is affected most by the current high health-care costs, by high 
energy costs, facing difficulties due to our current credit 
crunch to foot the bill for other proposals, many of which they 
would receive no benefit from.
    Congress should focus on ensuring passage of effective 
policy at a reasonable cost for all citizens before they rush 
to put the financial squeeze on the self-employed and micro-
business.
    Thank you.
    [The prepared statement of Ms. Darien may be found in the 
Appendix on page 51.]

    Chairwoman Velazquez. Thank you, Ms. Darien.
    And now I recognize Mr. Chabot for the purpose of 
introducing our next witness.

    Mr. Chabot. Thank you, Madam Chair.
    I would like to welcome a fellow Cincinnatian, Donald 
Boeding. He is the senior vice president and general manager of 
merchant services for the Fifth Third Bank Processing 
Solutions. Fifth Third is one of the more significant employers 
in the city of Cincinnati, and we are very pleased that they 
are there.
    He has direct responsibility for the day-to-day operations 
of the merchant processing business alliance. Mr. Boeding has 
been with the Fifth Third Bank since September 2004 and has 
been involved with merchant services for most of his career.
    He holds a BS in finance from the University of Iowa.
    And Fifth Third Bank Processing Solutions is one of the 
five principal activities of Fifth Third Bank Corp, a 
diversified financial services company headquartered, as I 
mentioned, in Cincinnati, Ohio.
    In addition to the Fifth Third Processing Solutions, Fifth 
Third is involved in commercial banking, retail banking, 
consumer lending and investment advising. Fifth Third 
Processing Solutions provides electronic funds transfer; debit, 
credit and merchant transaction processing; operates an ATM 
network; and provides data-processing services to affiliated 
and unaffiliated customers.
    Fifth Third processes $175 billion in card sales annually. 
According to the March 2008 Nielsen report, Fifth Third is the 
fourth-largest Visa, Master Card acquirer in the country.
    Mr. Boeding, we look forward to your testimony. Thank you.

 STATEMENT OF MR. DONALD BOEDING, GENERAL MANAGER OF MERCHANT 
  SERVICES, FIFTH THIRD PROCESSING SOLUTIONS, CINCINNATI, OHIO

    Mr. Boeding. Good morning, Chairwoman Velazquez, Ranking 
Member Chabot and distinguished members of the Committee.
    As Mr. Chabot said, my name is Donald Boeding, and I am the 
general manager for the Merchant Services Division of Fifth 
Third. I appreciate the opportunity to appear today and offer 
you some industry perspective on the proposal to require 
institutions that make payments to merchants for payment card 
transactions to file those annual information reports with the 
IRS.
    First, I would like to give you some general thoughts on 
the increased information reporting and then dive a little 
deeper on some of the aspects that maybe some of the other 
panel members haven't touched on.
    To begin, in short, I think we can draw a few initial 
conclusions about this potentially sweeping proposal, 
notwithstanding the limited availability of detail as to its 
specific requirements and implementation parameters.
    First, the enactment of such an increased information 
reporting measure would come at a very difficult time in the 
economy, particularly for financial institutions and small-
business sectors. New and increased reporting requirements will 
translate into significant IT investment expense and allocation 
of employee talent by processors like myself to ensure 
compliance during both the ramp-up period and on a go-forward 
basis.
    Second, the potential application of backup withholding 
presents tremendous risks for both processors and merchants. At 
28 percent, backup withholding will have deep impacts on 
merchants and, in some cases, represent the difference between 
success and failure.
    Third, the merchant processing industry as developed does 
not operate in a way to comply with the known parameters of 
this proposal.
    Fourth, the proposal will strain the relationship between 
payment processors and merchant customers, in some cases 
driving merchants to avoid the convenience and security of 
electronic payment systems.
    Finally, given the vague nature of the proposals offered to 
date, the full impact on all parties will not be known until 
implementation and compliance have been audited. It is likely 
that interested parties are not fully aware of the operational 
impacts that this will have.
    First, focusing on the costs of compliance. System 
modification and contract renegotiations and the time 
associated with both will place significant expense on payment 
processors. Further, processors will need to store and secure 
the data provided to the IRS. The expected hard costs 
associated with ramping up and maintaining a program to 
facilitate compliant reporting are only part of the cost that 
should be expected to arise out of this proposal.
