[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]



 
                       FULL COMMITTEE HEARING ON

   IRS OVERSIGHT: ARE TAX COMPLIANCE COSTS SLOWING DOWN THE ECONOMIC 
                               RECOVERY?

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


                                HEARING

                               before the


                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD
                             APRIL 1, 2009

                               __________

                  [GRAPHIC] [TIFF OMITTED] 
                               

            Small Business Committee Document Number 111-014
Available via the GPO Website: http://www.access.gpo.gov/congress/house


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                   HOUSE COMMITTEE ON SMALL BUSINESS

                NYDIA M. VELAZQUEZ, New York, Chairwoman

                          DENNIS MOORE, Kansas

                      HEATH SHULER, North Carolina

                     KATHY DAHLKEMPER, Pennsylvania

                         KURT SCHRADER, Oregon

                        ANN KIRKPATRICK, Arizona

                          GLENN NYE, Virginia

                         MICHAEL MICHAUD, Maine

                         MELISSA BEAN, Illinois

                         DAN LIPINSKI, Illinois

                      JASON ALTMIRE, Pennsylvania

                        YVETTE CLARKE, New York

                        BRAD ELLSWORTH, Indiana

                        JOE SESTAK, Pennsylvania

                         BOBBY BRIGHT, Alabama

                        PARKER GRIFFITH, Alabama

                      DEBORAH HALVORSON, Illinois

                  SAM GRAVES, Missouri, Ranking Member

                      ROSCOE G. BARTLETT, Maryland

                         W. TODD AKIN, Missouri

                            STEVE KING, Iowa

                     LYNN A. WESTMORELAND, Georgia

                          LOUIE GOHMERT, Texas

                         MARY FALLIN, Oklahoma

                         VERN BUCHANAN, Florida

                      BLAINE LUETKEMEYER, Missouri

                         AARON SCHOCK, Illinois

                      GLENN THOMPSON, Pennsylvania

                         MIKE COFFMAN, Colorado

                  Michael Day, Majority Staff Director

                 Adam Minehardt, Deputy Staff Director

                      Tim Slattery, Chief Counsel

                  Karen Haas, Minority Staff Director

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

                                  (ii)



                         STANDING SUBCOMMITTEES

                                 ______

               Subcommittee on Contracting and Technology

                     GLENN NYE, Virginia, Chairman


YVETTE CLARKE, New York              AARON SCHOCK, Illinois, Ranking
BRAD ELLSWORTH, Indiana              ROSCOE BARTLETT, Maryland
KURT SCHRADER, Oregon                TODD AKIN, Missouri
DEBORAH HALVORSON, Illinois          MARY FALLIN, Oklahoma
MELISSA BEAN, Illinois               GLENN THOMPSON, Pennsylvania
JOE SESTAK, Pennsylvania
PARKER GRIFFITH, Alabama

                                 ______

                    Subcommittee on Finance and Tax

                    KURT SCHRADER, Oregon, Chairman


DENNIS MOORE, Kansas                 VERN BUCHANAN, Florida, Ranking
ANN KIRKPATRICK, Arizona             STEVE KING, Iowa
MELISSA BEAN, Illinois               TODD AKIN, Missouri
JOE SESTAK, Pennsylvania             BLAINE LUETKEMEYER, Missouri
DEBORAH HALVORSON, Illinois          MIKE COFFMAN, Colorado
GLENN NYE, Virginia
MICHAEL MICHAUD, Maine

                                 ______

              Subcommittee on Investigations and Oversight

                 JASON ALTMIRE, Pennsylvania, Chairman


HEATH SHULER, North Carolina         MARY FALLIN, Oklahoma, Ranking
BRAD ELLSWORTH, Indiana              LOUIE GOHMERT, Texas
PARKER GRIFFITH, Alabama

                                 (iii)



               Subcommittee on Regulations and Healthcare

               KATHY DAHLKEMPER, Pennsylvania, Chairwoman


DAN LIPINSKI, Illinois               LYNN WESTMORELAND, Georgia, 
PARKER GRIFFITH, Alabama             Ranking
MELISSA BEAN, Illinois               STEVE KING, Iowa
JASON ALTMIRE, Pennsylvania          VERN BUCHANAN, Florida
JOE SESTAK, Pennsylvania             GLENN THOMPSON, Pennsylvania
BOBBY BRIGHT, Alabama                MIKE COFFMAN, Colorado

                                 ______

     Subcommittee on Rural Development, Entrepreneurship and Trade

                  HEATH SHULER, Pennsylvania, Chairman


MICHAEL MICHAUD, Maine               BLAINE LUETKEMEYER, Missouri, 
BOBBY BRIGHT, Alabama                Ranking
KATHY DAHLKEMPER, Pennsylvania       STEVE KING, Iowa
ANN KIRKPATRICK, Arizona             AARON SCHOCK, Illinois
YVETTE CLARKE, New York              GLENN THOMPSON, Pennsylvania

                                  (iv)




                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page

Velazquez, Hon. Nydia M..........................................     1
Graves, Hon. Sam.................................................     2

                               WITNESSES

Shulman, Hon. Douglas, Commissioner, Internal Revenue Service....     3
Smith Mr. Christopher, S.T.O.P.--Northland LLC, Pleasant Valley, 
  MO.............................................................    17

                                APPENDIX


Prepared Statements:
Velazquez, Hon. Nydia M..........................................    21
Graves, Hon. Sam.................................................    23
Shulman, Hon. Douglas, Commissioner, Internal Revenue Service....    25
Smith Mr. Christopher, S.T.O.P.--Northland LLC, Pleasant Valley, 
  MO.............................................................    35

Statements for the Record:
American Institute of Certified Public Accountants...............    38

                                  (v)




                       FULL COMMITTEE HEARING ON



                             IRS OVERSIGHT:



      ARE TAX COMPLIANCE COSTS SLOWING DOWN THE ECONOMIC RECOVERY?

