[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
                             SMALL BUSINESS 
                      HEALTH INSURANCE TAX CREDIT 

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

                                HEARING

                               before the

                       SUBCOMMITTEE ON OVERSIGHT

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                           NOVEMBER 15, 2011

                               __________

                           Serial No. 112-OS8

                               __________

         Printed for the use of the Committee on Ways and Means


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                       SUBCOMMITTEE ON OVERSIGHT

             CHARLES W. BOUSTANY, JR., Louisiana, Chairman

DIANE BLACK, Tennessee               JOHN LEWIS, Georgia, Ranking
AARON SCHOCK, Illinois               XAVIER BECERRA, California
LYNN JENKINS, Kansas                 RON KIND, Wisconsin
KENNY MARCHANT, Texas                JIM MCDERMOTT, Washington
TOM REED, New York
ERIK PAULSEN, Minnesota

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                            C O N T E N T S

                               __________

                                                                   Page

Advisory of November 15, 2011, announcing the hearing............     2

                               WITNESSES

Honorable J. Russell George, Inspector General, Treasury 
  Inspector General for Tax Administration.......................     5
Sarah Hall Ingram, Commissioner of the Tax Exempt/Government 
  Entities Operating Division, Internal Revenue Service..........    22
Patricia Thompson, Chair, AICPA Tax Executive Committee, American 
  Institute of Certified Public Accountants......................    49
Todd McCracken, President, National Small Business Association...    58
Matthew Hisel, Co-Director, Home Resource........................    71

                       SUBMISSIONS FOR THE RECORD

National Association of Professional Employer Organizations, 
  statement......................................................    96
National Federation of Independent Business, statement...........    98
Small Business Majority, statement...............................   101
The Center for Fiscal Equity, statement..........................   108


                             SMALL BUSINESS
                      HEALTH INSURANCE TAX CREDIT

                              ----------                              


                       TUESDAY, NOVEMBER 15, 2011

             U.S. House of Representatives,
                       Committee on Ways and Means,
                                 Subcommittee on Oversight,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 10:33 a.m., in 
Room 1100, Longworth House Office Building, Hon. Charles 
Boustany [Chairman of the Subcommittee] presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                       SUBCOMMITTEE ON OVERSIGHT

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
Tuesday, November 15, 2011
OS-8

                Chairman Boustany Announces a Hearing on

               Small Business Health Insurance Tax Credit

    Congressman Charles W. Boustany, Jr., MD, (R-LA), Chairman of the 
Subcommittee on Oversight of the Committee on Ways and Means, today 
announced the Subcommittee will hold a hearing on the Small Business 
Health Insurance Tax Credit created by the Patient Protection and 
Affordable Care Act. The hearing will take place on Tuesday, November 
15, 2011, in Room 1100 of the Longworth House Office Building, 
beginning at 10:30 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing. A list of invited 
witnesses will follow.
      

BACKGROUND:

      
    The Patient Protection and Affordable Care Act (Pub. L. No. 111-
148) (PPACA) included a limited-time tax credit to encourage small 
businesses to provide health care coverage to employees. The Small 
Business Health Insurance Tax Credit (Small Business Tax Credit) is 
available to certain small businesses and covers some of the cost of 
employee health insurance.
      
    The Small Business Tax Credit covers 35 percent of an eligible 
small employer's contribution to employee health insurance premiums for 
each tax year from 2010 to 2013. After 2013, the credit amount 
increases to 50 percent, but a taxpayer may only elect to take the 
credit for two consecutive tax years. The calculation to determine 
eligibility is a complex sliding scale involving employee hours of 
service and wages, along with certain exclusions.
      
    As the costs of health insurance continue to rise, it remains 
unclear whether the Small Business Tax Credit is beneficial to a 
meaningful number of small businesses or whether the Internal Revenue 
Service (IRS) is administering the credit appropriately. Due to the 
complex calculations associated with the Small Business Tax Credit, 
government watchdogs have warned that it leaves room for calculation 
error and opens the door to potential tax fraud. A recent report by the 
Treasury Inspector General for Tax Administration found that only 
228,000 taxpayers took advantage of the credit as of May 2011, despite 
earlier claims by the Administration that four million employers would 
be eligible. The Inspector General also found that the manner in which 
the IRS is administering the credit has created concerns over tax 
compliance.
      
    In announcing the hearing, Chairman Boustany said, ``Much of the 
President's new health care law will be administered by the IRS, and 
this is the first credit provision to come into effect. With small 
businesses hurting from a stalled economy and rising health insurance 
premiums, the Oversight Subcommittee will explore whether the Small 
Business Tax Credit is providing meaningful help to employers or if it 
is opening the door to more improper payments.''

FOCUS OF THE HEARING:

      
    The hearing will focus on whether small business employers are 
currently benefiting from the Small Business Tax Credit, problems they 
may be encountering when calculating the credit, and whether the IRS is 
administering it in a way that ensures tax compliance.
      

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    Chairman BOUSTANY. The Subcommittee will come to order. 
Good morning, and welcome to this morning's hearing on the 
implementation and effectiveness of the small business health 
insurance tax credit.
    Small businesses are the backbone of our economy. They 
account for more than half of America's private gross domestic 
product, and employ about half of its private-sector workforce.
    As our economy struggles to recover from the worst downturn 
since the Great Depression small businesses are bearing the 
brunt of the pain. Consumer demand is down, costs are rising, 
and too often Washington exacerbates the problem through new 
regulations, higher taxes, and burdensome red tape.
    As a former small business owner running a small medical 
practice in Louisiana, I certainly know the challenges facing 
small businesses across this country. And so I take special 
interest in the subject of today's hearing, because I know 
small business owners need real help when it comes to the 
rising cost of health care.
    The problem is worse today than ever before. The cost of 
premiums for family policies have gone up by an average of 9 
percent in the past year, and I've heard complaints of premiums 
for small businesses going up by as much as 43 percent. A 
recent survey by the National Small Business Association found 
that 32 percent of small business owners have held off on 
hiring new employees, due to rising health care costs.
    Today we're here to consider how the small business health 
insurance tax credit has been implemented, whether it is 
effective in reducing health care costs for employers. When it 
was enacted as part of the President's health care overhaul, 
supporters said the credit would provide access to affordable 
insurance, and help small employers insure their employees.
    Two years later, we see that the results do not match up to 
the promises. Instead, it is a convoluted tax credit that 
temporarily subsidizes the cost of employee health insurance in 
a very small number of cases. Employers must undertake 
complicated calculations to determine whether they even qualify 
for the credit.
    The instructions to the form are eight pages long and 
somewhat complex. And, in fact, we have a chart--and I don't 
know--we have a chart on the screen here. This chart shows the 
complex analysis an employer has to undertake before knowing 
whether they can claim the credit, or how much it's worth. If 
employers are able to navigate the calculations and confirm 
they are eligible, they must limit additional hiring and 
employee compensation in order to keep it, oftentimes.
    Although the credit does not appear to be providing 
meaningful assistance to small business owners, it is still the 
IRS's job to implement it, and to do so in a way that protects 
taxpayer dollars from erroneous payments. So, we are here today 
to discuss two critical issues. Is the IRS administering the 
small business health insurance tax credit in a way that 
reduces the risk of erroneous payments and provides necessary 
information to taxpayers? And two, why is the credit then 
ineffective in helping many small employers reduce the cost of 
health insurance, or incentivizing employers not previously 
offering insurance to begin doing so?
    These are important questions, and I look forward to 
today's discussion. And I want to thank both of our witnesses 
for joining us here this morning.
    Before I yield to Ranking Member Lewis, I ask unanimous 
consent that all Members' written statements be included in the 
record.
    [No response.]
    Chairman BOUSTANY. And without objection, so ordered. Now I 
yield to the Ranking Member, Mr. Lewis.
    Mr. LEWIS. Thank you, Mr. Chairman. Mr. Chairman, I want to 
thank you for holding this hearing on the small business health 
care tax credit. In these tough economic times, many Americans 
fear they are just one medical emergency away from losing their 
home, their businesses, or their savings. This tax credit is 
designed as a temporary measure to help small employers afford 
health insurance for their employees. It is the bridge to 
broader reforms that will help small businesses purchase 
affordable, high-quality health insurance in 2014.
    To date, more than 300,000 small businesses have claimed 
and benefited from over $400 million in tax credits to help 
them provide health insurance to employees. Still, some 
question whether the credit is meaningful. Maybe I should 
repeat this. Still, some question whether the credit is 
meaningful.
    It would be a mistake to draw conclusions from the early 
claim number currently available. Many small businesses request 
extensions and file their tax returns in September and October. 
Returns receive in October are still being processed. And, the 
agency does not expect to finish processing these returns until 
December of the end of this year. It is simply too early to 
tell how many businesses will claim the credit.
    Finally, we must also remember that any serious discussion 
of the administration of tax credits must begin with fully 
funding the IRS.
    Today's hearing provides a real-time example of how the 
$600 million in budget cuts proposed by the House Republicans 
may affect small businesses and employees. The Inspector 
General's report states that the agency needs about $24 million 
to administer this credit next year.
    I want to thank the witnesses for being here today, and 
look forward to hearing from each of you. As we have 
successfully done in the past, I would like to work with the 
Inspector General to provide the agency with any additional 
authority it needs to administer this tax credit.
    Mr. Chairman, again I want to thank you, sir.
    Chairman BOUSTANY. I thank the Ranking Member for his 
opening statement. And now I want to welcome our first panel of 
witnesses.
    We have Mr. Russell George, who is Treasury inspector 
general for tax administration, and Ms. Sarah Hall Ingram, who 
is commissioner of the tax exempt and government entities 
operating division of the Internal Revenue Service. I want to 
thank you both for being here today, and to provide your 
testimony. You will each have the customary 5 minutes to 
present your testimony with your full written statement 
submitted for the record.
    And, Mr. George, we will begin with you.

 STATEMENT OF HONORABLE J. RUSSELL GEORGE, INSPECTOR GENERAL, 
TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION, WASHINGTON, 
                               DC

    Mr. GEORGE. Thank you, Mr. Chairman, Chairman Boustany, 
Ranking Member Lewis, Members of the Subcommittee. Thank you 
for the opportunity to testify on the Internal Revenue 
Service's implementation of the Small Business Health Care Tax 
Credit.
    The Patient Protection and Affordable Care Act amended the 
Internal Revenue Code to provide the credit. As noted, the 
credit was designed to encourage small employers and certain 
tax-exempt organizations to offer health care insurance and 
receive a credit for the employee health insurance expenses 
that they have incurred. It took effect January 1, 2010. The 
Congressional Budget Office estimated the credit would cost $37 
billion over 10 years.
    As it pertains to which taxpayers qualify for the credit 
and how to calculate the credit amount, the law is very 
complex. To address this, the Internal Revenue Service issued 
two Notices which set forth detailed guidance on claiming the 
credit, copies of which are included in my written testimony.
    There are multiple steps to calculate the credit and seven 
worksheets that must be completed in order to claim it. These 
worksheets are required to determine the correct amounts to 
enter on 8 of the 25 lines on IRS Form 8941, which is the form 
used to claim the credit.
    Despite IRS efforts to inform over four million taxpayers 
who could potentially qualify for the credit, the volume of 
claims for the credit has been low. Through mid-October 2011, 
the IRS reported that just over 300,000 taxpayers, including 
tax-exempt taxpayers, had claimed the credit for a total amount 
of $416 million. This is substantially lower than the 
Congressional Budget Office estimate, that taxpayers would 
claim up to $2 billion of credits for Tax Year 2010.
    There is a risk of errors occurring when the credit is 
claimed or processed. The credit is new, and both taxpayers, as 
well as IRS employees, will need to educate themselves with the 
procedures for claiming the credit. Our review found that the 
complexity of the rules make them difficult for taxpayers to 
follow. The IRS also had to complete new computer systems' 
programming to update the new Form 8941 and identify potential 
compliance risks.
    While the credit is specifically targeted to small business 
employers, some taxpayers may claim it even when they have not 
filed required employment tax returns. A lack of employment tax 
returns could indicate an erroneous claim and that the taxpayer 
is not an employer. However, it could also mean that the 
taxpayer is using the services of a professional employer 
organization, also known as a ``PEO.''
    PEOs, acting as the employer, file employment tax returns 
under their own Employer Identification Number, and the client 
businesses where the employees work, claim other employment-
related expenses, and the related deductions and credits that 
they paid. This presents a challenge to the IRS to determine 
whether a company which does not file employment tax returns 
qualifies for the credit without corresponding with or auditing 
the company.
    We identified the issues by tracking the relationships 
between the PEOs and client companies in a previous review. In 
that report, TIGTA recommended that the IRS work with the 
Department of the Treasury to explore all options, including 
the use of the revised Form 2678, which is the Employer/Payer 
Appointment of Agent Form, to document the relationship between 
PEOs and their clients. The IRS agreed to establish such links 
between PEOs and their clients. However, their efforts were not 
successful.
    To administer employment tax laws and to effectively use 
scarce compliance resources, the IRS needs to be able to 
identify businesses that begin using the services of a PEO, as 
well as when they terminate those services. Without this 
ability--which, again, the service does not possess--the IRS 
may not take appropriate actions against the businesses that do 
not pay employment taxes or improperly claim credits.
    Some errors and omissions made by taxpayers when claiming 
the credit were not identified by the IRS. Early in 2011 filing 
season, TIGTA auditors evaluated whether tax returns with 
errors were identified by the IRS. The types of errors we 
identified included errors in calculating Full-Time Equivalent 
employees, incorrect application of percentage allowances or 
phase-out rules, missing Form 3800, among others. The IRS was 
not identifying these errors, but has stated to us they are 
taking steps to address this as a result of our report.
    Some errors that the taxpayers made could be addressed with 
the IRS's existing authority to correct mathematical and 
clerical errors, which is known as ``math error authority.'' 
However, the lack of authority for other types of errors could 
hamper the IRS's compliance efforts. This authority could allow 
the IRS to stop credit amounts claimed by taxpayers who do not 
appear to be qualified for these credits.
    Chairman Boustany, Ranking Member Lewis, Members of the 
Subcommittee, thank you for the opportunity to provide TIGTA's 
assessment of the IRS's administration of the Small Business 
Health Care Tax Credit.
    [The prepared statement of Mr. George follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Chairman BOUSTANY. Thank you, Mr. George.
    Ms. Ingram, you may proceed.