    It should be expected that the number of hours a processor 
will ultimately have to devote to trouble-shooting alleged 
errors in the reporting would be significant. For instance, if 
the IRS reporting from a processor does not reconcile with 
other reporting received by a particular merchant, it will 
likely result in significant hours spent by myself and my team 
trying to help that merchant reconcile through that process. 
This will add a level of complexity to all new product 
initiatives, additional analysis, and possible extra 
development will be required each time a new payment product is 
developed and/or rolled out.
    Specific to backup withholding, as noted, the merchant 
reporting proposal includes a proposal to withhold 28 percent 
of payments made to merchants on whom we do not have a valid 
TIN. Processors would be required to immediately withhold on 
any payment on which a TIN is missing or is obviously an 
incorrect number.
    The impact of this new withholding on merchants, 
particularly smaller merchants, would be substantial, 
presenting great complication and burden on their cash-
management procedures, as has been already noted by the panel. 
The reduction of cash-flow based upon transactions that may 
have no income tax consequence would be a tremendous burden to 
our merchant clients.
    At a minimum, should back-up withholding remain a part of 
any increased merchant reporting proposal, a period of 
significant phase-in, perhaps 2 to 3 years, should be provided 
before withhold is required. This will allow payers time to 
obtain the necessary information. And, additionally, any new 
compliance regime in this area should include appropriate safe 
harbors from penalties where 100 percent compliance is not 
achieved.
    Focusing on the impact of the merchant reporting entity 
relationship, it is certainly possible that the reporting could 
create tensions between acquirers and processors and their 
merchant customers, who don't understand how the information is 
going to be used and/or disagree with the methodology by which 
the processors have created the reporting. This will result in 
a tremendous amount of concern and confusion among our merchant 
customers. Additionally, fear of audit can make merchants less 
likely to accept electronic payments.
    On a final note, it should be expected that the 
noncompliant taxpayers this proposal targets will ultimately 
find and develop schemes to avoid recognition through this type 
of reporting. Some may simply stop accepting cards all 
together, thereby making it less likely that the IRS will be 
able to track taxable income. Others may simply work to find 
loopholes in the reporting mechanisms that are ultimately 
established.
    The benefits expected to arise from this initiative may 
ultimately result in increased cost to the compliant payment 
card participants--consumers, acquirers, processors, issuers 
and merchants--with no real benefit to these same participants.
    Thank you for your time, and I look forward to answering 
any questions that you may have.
    [The prepared statement of Mr. Boeding may be found in the 
Appendix on page 56.]

    Chairwoman Velazquez. Thank you, Mr. Boeding.
    I would like to address my first question to Ms. Stubna.
    Ms. Stubna. Yes.
    Chairwoman Velazquez. It has been suggested that only banks 
providing services to businesses would be affected by these new 
reporting requirements. Is that an accurate assessment of who 
would be required to file information reports?
    Ms. Stubna. Madam Chairwoman, we don't actually believe it 
would just fall on banks. In fact--and First Data's role to 
accept--when a merchant wants to accept a credit or debit card, 
a bank must actually sponsor the merchant into the system. That 
is what Visa and Master Card, at least, require for their 
particular cards. And First Data is then usually a party to 
that contract. So, in our role as a service provider to a bank, 
we would assume that the bank would ask First Data, because we 
are actually part of the processing arrangement, to actually 
report the information. So, no, we feel like it would fall on 
banks, processors, merchant acquirers.
    Chairwoman Velazquez. Thank you.
    Mr. McCracken or Ms. Darien, Ms. Stubna suggested self-
reporting electronic payments as an alternative to bank 
reporting. Could you comment on that proposal?
    Ms. Darien. Yeah, one of the less burdensome 
recommendations that we have made is that we think that there 
are very easy things that can be done with the current tax 
forms to help facilitate reporting.
    One of the things we recommended was modifying the Form 
1040 Schedule C, which is the form that sole proprietors use, 
which is who the IRS seems to think is the segment of the 
population that are underreporting. Where, in part one of the 
form, we could simply separate the line item for gross receipts 
and sales into two and ask them to distinguish between cash 
payments and also credit and debit card transactions. It is an 
easy way to self-report, and it is also an easy way to remind 
the businesses that they have to track their cash payments 
equally as well as their electronic transactions.