                              ----------                              


                        Wednesday, April 1, 2009

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 1:00 p.m., in Room 
2360 Rayburn House Office Building, Hon. Nydia Velazquez 
[chairman of the Committee] presiding.
    Present: Representatives Velazquez, Dahlkemper, Schrader, 
Altmire, Clarke, Graves and Luetkemeyer.
    Chairwoman Velazquez. I call this hearing of the House 
Small Business Committee to order.
    Every American circles April 15 on their calendar, but 
outside of a few eager CPAs, most people do not look forward to 
tax day. While this time of year brings an annual headache for 
us all, it is especially daunting for our nation's 
entrepreneurs. Historically, tax code complexity has been the 
greatest source of frustration for small businesses. No 
surprise there, the tax code contains over 200 small business 
provisions.
    Simplification is key, and this Committee has held hearings 
on this issue, but today in light of historic economic 
challenges, that matter has taken a back seat to more immediate 
concerns.
    This afternoon we will explore ways in which the IRS can 
help entrepreneurs meet tax obligations during a recession. We 
will also discuss the role of the agency in handling incentives 
within the stimulus.
    In February small businesses finally got their stimulus. 
Within that bill were critical tax incentives from bonus 
depreciation to net operating loss extensions. This is the kind 
of relief entrepreneurs need, but like most tax policies, these 
initiatives are complex.
    The IRS needs to insure their meanings are clear before 
small firms can take advantage of incentives. They need to 
understand how they work. Otherwise the benefits of these 
provisions and of the stimulus overall may be diminished.
    Unfortunately, clarification has never been an IRS strong 
point. After all, we are talking about the agency that handles 
the 54,000 page tax code, but with new stimulus policies on the 
books, the IRS will have to improve communications. Part of 
that improvement process should include increased outreach and 
enhanced client services.
    Entrepreneurs need to know they can count on the IRS to 
answer their tax question quickly and accurately. In an era of 
growing uncertainty, those kinds of resources are critical, 
especially considering recent increases in small businesses' 
audits. Unlike big businesses, small firms do not have an army 
of tax attorneys and accountants. As a result, they are largely 
defenseless against the IRS, making them easy targets.
    In the two years between 2005 and 2007, small business 
audits shot up 41 percent. Meanwhile, investigation of the 
biggest companies plummeted 40 percent. It does not matter who 
you are or how big your business is. No one had the right to 
skirt their taxes. But at a time when small business audits are 
up and big business audits are down, you have to wonder where 
are the priorities.
    Small firms have been battered enough by the recession. The 
last thing they need is the added nightmare of an IRS 
investigation. In the face of deepening recession, tax policies 
should be a means for small business growth and not the straw 
that breaks the camel's back.
    I would like to thank today's witnesses and especially the 
Commissioner of the IRS, and in advance for the testimony. I 
know this is an especially busy time of the year, and I am 
pleased that they both can join us.
    With that I would like to yield to Ranking Member Graves 
for his opening statement.
    Mr. Graves. Thank you, Madam Chair, and thank you for 
calling this hearing on tax compliance costs for small 
businesses.
    I also want to extend my special thanks to our witnesses, 
Commissioner Shulman, and the witness on the second panel, 
which is Kit Smith, a constituent from Missouri whom I am going 
to introduce later.
    Every day it seems that we hear more bad news for 
entrepreneurs. The faltering economy, federal bailouts of big 
companies that owe back taxes, studies showing that small 
companies are increasingly targeted for audits. Our nation's 
small company owners are in the trenches day in and day out 
working hard during the recession to keep their businesses 
afloat, contribute to the economy, purchase equipment, and 
create the majority of new jobs, and of course, pay their 
taxes.
    According to the Internal Revenue Service's National 
Taxpayer Advocate, tax issues present the single most 
significant set of regulatory burdens for small firms. The 
Small Business Administration's Office of Advocacy reports that 
firms with less than 20 employees spend more than $1,200 per 
employee to comply with tax paperwork, record keeping, and the 
reporting requirements that go along with it.
    This is twice the cost of compliance for larger firms, and 
surveys by the National Federation of Independent Business 
consistently ranked federal taxes among the top five issues of 
greatest concern to entrepreneurs. Small businesses have good 
reasons to be concerned. Most of them pay their taxes and on 
time, and they want others to do so as well. We have heard 
about the tax gap, or the difference between what is legally 
owed and what is actually paid voluntarily and on time.
    One prong of the IRS strategy to reduce the tax gap is to 
increase enforcement. And it appears the IRS has small 
businesses in its crosshairs. A 2008 Syracuse University study 
revealed that small businesses were 41 percent more likely to 
be investigated than large firms, while the audit rate for the 
nation's largest corporations fell to the lowest level in 20 
years. One can only surmise that this is because small firms 
are less able to hire high-priced attorneys and accountants to 
fight back.
    Today we will hear from one of my constituents, Mr. Smith, 
who is going to describe the horrific IRS audit of his small 
business. If small firms did not have enough stress trying to 
run a small company in a recession, we burden them with 
countless laws, regulations, reporting requirements, and we 
continue to do so every year. We must simplify our tax code and 
require the IRS to do a better job of helping small businesses 
comply. Small businesses deserve better.
    Madam Chairman, again, I appreciate your work on this and 
the hearing you are having today.
    Chairwoman Velazquez. Thank you.
    And now I welcome the Honorable Douglas Shulman, IRS 
Commissioner. Mr. Shulman is Commissioner of the Internal 
Revenue Service. He is the 47th Commissioner and began his 
five-year term on March 24th, 2008.
    Prior to joining the IRS, he worked for the Financial 
Industry Regulatory Authority, the private sector regulator of 
all security firms doing business in the United States. The IRS 
collects approximately $2.4 trillion in annual tax revenue that 
funds most government operations and public services.
    Welcome.