STATEMENT OF SARAH HALL INGRAM, COMMISSIONER OF THE TAX EXEMPT/
   GOVERNMENT ENTITIES OPERATING DIVISION, INTERNAL REVENUE 
                    SERVICE, WASHINGTON, DC

    Ms. INGRAM. Chairman Boustany, Ranking Member Lewis, and 
Members of the Subcommittee, my name is Sarah Hall Ingram, and 
I am commissioner of the tax-exempt and government entities 
operating division at the Internal Revenue Service. And I also 
serve as the executive lead for the IRS operational planning 
and implementation of the tax law provisions of the Affordable 
Care Act of 2010. I appreciate the opportunity to testify with 
you here today.
    My purpose this morning is to discuss the credit and what 
actions the IRS has taken and plans to take to help insure that 
small employers that may be eligible for the credit are aware 
of it.
    The small employer health care tax credit is designed to 
help small businesses and tax-exempt organizations afford the 
cost of premiums for health coverage for their employees. In 
general, the credit is available to small employers that 
primarily employ low and moderate-income workers and who pay at 
least half the cost of single coverage for their employees.
    For tax years 2010 to 2013, the maximum credit is 35 
percent of premiums paid by eligible small businesses, and 25 
percent of premiums paid by eligible employers that are tax-
exempt organizations. After 2013, eligible employers will be 
able to take the credit for 2 additional years, and the maximum 
credit will increase to 50 percent for eligible small 
businesses, and 35 percent for eligible tax-exempt 
organizations. I provided further details on how the credit 
works in my written testimony for the record.
    Now, to claim the credit, a small business uses Form 8941 
to calculate the credit amount, and then includes that amount 
as part of the general business credit that it takes on its 
income tax return. A tax-exempt organization, which generally, 
by definition, has no income tax liability, uses the same Form 
8941 to calculate its refundable amount, but then claims the 
credit on Form 990T.
    Because the credit was enacted mid-year in 2010 but was 
effective immediately--in fact, back to January 1--the IRS was 
concerned that not all small employers that might qualify for 
the credit would know about it, and would claim it on their 
2010 return. So the IRS launched a significant outreach 
campaign in the months following enactment.
    In April, to increase awareness in the community, the IRS 
mailed postcards to more than four million small businesses and 
tax-exempt organizations that were identified as potentially 
eligible for the credit, based on the limited payroll data 
maintained by the IRS, which gives a general indication of the 
number of employees and their wages.
    The IRS issued detailed guidelines in May. And based on our 
continuous engagement with the small business and practitioner 
communities, we have regularly added materials and tools to a 
dedicated webpage on IRS.gov, including frequently asked 
questions, multi-language videos, practical tool kits, and even 
a recorded webinar.
    Since the provision was enacted, the IRS has held or 
participated in more than 1,500 outreach events targeted at 
small businesses and the tax practitioners and business 
professionals who serve them, both to increase awareness and 
knowledge in the community, and also to obtain practical 
feedback on our outreach strategies and on our materials.
    The IRS is now developing a new outreach campaign to ensure 
that small employers that are eligible for the credit in 2011 
will know how to claim it on their returns filed for the 2012 
filing season. Based on our experience to date, and feedback 
from the community, this campaign will focus on working with 
our partners and stakeholders, including the tax software 
industry, insurance agents and brokers that work with small 
businesses, and the tax practitioner community.
    The IRS is working to enhance information available through 
IRS.gov, as well as through social media and other venues in 
order to better communicate information to the small business 
community and the professionals who advise them.
    Mr. Chairman, this concludes my oral testimony, and I'd be 
happy to answer any questions.
    [The prepared statement of Ms. Ingram follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Chairman BOUSTANY. Thank you, Ms. Ingram, and I appreciate 
your testimony.
    We're talking about a relatively new tax credit that 
appears to be somewhat complex for the small business owner 
trying to navigate through it. And now we have preliminary 
figures that show that it's not being utilized or claimed to 
the extent that was initially thought would be the case.
    And so, Ms. Ingram, I know IRS has gone through great 
efforts, sending out 4.4 million postcards, holding numerous 
outreached programs, as you outlined, and it's certainly 
detailed in your written testimony. Yet, as of mid-October, the 
figure that we have is 309,000 taxpayers out of a potential 4 
million have taken the credit. And while we recognize it's 
early and we're not finished with the season yet, do you have 
more recent numbers as to who has filed for the claim--or for 
the credit?
    Ms. INGRAM. No, Congressman. The 309 figure is the most 
recent.
    Chairman BOUSTANY. The most recent. What's the cost to date 
to the IRS for the outreach program and for the implementation 
efforts?
    Ms. INGRAM. I don't have figures broken out by this 
provision. We use many of the same people to work on a number 
of provisions. So we would have to reconstruct that carefully--
--
    Chairman BOUSTANY. Okay.
    Ms. INGRAM [continuing]. And provide that followup.
    Chairman BOUSTANY. If you could provide that to the 
Committee----
    Ms. INGRAM. Yes, we will give you what we can.
    Chairman BOUSTANY. I appreciate that. And, Mr. George, I 
think TIGTA estimated that it's been about $29 million that's 
been spent on this?
    Mr. GEORGE. Well, we know that the IRS has requested that 
amount. And to assist my colleague here, they've expended over 
$1 million in the effort to inform the potential eligible 
taxpayers about this tax credit. But again, they have requested 
over $24 million to help implement this credit.
    Chairman BOUSTANY. Thank you. And, Ms. Ingram, TIGTA's 
report noted that the IRS has asked industry groups and 
professional organizations to determine why businesses are not 
taking the credit. Does the IRS engage in similar outreach 
programs, and for other types of tax credits? For instance, an 
R&D tax credit?
    Ms. INGRAM. We have a fairly continuous process of talking 
to the practitioner community or industry associations about 
how their understanding and implementation of provisions are 
that affect that particular group.
    Whenever we have new provisions coming into the tax laws, 
we do take opportunities to try to get focused feedback, both 
about the level of awareness, and anything we can do to assist 
people in either understanding whatever the provision is, or 
improve our tools so that they can take advantage of them.
    So, for example, in our summer tax forums, which is a 
practitioner--gathering of tax professionals every summer 
across the country, we do focused feedback sessions with 
practitioners to get at that kind of information.
    Chairman BOUSTANY. Thank you. And does the IRS want math 
error authority for this particular tax credit? And if not, 
why?
    Ms. INGRAM. We engaged in some good conversations with the 
TIGTA audit team about how the current math error authority or 
augmented legislative math error authority could be used in 
this setting. And we have shared those conversations with the 
Treasury Department, who is looking at ways in which there 
might be some policy choices around this credit.
    Chairman BOUSTANY. Thank you. And is there some concern at 
this stage--this tax credit was proposed as a means of helping 
to mitigate the high cost and rising cost of health insurance 
premiums for small businesses, which are under tremendous 
pressure right now.
    And my sense is, based on testimony I've read and other 
reports, that this tax credit is not achieving that goal of 
helping to bring down those costs, and helping, you know, small 
businesses to provide health insurance for their employees. Is 
there a concern right now at the IRS, or are you just focused 
now on purely the administration of this tax credit?
    Ms. INGRAM. Well, the analysis about the policy and 
economic impact would be better addressed to the Treasury 
Department. My role is to take what we have and implement it as 
well as possible. And, as I mentioned, my two goals are to 
educate the community and get them what they need, and listen 
to them about what they need, and then to make sure that what 
gets filed is an appropriate claim for the credit.
    Chairman BOUSTANY. Mr. George, in the TIGTA report on IRS 
efforts to implement this tax credit, you discuss problems with 
tracking employees when employers use professional employer 
organizations. I read your written testimony with great 
interest on this. And can you explain what the problem is with 
regards to this particular tax credit, and how the IRS could 
potentially fix this particular problem?
    Mr. GEORGE. Yes. Again, in effect, the IRS has--or there 
are entities called, again, PEOs, which are outsourced to by 
small businesses and the like, so that certain aspects--
accounting, you know, leave, medical leave, what have you, 
these businesses will take over those responsibilities for a 
small or, you know, individual practitioner to help alleviate 
that burden from that person, and they will be paid a fee. The 
PEOs will be paid a fee.
    And so, the problem is there is a disconnect between what 
the IRS knows and doesn't know, as to who is actually paying 
the employee taxes and the various taxes, as they relate not 
only to this credit, but to other credits. And we recommended 
in a report over two years ago that the IRS, seek legislative 
help from the department--because it is the department who has 
responsibility for developing tax policy--and to address better 
ways in which the IRS could develop processes, internal 
processes, to match the various Employee Identification Numbers 
between the PEOs and the organizations with which they 
contract.
    And for some reason, which--I will defer to the IRS--that 
hasn't been done. And had that been done, it would assist not 
only in the implementation of this particular credit, but in 
others.
    Chairman BOUSTANY. Before I turn to the Ranking Member, Ms. 
Ingram, do you want to respond to that?
    Ms. INGRAM. The issue of how to handle professional 
employee organizations has been a matter of discussion as we've 
tried to work through the extent to which what is needed is 
legislative change, and to the extent what is needed is changes 
in systems and forms.
    I don't think that we have any difference of philosophy 
about what would be advantageous. I think as we work through 
the logistics of what we can do administratively, in addition 
to sharing analyses with the Treasury Department, we continue 
to welcome all of the advice we get from TIGTA about ideas of 
how to do that.
    There were some additional ideas in this report, and we're 
working on those now, and I assume we will have further dialog, 
in case we have questions about TIGTA's advice.
    Chairman BOUSTANY. So, are you confident that that can be 
fixed?
    Ms. INGRAM. The----
    Chairman BOUSTANY. Without legislation?
    Ms. INGRAM. We could do some things. We have to make sure 
that we're not burdening legitimate arrangements, and that we 
do it in a way that enables us to check what we need to check 
without being burdensome on people who are otherwise just 
following the rules just fine.
    So I think those logistical issues we want to continue to 
work on internally.
    Chairman BOUSTANY. Thank you. Mr. Lewis.
    Mr. LEWIS. Thank your, Mr. Chairman. Commissioner Ingram, I 
believe it is too early to draw any conclusions about the 
credit. Commissioner, many businesses request extensions and 
file their returns in October and November. Is this correct?
    Ms. INGRAM. Yes, they do.
    Mr. LEWIS. When will the agency finish processing these and 
other tax returns?
    Ms. INGRAM. As you stated earlier, sir, it's toward the end 
of the year that we would finish processing and posting the 
returns all the way through the season. In fact, today is the 
last day that the exempt organizations could file and claim 
those credits. So, they would--returns are still coming in for 
this credit. It will be the end of the year.
    Mr. LEWIS. Commissioner, early data show less than 5 
million business returns have been processed through mid-
October, and that over 10 million business tax returns were 
processed in 2010. Is this correct?
    Ms. INGRAM. I don't have the figures directly with me, but 
I believe--the difficulty with those figures is that it depends 
on which returns you look at, if you look at 1120s and 1120Ss 
and 1065s, or whether you also include the 1040 returns that 
include schedule C's and the other schedules that indicate 
business activity. So I would prefer to respond afterward, with 
a full set of data.
    Mr. LEWIS. Thank you. With respect to small corporations, 
the so-called, I guess, S-corporation, early data show that 
less than 2 million returns have been processed through mid-
October, and that about 4 and a half million returns were 
processed in 2010. Do you believe this to be correct?
    Ms. INGRAM. Again, I'd like to make sure I can confirm that 
after the hearing.
    I think what is true is that the partners in flow-through--
the recipients of flow-through adjustments like this credit, if 
they're filing on extensions, would go to October 15th. And the 
data that we were able to pull for the request for this hearing 
would not include everybody who had filed on the October 15th 
date, for a variety of reasons, whether they came in on paper, 
or whether they were in the queue for posting and processing. 
So it is an incomplete data set at this point.
    Mr. LEWIS. Commissioner, so with less than 50 percent of 
business returns processed through mid-October, is it too early 
to know how many businesses will claim the tax credit this 
year?
    Ms. INGRAM. It is definitely too early to know how many 
total claims we are going to get. And, as I mentioned, although 
the tax-exempts are a very small portion of this picture, their 
deadline is not even until today. So, yes, we do not have final 
numbers.
    Mr. LEWIS. Thank you very much. Mr. Inspector General, what 
grade would you give the Service on its outreach effort for the 
health credit? If you had to give a grade right now, this 
moment.
    Mr. GEORGE. Well, if I may, sir, answer the question in the 
following manner, the overall implementation of this credit by 
the IRS, we would give them a B to a B+. We think they have 
done an effective job implementing the credit, reaching out to 
people, and changing the computer processes that are needed to 
be changed to help accommodate it.
    Again, the challenge is the complexity of the law itself. 
And so that is a different issue. But overall, we would--I 
would give them a B, B+.
    Mr. LEWIS. Mr. Chairman, I am concerned that the proposed 
Republican budget cuts would hurt taxpayer service such as 
outreach efforts, compliance, and enforcement.
    Without objection, I would like to enter into the record an 
October letter from the Commissioner that provides an example 
of how the budget cuts would hurt small businesses.
    Without objection, I would also like to enter into the 
record the Commissioner's November notice to employees 
announcing an early out, or buy-out program.
    Chairman BOUSTANY. Without objection, both will be entered 
into the record.
    [No response.]
    [The information follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. LEWIS. Mr. Inspector General, in your testimony before 
this Subcommittee in September, you stated that the Service had 
limited resources to examine claims after energy tax credits 
had been paid. Does this statement apply to the health care tax 
credit?
    Mr. GEORGE. It does, sir. I mean the IRS--one of the 
previous commissioners of the IRS used to use a formula of 
customer service plus enforcement equals compliance. And that 
theory still exists today. That concept, I believe, is still 
accurate now. For the IRS, it is almost a zero-sum gain. They 
have limited resources. They have to make a determination as to 
whether they are going to focus on this aspect of their 
responsibilities or that aspect. So, whether it is customer 
service, or whether it is enforcement.
    And so, yes. Unless there are additional resources, a cut 
in their appropriations would adversely impact their ability to 
do their job.
    Mr. LEWIS. Thank you. Thank you, Mr. Chairman.
    Chairman BOUSTANY. I thank the Ranking Member. Ms. Black.
    Ms. BLACK. Thank you, Mr. Chairman. And I want to go back 
to the issue of the supporting documents. The chairman started 
to explore the documentations with the PEOs. But while many 
credits do not require supporting documentation to be submitted 
to the IRS, the small business tax credit appears to be 
especially complicated. And despite the fact of this 
complication, what, I think 8 pages that they need to fill out 
since $435 million in credits have already been claimed, and 
the IRS does not require filers for the small business tax 
credit to provide documentation to support their claims.
    Would additional documentations--this question is for you, 
Ms. Ingram--do you believe that additional documentation would 
help the IRS to administer the credit and prevent any erroneous 
payments?
    Ms. INGRAM. Well, Congresswoman, we're always looking for 
ways to prevent or reduce erroneous payments. It is important 
to remember about this credit that the credit that is available 
to small businesses is one of many credits that fall into the 
general business credit category. And those are not refundable 
credits. And we do not ask for attached documentation in most 
instances. And compliance is generally quite high.
    Where we are worried, particularly on the refundable credit 
side, we sometimes do ask for additional documentation. We did 
that with the adoption credit this year, because of the timing 
of having--when we could implement that.
    On the refundable side of this credit, which is what the 
tax-exempt organization small employer could get, we have not 
asked for additional documentation but we have put in 
additional filters that are particularly suitable for a 
refundable credit. So on the--where the risks are higher with 
refundable credits. And we do freeze those refunds and 
correspond, as needed, with that taxpayer.
    But more than 95 percent of the credits claimed--at least 
as far as we can tell at this point--are being claimed by the 
taxable small employers, and that is one of the many credits 
that goes into the general business credit.
    Ms. BLACK. So you don't feel that you need any legislative 
authority to go further with any additional documentation. You 
have all the authority you need right now, if you see that 
there is a need for additional documentation?
    Ms. INGRAM. I think we have--yes, I think we have the 
authority if we wanted to ask for more documentation. But we 
are also very mindful that additional documentation, in 
connection with the return itself, changes the dynamics around 
electronic filing, it can add burden to the compliant taxpayer.
    And so we try to use that very carefully, particularly when 
we don't have information that shows that we have a real 
compliance problem, or where it is the type of credit or the 
type of refundable credit that might indicate a higher risk, 
and the need to do that. So, we try to balance those, those 
things.
    Ms. BLACK. Mr. George, could you also weigh in?
    Mr. GEORGE. Yes, thank you. As you are well aware, 
refundable credits are available to people, even--whether or 