    So, yes, we agree that would be a great way to begin the 
process of increasing compliance.
    Mr. McCracken. It is not something we have specifically 
dealt with yet, but I would agree that it would be a better 
alternative than what we have on the table now. I am not in a 
position to endorse it yet, but it is something that I think 
bears some looking at.
    Chairwoman Velazquez. Okay. Mr. McCracken, many businesses, 
particularly small businesses, make agreements to sell their 
card payment income to other entities, often with franchise or 
separate station agreements.
    Do the proposed reporting requirements account for this 
type of arrangement, where the merchant never receives the full 
value of their card payment income? Can you comment on that?
    Mr. McCracken. I am probably not the best person up here to 
comment on that, but it does strike me that that would be a 
significant problem. I mean, I think that gets at the heart of, 
I think, the whole issue, is you can't begin to catalog all of 
the situations where the money that moves through the credit 
card processing system is not reflective of real income.
    Chairwoman Velazquez. Any other member of the panel would 
like to comment on that? Yes, Mr. Boeding?
    Mr. Boeding. I think I can specifically address that where 
the merchant effectively sells their receivables and they 
instruct me to credit their daily receipts to the entity that 
has fronted them the money. And that would present tremendous 
difficulties of determining who is responsible for the tax 
burden.
    Chairwoman Velazquez. Thank you.
    Ms. Stubna, when this new reporting requirement was first 
proposed for 2007, it was estimated that it could generate 
approximately $225 million over 10 years. Only 1 year later, 
that figure jumped to $10.8 billion over 10 years.
    What accounts for this large discrepancy in those 
estimates?
    Ms. Stubna. You know, actually, we asked the same question. 
We posed that question to Treasury in the meetings that we had 
with them. And nobody ever really actually gave us an answer as 
to what accounted for the jump. And, I mean, it has been, 
obviously, significant.
    One of the things that Treasury said was that the large 
number accounted for all of the different tax gap proposals 
together, and it wasn't just the credit card reporting ones. 
So, I am sorry I don't have a better answer, but--
    Chairwoman Velazquez. Does anyone on the panel have any 
comment?
    Mr. McCracken. Well, we don't know either where the number 
came from. And there are so many different ways that you hear 
that this could raise revenue, that increased reporting 
increases revenue, that being able to track this and get more--
audits raises revenue. But we are not really sure which of 
these they think are the primary ways that the revenue will 
come in.
    Chairwoman Velazquez. Sure.
    Ms. Darien?
    Ms. Darien. Again, we agree, we don't know where their 
numbers are coming from. And a big concern is that I don't 
think there has been any account for how many businesses would 
go under because of this and how many entrepreneurs would be 
deterred, because if they want to go into a business which 
happens to be an electronic-payment-card-heavy business, like 
retail, for example, high fees are a great way to push people 
out of entering entrepreneurship. And I am certain that that 
has not been accounted for in their numbers.
    Chairwoman Velazquez. Thank you.
    Mr. Sohn, in your opinion, how should consumers and 
merchants be made aware of the privacy risks if a card payment 
reporting requirement were enacted?
    Mr. Sohn. Right, well, I think the initial thing is to make 
sure we have a full public debate on it now, before the 
proposal is put into effect, and that it is fully considered, 
that Congress looks into all the different ways that this might 
end up expanding information reporting requirements and that 
that be fully part of the public debate.
    You know, I think to some extent if a proposal like this is 
actually enacted, it is to a large extent too late. If people 
are aware of the privacy consequences and concerned about it, 
their real option will be to not use credit cards as a means of 
payment. And that strikes us as an unfortunate consequence.
    Chairwoman Velazquez. Are there ways that entrepreneurs 
could protect themselves from the privacy risks associated with 
the reporting regime if they currently use their Social 
Security number as their taxpayer ID number?