   STATEMENT OF THE HONORABLE DOUGLAS SHULMAN, COMMISSIONER, 
                    INTERNAL REVENUE SERVICE

    Mr. Shulman. Thank you, Chairwoman Velazquez. I very much 
appreciate being at this hearing. Ranking Member Graves, other 
members of the Committee, I am happy to have an opportunity 
today to testify about the Internal Revenue Service's efforts 
to assist America's small businesses, particularly during the 
current economic downturn.
    As President Obama recently observed, our recovery in the 
present and our prosperity in the future depend upon the 
success of America's small businesses and entrepreneurs. I 
believe, and I have been very public in this belief, that the 
IRS has two equally important parts of its mission: service and 
enforcement. We need to provide world class service to the 
small businesses, the individuals who are out there trying to 
wrestle with an incredibly complex tax code, and we have to 
have enforcement programs for those who aren't paying their 
taxes across the spectrum.
    I have started two small businesses personally in my 
career, and therefore I am acutely aware of the many problems 
confronting a small business. From struggling with the economic 
environment to securing a loan, to hiring employees, to getting 
sales, to the obligation to pay their taxes.
    I have included information in my written testimony about a 
number of issues. Let me highlight a couple of things we are 
doing now to try to help small businesses during this 
recession.
    It is inevitable during these kinds of times that taxpayers 
may fall behind in their taxes. As the IRS Commissioner, I am 
very committed to striking the right balance between collecting 
the revenues needed to fund the government and using all the 
tools that we have available to work with small businesses who 
find themselves unable to pay. I have told our people, from the 
most senior to those working on the front lines, that we need 
to be flexible, principled, and that we need to empower all of 
our people to use their judgment when they are working with 
taxpayers.
    As the economy got worse last summer, I sat down with our 
senior team and said what can we do for taxpayers and where are 
we going to find stress in our system between us and taxpayers. 
We did a number of things that benefit small businesses. Let me 
take you through a few.
    First, our employees were reminded of their ability to 
offer install agreements at the end of an audit when taxpayers 
are having difficulty satisfying their obligations to pay 
immediately.
    Second, I gave IRS employees more flexibility to suspend 
collection actions in certain hardship cases.
    Third, we gave employees more flexibility to work with 
previously compliant taxpayers in an existing installment 
agreement who cannot pay because of an economic hardship.
    Fourth, taxpayers unable to meet the payment terms of an 
accepted offer in compromise are now being informed of the 
options available to them to help them avoid a default.
    And, fifth, we are speeding up levy releases by easing 
requirements on taxpayers who request expedited levy release.
    Turning to the American Recovery and Reinvestment Act that 
you mentioned, Madam Chairwoman, the IRS announced last month 
that small businesses with deductions exceeding their income in 
2008 can use a new net operating loss tax provision to get a 
refund of the taxes paid in prior years. This new provision 
enables small businesses with a net operating loss in 2008 to 
offset losses against income earned and allows a carry back of 
up to five years instead of the normal two years.
    This could throw a lifeline to struggling businesses with 
an infusion of cash. I have made sure that we have the 
resources to move quickly to get cash into the hands of small 
businesses when they apply for such a refund. We are going to 
be monitoring this on a daily basis, and if we find a backlog 
or any clogging in the system, I am going to apply more 
resources so that we can implement this smoothly and 
seamlessly.
    Madam Chairwoman, the IRS is always looking for ways to 
better serve taxpayers through outreach and education. As you 
said, a lot of small businesses do not have all of the high 
priced lawyers and accountants and other sort of service 
providers, and so we are acutely aware that we need to be 
directly helping small businesses.
    Last year we participated in more than 2,600 meetings with 
small businesses, reaching directly 162,000 small businesses 
through outreach efforts. We hold national and local small 
business forums to have an avenue of communication with the 
IRS. At the local level we have special business units that 
work with Chambers of Commerce, small business development 
centers, better business bureaus, and other groups that assist 
small business owners.
    We also work with the Small Business Administration to get 
the word out to taxpayers. We are also very focused that we are 
never going to be able to get to all of the taxpayers 
ourselves, and so we try to work with associations to reach 
taxpayers.
    Finally, we recognize that we are not going to be able to 
reach everybody through direct contact. We have phone-in 
forums. People can call our 1-800 number if they have questions 
or concerns.
    We also have an E-newsletter for small businesses with 
140,000 small businesses subscribing.
    Let me just say that again I want to thank you for the 
opportunity to testify about what we're doing to help small 
businesses, as we are all trying to be on this road to 
recovery. We have made some progress, but I am a believer that 
institutions can always get better, and you have my assurance 
that I am going to push the institution to work with small 
businesses.
    I look forward to working with you, other members of the 
Committee, and the staff to make sure that this great engine of 
economic growth and prosperity of the country continues to 
operate at its full potential.[The prepared statement of Mr. 
Shulman is included in the appendix at page 25.]
    Chairwoman Velazquez. Thank you.
    I recognize Mr. Schrader.
    Mr. Schrader. Thank you, Madam Chair. I appreciate that.
    Commissioner Shulman, I will not blame the IRS for all of 
the rules and regulations you have to deal with because 
obviously they came from somewhere, and oftentimes that is this 
great, august body as we try and help people, but recognize 
fully that things are very complex. There has been a lot of 
interest in simplifying the tax code. As Chairman of the 
Subcommittee on Tax and Finance, I am interested in your 
thoughts on for particularly small businesses, let's say, under 
that $15 million gross threshold. Are there certain ways one 
could really simplify their filing of taxes and make it very, 
very simple?
    Mr. Shulman. Let me say a couple of things about it. One is 
I could not agree with you more. The tax code is incredibly 
complex, and we certainly can do better in administering it, 
but a lot of the complexity is in the law, not in the 
administration of it, and so I appreciate the observation.
    As you know, the President has appointed a working group to 
look at a variety of tax issues, and certainly simplification 
is one of the things on the agenda. We are going to keep trying 
to do everything we can to simplify our forms to things like, 
for very small businesses, we have recently said that you do 
not need to file quarterly employment taxes. You only have to 
file annually. We can do things like that.
    I do not have big, broad policies to announce around 
simplification. Clearly, the administration is going to be 
working with Congress on those kinds of things.
    Mr. Schrader. There has been interest, and it has been 
articulated by different small business groups, members of this 
Committee with regard to some sort of flat tax for very small 
businesses. What are your comments on that extreme 
simplification?
    Mr. Shulman. I will reserve judgment. I recognize there has 
been a lot of debate about all of the taxes, including the flat 
tax, and I will not make any comments on it.
    Mr. Schrader. I guess I will defer my questions then at 
this point.
    Thank you, Madam Chair. I yield back.
    Chairwoman Velazquez. Mr. Graves.
    Mr. Luetkemeyer.
    Mr. Luetkemeyer. Thank you, Madam Chair and Ranking Member 
Graves.
    Just kind of quickly, thank you for your service. I know 
you have a difficult task, and sometimes I am sure it is 
maligned in many instances, but I would just ask you to 
continue to do the good job you are doing. Obviously most 
taxpayers are more concerned with fairness. I think that is the 
issue that most are most concerned with, from the standpoint 
that while they do not like to pay taxes, they are more than 
willing to do so as long as they believe that their neighbor 
and everybody else that they are acquainted with pays their 