not they have a tax obligation. And as Ms. Ingram indicated, it 
is the tax-exempt community in this instance that has access to 
this credit on a refundable basis.
    We have estimated that there are over $36.4 million in 
refundable credits that have been requested thus far, using 
this credit, and that overall, the non-business, so the non-
refundable credits, are at around $379 million.
    I believe that additional information can be helpful, if it 
is used. The IRS requests a lot of information that it does not 
necessarily utilize. And so I share Ms. Ingram's concern about 
overburdening taxpayers unnecessarily. But at the same time, 
again, any information that can help stem inappropriate 
requests, improper requests for the credit, that--will help the 
IRS better do their jobs.
    Ms. BLACK. Thank you. I yield back my time.
    Chairman BOUSTANY. Mr. Becerra, you are recognized.
    Mr. BECERRA. Thank you, Mr. Chairman. And to the two of 
you, thank you very much for the update on the information.
    We could get very technical sometimes, and when you go into 
the weeds you lose a lot of folks. But at the end of the day, 
what we are talking about is trying to figure out how to make a 
tax credit that is going to small businesses who offer health 
care to the employees work. And we need to get the information 
out there, because it is a new tax credit. These small 
businesses that have been filing taxes didn't have this before. 
Many small businesses are making decisions on whether or not to 
offer to their employees health insurance to begin with. And 
sometimes these small businesses are trying to file their taxes 
without a lot of professional help, because it is expensive to 
get professional help.
    And so, it is good that we are doing a hearing. But 
Commissioner Ingram, as we have just heard, we can't make--or 
can't reach--conclusions yet without all the information to 
know how it is working best, where we can make changes. And I 
think, Mr. George, you would agree that once we have the full 
set of data that help us understand how this credit has worked 
so far, you can then come back to us and really give us some 
concrete ideas of how to make it work best.
    This, at the end, is a bridge. This tax credit is a bridge 
to get us to the point in 2014 when we have the full 
implementation of the historic health care reform, so that 
small businesses will be able to offer to their employees real 
health insurance.
    Now, I just wanted to check on something. Small businesses 
are paying, on average, for health insurance for their 
employees, for an individual employee, something in the order 
of $5,300 a year. And if that employee has a family, and if the 
business offers an insurance policy for the family, it is about 
$14,000 a year. That is a chunk of money that a small 
businessman or woman who is trying to survive a business is 
making, in terms of a commitment to his or her employees.
    And I think all of us applaud a small business man or woman 
who figures out a way not only to make a profit, but at the 
same time to offer decent affordable health care to their 
employees. So this tax credit, which gives them some assistance 
to be able to offer that, or to keep offering that health 
insurance, is something we should try to really make work well. 
And so we thank you for your testimony.
    But my concern is this. And, Commissioner Ingram, you know 
this directly, because you work in the IRS under the 
Commissioner. If the Commissioner is sending us a letter 
essentially saying, ``The budgets you are sending us don't give 
us a chance to do the outreach, don't give us a chance to do 
the enforcement''--sometimes the enforcement brings to the 
American taxpayer savings of $7 on every dollar of enforcement 
we spend, because we are able to go after the tax cheats and so 
forth--that we do more harm for programs like this tax credit 
if we don't give you the ability--which I think Inspector 
General George would agree is necessary for you--to police the 
activity of this new tax credit.
    And so, let me paraphrase what the Commissioner said in a 
letter recently to Congress. Cuts of the magnitude in their 
budget contemplated in the current appropriations bills would 
lead to noticeable degradation of both services and 
enforcement, and would have a serious detrimental impact on 
voluntary compliance for years to come. He goes on to give some 
specific examples of how this would hurt small businesses if we 
don't provide the IRS the funding it needs to do its work 
properly.
    And so, I hope what you will do is let us know what 
resources you need, one, to make the credit less complicated; 
two, to do effective outreach to make the credit work for those 
small business men and women; and three, let us know what 
resources you need to not have this impact the work that you 
have to do not just on this tax credit for small businesses, 
but for everything else you have to do to make sure that those 
who are willing to voluntarily comply with the Tax Code do so 
in a way that isn't harmful to them.
    It is hard for me to ask you a lot of questions, because 
the data you have is incomplete. But I do appreciate that you 
are willing to give us an update, and point out some of the 
areas where we can try to help you make this work. But I would 
hope that what we don't do is make it harder for a business 
that right now is willing to offer health insurance to its 
employees at a time when times are so tough. We make it more 
difficult for them to take advantage of a tax credit that was 
meant to help them offer to American people who are working a 
chance to get decent, affordable health care.
    And so, I appreciate your being here. I look forward to 
hearing from you again, once we have the complete data and can 
make some real judgements about the program.
    So I thank you, Mr. Chairman, for holding this hearing, and 
I thank the witnesses for having been here.
    Chairman BOUSTANY. Thank you, Mr. Becerra. Ms. Jenkins.
    Ms. JENKINS. Thank you, Mr. Chairman. Thank you for holding 
this hearing, and thank you both for being here.
    Proponents of the tax credit claim that it has been 
designed to provide an incentive to small businesses to offer 
health insurance to their employees. However, according to the 
Small Business Administration report released in September, 
this credit will primarily benefit those businesses that 
already offer health insurance.
    So, for both of you, from your experience with this credit, 
is there data available that could tell us whether the tax 
credit is being used by small businesses that otherwise have 
not offered health care? And do you have any data on the amount 
of small businesses--those with 10 or fewer employees--that 
offer health insurance coverage to their employees?
    Mr. GEORGE. Actually, I do not at this time, Ms. Jenkins, 
have that information.
    Ms. INGRAM. At the IRS we don't have a good way of knowing 
who already offers health insurance. So the data question isn't 
one that we can really help you with at this point.
    I think the key is when we go out and we ask people what 
their experience was in the first filing cycle, one of the 
things they mention is that because the act was passed in 
March, or toward the end of March, that many of them had 
already locked in to their health care decisions, because they 
tend to make--in the industry they tend to have calendar-year 
health packages for their employees if they have health care.
    So, what we have been told by small businessmen is that 
even if they don't have health coverage today they will 
consider it. But we don't' have any data that would be 
responsive to your question.
    Ms. JENKINS. Okay. Well, thank you. If data becomes 
available, I hope you will share it with us.
    And Commissioner Ingram, the IRS agreed with TIGTA that the 
use of professional employer organizations pose a problem with 
regard to the small business tax credit, and it appears that 
this is a long-standing problem for the IRS. How do you intend 
to address the problem with regards to this credit?
    And, given that it is really not a new problem, are you 
confident you can resolve the issue so that the IRS can 
properly link employers and their employees?
    Ms. INGRAM. Well, Congresswoman, I always get a little 
nervous about getting too specific about methodology of finding 
problems, because I don't wish to give anybody any ideas. But 
in the conversations with the inspector general's team, and in 
the suggestions made in some recent reports as well as in this 
one, we are looking closely at what we could do 
administratively to make the kind of connections and the kind 
of crosswalks that Mr. George has mentioned.
    There are a lot of ideas, and we are working through the 
logistics of each one. I would say most of them cost money, and 
we need to do it efficiently. And we also, as I mentioned 
before, need to do it in a way that doesn't throw taxpayers who 
have no problem into a filtering system that creates work for 
them.
    So, I think there are some things we can do. We are working 
on the logistics and the ideas that we continue to throw back 
and forth between our teams.
    Ms. JENKINS. Okay, thank you. Inspector General George, 
this hearing was designed, I think, to highlight the complexity 
of the tax credit as a key factor as to why small businesses 
maybe have not raced to embrace the credit. This is despite 
TIGTA's findings that the IRS made extensive efforts to 
implement the credit. And I think our next panel, we are going 
to hear from small business men and women about the burdens 
that they are dealing with.
    But I am just curious, Mr. George. This tax credit also 
puts an administrative burden on already scarce resources for 
the IRS. So can you elaborate on the amount of time and effort 
the IRS has devoted to administrating this credit, and if you 
have any ideas on what we can do to simplify it?
    Mr. GEORGE. Yes. I would just simply elaborate on a point 
that I embraced earlier. When I made reference to the IRS 
expending $1 million trying to alert people as to the 
availability of the credit, that $1 million was spent simply on 
sending 4.4 million postcards to taxpayers. So that was just 
the start of this.
    Again, they have requested almost $25 million in the most 
recent appropriations to help implement this credit. And I 
would simply note also again--this goes back to an earlier 
point that you raised--the IRS did a lot of focus groups. They 
did good outreach to people. And a lot of the responses that 
they received was that this is such a complicated credit in 
which to implement, that a lot of their customers were 
uncertain as to whether the cost benefit analysis really paid 
off for them.
    Ms. JENKINS. Just to clarify, so have we requested nearly 
$25 million to implement a credit that in 2010 was supposed to 
cost $2 billion?
    Mr. GEORGE. That is my understanding, but I think I would 
defer to Commissioner Ingram for the exact figure.
    Ms. INGRAM. The President's proposed budget had about $24 
million--something like that--in it, which was requested in 
order to work on the examinations coming out of the first 
cycle, as well as to work with the second cycle of filings. It 
also was to cover the work around the adoption credit which, as 
I mentioned earlier to Congresswoman Black, was--did involve 
additional documentation and a much different process.
    Ms. JENKINS. Okay, thank you. I yield back.
    Chairman BOUSTANY. Dr. McDermott.
    Mr. MCDERMOTT. Thank you, Mr. Chairman. I am pleased that 
we are having a hearing, but I am not quite sure of the value 
of it, because I learned very early--I think it was in geometry 
in about sixth grade--that with one point you can't draw a 
line. You have to have two points or three points or four 
points. And the only points we have are 228,000 and then 
309,000, which looks like things are going up. So I think that 
it means that more people are taking advantage of this.
    But what I am struggling with is trying to figure out how 
do you get a credit like this known by the small business 
people in this country. These are people with 25 or less 
employees and their employees are paid less than $50,000, on 
average. And they are struggling to keep it together in the 
worst economy in years. And so they get a card.
    Now, I don't know how many people have ever received a card 
from the Federal government that they didn't pay total 
attention to. Or, how many of you received a political brief 
from somebody on a card that you didn't pay total attention to? 
But you send out four million cards.
    Now, I understand that you sent them to businesses under 25 
employees, and average salaries of less than 50,000. But you 
had no data about who had or who was offering health insurance. 
Is that correct?
    Ms. INGRAM. That is correct.
    Mr. MCDERMOTT. So, a tax credit aimed at people who are 
offering a tax credit, and one that is in the middle of a year, 
they are going to get a card in July. People are saying, ``What 
am I getting a card in the IRS in July about?'' Because this 
says something about tax credits. ``I am not filing until 
January,'' or whatever.
    Give me a better design to get it to the people who would 
benefit from it. Because it defies my understanding of why 
somebody wouldn't want to figure it out if they could save 
money, if they could get 35 percent back of their premiums that 
they have paid, why wouldn't they apply for that?
    I mean what should have been done to make it better? How 
would you make it simpler--help us.
    Mr. GEORGE. Well, Mr.--if I may?
    Ms. INGRAM. Go ahead.
    Mr. GEORGE. Thank you. The community which, for the most 
part, would take advantage and be involved in this credit is 
such that they most likely would use tax preparers. And so, it 
would have behooved the IRS to focus their efforts on reaching 
out to tax preparers, the tax preparer community, and they have 
done that.
    But, that focus, whether it is through the national tax 
annual programs they put around the country, or through more 
directed mail to groups that represent tax practitioners--the 
National Association of Tax Preparers and the like--to help 
spread the word, there could have been much more of a targeted 
approach here, I think, that would have helped address the 
question you are raising.
    Ms. INGRAM. Yes. I think that one reason we turn to the 
postcards, any time there is a new piece of legislation and--
that is immediately effective, and we are worrying about how do 
people, A, know about it in the first place, and then who is--
who needs to know detailed information about it and how to do 
it, and so forth, we have tended in the small business 
community to look at--the small businesses need to be aware, 
but they tend to turn to their practitioners and advisors to 
solve it for them. So, we have received anecdotes of 
practitioners telling us, ``Yes, my client brought me the 
postcard.''
    So we tried to do a two-prong track during 2010 to get both 
of those needs addressed, both awareness and the professional 
ability to assist their clients in figuring out what they 
wanted to do as a business. Because some of those decisions 
needed to happen during that year, we were anxious to do that 
outreach ahead of what we might normally do with the filing 
season cycles, and that is why we acted----
    Mr. MCDERMOTT. Okay. So in about a month or 2 months, we 
are going to start a new filing season. And all the filers, now 
all the preparers, will have had 2 years to know this exists. 
Is that correct?
    Ms. INGRAM. They have been through one cycle and be 
starting their second cycle.
    Mr. MCDERMOTT. They will be starting their second cycle. 
And they will have had at least one notice from you. Have they 
had any further notices about the fact that this tax credit 
exists?
    Ms. INGRAM. We haven't done direct mailings of the same 
kind, but we have tried to be very visible out at conferences 
and programs. We have tried to do cost-effective tools like 
webinars for busy practitioners and small business men who have 
trouble taking time away to go to a conference, and we have 
tried to increase the kinds of materials from alert flyers, all 
the way to how-to kits that are available for practitioners to 
use themselves or with their clients.
    This evolution of the materials that we have been 
developing and the outreach we have been doing is very much in 
response to the feedback discussions that we have had with 
small businesses themselves, as well as with the practitioner 
groups.
    So the advice that we have received, consistent with what 
Mr. George said, was, having done the awareness to a certain 
point, to turn to the professional channels and focus on tax 
practitioners, those assisting businessmen in decisions around 
insurance products, and the software industry, to see if 
through tools like different software or different return 
filing mechanisms, things could be made more clear and easier 
for the businesses themselves.
    So, that is our shift from the first filing cycle to the 
second filing cycle to try to reach the right people and 
leverage that.
    Mr. MCDERMOTT. So we need another hearing at another time 
to find out the results of your efforts.
    Ms. INGRAM. Whenever you would like to ask me to come, sir.
    Mr. MCDERMOTT. Thank you, Mr. Chairman.
    Chairman BOUSTANY. I thank the gentleman. Mr. Marchant.
    Mr. MARCHANT. Thank you, Mr. Chairman. We are all going 
through tough economic times now. We are trying to reduce the 
Federal budget, the spending cuts. That is what we have been 
sent to Washington to do. In these hard economic times, all of 
the government has to find a way to work more efficiently. And 
the IRS will be no exception.
    What is the IRS doing on trying to stop fraud on this 
particular credit that is being requested? Ms. Ingram.
    Ms. INGRAM. We have a two-prong approach, sir, on this 
credit. One is designed around the non-refundable credit, the 
one that is going to more than 95 percent of the people 
claiming the credit, the business side, and an augmented 
methodology that we are using on the refundable credit side 
with the small exempt organizations or employers.
    All the returns go through certain kinds of checks that are 
the same for both groups. And these involve filters and checks 
that are a comprehensive set developed based on all of our 
experience with other kinds of credits, including advice that 
we received from people like TIGTA and GAO.
    And then, on the refundable side, we add certain additional 
filters that might be particular to that type of community, 
that type of group, because those--with the refundable side, we 
are pulling before payment is made.
    Mr. MARCHANT. Yes, sir.
    Mr. GEORGE. Mr. Marchant, if I may, again, while they are 
doing yeoman's work in certain areas, this is an Achilles heel 
for the Internal Revenue Service. If they don't address 
problems--and especially in the refundable credit area--at the 
outset, during the processing of it, the moment the credit goes 
out the door it changes the dynamic of the situation entirely, 
in that it costs much more to try to recover dollars that have 
already been sent out the door than it would to prevent them 
from going out in the first place.
    And so, again, while this is a tax policy issue, and we 
touched on this earlier, if they could buttress up their math 
error authority policies in both this area and elsewhere, that 
would allow them to prevent--make corrections to tax forms 
before they go out, as opposed to having to subsequently audit 
and/or reach out to organizations and individuals who 
inadvertently received or erroneously received tax credits.
    Mr. MARCHANT. With the time I have left, the biggest 
concern I have about this tax credit was when the 
Administration was selling this affordable health care act to 
the public, millions of small businesses heard the message that 
they were going to get a tax credit, they were going to benefit 
if they provided health care for their employees. Yet when we 