    Mr. Sohn. Yes. I mean, they certainly could. Individuals 
could register as a business and get a taxpayer identification 
number that is different from their Social Security number. I 
think, again, when you are talking about individuals doing 
relatively small-scale sales, that, too, puts a significant 
burden on them to take that extra step. But it might well be, 
if this proposal were to go into effect, that that is something 
they would want to do to try to protect their Social Security 
numbers.
    Chairwoman Velazquez. Ms. Darien, if backup withholding, 
which will require 28 percent of a business card reimbursement 
directly be sent to the IRS, were made part of the reporting 
requirements, what would be the effect on small businesses?
    Ms. Darien. It would be a massively detrimental effect, 
particularly on our members. Again, the majority of our 
businesses are 10 or less. Our average member is a two-person 
business. It is typically a family business. And as mentioned, 
when you are looking at a median gross revenue of a little over 
$62,000 and you are going to withhold 28 percent of gross 
transactions and that money directly flows through to their 
household income, you are going to put a severe strain on 
millions of American families that are counting on the self-
employed bread-winner in their family. So it will have 
widespread damaging effects on the self-employed community.
    Chairwoman Velazquez. Todd, I suspect you are having 
discussion with the IRS in terms of the implications, economic 
implications, that this will represent for small businesses. 
And have you posed a question to them if they have done any 
economic analysis as to the effect of 28-percent withholding on 
credit card reimbursements?
    Mr. McCracken. I don't know that we specifically asked the 
IRS if they looked at that. We certainly have asked them for 
more information on how they arrived at revenue estimates of 
it. But, clearly, the economic implications are potentially 
enormous.
    I mean, they clearly have not looked at all of the ways 
that, even aside from clerical errors, that the TIN just isn't 
going to correspond with the businesses being reported about. 
And so there is going to be not an inconsequential amount of 
backup withholding if this proposal goes forward, which is 
going to be just--and just think about a business--I mentioned 
deposits before.
    I mean, you may be running an inn. You may require a night 
or two stay deposit, and someone pays on a credit card. They 
cancel. You may issue them a refund via check; doesn't 
necessarily go back on their credit card. Well, you are getting 
backup withholding on revenue you are not going to have for 
another year until you file your taxes. And for those folks, 
every dollar counts.
    Chairwoman Velazquez. Thank you.
    Mr. Chabot?
    Mr. Chabot. Thank you, Madam Chair.
    Mr. Boeding, I will begin with you. Why is the withholding 
aspect of the proposal such a significant issue to both small 
businesses and merchant banks? And can you ID a better approach 
to improve the compliance than we currently have?
    Mr. Boeding. Well, let me start with the small business, as 
I have spoken with some of my customers about this particular 
initiative and the impact that it may have upon them.
    You know, concepts of the way that we paid in the 1970s and 
1980s are coming back. The desire to offer discounts for cash 
to be able to avoid--you know, wanting to accept checks as a 
preferred form of payment are the words that we are hearing 
from our clients. And, as you might imagine, in the business 
that I run, that is not a particularly good thing. And I also 
don't think it is a good thing for, you know, for our economy 
in general.
    Impacts to me and our business from a backup withholding 
perspective, we don't know. You know, the merchant processing 
business, you know, has been around for, you know, well over 30 
years, and this is not anything that we have ever contemplated 
in executing our business model. So there are so many 
intricacies that we have to work through to try to determine 
how we will do it and how we will communicate, how we will 
report and, most definitely, how we will work with our clients 
to try to help explain to them the numbers that we have 
submitted, especially if we are reporting on gross. Some of the 
other panel members have mentioned that.
    You know, charge-backs, refunds, you know, the prepayment-
type aspects all go into some very serious things that have to 
be considered. You know, many merchants, especially in, like, 
in the card-not-present space, they have, you know, 15 to 20 
percent return rates on some of the goods that they sell. So, 
you know, 28 percent for those types of clients, it would be a 
much higher effective rate against their net proceeds.
    We would prefer that no backup withholding be a part of 
this, that this simply be an information reporting at most.
    Mr. Chabot. Okay. Thank you very much.