fair share as well.
    And I think it is incumbent on us as legislators to make 
sure we pass laws that do not impact things in an unfair way, 
and hopefully you will enforce those laws in a fair manner as 
well.
    Along that line, I have an E-mail here, if you will bear 
with me just a moment. One of my constituents E-mailed me this, 
and we were talking about instances where we have concerns with 
impacts on small business, and he's a stock broker. He is with 
Morgan Stanley, and his CPA filed his tax return the 24th of 
March electronically and did not get his refund back in a 
timely fashion and tried to check with the IRS office, and the 
only explanation was that because he had a Morgan Stanley tax 
ID, it must have been flagged because of the TRAP funds.
    Are we flagging certain businesses for oversight, for 
further audits? I mean this an isolated instance where somebody 
just shot an opinion off the top of their head, or is that kind 
of stuff going on?
    Mr. Shulman. Oh, I do not think anyone would have said 
that. So I am happy to look into that, and I encourage you to 
send it to my office. We are not targeting any individuals 
because of any broad government program. So that is a surprise 
to me.
    Mr. Luetkemeyer. Okay. Well, I was just curious because 
obviously the Morgan Stanley folks do have some TARP funds. I 
am just wondering if that is a broad category that you are as 
well looking at a little bit differently.
    Mr. Shulman. We certainly are not looking at any 
individuals. There are a lot of new moving pieces that are 
happening as the federal government is getting involved in 
trying to shore up financial institutions and lots of pieces of 
the economy. We are quite aware that when people or 
institutions are given support by the federal government, they 
have got an obligation to pay their taxes, but we are not doing 
anything to target any individuals of institutions with any 
sort of other piece.
    And so if they filed on March 24, if you file 
electronically and get a direct deposit, you usually get a 
refund within about ten days. If you file using paper and you 
get a check, it can be up to six weeks, and so I am assuming 
this person, if they filed electronically, is trying to use 
direct deposit. I encourage them to call our 800 number and 
find out where they are in the process. They can let them know.
    Mr. Luetkemeyer. All right. Thank you.
    To follow up further, I noticed one of the things I think 
is important, we are talking about small businesses today, and 
many of them are partnerships, S corps. who oftentimes run 
those dollars through their personal income taxes.
    And I am just kind of curious if you have some thoughts. I 
know that the administration, the tax policy in the new budget 
is indicating they are going to try and tax those individuals 
over 250,000, which would put a lot of these partnerships and S 
corp. folks directly into the category of being taxed.
    Do you have any idea of how many businesses that would be 
or how many individuals file partnerships and S corps. as a 
percentage of the small businesses in this country?
    Mr. Shulman. Yes, small businesses come in a number of 
forms, and that is why sometimes when you look at our 
statistics, it is hard to get a grasp on small businesses. The 
vast majority actually come in 1040 Schedule C, sole 
proprietors and others. Then there are a number of C corps., 
which are small corporations, which if you look at our 
statistics there, and then there are lots of people who have 
flow-throughs, S corps., partnerships, LLCs.
    I do not have the exact number on me now. I can get back to 
you. What I will tell you though is since 2000 the number of 
flow-through entities, filing returns for those entities, so S 
corps., LLCs, partnerships, has increased about 50 percent 
while the number of C corporations has been relatively flat. 
For us that is an interesting phenomenon because if you think 
about us doing our job, my belief is any time you are running a 
regulatory agency or government agency, there are all sorts of 
incorporations that make a difference, but what really matters 
is the economics that you are looking at. So it makes our job 
much harder, I will tell you, because it is much more complex 
to look at a partnership where it is really a network of lots 
of other activities happening flowing through that partnership 
than it is C corporation where the taxes and the entity all 
stops right there.
    Mr. Luetkemeyer. I see my time is up. Thank you, Madam 
Chair.
    Chairwoman Velazquez. Mr. Altmire.
    Mr. Altmire. Thank you, Madam Chair.
    And, Commissioner Shulman, thank you for being here.
    Last week the IRS stated that COBRA provisions in the 
stimulus plan are a top priority, and I understand that one of 
the outstanding items for the IRS is defining involuntarily 
terminated to determine that eligibility.
    When does the IRS expect to issue guidance on this matter 
that affects COBRA obligations and rights?
    Mr. Shulman. We issued the first set of guidance several 
weeks ago. Today some questions and answers were put up on the 
IRS Website to try to answer a lot more of those pieces. The 
COBRA provision is one of the most complex for us to administer 
because right now when an employer sends their form 941 into 
us, we actually do not have individual taxpayer information. 
They just send gross employment tax to us. And so really the 
employer is going to have to do all of the true-up with the 
individuals, which we recognize them, and it is the way the law 
was written. The decision was to provide this medical benefit 
through the employment tax system. We have tried to simplify 
it.
    Your specific issue, I will check and see if it is on the 
Q&As that went out to day. If not, I can get back to you with 
the information.
    Mr. Altmire. Okay. Thank you.
    I wanted to ask a question about home-based businesses. For 
many entrepreneurs running a home-based business, the home 
office deduction is simply too complex and time consuming. It 
is clear that something needs to be done since only nine 
million of the nearly 30 million home-based businesses even 
took that deduction.
    Is the IRS considering writing new regulations that would 
make it easier for small businesses to take that deduction?
    Mr. Shulman. Yes. I will tell you when I said I have 
started a couple of small businesses, the first one I started, 
started in my home, and then we moved, and then we put phones 
in, and then we got employees, et cetera. So I am well aware of 
the complexity of that deduction.
    I know it is very hard for taxpayers. It is very hard for 
the IRS. The law is pretty clear about it. We are trying to 
administer the law, but I am interested in this issue, and 
these are broader conversations within the administration and 
with Congress. I would encourage Congress to simplify it and 
create a safe harbor, but it would not be out of the question 
for us to at least explore if there is a way to have some sort 
of safe harbor because we recognize this is a very complex area 
of the law.
    Mr. Altmire. Great. I want to ask one more question to what 
Mr. Luetkemeyer was asking. You may not have these numbers in 
front of you, I realize.
    With regard to the flow-through that you were talking about 
and that $250,000 income threshold, you were addressing the 
question that you were asked, which was how many total small 
businesses are there that fall into that category. How many are 
there that would be over that $250,000 threshold that would 
actually be subject to that new level of taxation?
    Mr. Shulman. I am going to have to come back to you on 
that. There are a lot of small business owners, the ones who 
are fortunate enough to make $250,000, and obviously if you are 
a flow-through, it shows up on your individual tax return.
    Mr. Altmire. Do you have any idea of the percentage with 
regard to businesses?
    Mr. Shulman. I do not. I am sorry, but I can get back to 
you with those numbers.
    Mr. Altmire. Okay. Thank you.
    Thank you, Madam Chair.
    Chairwoman Velazquez. Mr. Graves.
    Mr. Graves. Thank you, Madam Chair.
    I want to follow up on Jason Altmire's point, I appreciate 
what you said about trying to make the IRS do a better job, and 
you can always do a better job, and I very much appreciate 
that. And I know you understand, but do your auditors and the 
folks below you understand, the people who are making the 
decisions, you know, what it is like to start a small business 
and run a small business?
    Then I also wanted to ask you, too, I mentioned the 
Syracuse study from 2007. I did not know if you were aware of 
it, but my curiosity is, is it more likely for small businesses 
to get audited than larger businesses?
    The study was pretty clear, but you know, I would just ask 
you to comment on that.
    Mr. Shulman. A couple of things. One, on your question 