are given an explanation of this tax credit and given this 
chart, I don't know of a small business in my district that 
would look at this chart and say that this is a simple tax 
credit.
    And my biggest concern is that the compliance, the cost 
that it would take for a small business to employ an accountant 
to simply navigate through this chart and navigate through the 
qualifications, in many cases, would far outstrip any savings 
that they would get from the credit. So I think it is a 
testament to the complexity of this, the Code, to say that 4.4 
million people were told, ``You might qualify by it,'' and 
309,000 claimed it.
    Do you--have you figured out what the average tax credit 
issued to an applicant that takes advantage of it is, Ms. 
Ingram?
    Ms. INGRAM. I tend to be somewhat allergic to raw data, but 
it is several thousand. And it depends very much on the 
situation of that small business. I have heard from small 
businesses that they received 5,000, and I have heard from 
small businesses that it has been smaller. So it very much 
depends on where they land, in terms of their size and the 
kinds of premiums that they pay.
    Mr. MARCHANT. Thank you very much.
    Chairman BOUSTANY. Mr. Paulsen.
    Mr. PAULSEN. Thank you, Mr. Chairman. And thanks for 
holding this hearing. It is pretty clear from some of the 
discussion testimony this morning that you have a tax credit 
that small businesses were probably primarily hoping to take 
advantage of, and it is obviously the folks that are taking 
advantage of it or using it is substantially lower, or 
significantly lower--surprisingly lower--than was ever 
expected, about 8 percent of those that are eligible.
    I know we are going to hear from some folks in the next 
panel that will be able to talk a little bit about why that 
might be the case, but I want to dive a little bit deeper. And 
I assume a lot of it is about the complexity, but I do want to 
follow up a little bit and ask this question. Because it does 
seem that it is the burden perspective that is one of the 
reasons why companies are not participating in it.
    And I just--I remember I spoke to one small manufacturing 
company in my district about health care in particular, and to 
its credit this company does provide health insurance for its 
employees. And like many companies, this company is seeing its 
health insurance rates go up. But I think the reaction that I 
heard from the leaders that I talked with at the company when 
they say, ``Look, we are covering our health care costs, we 
wish Congress would address the cost issue, but we are not 
going to participate in any of the potential benefits in the 
new health care law, because we are not convinced it is worth 
the time and the effort to participate in these potential 
benefits.''
    And so, I mean that is of concern. I think it adds to the 
whole factor of uncertainty and how companies are investing in 
their people and in their equipment in the down economy.
    But let me do this. Let me ask this question, because we 
talked a little bit about fraud and accuracy. I want to dive a 
little bit deeper. Mr. George, in the report on the IRS efforts 
to implement the small business tax credit, you discuss the 
problems with tracking employees when employers are using these 
professional employer organizations. Can you explain a little 
bit about exactly what the problem is in regard to the credit, 
and how the IRS can fix the problem for--when these 
organizations are actually used?
    Mr. GEORGE. Yes. One of the points that I raised earlier 
was simply having the IRS have the ability to cross-check the 
Employee Identification Number between the PEO, the 
Professional Employer Organization, and the entity which they 
are representing.
    Now, I don't know whether or not the commissioner thinks 
that the IRS needs legislation in order to accomplish that. But 
again, we recommended that over 2 years ago in a report that 
related to this.
    Going back to your point about complexity, sir, what we 
have found in our study of this matter is that the taxpayer, in 
order to take advantage of this, has to determine which 
employees may be counted for credit purposes, what constitutes 
a qualifying arrangement, determining the number of FTEs for 
the purposes of the credit, determining the annual wages for 
purposes of the credit. The premium payments for purposes of 
the credit are capped, so they have to make sure that they 
don't exceed that. The phasing out of the credit, if the number 
of FTEs exceeds 10, and the average amount of wages exceeds 
$25,000, as you pointed out, and then the effect that state and 
local credits have on the overall issue. I mean that is a 
factor that needs to be taken into consideration.
    So, I know there--this is an extraordinarily difficult 
credit to implement. Very few people would be able to do it 
without the help of professional preparers. But I will, again, 
yield to the commissioner.
    Mr. PAULSEN. Well, and let me just--because it sounds like, 
okay, there is complexity, obviously. But if the math is 
correct on the form, the company could be complying from the 
math perspective but there could be erroneous--not fraud, 
potentially, but erroneous reporting based on these 
professional service organizations that may be employing the 
individuals, rather than the true small business.
    And so, I mean, how do you get away from doing an actual 
audit? You know, Ms. Ingram, Commissioner Ingram, how do you 
get away from doing an actual audit? Does the IRS plan to audit 
more companies, more businesses? And, in particular, now that 
tax-exempt entities are eligible for this credit taken against 
income, which has not been a practice in the past, from what I 
understand, with other credits, I mean, does the IRS plan to 
audit and increase audits for tax-exempt entities?
    Ms. INGRAM. Well, one of the interesting things on the tax-
exempt entity side is, because that is a refundable credit and 
we have additional filters involved, we have been very 
interested in what kinds of folks are getting kicked out by 
those filters.
    And so, learning from the profile, the demographics of 
which organizations seem to be hitting filters on that side has 
been important for us to monitor and to figure out how to tweak 
or cross-check those filters to make sure that we are getting 
the folks who do appear to have a reason that we should 
correspond with them prior to payment, and those which are 
getting caught up, and which we could resolve without contact.
    A good example would be--is if you were going to check 
certain databases about an exempt organization, you might find 
that a church that has no requirement to apply to be exempt, 
nor a requirement under the statute to file an annual return, 
might get kicked out and yet is filing an employment tax return 
and has the right range of employees and wages.
    So, that is a good example of kick-outs where we want to 
look at what is getting kicked out, and make sure that we are 
calibrating it to fit what really needs to be pursued----
    Mr. PAULSEN. And, Commissioner, I know my time is just out. 
But can you just tell me, so does the IRS intend to do 
increased audits of tax-exempt entities as a part of this now?
    Ms. INGRAM. If a tax-exempt entity has claimed a credit 
that we can't be comfortable with, we will correspond with them 
prior to payment.
    Chairman BOUSTANY. Mr. Kind.
    Mr. KIND. Thank you, Mr. Chairman. I appreciate you holding 
this important hearing. Hopefully, we will have another 
opportunity at some point to reconvene and have another hearing 
and an update because I think, in a lot of respects, it is a 
little premature. Obviously, the credit didn't take effect 
until last year. The Affordable Care Act didn't pass until 
March of last year. We are still waiting to see all the small 
business filings coming in, and the impact, who is going to 
take the credit. So, in some respects, it is a little bit 
premature.
    But let's get to the complexity a little bit, because I 
think we all have a shared goal. When you take a look at the 
number of uninsured individuals in this country, the vast 
majority of them are working people in small businesses. In 
fact, for small businesses the size of three to nine employees, 
less than half of them are offering health care coverage for 
their employees today.
    So, if we are going to be serious at all about trying to 
attack the number of uninsured, you have to do something to 
deal with small businesses to make it more affordable. And that 
is why, in previous years, there has always been bipartisan 
support for providing tax relief to small businesses and 
providing health care coverage for their employees. That is 
what we are trying to attempt here.
    Now, if there is a problem with complexity, let's address 
that and come up with some recommendations on what we can do to 
tighten it up and make it less complex. That is what I hope we 
can try to accomplish at a hearing and the feedback that we are 
getting.
    But, Mr. George, based on your study and analysis of the 
credit so far, have you offered any recommendations on how to 
simplify the tax credit to deal with the complexity that is out 
there right now?
    Mr. GEORGE. Again, it is the Secretary of the Treasury that 
has delegated substantive tax policy to the Office of Tax 
Policy. And so, I am not here to advocate any particular----
    Mr. KIND. Right.
    Mr. GEORGE [continuing]. Substantive tax policy. That said, 
something as simple, again, as math error authority, expanding 
it----
    Mr. KIND. Sure.
    Mr. GEORGE [continuing]. So that--to keep the IRS from 
having to send out money when they know there is a problem, and 
yet they don't have the authority to keep that money from going 
out, which would be a simple solution to this.
    Mr. KIND. I am talking from the employer's point of view, 
trying to simplify so that it is easier for them to take 
advantage of the tax credit.
    Mr. GEORGE. Well, when you----
    Mr. KIND. Are there any recommendations that you have 
there?
    Mr. GEORGE. Well----
    Mr. KIND. Ms. Ingram, has IRS been looking at this at all, 
as far as steps that we could take to try to simplify it, or 
can IRS do it on your own?
    Ms. INGRAM. I think that what we have to do, from our 
perspective, is look at whether we can simplify forms, simplify 
instructions, get better how-to kits in people's hands, help 
them with decision trees to reduce the number of questions they 
need to ask themselves.
    Many of the portions of the provision are getting at more 
complicated business arrangements, and not everybody needs to--
--
    Mr. KIND. Right. Well, Ms. Ingram, just for the sake of 
clarification now, it is not mandatory that a taxpayer complete 
the worksheets and the instructions in order to claim the tax 
credit. Is that right?
    Ms. INGRAM. Absolutely.
    Mr. KIND. Now, just so I am clear--and I have my own 
calculator on my website for small businesses to plug in 
information to see what they could qualify for under the tax 
credit--check me if I am wrong, but is it basically three 
pieces of information a small businesses owner is going to need 
or provide the accountant in order to take advantage of the tax 
credit? One, individuals considered as employees; two, employee 
hours of service; and three, employee wages paid. Are those 
basically the three criteria that they are going to need to 
plug in, in order to determine their tax credit under this?
    Ms. INGRAM. That is where most of the math questions are, 
yes. They do need to make sure that the insurance they are 
providing and the employer's share of the contribution also 
meets the rules.
    Mr. KIND. And that is the 50 percent rule.
    Ms. INGRAM. Yes.
    Mr. KIND. And most states, like Wisconsin, already require 
that at the state level. So, that is not a problem. I mean that 
is something that already applies.
    But those are basically it. And I can't think of a small 
business owner who wouldn't know that data or those facts that 
they could just plug in. Otherwise, your business probably 
isn't going to be open very much. If you don't know how many 
employees you have, how much you are paying them, and how many 
hours they are working, there is a problem, I think.
    Am I missing something here? Is it more complicated than 
that?
    Ms. INGRAM. I think the thing that we have been trying to 
listen to when we talk to stakeholders and small businesses and 
advisors is to try to hear where they would like assistance, 
where we could make it simpler, where we could say, ``Answer 
these couple of questions, and if the answer is yes for each of 
them, go straight to''----
    Mr. KIND. And the only reason you see a chart like this is 
just to score cheap political points and to confuse people. I 
mean realistically, this is what this is all about. But do you 
know, Ms. Ingram, how many small business owners that are 
filing taxes have a paid preparer, professional preparer, doing 
it for them?
    Ms. INGRAM. I don't have the exact statistic, but it is 
high.
    Mr. KIND. It is pretty----
    Ms. INGRAM. It is high.
    Mr. KIND [continuing]. Pretty high number. Right.
    Ms. INGRAM. Yes.
    Mr. KIND. And they are the ones who are supposed to have 
the expertise in being able to take advantage of all the 
credits, all the deductions that small business owners can 
claim anyway. Is that right?
    Ms. INGRAM. Yes, it is why we are shifting our strategy for 
outreach for the next cycle, to include the----
    Mr. KIND. Professional preparers.
    Ms. INGRAM [continuing]. Tax preparation industry, the 
electronic industry, to see what they can also do.
    Mr. KIND. Great. Thank you. Thank you, Mr. Chairman.
    Chairman BOUSTANY. Mr. Reed.
    Mr. REED. Thank you, Mr. Chairman. Mr. George, your point 
was very well taken about chasing the money once it is already 
out the door. That is a very practical point. Coming from a 
small business world, I know exactly what that issue relates 
to.
    So, my question actually is to Ms. Ingram. You talk about 
the filters as being kind of a primary tool--if I am hearing 
your testimony correctly--the filters being the primary tool to 
prevent that from occurring. Can you just articulate what are 
you--what kind of filters are you deploying? How are you 
determining those? What are you--how does that process work?
    Ms. INGRAM. I will try to be responsive, but again I am 
going to be a little cautious about specificity.
    But the--for all returns we do a certain number of layers 
of validating the return itself, of looking for basic 
indicators of fraud that might be, for example, of interest to 
our criminal investigation unit. So there is sort of the basic 
process that returns go through.
    In addition, we have a set of filters that are designed 
around cross-checking secondary information inside the service, 
information that we would not be able to use the ordinary type 
of math error to address. And, depending on whether it is 
refundable or non-refundable--because historically, the risks 
are quite different in our experience--we either use the 
additional filters to kick out any real outliers immediately, 
but otherwise to identify cases in which we would like to 
correspond, even if the return is processed first. Whereas, on 
the refundable credit side, we do all of that before any 
dollars leave the house.
    Mr. REED. Okay. And then, so what kind of success rate are 
you demonstrating with utilizing those filters, for example, on 
this credit? How are you--what is the metric that you are using 
in the agency to determine whether the filters are working or 
not?
    Ms. INGRAM. Well, we do that a couple of ways. And really 
telling how well they are working here is going to take a 
little bit of time.
    One of the things we looked at in designing our program was 
the work that we had done around the COBRA issue a couple of 
years ago. And GAO actually came in and looked at our filters 
there, threw some fake test cases at us, which we caught all 
of. So we thought we had a pretty good methodology developed 
through that experience, thought we had gotten some good advice 
in that case from GAO. And so we took a similar approach here.
    In the general business credit area, as I mentioned before, 
we are just not seeing the big issues in the early kick-outs in 
this return, in this issue.
    Mr. REED. Okay. So then, beyond filters, what other tools 
are being utilized to make sure that it is being monitored 
appropriately?
    Ms. INGRAM. Well, the filters are particularly good for up-
front identification, and the trick always is to get the 
filters right, feedback from our own observations, as well as 
from our oversight bodies.
    The other thing is to check on whether the filters are 
effective is also to sample and look at some returns, some of 
which went through filters and some of which did not kick out. 
There are various ways in which we try to look at sort of 
control groups--I don't know what you want to call that--to see 
what is being caught and what didn't get caught.
    Mr. REED. Okay. Mr. George, did you have any additional 
information on that?
    Mr. GEORGE. Again, I am repeating from my oral statement--
the IRS does have a program to attempt to identify taxpayers 
who don't file employment tax returns, and yet might still be 
able to have this legitimately paid by a PEO, the Professional 
Employer Organization. But the IRS truly can't tell the 
difference between whether or not the PEO had the 
responsibility to comply with this, or that the employer does.
    And so, when it is something that basic that they still 
can't determine, it is troubling. It is problematic, and I 
think would lead to more difficultly.
    Mr. REED. And that is a great point, because that would 
be--that would seem to me to be a very simple check. If you are 
doing the payroll tax and you are filing that, that you would 
match that up with the provider. What is the barrier to that? 
What am I missing?
    And that seems like a very simple--Ms. Ingram, what am I 
missing, why that doesn't match up with each other?
    Ms. INGRAM. I think the issue is if one of our filters for 
the small business is to compare their information about this 
credit with their employment tax filings, and if they have 
hired a firm to do that for them, the information may be in the 
system under two different employer identification numbers, and 
it is the connection that Mr. George is referring to.
    Mr. REED. So how do we fix that? How do we fix that, Mr. 
George?
    Mr. GEORGE. Their computer systems need to be updated. 
There is no question about that. That would seem like low-
hanging fruit, but it depends on the resources available to 
them, and their priorities.
    Mr. REED. All right. My time is up. Thank you, Mr. 
Chairman. I yield back.
    Chairman BOUSTANY. I thank the gentleman. Inspector General 
George and Commissioner Ingram, we thank you both for being 
here today and for testifying in front of the Subcommittee. 
Please be advised that Members may have written questions they 
would like to submit to you, and we would ask that you respond 
to those, and they will be made part of the official hearing 
record.
    And with that, we will conclude our first panel. Thank you.
    Mr. GEORGE. Thank you, Mr. Chairman.
    Ms. INGRAM. Thank you, Mr. Chairman.
    Chairman BOUSTANY. I will ask the second panel to come up 
and take their seats.
    I would like to welcome our second panel. We have Ms. 
Patricia Thompson, who is with the American Institute of 
Certified Public Accountants, and is chair of its tax executive 
committee. We have Mr. Todd McCracken, who is the president of 
the National Small Business Association. And Mr. Hisel is co-
director of Home Resource. I want to thank you all for being 
here today to testify in front of the Subcommittee.
    You will each have 5 minutes to present your oral 
testimony, with your full written statement being made a part 
of the official record. And, Ms. Thompson, we will begin with 
you.