    Ms. Darien, right at the end of your closing statement, you 
said something that I really agreed with strongly, and I 
thought I would just read it again. You said, "It is in our 
opinion that legislators"--that means us or Congress or the 
Ways and Means Committee or whoever the bad guys are in this--
"their true interest in this proposal and others relating to 
the tax gap lies with its possible use as an offset for various 
congressional spending programs. Congress should focus on 
ensuring passage of effective policy at a reasonable cost to 
all our citizens before they rush to put the financial squeeze 
on the self-employed and microbusinesses, which remain the 
foundation of both America's economy and communities."
    And, as we all know, small businesses are responsible for 
creating about 70 percent of the jobs, and they would be hit 
particularly hard in these various reporting requirements.
    And the term "tax gap," you didn't hear that years ago. It 
is a term that crept up recently, in recent years. And I think 
it is exactly what you said in your statement. It is a way for 
Congress to think there is this money that is sitting there, 
that all we have to do is get it and then we can continue to 
spend in the free spending style Congress has for years, both 
under Republican control and Democratic control; we have seen 
it under both. And, of course, my colleague here would indicate 
that it has been much more responsible recently--
    Chairwoman Velazquez. Bigger, bigger under a Republican 
administration, by the way.
    Mr. Chabot. We could debate that, too.
    But, in any event, I think you are right, that it is this 
new thing, that that is going to solve the fact that Congress 
doesn't balance its budget every year, even though families 
have to do that, but we don't. And that is just wrong. But I 
completely agree with you on that statement.
    Any comment?
    Ms. Darien. Yes, I mean, we understand--of course we want 
to increase tax compliance, help people to meet their 
responsibilities better. But, as a Nation, we have consistently 
had a tax gap since we have had a tax code. I don't think you 
find any industrial nation that has 100 percent tax compliance; 
I don't think you ever will.
    And I think the focus should really be on our government 
tightening their purse strings, learning how to be responsible 
with our money, just like a small business does. And I agree 
that, all of a sudden, it seemed like this pot of money was an 
exciting pot of money to go after as we are looking to pay for 
different proposals.
    And, again, many of these proposals that they are looking 
to attach these recommendations to will actually have no 
benefit to a small-business owner. So you are asking these 
people, this foundation of our economy, who have $62,000 a 
year, to squeeze out a little more to help our government, and 
they are already struggling. So I think we need to be mindful 
of who we want to help and who we are going to hurt in that 
process.
    Mr. Chabot. Thank you.
    Mr. McCracken, you mentioned that one of your principal 
concerns or worries was the additional audits that small 
businesses could be subjected to. And, obviously, other than 
the psychological trauma that the small-business owner and 
their employees, because their jobs could literally be at risk 
depending on how the audit comes out, could you tell us why 
that is particularly burdensome to a small business, that they 
have to go through an audit?
    Mr. McCracken. Oh, sure. I mean, an audit can be an 
extraordinarily time-consuming activity. A lot of small 
companies don't have a full-time CPA on staff or even on 
retainer for their company. So it is an issue they are often in 
the position of dealing with personally. And it can go on for 
quite some time and really sap a lot of time and energy out of 
a company, even if, at the end of the day, there is no 
additional tax revenue that is required to be paid.
    So, I mean, an audit is no small thing. And to the extent 
the IRS--I mean, we think it is a good idea for the IRS to 
figure out ways to target audits appropriately. And they have 
said they want to do that. And we think, to the extent they are 
going to audit people, they ought to figure out who are the 
best targets. Our concern is that the credit card information 
is going to provide a great deal of misleading information 
about who those targets really ought to be and that they are 
going to be auditing folks that aren't appropriate targets.
    Mr. Chabot. Okay. Thank you.
    Mr. Sohn, you had mentioned that--and, of course, you have 
privacy concerns as one of your big concerns. And I have been 
very active in that area over the years and very interested in 
it as well.
    And you mentioned that one of the concerns was the Social 
Security numbers being more susceptible to thieves getting a 
hold of these things. And could you explain the significance of 
that, what it is that the thieves do with these things and why 
that is such a risk to both the small business and anybody that 
may be listed on there?
    Mr. Sohn. Sure. It has been a finding of everyone who has 
looked into identity theft that, really, the most important 
piece of information an identity thief would like to get is a 
Social Security number. For purposes of trying to open fake 
bank accounts in someone else's name and so forth, that is an 
extraordinarily valuable piece of information and is really the 
gateway to identity theft and a variety of scams.
