[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]






      HOW TAX COMPLIANCE OBLIGATIONS HINDER SMALL BUSINESS GROWTH

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                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD
                             JULY 22, 2015

                               __________

           
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            Small Business Committee Document Number 114-020
              Available via the GPO Website: www.fdsys.gov
              
              
              
              
              
              
              
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                   HOUSE COMMITTEE ON SMALL BUSINESS

                      STEVE CHABOT, Ohio, Chairman
                            STEVE KING, Iowa
                      BLAINE LUETKEMEYER, Missouri
                        RICHARD HANNA, New York
                         TIM HUELSKAMP, Kansas
                        TOM RICE, South Carolina
                         CHRIS GIBSON, New York
                          DAVE BRAT, Virginia
             AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
                        STEVE KNIGHT, California
                        CARLOS CURBELO, Florida
                          MIKE BOST, Illinois
                         CRESENT HARDY, Nevada
               NYDIA VELAZQUEZ, New York, Ranking Member
                         YVETTE CLARK, New York
                          JUDY CHU, California
                        JANICE HAHN, California
                     DONALD PAYNE, JR., New Jersey
                          GRACE MENG, New York
                       BRENDA LAWRENCE, Michigan
                       ALMA ADAMS, North Carolina
                      SETH MOULTON, Massachusetts
                           MARK TAKAI, Hawaii

                   Kevin Fitzpatrick, Staff Director
            Stephen Denis, Deputy Staff Director for Policy
            Jan Oliver, Deputy Staff Director for Operation
                      Barry Pineles, Chief Counsel
                  Michael Day, Minority Staff Director
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                            C O N T E N T S

                           OPENING STATEMENTS

                                                                   Page
Hon. Steve Chabot................................................     1
Hon. Nydia Velazquez.............................................     2

                               WITNESSES

Mr. J. Christopher Mihm, Managing Director, Strategic Issues, 
  United States Government Accountability Office, Washington, DC.     4
Mr. Donald Williamson, Professor, American University, Executive 
  Director, Kogod Tax Center, Washington, DC.....................     6
Mr. Troy Lewis, Vice President, Heritage Bank, St. George, UT, 
  testifying on behalf of the American Institute of Certified 
  Public Accountants.............................................     8
Mr. Les Vitale, Partner, Local Markets Group, McGladrey, LLP, 
  Boston, MA.....................................................     9
Mr. Stephen F. Mankowski, Partner, EP Caine & Associates, LLC, 
  Bryn Mawr, PA..................................................    11

                                APPENDIX

Prepared Statements:
    Mr. J. Christopher Mihm, Managing Director, Strategic Issues, 
      United States Government Accountability Office, Washington, 
      DC.........................................................    33
    Mr. Donald Williamson, Professor, American University, 
      Executive Director, Kogod Tax Center, Washington, DC.......   112
    Mr. Troy Lewis, Vice President, Heritage Bank, St. George, 
      UT, testifying on behalf of the American Institute of 
      Certified Public Accountants...............................   124
    Mr. Les Vitale, Partner, Local Markets Group, McGladrey, LLP, 
      Boston, MA.................................................   137
    Mr. Stephen F. Mankowski, Partner, EP Caine & Associates, 
      LLC, Bryn Mawr, PA.........................................   144
Questions and Answers for the Record:
    Question from Hon. Alma Adams to Mr. Christopher Mihm and 
      Response...................................................   149
    Question from Hon. Alma Adams to Mr. Donald Williamson and 
      Response...................................................   151
    Question from Hon. Alma Adams to Mr. Troy Lewis and Response.   154
    Question from Hon. Alma Adams to Mr. Les Vitale and Response.   156

 
      HOW TAX COMPLIANCE OBLIGATIONS HINDER SMALL BUSINESS GROWTH

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                        WEDNESDAY, JULY 22, 2015