  STATEMENT OF PATRICIA THOMPSON, CHAIR, AICPA TAX EXECUTIVE 
COMMITTEE, AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS, 
                         WASHINGTON, DC

    Ms. THOMPSON. Good morning, Chairman Boustany, Ranking 
Member Lewis, and Members of the Subcommittee. My name is 
Patricia Thompson, I am a CPA and chair of the AICPA tax 
executive committee. I am also the tax partner at a small CPA 
firm in Rhode Island. And I would like to thank the 
Subcommittee for the opportunity to appear at today's hearing.
    This credit was designed to encourage small businesses and 
small tax-exempt organizations to offer health insurance to 
their employees for the first time, or help them afford 
coverage they already have. The AICPA does not have a position 
supporting or opposing this incentive. My testimony today is 
based on our members' experiences with working with small 
businesses, and will focus on the technical aspects of the 
credit, and address how they can be improved to make the 
exercise of the tax credit simpler and more transparent.
    The AICPA has a long-standing tradition of advocating for 
sound tax policy. The tax law should be simple, so that 
taxpayers can understand the rules and can comply with them 
correctly in a cost-efficient manner.
    Transparency is an important partner with tax 
simplification. Transparency is the basic notion that taxpayers 
should know, namely, that a tax or a tax incentive exists, and 
how and when the tax incentive applies to them.
    Based on our members' experiences working with small 
businesses, we believe there are a number of areas where the 
new code section 45-R could be made simpler. We understand the 
challenges Congress faces as it tackles the complex issues 
inherent in drafting tax legislation, and appreciate your 
diligence in trying to do the right thing for taxpayers.
    The IRS should be complimented on providing guidance on the 
application of the credit, and also on informing taxpayers and 
tax professionals on the availability of the credit.
    Since most small employers did not know until the end of 
the year or later, when their tax returns were prepared, 
whether or not they qualified for the credit, there was less 
incentive for them to provide health insurance coverage. Also, 
many of the variables, such as the number of full-time 
equivalents and the hours worked per employee are difficult to 
estimate early in the year. It was not very helpful for most 
employers with 10 or more employees to begin testing 
eligibility or potentially calculating the credit before the 
end of the year.
    Many taxpayers found the credit to be quite complex, 
because the definitions of ``eligible small employer,'' ``full-
time equivalent employees,'' and ``employee'' are not 
straightforward or consistent with other definitions in the 
Code. For example, the definition of ``eligible small 
employer'' was unique to this provision. The business was 
required to accumulate information sometimes not readily 
available, and perform several complex calculations before it 
knew whether or not the provision applied to them.
    It is also necessary to evaluate each qualified health plan 
to determine if the employer makes sufficient non-elective 
contribution on behalf of each employee, as well as determining 
the premiums eligible for the credit.
    Other complexities include the calculation of the number of 
full-time equivalent employees, and the phasing out of the 
credit, once an employer's full-time equivalent count exceeded 
10, or its average annual wages exceeded $25,000. For small--
some small employers, it was not uncommon this year for tax 
preparers to have spent a significant amount of time necessary 
to prepare an entire small business return, just on the credit 
calculation, only to find that the client did not qualify for 
the credit.
    The AICPA believes the tax credit should be simplified. We 
suggest that you consider changing the definition of a small 
business to either base the definition on gross receipts or 
employee count from the prior year, or the average of the prior 
two years. Prior-year information would be readily available, 
allowing small businesses to calculate early in the year the 
tax savings for purchasing or continuing the health insurance.
    We also suggest that the phase-out calculations for the 
employee count and the annual salary be eliminated. Phase-outs 
create difficulties in estimating an employer's benefit from 
purchasing or continuing to provide health insurance coverage. 
We appreciate your efforts in examining some of the 
difficulties that businesses face in navigating through the 
rules of this credit.
    Thank you again for the opportunity to testify, and I am 
happy to answer any of your questions.
    [The prepared statement of Ms. Thompson follows:]

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    Chairman BOUSTANY. Thank you, Ms. Thompson.
    Mr. McCracken, you may proceed.