about people understanding small businesses, one of the first 
things I did when I came in because I am a big believer that if 
you are going to run a government agency and if you are going 
to operate with the power and authority of law that a 
government agency has, you need to be very focused on 
understanding the impact on the people that you affect.
    And so the phrase I always use with our people is we need 
to walk a mile in the taxpayer's shoes, and we talk a lot about 
that. You know, the fortunate thing that we have is everybody 
who works at the IRS is a taxpayer. So I think everyone files 
every year and has to wrestle with the code. So they understand 
that.
    And I am very focused on doing what we can to increase 
outreach, increase dialogue and make sure people are really 
kind of stepping out of their mind and sitting on the other 
side of the table and feeling what it is like.
    So I cannot say we are all the way there. No business or 
government entity is all the way there, but it is a big focus 
of mine while I am here.
    Let me give you a couple of numbers that I think are 
interesting and tell you, one, if you looked at any of the 
public comments I have made in the last year in any of my 
testimony, I have talked about three focus areas. One is 
international tax evasion. Two is large business, and three is 
high net worth individuals. And so that is where my emphasis 
has been.
    If you look at businesses with less than $10 million of 
assets, and this is kind of how we break it down, we are eight 
times more likely to audit a business between ten and $250 
million of assets than we are a business with less than ten 
million of assets, and we are 18 times more likely to audit a 
business with over 250 million of assets, so the big 
businesses, than we are a business with less than ten million 
of assets.
    And so, you know, I am the IRS Commissioner. One of my jobs 
is to have every American feel like we are keeping an eye on 
everyone so that your neighbor is paying and your competitor is 
paying. So I would not say that we do not have good audit 
coverage everywhere. I would not be doing my job if I said 
that. But I really do not believe that we are unfairly 
targeting small businesses, and the numbers pretty much speak 
for themselves. You are a lot more likely to get audited, 18 
times more if you are a very big business, than you are if you 
are a very small, and you are eight times more likely if you 
are a mid- size business than a very small business.
    Mr. Altmire. Thank you, Madam Chair.
    Chairwoman Velazquez. Ms. Dahlkemper.
    Ms. Dahlkemper. Thank you, Madam Chair.
    Mr. Shulman, I want to go back to the COBRA issue because I 
have had a calls from small business owners regarding this, and 
although they agree with it and they think it is a great way to 
cover some of their employees that they have had to let go, 
they are concerned about the up-front payment.
    And how long currently under your current guidance, how 
long until they can be reimbursed for their out-of-pocket 
expenses on that 65 percent?
    Mr. Shulman. Yes. I have heard this issue. I think you are 
referring to people usually have to reimburse for premiums and 
pay premiums monthly, but do not get reimbursed until the end 
of the quarter, and so the time that you can take the 65 
percent out of your payroll taxes is when you file your 941 
quarterly returns.
    This is a timing issue that is in the law. There is not a 
lot we can do about it. What we have done is while it was going 
through the legislative process first we made sure Congress 
knew that this was going to be a problem.
    Two, we actually pushed back and we think we eliminated 
some complexity. One of the issues that was on the table is to 
make this reporting on the W-2, which would have made payroll 
processors and employers all have to change their W-2s, which 
we pushed back and did not do.
    We are well aware that this is an issue for small 
businesses. We have looked at it. We are going to do what we 
can, but some of these timing issues are really through the 
legislation, and there is not a lot we can do.
    Ms. Dahlkemper. And I know it is quite a financial burden 
on a lot of companies who are just living on a shoestring right 
now. Anyway, I appreciate your answer on that.
    My other question is regarding, you know, the meetings and 
the forums that you had, you know, for small business 
communities. Often we have these meetings and we have forums 
and everyone voices their concerns, but that does not lead to 
any reforms. Can you tell me some specifics, some action that 
the IRS has taken as reforms as a result of the meetings and 
the forums that you had last year or any time in recent 
history?
    Mr. Shulman. Yes, there are a couple of things. One, a big 
purpose of these meetings is because a lot of small businesses 
are not hiring accountants and lawyers and others; it is 
literally to give them face-to-face advice. So a lot of what we 
are doing is saying how do you open a business, how do you 
close a business, how do you work through an audit, what kind 
of information and record keeping do you take. So it is not all 
feedback. A lot of it is education and outreach.
    A few examples of things that have happened because of 
feedback from small business community in recent years. One is 
when there is a lifetime exchange of property. A small business 
sells a building and then buys another building, and it is a 
lifetime exchange of property. They have to actually hold the 
proceeds in an escrow account.
    The law allows that the proceeds in the escrow account to 
pay interest, and if they are not paying a certain amount of 
interest, there is imputed interest to the small business. We 
heard a lot of small business owners say that I was not getting 
any interest and then there is this imputed interest. I have to 
pay a tax.
    We have created an exemption for under $2 million. The 
other thing we heard is there are a lot of people who are very 
small businesses who were having to file quarterly employment 
taxes. We extended that. We heard from a lot of small 
businesses that when you filed an extension of your income tax, 
especially Schedule C filers, you had to file a four-month 
extension and then another two-month extension. Through hearing 
from many people, including small businesses, we made that a 
one time six-month extension.
    The other thing we have done is we increased the threshold 
to file the Schedule C EZ to $5,000 of business expenses, and 
so we tried through the dialogue to hear from people. Do we do 
a perfect job of it? Absolutely not. Could we do better? Yes. 
But we are quite committed to trying to hear and do what we 
can, again, within the confines of knowing we also have a job 
to fund the government.
    We need to work with the Treasury Department on these 
pieces, and there are a lot of issues that are really purely 
legislative.
    Ms. Dahlkemper. I appreciate that, and I think, you know, 
listening to the people who are out there every day trying to 
create jobs and keep this economy going and seeing what you can 
do within the constraints that you have is important because I 
think a lot of people who are doing their job in your agency 
really do not know what small businesses are going through 
every day. So I appreciate your listening to them.
    Thank you. I yield back.
    Mr. Shulman. Thank you.
    Chairwoman Velazquez. Thank you.
    And now the Committee is going to stand in recess until we 
finish up voting on the floor.
    [A recess was taken.]
    Chairwoman Velazquez. The Committee is called back to 
order.
    Thank you, Mr. Commissioner, for your indulgence.
    I will recognize Ms. Clarke.
    Ms. Clarke. Thank you, Madam Chairwoman and Ranking Member 
Graves, for holding this hearing on tax complying costs and 
whether it is slowing this country's economic recovery.
    As I have always stated, as we move forth in the 21st 
Century, small businesses will become more and more an 
essential element in driving the U.S. economy. About 30 million 
small businesses operate in the U.S., which employs virtually 
80 million workers.
    When it comes to tax compliance issues, small businesses 
benefit from greater flexibility and fewer bureaucratic 
controls. But today during these tough economic times, small 
businesses are having difficulty staying open. Now, is the time 
for the IRS to do much more in outreach and education to small 
businesses to answer the many questions and address their 
legitimate concerns.
    For small business the tax code is simply too complex and 
burdensome, and I hope that our conversation here today will 
enable us to come out with recommendations to assist in those 
outreach efforts.
    So, Mr. Shulman, a lot of the tax issues are not merely 
about the money, but about the compliance problems when dealing 