                  House of Representatives,
               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 11:00 a.m., in Room 
2360, Rayburn House Office Building. Hon. Steve Chabot 
[chairman of the Committee] presiding.
    Present: Representatives Chabot, Luetkemeyer, Hanna, Rice, 
Brat, Radewagen, Knight, Hardy, Velazquez, Payne, Meng, 
Lawrence, Adams, and Moulton.
    Chairman CHABOT. Good morning. Thank you all for being 
here. Special thanks to our witnesses who have taken the time 
away from their undoubtedly busy schedules to be with us here 
this morning. We really do appreciate that.
    Earlier this year, our Committee heard from a gentleman 
named Scott, who owns a small mattress factory in Franklin, 
Ohio. Scott wants to pay his taxes. He probably wishes he could 
pay less but more than anything he wishes the process could be 
simpler. He wants a flatter and fairer code that is more 
predictable.
    Scott is emblematic, I think, of many small businesses all 
across this country. There are millions of Americans out there 
just like Scott who feel the weight of the tax code every day. 
I speak to them every time I am back in my area, back in Ohio, 
and I hear the same concerns again and again. More Americans 
are frustrated with the process of paying their taxes, more so 
than even actually writing the check to the government. I am 
sure there are exceptions, but it is far too complicated. It is 
unacceptable and we must do better.
    Making the tax code simpler is particularly important for 
America's small business owners, as they are disproportionately 
affected by the tax code's complexity. This is a finding that 
unfortunately has not changed with time. Studies conducted for 
the Office of Advocacy at the SBA over the past 10 years found 
that small firms pay 67 percent more to comply with the tax 
code than large firms do. A recent update to those advocacy 
studies found that firms with less than 50 employees pay on 
average over $1,500 per employee in tax compliance costs, 
whereas, firms with more than 100 pay $647.
    It is because of statistics like that in 2013 this 
Committee asked the Government Accountability Office to examine 
the dynamics of small firms and their tax compliance burden. 
The GAO will be testifying today to outline their findings, and 
I would like to point out that right at the end of the report, 
the GAO outlines 25 separate recommendations that they have 
made to the IRS over the past few years that could, and 
probably would in my estimation, help reduce tax payer 
compliance burdens. The IRS has implemented none of them, and 
that is a problem.
    To be fair, I am not only blaming the IRS for this problem. 
Congress has been guilty as well. The tax code has grown to 
nearly 74,000 pages. The IRS did not do that; Congress did. 
This Committee is and will continue listening to the American 
people and urging Washington to make the tax code simpler and 
less stressful.
    As I stated earlier, we have the GAO here today to discuss 
their illuminating report in greater detail, and we will also 
hear from tax experts who will suggest ways to reduce the 
strain on small firms through comprehensive tax reform that 
reduces the complexity faced by small business.
    I am looking forward to the testimony of everyone here 
today, and I again want to thank each one of you. And I would 
also mention, originally there may have been a case where we 
were going to have two panels, but I have found over the years 
when we do that, oftentimes members have a certain amount of 
time that they can be here and they have other Committees and 
obligations and will listen to one panel and then not the 
other, and this is really a much better way to hear from all of 
you. And so that is why we changed that around, so if it was 
any inconvenience to anybody, we apologize.
    And I would now like to yield to the ranking member, Ms. 
Velazquez, for her opening statement.
    Ms. VELAZQUEZ. Thank you, Mr. Chairman.
    The success of the American economy relies heavily on its 
vibrant small business community. Small businesses employ 50 
percent of our workforce and generate nearly $6 trillion in 
revenue. When talking with small business owners, we often hear 
that an intense focus on the bottom line is necessary to 
succeed. They know every dollar counts and devote significant 
resources to work that goal.
    One area every small business owner must focus on is 
complying with our tax laws. The tax compliance burden on small 
businesses takes many forms. Most notably is the complexity of 
the code itself. With so much paperwork to fill out every year, 
the majority of firms report spending more than 40 hours 
preparing their tax returns.
    To better understand the costs of the burden and what the 
IRS is doing to reduce it, this committee requested the GAO 
report at the center of today's hearing. That report reinforced 
much of the anecdotal evidence we have heard on previous 
occasions. The complexity of the tax code creates a number of 
fixed cost items that do not scale with the size of the 
company. As a result, smaller businesses are disproportionately 
impacted compared to their larger counterparts.
    One way to address this problem is by simplifying the tax 
code. By reducing its complexity, small businesses will see 
decreases in these fixed costs as the need for expert 
preparation and the time commitment will both be reduced. The 
complexity of the tax code cuts both ways. Taxpayers' 
noncompliance costs the IRS nearly $350 billion every year 
prompting numerous initiatives to close the gap. One of them is 
the use of Form 1099-K to track electronic payments. By 
collecting data directly from payment processors, like Visa and 
PayPal, the IRS intends to cut down on underreporting and spur 
more businesses to voluntarily comply.
    Unfortunately, if the information does not match up or 
errors are made, it could trigger costly and time-consuming 
audits for law-abiding firms. In response, the IRS began the 
Payment Mixed Comparison Tool (PMCT) pilot to reduce the burden 
which GAO was also asked to look at. While they found IRS's 
payment card matching program has the potential to reduce 
noncompliance, it was unclear whether it would reduce taxpayers 