            STATEMENT OF TODD McCRACKEN, PRESIDENT, 
      NATIONAL SMALL BUSINESS ASSOCIATION, WASHINGTON, DC

    Mr. MCCRACKEN. Thank you, Mr. Chairman. Chairman Boustany 
and Ranking Member Lewis, we appreciate the opportunity to be 
here today to speak to the Subcommittee, and we appreciate your 
commitment to finding ways to find workable solutions to get 
affordable health coverage in the hands of small companies. 
Again, my name is Todd McCracken, I am the president of the 
National Small Business Association. And we are a national 
small business advocacy organization that has worked on these 
issues for many, many years.
    Our sources indicate that there is still a very high level 
of confusion about the health care law among the small business 
community that extends, I think, to this tax credit. Part of 
the confusion, I believe, stems from the start date of the law, 
2014. I think there are still some companies that don't believe 
that some of these credits really begin until that timeframe.
    That said, I think the IRS actually has done a pretty good 
job of outreach to the small business community. I think that 
they have engaged a lot of small business organizations in 
creating awareness of the tax credit. We certainly try to get 
information to our members, so that if there is a credit that 
they are able to claim, they are making sure they are doing it.
    But I think there is still a huge vacuum there, because 
it--the overall complexity of the Tax Code plays a significant 
role, I think, in this as well, because there are so many 
aspects, so many credits, so many things we are trying to 
induce or incent companies to do or not do, that to a large 
extent it becomes sort of a white noise for them, and it 
becomes very difficult to get their attention on a particular 
provision to affect the way they do business.
    And as my colleagues from the AICPA have pointed out I 
think very capably in their written statement, the calculation 
is relatively complex, especially for small companies that 
don't have a stable work force. They have employees that come 
in and out of service that work differing hourly schedules on a 
week-to-week basis, those that have seasonal and part-time 
employees. It can be relatively complex for them to calculate. 
And that is a lot of companies. It is more standard for many 
small businesses to have that kind of work force than to have a 
very stable, it's pretty much the same all year kind of work 
force. For those companies it would be relatively simple.
    But I think the single biggest issue that this credit faces 
is that it is a credit chasing an audience that is just very, 
very small. If you look at the provision of health insurance in 
the smallest companies, most--by quite a lot--companies do not 
offer health insurance to their employees. If you look at the 
number of those very small companies--ones who would be most 
eligible to receive the full 35 percent tax credit that are 
fewer than 10, have low-wage workers, less than $25,000 a year, 
a very high percentage of those companies employ family members 
in the business. And those family members are specifically 
precluded from taking this tax credit if they are an employee 
in the business.
    So, you may have a situation where a small business offers 
health insurance, and most of the low-wage employees who are 
eligible decline the coverage, because they simply cannot 
afford to pay their half of the premium, which is clearly 
understandable in that labor market. And so there is really 
nothing left for that company, even though they technically 
offer health insurance, there is nothing left for them to take 
a tax credit against, because they don't have that expense.
    And when you look at the raw numbers that have been--that 
the IRS and Treasury have provided, granted, they are 
preliminary and they need a thorough analysis when they are all 
in. But if you look at the numbers, there is about 300,000 
companies that have claimed the credit for about $400 million, 
a little above that in both cases. That works out to an average 
of about $1,300 per business. And $1,300 is $1,300. But in the 
larger scheme of how much health insurance costs, that is not 
even 25 percent of one employee's single coverage value.
    So that leads me to believe it seems very likely that there 
is a whole bunch of companies who are taking it at the margins, 
who have more than 10 employees, have average wages more than 
$25,000 a year, and have--did the whole calculation, and 
figured out they could get a very small sliver of the tax 
credit. But it winds up being a very small percentage of their 
overall health insurance costs, which could be 80, $100,000 a 
year. So I suspect that may be what is happening here.
    But all this being said, we have always believed that the 
best way to subsidize health insurance is to look at 
individuals, look at their own personal situation, and not to 
do it through businesses. And to bring down the overall cost of 
health insurance is the fundamental issue I think this congress 
needs to grapple with.
    Thank you for having me today.
    [The prepared statement of Mr. McCracken follows:]

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    Chairman BOUSTANY. Thank you.
    Mr. Hisel, you may proceed.