    So the general principle--and this is the precise policy 
the Government has adopted--is, we need to stop relying on 
Social Security numbers so much, we need to stop collecting and 
using them as much as we do, because when they are out there 
and when they are stored in lots of different databases all 
over the place, it just creates more opportunities that, 
through data breaches, they could fall into the wrong hands.
    So really trying to minimize Social Security number use is 
a core piece of the strategy of combating identity theft, and 
this proposal goes the opposite direction.
    Mr. Chabot. Thank you very much.
    And, finally, Ms. Stubna, you mentioned that--well, I think 
the panel here and I think both the chairwoman and myself agree 
that this electronic payments reporting is greatly suspect and 
that there ought to be other ways found.
    Could you again point out what alternatives are out there, 
what should be done instead of this if--and, again, I don't use 
the term "tax gap," but the noncompliance or underreporting or 
the fact that some people historically have gotten away with 
not paying their fair share to the detriment of everybody else. 
But what would you do as an alternative that might work, 
compared to this, which we all agree would be too burdensome?
    Ms. Stubna. Well, we are actually still trying to come up 
with--we have been having quite a few meetings internally with 
operations to find maybe some other alternatives, whether it 
is, you know, looking at the monthly transaction statements 
that we supply to merchants. You know, we are trying to figure 
out if we could do that on an annual basis.
    But I really do think that, first and foremost, the self-
reporting would at least be a good start. You know, if it 
doesn't meet the compliance that the IRS is hoping to achieve, 
then maybe look at other alternatives. But, you know, we 
weren't set up to be an extension of the IRS. We were set up to 
move money efficiently, quickly, securely, not to report 
information to the IRS. And so we would love to be not placed 
in that spotlight.
    And I will just point out too, you know, the whole thing 
seems to be predicated on this 90 percent compliance rate for 
reporting. But, you know, in the meetings that we have had, the 
issues about inaccurate data, the problems with our systems, it 
doesn't seem like they care. They are just looking at this 
magic 90 percent compliance number.
    And I think it would be more appropriate to look into some 
of the concerns that we have raised before moving forward with 
it.
    Mr. Chabot. Okay.
    Thank you, Madam Chair.
    And I just would conclude by commenting that your statement 
just then about not being an extension of the IRS, I think 
unfortunately the Government looks at all of us as an extension 
of the IRS.
    I yield back.
    Chairwoman Velazquez. Ms. Hirono?
    Ms. Hirono. Thank you, Madam Chair.
    I conclude from the testimony from all of you that this is, 
while well-intentioned as a way to make sure that everybody 
pays the taxes they owe, it is very broad and burdensome. So I 
am glad, Ms. Darien, that you offered an alternative way for 
people to comply with the IRS's needs.
    I am not sure whether anybody talked about how much it 
would cost the businesses to comply with this. Is there a 
ballpark figure? You all, I think, testified that this is going 
to be very costly to comply, but is there a figure that you can 
come up with?
    Mr. Boeding. I think we are having a difficult time, being 
a processor, coming up with what that will be. Certainly, the 
number for us, in just our business, ranges well into the 
millions to establish the ability.
    What is most concerning to us and really an unknown is the 
ongoing costs associated with compliance and servicing and 
dealing with our customers and the ongoing explanation. We 
think that is going to be, over the long term, the most 
significant portion of the expense.
    Ms. Hirono. When you are having your discussions with the 
various committees, including the IRS, do you kind of go as a 
group, or are you individually doing that? Because I notice we 
have testimony from the ABA. That is a large interest group out 
there. Are you coordinating or collaborating in any way?
    Ms. Darien. Of the small-business groups, there is a 
Coalition for Fairness in Tax Compliance, which is a large 
coalition of small-business organizations that are addressing 
some of the tax gap recommendations, including this. So we have 
begun to work together on these particular issues.
    But in terms of your cost, I think that one of the big 
issues is this proposal has been misrepresented as being not 
burdensome to small business, because actually the onus on 
compliance is on the credit and debit card companies. But what 
they doesn't take into consideration, again, are the 
consequences of the proposal, the time costs for small business 
in having to address any inaccuracies, the time costs in 
dealing with backup withholding and, more specifically, the 
cost they are going to face with higher user fees on their 
credit cards, which is almost a guarantee should this go 
through. And that would be a substantial cost on small 
business.