with the government, especially when it comes to reporting. 
Most sole proprietorships have to pay federal and state payroll 
taxes, as well as unemployment insurance, and therefore have to 
meet so many deadlines. And yet when the IRS alleges that a 
small business tax return is incomplete, they attempt to 
reprimand the small business without any inquiry to determine 
what may have happened.
    If that is the temperament and culture of the IRS, do you 
think that the burden of proof should then be on your agency to 
show paper work was, indeed, not reported by a small business?
    Mr. Shulman. Thanks for all of your comments and I could 
not agree with you more that in this tough time everyone is 
counting on small businesses bouncing back. The President has 
been very clear that small businesses and entrepreneurs are an 
essential part of the engine that is important for the country.
    I talked quite a bit in my oral testimony about the 
outreach efforts we have, about the things that I ask every 
person in the agency to do around making sure we are flexible 
with businesses who are experiencing hard times.
    I guess I have not experienced the culture that you are 
talking about. We have got a lot of employees, and there are 
always going to be exceptions, but in general, our people I 
think try to work with taxpayers. They have a job to do, 
obviously, to make sure that they audit businesses and 
individuals, nonprofits to make sure they are abiding by the 
law.
    When it comes to paper work, one of the things that I know 
for sure, I have talked with our Commissioner of Small 
Business, who is here today, who has actually gone out and done 
round tables with our agents. We seldom disallow expenses 
because records are not there for small businesses. Our agents 
usually work with the taxpayer to try to reconstruct those 
records.
    So I guess I would not necessarily agree with the 
characterization, but I very much agree with the sentiment that 
you put forward, which is that we need to go out, we need to be 
reasonable, we need to work with taxpayers. We need to assume 
that the majority of small businesses are wrestling with an 
incredibly complicated code and just trying to get it right.
    Ms. Clarke. Fair enough, Mr. Shulman. The hope is that 
there can be that level of engagement sustained in terms of 
quality across the span of the agency. As you have said, you 
know, you send forth a certain culture within the agency, and 
you hope that is followed through to the end, and certainly 
there are nuances with each individual business that you may 
confront.
    So we are looking for that consistency and quality, 
commitment to small business, and I am glad to hear that that 
is your goal, your aim, your philosophy within the agency.
    I understand that recently you held a program called Super 
Saturdays, and this program provided free tax help to 
communities nationwide. My question is why has there been no 
Super Saturday directly focused on small business, especially 
during these tough economic times.
    Mr. Shulman. Yes. Last year actually was the first year we 
did Super Saturday, while we were trying to get 120 million 
stimulus checks out to the American people. There was a whole 
category of seniors and veterans who usually would not have to 
file a tax return but did last year because of the stimulus.
    It was such a success, and frankly, we had employees from 
all over the agency work directly with taxpayers. One of the 
things I talked about before is a key and a focus of mine is to 
make sure we walk in the shoes and we understand what it is 
like to be the taxpayer.
    So having our executives from across the country deal face 
to face with taxpayers was a great experience. So we did it 
again. We opened up on Saturdays. We had people come in. This 
was open to individuals; it was open to small businesses, to 
any taxpayer.
    Last year we actually held 2,600 seminars, education 
events, forums for small businesses, and I will refer to my 
written testimony so that I do not go through it again, but I 
think we have a lot of outreach for small businesses. We could 
always have more, and one of my jobs is to triage the resources 
between our phone people, people who make the Internet work, 
people who do service, people who do enforcement around small 
businesses, large businesses, individuals, both service and 
enforcement, and so we are just trying to balance that.
    But you have my commitment that we are very focused on 
trying to give support to small businesses.
    Ms. Clarke. Thank you very much.
    My time has expired and I yield back.
    Chairwoman Velazquez. Mr. Commissioner, the IRS procedures 
require consideration of whether a collection against a 
taxpayer will impose an economic hardship. In a March 11 
release, the IRS stated it would be flexible when considering 
collectability during these times. Could you be more specific?
    And you mentioned that you are telling your staff to be 
more flexible, to even suspend collection or work out 
agreements. Can you be more specific regarding any procedures 
the IRS plans to implement in light of the economic downturn?
    Mr. Shulman. Yes. So a couple of things we did. When I 
mentioned postponing collection, we give thresholds which are 
not public about how much tax is due, where the front-line 
employee who is talking to the taxpayer can actually take that 
collection case and put it back to the queue because of 
economic hardship. We actually raised those thresholds, meaning 
it can be a larger amount of tax and our front-line employee 
has that flexibility. So that is one of the things we did.
    In the past, if you missed one payment, if you either had 
had an offer-in-compromise or an installment agreement, it was 
an automatic default. We actually gave, again, flexibility to 
people that you could miss more than one if you show some 
economic hardship.
    We gave some flexibility that that can be a discussion with 
people because, as you have all mentioned, at the end of the 
day you have got to trust the judgment of your people out in 
the field. If you are going to tell them to use their judgment, 
you have got to trust them, and so we gave them more 
flexibility and less rigorous documentation requirements.
    With liens, we actually have now made it clear. A lot of 
small businesses, the way they get a loan is they actually have 
the security be their house, and so we have actually made it 
that if somebody in this down real estate market is either 
trying to refinance their house or renegotiate or sell their 
house, that our lien will not stand in the way of that action.
    There is more which I would be happy to give you. What we 
have tried to do is do all of this, but also we have to protect 
against a flood of people who can pay their taxes saying they 
cannot pay their taxes, and so we are just trying to get this 
balance right.
    I think some have criticized and said I have leaned too far 
towards the taxpayer. I think in these times it called for 
extraordinary measures, and that is why we took some of them.
    Chairwoman Velazquez. Okay. You mentioned that you are 
going to pay more attention to recoup some of the money in 
terms of international tax evasion, do more audits of 
international tax evasions; is that right?
    Mr. Shulman. Yes, yes.
    Chairwoman Velazquez. So do you have the manpower, the 
resources to go after this type of tax evasion?
    Mr. Shulman. A couple of issues. One is once you leave our 
border and we do not have all of the authorities we have inside 
the border to follow the money trail, we have to coordinate 
with other governments. There is a lot of diplomacy that is 
needed, and it is easier to hide money. So this is some of the 
toughest work that we do.
    When we started a continuing resolution at the end of last 
September, we essentially had a freeze on staffing. What I did 
was move some staffing from other areas so that we could keep 
staffing up in international, and you might have seen in 
President Obama's budget he put a line item for robust 
international enforcement efforts from the IRS, and we 
anticipate getting significant increases in agents, both civil 
and criminal, for international lawyers so that we can work 
through some of the complex issues, et cetera.
    Chairwoman Velazquez. Well, you are saying you are 
reprogramming the manpower that you have so that you are going 
to use the staff for international compliance?
    Mr. Shulman. It is a priority. I have already done some 
shifts, and we are certainly as we get more staff going to lean 
towards international.
    Chairwoman Velazquez. So my concern is how then will you 
have the people in your staff, the numbers that are required to 
be able to answer the questions coming up from small businesses 
who need to call the IRS or for you to process some of the 