           STATEMENT OF MATTHEW HISEL, CO-DIRECTOR, 
                HOME RESOURCE, MISSOULA, MONTANA

    Mr. HISEL. Chairman Boustany, Ranking Member Lewis, and 
Subcommittee Members, thank you for the invitation to testify 
today. I appreciate the opportunity to share my experiences as 
a small employer with the ACA health insurance tax credit. My 
name is Matthew Hisel. I co-direct Home Resource, a building 
materials reuse center in Missoula, Montana.
    We collect and sell reusable building materials to reduce 
waste and promote a more vibrant and sustainable local economy. 
We also partner with a range of work training programs and 
offer educational classes. Home Resource, Incorporated is a 
non-profit under section 501(c)(3) under a special category for 
resource conservation. When we founded Home Resource in 2003, 
my co-founder and I were the only people on payroll. Now we 
employ between 15 and 20 people.
    At Home Resource we believe our employees work best when 
they are healthy. We also know our health care benefit is key 
to attracting and retaining great employees. We have offered 
health insurance to employees who work more than 30 hours a 
week since 2004, and we pay 100 percent of the premiums.
    Skyrocketing costs have made this difficult to sustain. We 
face double-digit increases practically every year, sometimes 
as high as 39 percent. We have had to shop around for a new 
plan almost every year, and we have had to increase our 
deductibles and reduce benefits. We now have a $5,200 
deductible. It is the kind of insurance that works fine until 
something goes wrong, as I can attest to personally from an 
emergency hospital stay that left me with bills totaling around 
$4,000. I had just barely been able to achieve the American 
dream of homeownership a few years before, and these bills 
forced me to sell my home.
    In the past year the ACA has changed our situation 
significantly, and for the better. This is thanks to both the 
tax credit and also other parts of the law. In 2010 we paid 
close to $11,000 for our employees' health insurance. The tax 
credit cut our costs by over $2,000. For a small business 
struggling to keep health coverage, that makes all the 
difference. We were actually considering dropping our insurance 
in June of 2011, but knowing we would get the tax credit for 
2010 tipped the balance and helped us maintain coverage.
    I found the credit pretty straightforward. I prepared the 
worksheet to determine if we qualified myself. It took me less 
than 10 minutes. Our accountant spent a little over an hour 
preparing the final forms, at a cost of $195 to Home Resource. 
That is $195 to get more than $2,000 back. A small business 
like mine cannot ask for a better return on investment than 
that.
    While I was aware of the credit from following the debate 
over health care reform, and my accountant was aware when I 
asked her about it, I do believe there would be value in a 
broader education effort to ensure that all small business 
owners and their accountants are aware of the opportunity to 
claim it. If utilization of the credit is lower than expected, 
I would encourage you to consider building on it to help more 
businesses benefit. This could be done by raising the 
thresholds for FTEs to 50 and wages to $75,000. Since the 
Congressional Budget Office scored the credit at 38 billion, I 
believe Congress should make sure all of these resources are 
getting to small businesses to help us with our health care 
costs.
    The tax credit isn't the only piece of the health law that 
is helping us. There is the requirement that insurers cover 
free preventative care. There is the end to denying coverage 
for kids with pre-existing conditions. I lost one of my best 
employees before this provision went into effect, because our 
insurer wouldn't cover his kid, who was a cancer survivor with 
Downs Syndrome.
    And finally, after years of steep increases between 19 and 
39 percent a year, this year's increase was only 9 percent. 
Combine this with the tax credit, and we will see our effective 
health insurance costs go down by double digits this year.
    There are other benefits we are looking forward to in the 
health care reform, as well: the state insurance exchange, 
which will give small businesses more transparency, better 
choices, and more bargaining power; stronger rate review to 
protect us from unreasonable rate hikes; the minimum medical 
loss ratio requirement, which will ensure a basic standard of 
value for premiums; and reduced cost shifting, as more people 
get health insurance and start paying into the system.
    Based on the improvements we are already seeing, I believe 
it is critical that we keep moving forward on implementing the 
health law. You have an opportunity to build on the tax credit 
to help more businesses benefit. This credit is a bridge to a 
reformed insurance marketplace in 2014. If not enough 
businesses are making it across the bridge, let's build the 
bridge wider, not blow it up.
    Helping small businesses get affordable health coverage is 
one of the most important things you can do to help us succeed, 
grow, and create jobs. Thank you.
    [The prepared statement of Mr. Hisel follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Chairman BOUSTANY. Thank you, Mr. Hisel. We have heard a 
lot about the complexity of this tax credit this morning, both 
with the first panel and, Ms. Thompson and Mr. McCracken, your 
testimony both sort of corroborate that. And you know, we have 
heard about Form 8941 and the instructions, 8 pages, complex 
calculations that need to be done.
    What kind of feedback have small businesses been giving you 
on the value of this credit?
    Ms. THOMPSON. For my clients that are able to take 
advantage of the credit, they find that it is very helpful, 
because it does reduce the health insurance costs. And so the 
complexities that we are going through, to them it is worth it.
    Chairman BOUSTANY. Okay. Mr. McCracken.
    Mr. MCCRACKEN. I would say it is a mixed bag. I mean there 
certainly are companies that, as we just heard from the last 
example, that fit the definitions nicely, and can take a rather 
large share of the credit. My point is that there are very few 
of those companies in the larger scheme of the American 
economy. And so, you just have to factor that factor in.
    So I do think there are some companies who have gone 
through the exercise--and I have heard from some of these 
folks--who went through the exercise of doing the calculation, 
having their outside CPA firm do a lot of work for them to 
figure out what the credit would be, and at the end of the day 
claiming the credit, yes, because they had done the work, but 
it being a relatively small credit. And there was a frustration 
that they had gone through all the trouble. And if they had 
known the outcome, they probably wouldn't have paid the CPA and 
done all the hassle to figure out the credit, because they only 
got a few hundred dollars or a thousand or two, which, in the 
scheme of a company that might have 15, 20, 25 employees, would 
be a relatively small percentage of the credit.
    So, it is--it really depends very much on the specifics of 
the individual business. They really run the gamut between 
those two.
    Chairman BOUSTANY. Mr. McCracken, do you have any 
information on the actual cost to a small business to get this 
credit?
    Mr. MCCRACKEN. I don't. And again, that is going to also 
vary greatly, depending upon the type of workforce that company 
has, because it is going to be much more difficult for a small 
company to have a highly seasonal, highly--lots of variations 
in its work force over the course of the year, sort of week by 
week and month by month.
    I should also point out that the smaller those companies 
are--which are the ones that stand to get the biggest credit, 
potentially--are the ones that have least automation in those 
processes, or the ones who are least likely--most of them don't 
use a payroll service, just for example, in the below 10 
market.
    So, for them to then go back and collect that data often is 
a time-consuming manual process than to go back and figure out 
how many hours did each person work each week to figure out 
what the FTEs--so--but if you are a company that has a stable, 
5-person work force and they all work 35 hours a week every 
week and that doesn't change, it would be relatively simple. 
So----
    Chairman BOUSTANY. Ms. Thompson, do you have information on 
cost, maybe average cost for a small business?
    Ms. THOMPSON. We don't really have the information on the 
cost of preparing the credit, because it depends on the size of 
the firm that is preparing the credit. It could be a small CPA 
firm, it could be a large, or it could be mid-sized. So you 
can't really generalize on what the cost is going to be to 
prepare the credit calculations.
    Chairman BOUSTANY. Ballpark?
    Ms. THOMPSON. You can't really ballpark it.
    Chairman BOUSTANY. Not even a ballpark figure?
    Ms. THOMPSON. Uh-uh.
    Chairman BOUSTANY. Okay. Well, the IRS has mentioned their 
outreach efforts. And Inspector General George gave them a B on 
it, not a bad mark. So it sounds as if they have really made 
significant efforts to move forward, to get the information out 
to tax preparers and--as well as to small businesses about 
the--their awareness of this credit. Yet, with all of this, 
participation still seems to be below what was predicted, and 
seems to be low, by most standards, even at this early stage.
    Ms. Thompson, is that because of insufficient outreach, 
insufficient information being put out to small business? Or is 
it because the credit is just complex, and small businesses 
have not availed themselves of that because of the complexity 
and cost?
    Ms. THOMPSON. I think at this point it is really too early 
to make a conclusion as to the effectiveness of the credit. 
Because, as we had heard, the information is not in for all of 
the tax returns that were on extension, which was as late as 
October 15th. And for those that were located in disaster 
areas, it could have even been October 31st. And as someone had 
mentioned, the tax-exempt organizations are due today. So, 
without having a full year of information, it is really too 
early to answer that question.
    Chairman BOUSTANY. Okay. Fair enough. Mr. McCracken.
    Mr. MCCRACKEN. I think a big issue, as I said before, is 
that there is a relatively small population of these firms who 
can maximize the credit. Most companies that offer health 
insurance that are below 10 employees are not low-wage firms. 
So they are limited on that end.
    So, when you drill down to how many companies are truly 
low-wage firms, have fewer than 10 employees, have been able to 
offer health insurance nevertheless, and have an uptake rate 
for their employees for the offer, you are just looking at a 
very small slice of the small business community. And I think a 
lot of the low uptake comes down from that fundamental point.
    And a lot of the companies that do offer health insurance 
in that market that might have been assumed to be taking the 
credit, when you dig deeper you find out that they are often 
employing family members who are specifically precluded from 
using the credit.
    Chairman BOUSTANY. And Ms. Thompson and Mr. McCracken, both 
of you mentioned that small businesses are often 
disproportionately hurt by the complexity of the Tax Code, 
because they are unable to hire or they don't have the 
resources to hire the number of tax preparers and accountants, 
lawyers, and so forth, advisors to navigate through the Code.
    And I am concerned about these different definitions of a 
small business that are out there. I think it was your 
testimony that highlighted some of that, your written 
testimony. For example, the research credit defines ``small 
business'' as one with 500 or fewer employees. But for the 
purposes of an Archer Medical savings account, it could be a 
business with fewer than 51 employees. And then there are all 
these various definitions.
    So, comment on how the Tax Code's complexity affects these 
small employers, however they are defined, and hone in on the 
impact of this particular tax credit and its complexity, and 
the impact it is having.
    Ms. THOMPSON. Well, the AICPA is definitely in favor of 
simplifying the Tax Code. There is no such thing as a simple 
code, because the world is just very complex. So you really 
need to make it simpler than it is. And as you pointed out, 
something as basic as the definition of a small business, 
depending on which particular provision you are looking at, you 
are going to get a different answer.
    But we also understand that there may be reasons why they 
are different, depending on what you are trying to accomplish 
as your goal in passing legislation.
    So we can understand why it is different. We would like to 
see it a little bit more consistent, and for example, on this 
one, when we are talking about having to use current 
information, on all those other provisions that I had 
identified they were all using prior years, which is very 
helpful to that small business, because that is information 
that is going to be readily available to them, and it may not 
be as much of a stretch for them to go on the prior year, 
rather than the current year.
    So, it is more challenging for a small business. But I 
would have to say that the small businesses do need a 
professional to prepare their tax returns. And we do find that 
if they do hire the professional, they are going to be done 
correctly, and they may find that they are going to be saving 
more in taxes than they would otherwise, because they are going 
to be aware of these incentives.
    And the tax professional is doing these calculations all 
the time. So if it was a one-off, where one person was just 
preparing it, yes, it is going to sound very complicated. But 
if a CPA firm is doing it, they are doing it multiple times for 
multiple employers, and it is going to become a lot less 
complex for them.
    Chairman BOUSTANY. Mr. McCracken, briefly, would you like 
to respond?
    Mr. MCCRACKEN. Yes. Your basic question was about the 
definition of small companies. And there aren't very many other 
instances for the tax law--usually there is other ways of 
defining smaller entities, rather than necessarily employee 
size.
    But I also would warn against creating sort of a cliff 
effect by, for all purposes, defining small business exactly 
the same way. Because if you sort of define it at 25 employees, 
or wherever you pick that number, whether it is for good things 
below that or bad things above that, you are going to create a 
significant disincentive. So there does need to be some 
variation, to some degree, so that you don't wind up with one 
place where people don't want to cross.
    Chairman BOUSTANY. Thank you. Ranking Member Lewis.
    Mr. LEWIS. Thank you very much, Mr. Chairman. I want to 
thank each of you for being here this morning.
    I would like for each one of you to respond to this 
question by saying yes or no. Do you support repeal of the 
small business health care tax credit in the Affordable Care 
Act?
    Ms. THOMPSON. I know you said that was supposed to be a yes 
or no answer.
    Mr. LEWIS. Yes?
    Ms. THOMPSON. Except the AICPA doesn't have a position 
either for or against, so I can't really answer that question.
    Mr. LEWIS. Yes, would you want to speak for yourself as 
individual? You don't want to get in trouble?
    Ms. THOMPSON. I am not going to get in trouble today.
    [Laughter.]
    Mr. LEWIS. Oh, just take a chance.
    Ms. THOMPSON. No, I think I am going to pass.
    [Laughter.]
    Mr. LEWIS. Oh, you will pass?
    Ms. THOMPSON. Yes, sorry.
    Mr. LEWIS. That is all right.
    Mr. MCCRACKEN. I would say no.
    Mr. HISEL. No.
    Mr. LEWIS. Thank you. Mr. Hisel, what role did the health 
care credit play in your decision to provide health insurance 
for your employees? Did it play any role?
    Mr. HISEL. We were already providing health insurance. But 
as I said, we were considering dropping it at the beginning of 
this year, 2011. I spent a lot of time trying to balance my 
budget for a year, looking a year in advance. And you know, 
this year we were really struggling with a challenging economy 
through the winter, and I was working very hard to get the 
number at the end of the day to remain positive.
    And it ultimately made a big difference to us, because I 
really was looking at health insurance this year. And 
ultimately, knowing that we would get the credit for 2010, and 
then again in 2011, that tipped the balance. It was a deciding 
factor, and we decided to keep our health insurance.
    Mr. LEWIS. So you would be a strong supporter of the health 
care tax credit?
    Mr. HISEL. Absolutely.
    Mr. LEWIS. So you are saying as for my house, for your 
house, could you say to other small businesspeople, ``You 
should take a look at it?''
    Mr. HISEL. Absolutely. And I know a lot of people have. And 
I do agree that it should be expanded to include more small 
businesses. Those thresholds should be increased and perhaps 
brought in line with other definitions, 50 FTEs and wages.
    I would also like to say that we are a very seasonal 
business. We fluctuate with the construction season quite a 
bit. And I completed this qualifying worksheet myself. It is 
six simple fill-in-the-blanks. I had all the information in 
QuickBooks. It was not that challenging. I don't quite 
understand what the problem was. And then, you know, to just 
hand it over to our accounting service, they did not seem to 
have a huge problem with it.
    And I think it just needs to be expanded.
    Mr. LEWIS. Well, you traveled a great distance to be here 
today.
    Mr. HISEL. Yes.
    Mr. LEWIS. Further than anyone.
    Mr. HISEL. I am sorry?
    Mr. LEWIS. I said you traveled a great distance to come and 
testify today. And I just want to thank you for coming.
    Mr. HISEL. You are welcome, thank you for having me.
    Mr. LEWIS. Thank you. Mr. Chairman.
    Chairman BOUSTANY. I thank the gentleman. Ms. Black.
    Ms. BLACK. Thank you, Mr. Chairman. Again, thank you, 
panelists, for being here today. It is very helpful.
    It has been suggested that what we see here was just a 
political stunt. And yet I continue to hear that there is 
complexity. And the complexity includes things like definitions 
that are confusing, that it is also confusing with the other 
parts of the tax code. And yet, there--has been suggested that 
it could be done in three simple steps.
    I would like to hear--and Mr. Hisel, I probably want to 
come back to you, but I would like to hear, first of all, from 
Ms. Thompson and Mr. McCracken about what they are hearing and 
what their experience are with dealing with the small 
businesses. If it is just three simple steps, then why is it 
that there are folks that are saying that it is more complex 
than that? So help me understand that.
    Ms. THOMPSON. I think that the provision does require a lot 
of questions to be answered. And the first one is starting off 
with whether or not they do qualify as a small business. And it 
is not as easy as just looking to the prior year's gross 
receipts, or the prior year's employee count. It is really 
based on the current year information.
    And when you look at the definition of ``employee,'' as one 
of the other panels had mentioned, it is not just your employee 
count on the W-2s that were issued during the year, it needs a 
little bit more analysis to look at those employees, to see 
whether or not there is any family members that have to be 
excluded. If you have seasonal workers, how many--whether those 
seasonal workers can be included or not. And so, there is a lot 
of definitions or analysis that goes into whether or not that 
person is an employee that is going to be eligible for that 
credit.
    And then, if you talk about the hours, the hours are going 
to be based on the payroll records, again. But you do have to 
look at it, because if somebody went over 2,080 hours, you 
don't include the excess over that level, so you would include 
only that amount. If the people aren't being compensated on an 
hourly basis, then they may have other methods of determining 
what--the hours works.
    So, it is those type of definitions and analysis each step 
of the way that adds to the amount of work that is being done 
for that credit. And so that is why we were suggesting that if 
you change the definition away from the way it is right now, 
and base it on something like the prior year, it does away with 
a lot of the complexity that is there.
    Ms. BLACK. Mr. McCracken.
    Mr. MCCRACKEN. Actually, I don't have a lot to add to that. 
But I would also point out that, you know, for a lot of these 
companies, they will see that and realize they need to go 
through lots of steps, and they have to change their procedures 
to simplify how they can gather that data in order to claim the 
credit. And if the credit they are able to claim they think 
will be at a relatively low level, and it is temporary, they 
might not want to go through that trouble of change the way 
they do it.
    Again, that is more likely for the companies that have more 
than 10 or 15 employees, that are sort of reaching the upper 
size of the availability of the credit. But my sense is those 
are the companies that are far more likely to be offering 
health insurance to the employees. So it is going to affect a 
greater variety of actual--of people.
    Ms. BLACK. So I think what I hear you saying is that it is 
all across the board. And maybe Mr. Hisel has a little bit more 
stability there, where he is not having to figure quite as many 
of these different categories that I am seeing to not be well 
defined, or that there is a lot of variations in the employees, 
the number of employees, the hours worked, and that kind of 
thing.
    Obviously, we all want to get to the same point, where we 
can let small businesses take advantage of something that is 
there to incentivize them to provide insurance for their 
employees. So I appreciate your recommendations there.
    The next question I wanted to ask is the piece on the 
family members. Is there a reason why you believe that--and I 
wasn't here when this was passed, so I don't know--why family 