    Ms. Hirono. I just think that that cost that is ultimately 
going to be borne by the merchants, that should be a pretty 
basic kind of an understanding. And including the 28 percent 
backup withholding, I think that is very burdensome.
    My question is, since this seems to be an idea that--has 
the train left the station already? Do you think that we can do 
some things that will cause us to pause on this?
    Because let's face it, we are looking for all kinds of ways 
to comply with our PAYGO requirements. And I think, as business 
people, you would agree that Government should make sure that 
we have money for the programs that we are supporting.
    So what is your sense of where we are?
    Ms. Darien. I think we are all here asking, maybe, you for 
help. Obviously, Senate Finance had a public comment period on 
this particular proposal. And they, the Chair and ranking 
member of that Committee, are extremely interested in using the 
tax gap proposals to finance various priorities. So that is a 
big concern for us.
    So, you know, we seek your assistance, being the voice for 
small business in Congress, to get our message across about 
this particular proposal and others, and get people 
understanding what they are about to do to this important 
sector of our economy.
    Ms. Stubna. And I think the problem is, too, you have this 
enormous number that has been tagged to this proposal, you 
know, $12 billion, $18 billion, whatever it is now--it keeps 
changing, but--
    Ms. Hirono. It doesn't seem real, right?
    Ms. Stubna. It doesn't. And as long as that is associated 
with it, unfortunately I think it is just an easy target.
    Ms. Hirono. An easy target, yes. Well, that is the purpose 
of this hearing, so I thank the chairwoman for convening all of 
us. Thank you.
    Chairwoman Velazquez. I have two or three more questions.
    Mr. Boeding, how much time would be required for the 
payment processing industry to change its system to effectively 
implement new reporting requirements?
    Mr. Boeding. We have held several meetings with that, and 
our ranges are very extreme. The amount of time for us to do 
this will be significant. To put a specific number to it, Madam 
Chairwoman, it is difficult for us to do.
    The thing that is absolutely certain to us is that it will 
come at the cost of other product innovation and offering 
better, more efficient services for consumers and merchants to 
get consumers to pay. And that is, you know, a reality for us, 
is that we will have to stop much of the innovation in the 
industry in order to seek compliance.
    Chairwoman Velazquez. Ms. Stubna, do you have any comments 
on that?
    Ms. Stubna. Yes. We were looking--when this originally came 
out in 2006, we talked to some of our IT folks. And we have 
about 10 platforms throughout the country that we process from. 
And they were estimating that just to link the 10 to the First 
Data ID, like I mentioned earlier, that it would take about 
3,000 man-hours for each system. That is, again, not even 
taking into account the errors and all of that once it is 
implemented.
    Chairwoman Velazquez. Thank you.
    Mr. McCracken, what should be done to ensure that 
businesses with a high volume of small-dollar transactions do 
not face excessive administrative burdens to reconcile their 
information reports with their books and records?
    Mr. McCracken. I am not sure there is an easy solution 
aside from not doing this. I think that is the very real danger 
that you have in moving this forward, are, if you have--
especially people who do a lot of small transactions who are 
bent on being tax cheats and they don't want to report their 
income, and you decide to do this, I mean, all you are doing is 
creating incentives for them to move to cash.
    And either set an amount, like a lot of merchants already 
do, of a minimum of $15, $20, $25 to accept credit cards or not 
to accept credit cards at all, and you have moved those 
businesses from at least having some credit card data 
collection, which if there is an audit the IRS can go get that 
data and prove that those transactions occurred--instead you 
have moved those businesses to an entirely cash basis, in many 
cases.
    So if there is--and there is a very small minority of 
companies that don't want to report all their income, but they 
do exist--by doing this, you have created yet less of an 
ability to track what they are really doing and what income 
actually going to their business.
    Chairwoman Velazquez. Thank you.
    Ms. Darien, like always happens, do you think it is 
reasonable to assume that the additional costs associated with 
these new reporting requirements will be passed along from 
banks and processors to merchants?