returns in an appropriate manner.
    Mr. Shulman. Yes. So we have three appropriations. We have 
a support appropriation, we have an enforcement appropriation, 
and a service appropriation. This is in our enforcement 
appropriation. We are not planning on taking people out of 
service roles. We really triage our enforcement people.
    And so it is a perennial issue. I mean, just an interesting 
statistic, we have had a nine percent decline in staffing over 
the last five years and a ten percent increase in returns 
filed. We have had a 23 percent increase in productivity. 
Technology and electronic filing helps. The Web helps, but we 
are always having to manage resources.
    But a lot of people ask you when you become the IRS 
Commissioner are you going to focus on enforcement, are you 
going to focus on service. I have been very clear. I am going 
to focus on both. By no means am I going to overemphasize 
enforcement at the expense of service.
    Chairwoman Velazquez. Okay. So we know that so many 
businesses are experiencing a downturn and many will be taking 
advantage of the expanded net operating loss provision in the 
recovery bill. What special steps has the IRS taken to insure a 
timely processing of returns so many small businesses can get 
an infusion of capital?
    Mr. Shulman. Yes. Right when this conversation started 
around increasing net operating losses we brought together our 
teams who work on this. We assigned an executive to review the 
procedures and make sure there were not any clogs in the 
system.
    There are two ways to get these expedited returns. One is 
by filing form 1139 for the Schedule C filers or for 
corporations, and one is form 1045 for the Schedule C filers. 
We have actually staffed up. So some of these areas we have 
been triaging we have made sure there is enough staff there. I 
am very confident that we are going to get these out quickly. 
We have made a commitment that all of them will get out within 
45 days, but I have challenged the staff to get it sooner, and 
that is quicker than these usually get processed, and I am 
going to be monitoring it daily.
    If we see a surge beyond what we are expecting, we will put 
more staff. We are going to make sure that we do this right. We 
recognize how important it is.
    Chairwoman Velazquez. It is important since small 
businesses right now are having problems getting access to 
capital. You know, the credit crunch is incredible and it is 
impacting them. So this is a tool that would help get money 
back to small businesses, and I hope that our offices would not 
be inundated with phone calls telling us that they are not 
getting the rebates that were promised to them.
    Mr. Shulman. No, I do, too. I know a lot of this came 
through with your leadership. Clearly, the President has asked 
every agency to prioritize the Recovery Act and making sure we 
implement it well. The Treasury Secretary has asked me this as 
well, and this is something that I am personally engaged in.
    If your office gets any information to the contrary, please 
reach out because we are focused on this.
    Chairwoman Velazquez. Thank you.
    Mr. Graves.
    Mr. Graves. Thank you, Madam Chairman.
    I just want to follow up again on Representative Altmire, I 
too am concerned about the possible consequences to small 
business when it comes to the tax rates of $250,000 for couples 
and $200,000 for individuals, how many small businesses that is 
going to affect. You had said before that you were going to get 
that information, and I definitely want to make sure that we 
get it. I think it is something that is very important, and I 
would like to know just how many small firms that is going to 
affect.
    Mr. Shulman. Absolutely. We will follow up.
    Chairwoman Velazquez. Ms. Clarke, any other questions?
    Ms. Clarke. Thank you, Madam Chair.
    Mr. Shulman, I guess we keep reiterating how hard these 
times are for small businesses, but I guess it is a point that 
is worth driving home because they are really having a hard 
time paying tax liabilities, which not only impacts their 
businesses, but their families, too.
    You know, I believe that this is a time when some of the 
reporting responsibilities really need to be reexamined when it 
comes to small businesses. For example, credit card companies 
can report to the IRS sales of small businesses, such as 
restaurants, which in the past was a chronic source of 
noncompliance. Do you agree that the IRS should be trying to 
reduce the noncompliance burden on small businesses?
    And what is your agency doing to come up with new guidance 
to address this matter?
    Mr. Shulman. A couple of things. One is, I think the 
biggest compliance burden is the law, very complicated. My 
favorite statistic is that the tax code is four times as long 
as War and Peace, and we are going to do everything we can 
within the confines of the laws that are passed by Congress and 
debated to make things simpler.
    We have done a number of things that I walked through 
earlier that I would be happy to go through with you and meet 
with you individually or send you a letter about, that we have 
done to try to reduce the burden on the administrative side.
    You mentioned the credit card reporting. A lot of 
information and all of the statistics show there is always 
higher compliance when there is third party reporting. The best 
compliance is the teacher or the firemen or the employee who 
has a W-2 because they know we are going to get information, 
and they get reported to them in a simple format exactly what 
their wages are. They copy it onto their 1040. They send it in 
to us. It is much easier.
    My hope is that information reporting like credit cards, 
first of all, that reporting is not going to happen until 2012. 
So there is plenty of time to get a lot of input from the 
community as we do that.
    But more importantly, my hope is third party reporting 
actually can simplify and get the information in a simple 
format for people, and so that is always my hope.
    Ms. Clarke. Thank you very much, Commissioner.
    Thank you, Madam Chair. I yield back.
    Chairwoman Velazquez. Sure. Commissioner, I have a last 
question, and that is a major concern for some taxpayers is the 
lack of review of certain civil penalties, and one of the most 
draconian penalties is found on 6707(a). This section imposes 
mandatory penalties of up to $200,000 for failure to make 
disclosures of certain listed transactions.
    Mr. Shulman. Yes.
    Chairwoman Velazquez. Unfortunately, there is no regulatory 
process or public comment period involved in determining what 
should be listed, a listed transaction. So is it possible for 
the IRS to suspend these penalties until a better review 
process is implemented?
    Mr. Shulman. Yes. We have actually looked at this. I would 
agree with you. Let me just step back for a minute. The listed 
transactions were an important thing that the IRS did, which 
was to put taxpayers on notice that there are certain 
transactions designed for big corporate tax evasion kind of 
transactions, tax shelters that we are going to be looking at 
that you need to file information on.
    We recognize that some taxpayers have gotten caught up in 
this that the law never presented. We are trying to have 
dialogue about that. Right now we think our hands are tied, 
that the legislation, if I have this correct, and I will come 
back to you, is actually we do not have a lot of leeway for us 
to suspend it. But this is something that we are going to want 
to talk about. You know, we are in discussions and the 
administration is going to need to be discussions with Congress 
because we recognize this is an issue.
    Chairwoman Velazquez. Very good. Thank you. And let me take 
this opportunity to thank you, and I am sorry that we have so 
many votes on the floor, but this is the way it goes here.
    Mr. Shulman. The people's business.
    Chairwoman Velazquez. Okay. So thank you so much.
    Mr. Shulman. Thank you very much.
    Chairwoman Velazquez. The gentleman is dismissed.
    So now we call on the second panel, and that will be Mr. 
Christopher Smith.
    Are you going to introduce him?
    Mr. Graves. Thank you, Madam Chair.
    I am pleased to introduce Kit Smith. He is a constituent 
and owner of S.T.O.P. Restoration, LLC, and S.T.O.P.--
Northland, LLC, in Pleasant Valley, Missouri. Mr. Smith is 
certified in fire and water restoration, mold remediation, door 
and window installation. He is also a certified restoration, 
remediation, and recovery instructor.
    He is a non-combat disabled veteran. Mr. Smith served six 
years in the United States Navy. He has been an entrepreneur 
and owner of his own small business since he was 16 years old.
    Mr. Smith, thanks for coming. We want to welcome you to the 
Committee, and we appreciate your coming here to Washington to 
tell us your story.