members would be excluded? Because it seems that that is very 
typical in small businesses, that small businesses are very 
family-oriented. And to exclude family members doesn't seem 
like it is really going to be beneficial. Is there a reason, 
Ms. Thompson or Mr. McCracken, that you could enlighten me on 
that piece?
    Ms. THOMPSON. I really didn't look into the committee 
reports as to why the family members were excluded from the 
definition of ``employee,'' so I can't really answer that 
question.
    Ms. BLACK. Okay. Okay. Mr. McCracken, any idea----
    Mr. MCCRACKEN. I don't--wasn't privy to those 
conversations, of course, but I have to believe it is because 
the congress at the time was concerned about, you know, 
potential abuse, that you might hire an employee--a family 
member who is not really an employee, that kind of thing, and 
so they sought to prevent that.
    Ms. BLACK. Well----
    Mr. MCCRACKEN. I should also point out, though, that it 
does work both ways. Because in companies where you have family 
members who are working in the company, more often than not 
they are in a kind of a management position. So not only are 
they not eligible for the tax credit, but they also aren't 
counted in the calculation of whether you are low wage.
    And so, if you added them back in to that calculation, 
probably the average wage of the company would go up, but your 
tax credit would go down for the employees you can claim it 
for.
    So, if you are going to think about a system that allows 
the business owner who works as an employee and the family 
members who work as employees to participate, you might need to 
sort of think through the levels, because you will wind up 
allowing some businesses to claim a credit for some of the 
individuals' health insurance, but you might actually reduce 
the credit available to other companies.
    Ms. BLACK. Good point. And I just think that it is 
something we need to take a look at, Mr. Chairman, in 
particular. I don't know the reason for it initially, but my 
experience with small businesses, of which our family is a 
small business, and that many of those that we know do have a 
lot of family members that are involved in the business. Thank 
you.
    Chairman BOUSTANY. Dr. McDermott.
    Mr. MCDERMOTT. Thank you, Mr. Chairman. Mr. Hisel, I feel 
an affinity for you. I worked for a gypo logger one summer. I 
see that you have been to the University of Montana and got a 
master's degree and then you took an entrepreneurship course in 
the Montana Community Development Corporation. Did they have a 
course in there to figure out how to fill out government forms, 
in the master's degree program or in the entrepreneurship?
    Mr. HISEL. I do not recall such a course, specifically.
    Mr. MCDERMOTT. So, the skills that you used were skills 
that you learned in maybe common public schools and eighth 
grade, where you learned to multiply fractions and add and 
subtract?
    Mr. HISEL. And divide, yes. That is correct. In fact, there 
is an addition symbol right here, and a division symbol. It is 
pretty basic.
    Mr. MCDERMOTT. And so, my feeling then is--why do you think 
people are complaining about this form? I mean did you get that 
card in the mail? Is that how you figured out about this?
    Mr. HISEL. No. I was aware of it from following the health 
care debate, that it would be coming. And I was quite anxious 
to be aware of it. But my accountant did know about it from 
receiving some type of communication from the IRS, I believe. 
So----
    Mr. MCDERMOTT. And so why are we hearing all these 
complaints? I mean you are just an ordinary guy who learned 
eighth grade math and figured out this thing, and figured it 
out, and handed it to your accountant and said, ``I think this 
will work for us,'' and your accountant said, ``Yep, you're 
right,'' and it cost you $195. Why are other people finding it 
so complicated?
    Mr. HISEL. I don't know.
    Mr. MCDERMOTT. All your people work every day, 8 hours a 
day, 50 weeks a year?
    Mr. HISEL. No, we have--in fact, we have three full-time 
employees--that is one of the blanks--and then the full-time 
equivalent of part-time employees is simply a matter of finding 
the total number of hours worked by part-time employees, which 
is reporting QuickBooks, and you divide by 2,080, and you get 
the number of full-time equivalents.
    Mr. MCDERMOTT. So, it is not that complicated.
    Mr. HISEL. Doesn't seem to be, to me.
    Mr. MCDERMOTT. And why, then, Ms. Thompson--I mean you got 
these accountants. I mean I got an accountant. Everybody here 
on the dais has an accountant, I will bet. Bet there is nobody 
up here that doesn't use one. They fill out a million forms 
every year. Months of February, March, and April are absolutely 
crazy at Bader Martin in Seattle.
    So, when they have done 100 of these, or 1,000 of them, 
what is the complexity then?
    Ms. THOMPSON. You made a very good point. It is the tax 
professional that is preparing the form. And to them, it is not 
complex. But it is to the individual small business owner that 
is accumulating that information that it may not be as 
straightforward for everybody as it is for my fellow panelist 
here.
    And so, that is where the complexity comes in. The 
complexity is when the small business owner has to accumulate 
the information that they don't readily have available. Yes, 
they have it available, but it is not just picking up one 
number from here and dropping it there. They have to analyze it 
in a little bit more detail. But you are absolutely right----
    Mr. MCDERMOTT. If you are running a business--if I could 
interrupt you just a second--if you are running a business, how 
can you run it without knowing how many people you are paying 
how much per hour times hours to give them a paycheck at the 
end of the week? How could you not know that information, to 
just hand it to your accountant and say, ``Here is what I do''?
    Ms. THOMPSON. You are absolutely right. There are payroll 
records that have annual amounts on them. But it is not as easy 
as just picking up that annual amount, because you have to know 
if the person had more than 2,080 hours because that person--
you are not picking up the total hours. Maybe they worked 3,000 
hours. But in your calculations you are not picking up 3,000, 
you are picking up 2,080. And then you have to look at whether 
or not you have part-time employees. And so those have to get 
special attention. If you have seasonal workers that work less 
than 120 days, they are handled one way. But if you have 
seasonal workers that are more than--you handle them a 
different way.
    So, it is every situation for the small business owners 
themself that is where the complexity is. But you are 
absolutely right. For the tax professional that is preparing 
that form, it is not complex for them at all.
    Mr. MCDERMOTT. So, if I want a deduction, I bring into my 
tax preparer the information about my contributions, and about 
my business expenses, and all that kind of stuff. If I don't 
give it to him or her, I don't get the deduction, right? So it 
is up to me?
    Ms. THOMPSON. No, it would be up to the tax professional to 
make sure you, as a small business owner, were aware of the 
credit. And if you didn't provide it to the tax professional, 
the tax professional should be asking you the questions to get 
the information in.
    Mr. MCDERMOTT. So in the second year we will have some 
better data.
    Ms. THOMPSON. Second year it is going to be a lot better 
than the first year. And I think that is true of any tax law, 
the first year is always a little bit more challenging than the 
second year.
    Mr. MCDERMOTT. Exactly. Thank you.
    Chairman BOUSTANY. Ms. Jenkins.
    Ms. JENKINS. Thank you, Mr. Chairman. Thank you all for 
being here.
    Ms. Thompson, in your written testimony you explained how 
small business--the small business tax credit did not provide 
an incentive for small business to provide health insurance. If 
the employer is even aware of the credit, you said they are not 
likely to know whether their business is eligible for the 
credit--and if so, the size of the credit--until after the end 
of the year.
    I would be curious for both you and Mr. McCracken to 
comment or elaborate on the challenges that a small business 
faces when planning its expenses, including health benefits for 
employees, and perhaps elaborate specifically on the effects of 
the temporary nature of this tax credit, which will expire 
after 2015, and how this affects a business owner's 
calculations when they are deciding whether to offer insurance, 
given that the health insurance law has not reduced the cost to 
provide the health insurance.
    Ms. THOMPSON. I think I was answering the question from the 
perspective that the small business owner didn't know at any 
point during the year whether or not they were going to be 
eligible for the credit. There are those situations that they 
would absolutely be aware of it.
    If there are less than 10 employees, and they know their 
compensation is--average compensation is less than $25,000, 
that is really very clear, very straightforward. They know they 
are going to be eligible for the credit. And so they would be 
able to calculate the credit, or the professional would be able 
to calculate the credit, and let them know how much they would 
be able to save, if they did have or purchase the insurance for 
those employees.
    So, that is the perspective I was coming from. It is that 
they didn't--weren't able to plan for it during the current 
year to know whether or not they were going to be eligible for 
the credit. And that is why we say, okay, it would be so much 
better for them to do that look-back to the prior year, because 
then they can plan and make a really good business decision as 
to whether or not to purchase that insurance.
    When you talk about the temporary nature of it, I don't 
think a small business owner is going to be that concerned with 
something that is going to be happening 7 years from now. If it 
is going to be very helpful for them in the short term to be 
able to pick up this insurance and be able to take advantage of 
the credit, that is probably what they are looking for.
    As you know, tax laws change all the time. So maybe by the 
time this credit is scheduled to be repealed, maybe it won't 
be. And so there is a lot of things that go on when people are 
talking about whether or not to take advantage of the credit.
    But our answer was perspective from planning for the 
current year, and whether or not to buy the insurance.
    Ms. JENKINS. Okay. Mr. McCracken.
    Mr. MCCRACKEN. I agree with part of that. I think that the 
temporary nature of the tax credit doesn't have--play a 
significant role in determining whether someone is going to use 
the tax credit. But I do think it plays a significant role if 
you are trying to incent a company that doesn't currently offer 
health insurance to begin offering health insurance.
    Because small business owners are very reluctant to start 
doing something--an employee benefit--that they don't feel 
confident that they are going to be able to sustain. That is 
one of the biggest issues, I think, that played into health 
care reform for small companies, is newer companies simply were 
not starting to offer health insurance the way companies had in 
the past. And as older companies have gone away, newer small 
businesses are much less likely to offer health insurance, 
because they have seen this cost trajectory, and they are very 
concerned that they won't be able to keep offering it.
    And it is a very different conversation with your employees 
if they came into your company because you offered health 
insurance, and now you have to get rid of it. That is a much 
more difficult conversation than if they came into your company 
knowing that you didn't provide health insurance, and being 
able to deal with that.
    So it is just a really different situation. So I do think 
the temporary nature makes it very difficult to incent 
different behavior on the part of the small business.
    Ms. JENKINS. Thank you. I yield back.
    Chairman BOUSTANY. Mr. Paulsen.
    Mr. PAULSEN. Thank you, Mr. Chairman. And, you know, the 
last panel, as well, talked about some of the complexity issues 
that are obviously out there when you have less than an 8 
percent compliance rate, or an 8 percent participation rate, I 
should say, as a part of this tax credit. And it goes back to a 
little bit of that definition perspective of what is a small 
business, right? It is 25 employees, 15 employees.
    I just remember in the health care debate and when that law 
was being first debated, I talked to one small business owner. 
I said, ``Well, how many small--employees do you have, as a 
small business?'' He said, ``Under 50, and I am going to stay 
that way.'' And to me, that really sort of struck home. And now 
we are talking about a certain tax credit to help small 
businesses like Mr. Hisel's and others, where you have a 25-
employee limit.
    And Mr. McCracken, let me ask you this, because you 
testified about the difficulties that a small business faces in 
figuring out whether they are eligible for the credit, and if 
so, then calculating the amount of what that credit is. But 
moving beyond just those two hurdles, what effect do the 
employee and average wage limitations have on hiring or wage 
increases?
    So you got seasonal employees, you got family members, you 
have wage restrictions, you have FTE restrictions. I mean do 
you believe that this complexity--this could actually prevent 
small businesses from hiring additional employees, or 
increasing wages?
    Mr. MCCRACKEN. Do you mean the tax credit itself?
    Mr. PAULSEN. Just in terms of the complexity component of 
it, yes.
    Mr. MCCRACKEN. It could. I mean that is one of our concerns 
about having a long-term policy that provides incentives to 
small companies directly to provide health insurance. Because 
while the temporary doesn't have much effect on their behavior, 
a long-term tax credit or incentive could have effects on their 
behavior. But they might not be what you expect.
    So, for instance, if you offer low-wage companies a 
significant tax credit for offering health insurance, you are 
essentially encouraging low wages. You are subsidizing low 
wages for the long term. And I think you would have a very real 
effect, in that regard.
    If you are going to--and there are other ways you could 
define. If you subsidize small companies exclusively and have a 
cliff, you are giving them significant incentives to stay 
small, and to think about that growth, as you point out.
    I think on the--with this credit being a temporary credit, 
those kind of effects are more muted than they would be if this 
was a permanent policy, going forward.
    Mr. PAULSEN. Yes. And, Ms. Thompson, want to expand at all? 
Any comment?
    Ms. THOMPSON. [No response.]
    Mr. PAULSEN. I will just mention this, too, is I think that 
is fairly accurate, from the perspective of Congress is always 
thinking in short-term cycles. Is this certain tax credit going 
to get renewed for another 6 months? I mean this is actually a 
fairly unique credit. It is out there for a few years, and then 
it is going to be set to expire.
    And so at some point Congress is going to be asked to come 
back and say, ``Well, do we want to keep it going? Do we want 
to renew it? Do we want to extend it to other categories, for 
instance?'' And it does create the uncertainty out there from 
those in the business community that want to allocate capital 
as a part of just the overall Tax Code. I mean that is a 
factor.
    And I hope that, Mr. Chairman, we are going to continue to 
have these conversations. This is just one credit we are 
talking about, but it is an issue across the board, large 
companies and small. So I yield back.
    Chairman BOUSTANY. And next we will go to Mr. Reed.
    Mr. REED. Mr. Chairman, I am going to yield back. I am all 
set today. Thank you.
    Chairman BOUSTANY. Mr. Crowley.
    Mr. CROWLEY. Thank you, Doctor. Thank you for letting me 
participate today. I am pleased you are having this hearing 
today. And, my colleagues, if the worst thing you can say today 
about the health care law that we passed, also known as the 
Affordable Care Act, is that it only provided 228,000 small 
businesses with a tax cut, averaging $1,220, then it is clear 
to me that we have much larger problems on our hands. Because, 
in my book, tax cuts for 228,000 small businesses is a pretty 
good start. Furthermore, even more small businesses will 
receive this small business tax cut. That is clear from the 
testimony that you have offered.
    But I am happy to use this hearing as an opportunity to 
spread the good word about this tax cut, and ensure we educate 
even more small businesses about the range of benefits 
available to them through health reform, so they can afford 
health coverage for their employees.
    So I am thrilled to have this hearing today to allow us to 
trumpet the health care law, and reiterate that we are all in 
agreement on two points today: the Democratic health care law 
expands private health insurance coverage, and cuts taxes on 
job creators, small business men and women.
    So welcome, Mr. Hisel, to the Ways and Means Committee, and 
please give my regards back to Montana when you go. My wife is 
from Billings, Montana, and her brother lives just outside 
Missoula in Clinton, Montana. So, maybe a neighbor of yours? So 
welcome here today.
    So, you are a small business man who employs 17 folks, 
correct?
    Mr. HISEL. We are at----
    Mr. CROWLEY. Or less?
    Mr. HISEL [continuing]. Nineteen right now.
    Mr. CROWLEY. Nineteen? Good for you. Was this tax credit 
for small businesses in the Democratic health care law helpful 
to you? And I know you may have already answered this question, 
but I don't think we can hear it enough. Was it helpful to you?
    Mr. HISEL. Yes. It continues to be helpful to us.
    Mr. CROWLEY. So how much did you see refunded from your 
taxes because of the small business tax cut in the Affordable 
Care Act?
    Mr. HISEL. Over $2,000.
    Mr. CROWLEY. Over $2,000. So is it safe to say that this 
tax credit made it more affordable for you to provide health 
insurance to your workers, and without it you might have had to 
give it up, or give up on providing the private health coverage 
you give your employees today?
    Mr. HISEL. Yes. It was on the chopping block this year.
    Mr. CROWLEY. So we are hearing from a few people that not 
enough qualified small businesses are applying for this tax 
credit, and that it may not be worth it as it may be too 
complicated. What do you think, again? Is this tax credit worth 
it or not?
    Mr. HISEL. It is absolutely worth it. Not too complicated, 
in our experience.
    Mr. CROWLEY. There is a charge in the House of 
Representatives to repeal the health care law as we know it, 
known as the Affordable Care Act, to eliminate all future 
benefits, such as this small business tax break, and to reclaim 
all past benefits.
    And I would allude to H.R. 2, which--I would think that Mr. 
Cain would have no difficulty reading this bill--it is on the 
second page where it says the act--``Such act is repealed, and 
the revisions of law amended or repealed by such act are 
restored or revived, as if such act had not been enacted.'' An 
entire repeal to reclaim all past benefits provided, such as 
the money you got to keep with this tax credit for job creators 
like yourselves, small businesses.
    How would you feel if Congress repealed the health care 
law? And, once again, let me quote again--``as if it never was 
enacted,''--which experts have said could be used to force 
people to repay any benefits they have received like this tax 
cut or the $250 check that the seniors in our country received 
to close the doughnut hole in 2010. How would that make you 
feel, if you had to pay back that $2,000?
    Mr. HISEL. I would be absolutely livid. It would be----
    Mr. CROWLEY. How would it affect your business and your 
employees' well-being, having to write a much larger check to 
the IRS to deal with the small business tax cut that my 
colleagues on the other side of the aisle vehemently oppose?
    Mr. HISEL. That would be absolutely infuriating. It is 
going in absolutely the wrong direction. I believe that the ACA 
is an actual stimulus to small businesses. It has helped me. It 
has reduced my premiums. And I would be absolutely infuriated 
if we went backward.
    Mr. CROWLEY. I thank the witness for his testimony. I am 
pleased we got the opportunity to hear from a hard-working 
small business man like yourself.
    Let me just for the record really point out other benefits. 
No mandates on any employer with under 50 employees to comply 
with this. No more health care decisions will be made by HMO 
employees on the phone, but rather by patients and their 
doctors. Children can no longer be denied coverage on their 
parents' private health insurance because of a previously 
existing condition, like asthma. Children can stay on their 
parents' private health insurance until 26. And the list of 
benefits goes on and on and on.
    I thank you all for your testimony today.
    Chairman BOUSTANY. I want to remind the gentleman that he 
did raise prospective legislation, which has been under 
consideration, and that is not the purview of the Oversight 
Subcommittee. And at the same time, I would also remind the 
gentleman that the--Mr. Hisel has a non-profit entity, so that 
some of the tax considerations you proposed would not apply.
    Mr. CROWLEY. If the chairman would just yield for a moment?
    Chairman BOUSTANY. I will yield.
    Mr. CROWLEY. I was just taking the opportunity to point out 
the benefits of the law that we passed. So I thank the chairman 
for yielding.
    Chairman BOUSTANY. And we have better proposals going down 
the line.
    So I want to thank the witnesses for being here today, for 
your testimony, and I want to remind you all that--please be 
advised that Members may have written questions that they will 
submit, and your answers to those would be made part of the 
official hearing record.
    Again, thank you. And this hearing is now adjourned.
    [Whereupon, at 12:45 p.m., the Subcommittee was adjourned.]
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