    Ms. Darien. Oh, yes, definitely. I mean, I have no doubt 
that that will be the case. I mean, they are a business as 
well, and you are going to see that a lot of these fees or 
costs of compliance will be passed on to small businesses. And 
what will likely happen is either they will, as Todd had 
mentioned, no longer take credit cards and move specifically to 
a cash economy, or either raise their prices for their 
customers, which will just hurt them in the end.
    Again, I think you will see a huge deterrence from people 
going into businesses, like, such as retail, where you almost 
have to take credit cards in order in order to stay in 
business. So, yes, I definitely think the cost will be passed 
on to small business.
    Chairwoman Velazquez. Okay. Thank you.
    And again to Ms. Darien, officials from the IRS concede 
that extraneous economic data will be necessary to make 
information reported on business card reimbursement useful. 
Does the IRS already have this type of information, or will it 
be necessary to acquire this data from another source?
    Ms. Darien. I am not quite sure what data they are seeking. 
You know, we take the position that information can be a good 
thing; it is the way you go about doing it. As mentioned, there 
are simple ways that we can use the system we have in place, 
the forms we have in place, to acquire additional data that 
might help them take a look or just get a better accurate 
figure on the quote/unquote "tax gap."
    I don't know if they will seek again--and this is the 
perfect proposal--going to other companies that have a whole 
host of data on merchants in hopes of getting additional data. 
I am not quite sure if they will go in that direction.
    Chairwoman Velazquez. Mr. Chabot, do you have any 
additional questions?
    Mr. Chabot. Thank you, Madam Chair. Just kind of a final 
comment, at least wrap it up from our point of view, not 
necessarily a question.
    But this electronic payment tax reporting that we are 
dealing with here, which I think we all sort of agree is not a 
good idea, is part of the whole tax gap. It is a way for the 
Government to find more money to, kind of, mask what we are not 
doing right, which is being restrained in our spending up here. 
So we are trying to pick that number out of the air and say, 
"We have this money, it is a tax gap, so we can continue to 
spend because it is there." And then we put the burden on you, 
that is how we are going to collect the money. We all agree it 
is not going to work and it will just be more burdensome on 
small-business folks.
    But the tax gap reminds me of a couple of these things. We 
used to do this, Congress did, by--we were going to sell the 
spectrum. And we had all this money out there. Every year, that 
would be part of the budget, the selling of the spectrum, that 
there would be billions of dollars that we would get.
    There was the infamous peace dividend. And the Cold War 
ended, so we had all this extra money we were going to spend 
for universal health care or you name it. It was there. But we 
all know that there are always things which are faced and 
additional costs. And so, arguably, that wasn't there either.
    And the chairwoman kidded me before about when was I going 
to bring up ANWR again, well, I just figured out a way to get 
it in.
    Chairwoman Velazquez. Oh my.
    Mr. Chabot. Ethanol was going to be the solution to all our 
problems. We didn't need to drill in ANWR. We didn't need to 
drill in the Outer Continental Shelf. Ethanol was going to take 
care of things. And, as we found out, it has driven up the 
costs, because we are diverting our food stock into now 
ethanol, and we are still seeing the prices go up. And now we 
are seeing food prices go up also.
    So I got ethanol in there.
    Chairwoman Velazquez. I see that. Okay.
    Mr. Chabot. All right. But anyway, thank you very much. I 
thought the panel was excellent.
    Chairwoman Velazquez. Let me thank all of you for being 
here today.
    And, clearly, this proposal really represents a problem for 
the members of this Committee. We are going to continue to 
monitor what is happening and what will take place in Ways and 
Means. But I intend to send a letter to the Ways and Means 
chairman and ranking member with a copy of the transcript and 
comments of this hearing.
    I probably will be asking the Government Accountability 
Office to do an evaluation on those numbers that came out from 
the Treasury Department, to take a look at those numbers. And I 
will invite the ranking member to join me on those letters and 
requests.
    So, with that, I ask unanimous consent that members will 
have 5 days to submit a statement and supporting materials for 
the record.
    Without objection, so ordered.
    This hearing is now adjourned. Thank you.
    [Whereupon, at 11:15 a.m., the Committee was adjourned.]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
                                 