 STATEMENT OF CHRISTOPHER ``KIT'' SMITH, S.T.O.P.--NORTHLAND, 
                              LLC

    Mr. Smith. Chairwoman Velazquez and Ranking Member Graves, 
my name is Kit Smith, and I am owner of a small business in 
Pleasant Valley, Missouri. I am pleased to be here today to 
testify of the burden of tax compliance for small businesses.
    My company has been battling with the IRS since 2007 on a 
matter that generated an audit going back to 1989. It started 
because an employee had embezzled $58,000. She was trying to 
hide this by switching my EIN numbers around and making 
deposits with them to the State of Missouri and the IRS. This 
encompassed a sole proprietary, a corporation, and two LLCs.
    The deposits owed for the taxpayer in question were, in 
fact, paid. The IRS person who received the deposits placed the 
money where they deemed needed and not where it was supposed to 
go per the forms that the deposits accompanied. The agent and I 
proceeded to uncover the fact that the payments were made. They 
were misplaced, and the agent would locate and identify where 
to correctly put the payments.
    After a short period of 30 to 45 days, I received a call 
from the agent and was informed that there was a small refund 
from past years and that the payments would need to be placed 
correctly if I agreed, and of course, I did.
    I was then informed that there was a slight overpayment on 
my part and did I wish a refund or place it on account. I chose 
the refund.
    After about a month or so I received a call from the agent 
stating that there was a mistake by them in the calculations 
placement of the funds, and I needed to repay approximately 
$2,300. I gave the agent the check number and wrote the check 
for the amount and put it in the night mail.
    When we thought the audit was about done, up pops a new IRS 
agent on the phone stating that I owed approximately $2,300. I 
disagreed, and after two to three minutes on the phone, I asked 
if the phone agent could give the particulars to my office 
staff so that we could again research this.
    To my complete amazement, my office staff came in and 
proudly proclaimed she had my amount reduced to approximately 
$1,800. How on earth can an employee negotiate with an IRS 
agent the amount of a tax due when during an audit they ask 
specific questions to qualify you as the appropriate person to 
be liable?
    I just paid this tax for the third time. The tax advocate 
informed me of information that contradicted the supervisor's 
statement made to me via my message machine. I informed the tax 
advocate that they were hiding a big mistake. The agent was no 
longer to speak with me, and I was informed this matter was 
closed.
    Who regulates this arm of government? What oversight do 
they have? How far can they go? Why do they have immunity from 
repercussions? They need checks and balances, one, to insure 
the tax due is paid, but, two, that when they are wrong they do 
not cover it up, destroy lives or businesses.
    The burden placed on my business alone was over 150 hours 
of my personal time at $175 an hour to keep my doors open. Well 
over 100 hours of my staff time. The reams of paper and phone 
bill time. I cannot even think of the amount of business I lost 
focusing on this instead of my company. I will never get over 
this loss.
    We as small businesses need a flat tax so we can plan for 
what tax is due instead of wondering what will be due. This 
would take the unknown out of taxes. It's funny, but not too 
long ago I had an IRS agent on the phone. She stated to me, 
``Mr. Smith, the IRS does not make mistakes.'' And I still have 
that tape! Can you believe the audacity? We are all human. 
Heck, I may have made a mistake coming here.
    The stimulus package: There is nothing in the stimulus 
package for my business. I cannot afford to go further in debt, 
period! Buy equipment? Get an SBA loan for 35,000? No to 
further debt.
    What the small businesses need , the available loan 
opportunity to lower their loan payments. Lower taxes to be 
able to afford and retain good employees instead of having to 
lay them off. Lower taxes to afford to give themselves a raise, 
I have not had one in five years. Lower taxes to insure the 
benefits package available matches the larger institutional 
ones. Lower taxes to be able to afford, without a loan, 
improvements to facilities and equipment.
    The stimulus package should not help mega companies that 
affect our economy. They need to fail just like if I failed no 
one would help me except me. If the big dogs fail, let them. 
Then smaller entrepreneurial companies will sprout up and take 
over where they failed. That is the spirit of America, freedom 
and hard work!
    The stimulus package should not be for earmarked projects. 
They don't help small business. The package is wild spending of 
money that is not even printed yet. We need Congress to control 
spending and lower taxes. Small business will help pull us out 
of this faster.
    Government is in place to keep peace, not to create jobs! 
They implement laws and govern, not dictate how much someone 
can make. The government can help create jobs by helping people 
who create jobs, us, the small business people of America who 
give every day!
    In my State of Missouri, 90 percent of the employed people 
are employed by companies with fewer than 25 employees, small 
businesses! Unbridle the small business community. Give them 
the ability to rebuild the economy, and watch what we're 
capable of, but do not give us more burden, more taxes, and 
more administrative burdens such as more COBRA regulations.
    Thank you for the opportunity to testify today.[The 
prepared statement of Mr. Smith is included in the appendix at 
page 35.]
    Chairwoman Velazquez. Thank you, Mr. Smith.
    Mr. Graves.
    Mr. Graves. Thank you, Madam Chair.
    I actually brought up a Syracuse University study that 
small businesses are targeted because they do not have the 
ability to hire expensive counsel or expensive representation 
to work on the audit, and I was just curious if you were able 
to do that and if you have heard of other small businesses that 
have been targeted by audits who are not able to hire counsel 
or get the expensive resources to be able to represent 
themselves before the IRS.
    Mr. Smith. Mr. Graves, with the amount of burdens placed on 
by local taxes, increased property taxes, and the tax burden 
that we already have, I couldn't afford an attorney. I hired an 
attorney in the first place, and it came to no resolve. It was 
not worth the money that I was spending. So I opted to go 
through this myself with the agent, and it was successful.
    And I know of other gentlemen and women in business who 
have had this similar type of situation, not to this complete 
amount, but they have had the same situation where they have 
had employees that are embezzling, whether they have a gambling 
problem or whatever it is, that embezzle money, and now we are 
at a disadvantage because we do not have the capital to fight 
the IRS.
    Ms. Clarke. In your opinion, was it a situation where one 
agent did not know what the other agent was doing, the left 
hand does not know what the right hand is doing, or is it a 
situation of as far as they were concerned you were guilty 
until proven innocent, in your opinion at least?
    How did you feel? You know, what could have made it a whole 
lot more user friendly, I guess, approach, you know, in working 
with you in this? What would you have done different if you 
were on the other side?
    Mr. Smith. I really appreciate that question. The original 
agent that came into my office and flipped their badge was 
awesome. She went back to 1989 like my testimony said, and she 
uncovered where these payments went. She found them. She was 
diligent in her job, and she did it well.
    Where the breakdown came was when we got the phone call 
from an agent on the phone that said mysteriously we owed this 
money again, and I went and said, ``What is going on here?''
    I tried to talk to that agent. I was not allowed to. I went 
to the tax advocate, thanks to your office, and that is an 
oxymoron because she is an employee of the IRS. Through her we 
contacted this department again, and I was given conflicting 
stories. I did talk to the agent very shortly and very briefly, 
and I was told I had to go to the supervisor.
    The supervisor told me that I had to go to the tax 
advocate, and I told the tax advocate this, and she said, no, 
that is not what he said, and he left a contradictory response 
to that on my answering machine. So I could not figure out.
    I am thinking, okay, why doesn't the IRS just, and I asked 
them, ``Why don't you just bring this file that the original 
agent did, let's sit down at a table, and let me see what you 
have so that I can see where she went?''
    And all they would divulge to me was this unknown, 
unbeknownst jumble of figures that unless I was an IRS agent I 
would not know how to discern what was there. But she went back 
all the way to 1989 and covered money that they owed me from a 
long time ago, but they did not give that up! But she found out 
where I made the payments and where they were sidelined because 
this person was trying to throw a smoke screen, and she found 
that we, in fact, did make the payments, and then I found out I 
had to do it again.
    So I would say that in this case that they should have 
brought the file, sat down with me and said, ``Mr. Smith, this 
is what we found.'' They would not do it. They said you are not 
allowed to talk to the agent and this matter is closed. And I 
think that's wrong.
    Mr. Graves. Thanks, Madam Chair.
    Chairwoman Velazquez. Ms. Clarke, no questions?
    Okay. So we have got some stuff here from the IRS, and I 
guess there are some pending issues. We could use that 
opportunity after the hearing to continue the conversation.
    With that I ask unanimous consent that members will have 
five days to submit a statement and supporting materials for 
the record. Without objection, so ordered.
    This hearing is now adjourned.
    Thank you.
    [Whereupon, at 3:14 p.m., the Committee meeting was 
adjourned.]
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