burden.
    GAO also found that the majority of small businesses use 
pass-through entities, like partnerships and S corporations, 
which prevent them from receiving a number of business friendly 
tax incentives. The average corporate tax rate is just 12.6 
percent compared to 31.6 percent and 29.4 percent that S 
corporations and partnerships pay.
    Comprehensive tax reform, not only corporate, is necessary 
to spur additional economic growth in our small business 
sector. In other words, small entities are not looking for 
special treatment, just equal treatment with their larger 
counterparts.
    One of the principal tenets of tax policy is that we strive 
for simplicity and some semblance of certainty. The tax rules 
should specify when the tax is to be paid, how it is to be 
paid, and the amount to be paid. Through comprehensive tax 
reform, Congress can provide small firms with both, by limiting 
yearly policy changes which will help them more easily plan 
their business investments, operations, and estate planning 
based on those known laws.
    I look forward to hearing from today's witnesses on the 
findings and recommendations contained in GAO's report. And I 
thank you for being here today.
    Mr. Chairman, I yield back.
    Chairman CHABOT. Thank you very much.
    And if Committee members have opening statements prepared, 
we would ask that they submit them for the record.
    And I will take just a moment to--before I introduce the 
panel, to kind of explain our rules. You get five minutes to 
testify. There is a lighting system. A green light will be on 
for four minutes. The yellow light will let you know you have 
got a minute to wrap up, and then the red light will come on 
and we ask you to stay within that as much as possible, and 
impose those same rules on ourselves, so we get five minutes to 
ask questions.
    And I will now introduce our panel. We will begin with our 
first witness, Chris Mihm, the managing director for Strategic 
Issues at the United States Government Accountability Office. 
He leads GAO's work on government oversight and transformation 
issues such as performance management and collaboration, 
federal budgeting, regulatory policy, and federal tax policy 
and administration. He is a fellow and former board chair of 
the National Academy of Public Administration and an adjunct 
lecturer in Public Administration at the University of Maryland 
Graduate School of Policy, and we welcome you here this 
morning.
    Our next witness will be Don Williamson, professor in the 
Department of Accounting and Taxation at American University. 
He also serves as the executive director of the University's 
Kogod Tax Center, a research institute focusing on the 
interests of small business. He has also served as an adjunct 
professor at American University's Washington College of Law. 
Professor Washington published over 50 articles in professional 
and academic journals and was recognized as the Bureau of 
National Affairs' Outstanding Author for 2007. Welcome this 
morning.
    Our next witness will be Troy Lewis, who is vice president 
and chief enterprise risk management officer at Heritage Bank 
in St. George, Utah. He is also the manager of Lewis and 
Associates, a small accounting firm in Draper, Utah. 
Additionally, he serves as adjunct faculty in the taxation 
department at Brigham Young University. He is also chair of the 
Tax Committee at the American Institute of Certified Public 
Accountants, whom he is testifying on behalf of today. We 
welcome you as well.
    Our next witness will be Les Vitale, managing director and 
partner at McGladrey and Pullen in Boston, Massachusetts. Mr. 
Vitale brings over 30 years of professional experience to his 
clients and his broad base of knowledge includes specialties in 
the traditional accounting, auditing, tax, and assurance 
services. He has authored technical articles and developed 
policy and procedural manuals for the firm in the areas of 
quality control, staff training and evaluation, recruiting, and 
technology.
    We thank you all for being here, and I would now like to 
yield to Ms. Velazquez to introduce our final witness.
    Ms. VELAZQUEZ. Thank you, Mr. Chairman.
    Stephen Mankowski is the vice president and national tax 
chair of the National Conference of CPA Practitioners, the 
nation's second largest CPA organization. His firm has been 
advising small firms on accounting and taxation for over 30 
years, helping 2,000 clients annually. As an expert in the 
field, Mr. Mankowski has participated on IRS panels regarding 
compliance burden for small businesses and as a member of the 
NCCPAP, partook in the electronic payment pilot program that 
was examined by today's GAO report. Mr. Mankowski graduated 
from LaSalle University.
    Welcome to the committee. Thank you.
    Chairman CHABOT. Thank you very much.
    We will begin with Mr. Mihm. You are recognized for five 
minutes.

STATEMENT OF J. CHRISTOPHER MIHM, MANAGING DIRECTOR, STRATEGIC 
     ISSUES, UNITED STATES GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. MIHM. Well, thank you, Mr. Chairman, and Ms. Velazquez, 
and members of the Committee. It is an enormous pleasure and 
honor to be able to be with you here today to discuss our 
report on Tax Compliance Burden and Small Businesses. That 
report is being released today and it is available, of course, 
on the GAO website at gao.gov.
    As this Committee is well aware, given the important role 
that small business plays in the U.S. economy, reducing the 
cost of compliance with the tax code frees up additional 
resources to expand, hire new employees, and further 
contributes to economic growth. At the same time, small 
business tax issues are a significant contributor to the annual 
tax gap which is the difference between taxes owed and taxes 
paid on time. And as both the chairman and Ms. Velazquez 
mentioned in their opening statements, and IRS takes as a given 
as well, the overwhelming majority of taxpayers want to pay 
their taxes in full and timely manner. It is just that we need 
to make sure that we create the environment and give them the 
tools that enable them to do that, including reforms to the tax 
code as you pointed out. Thus, the key challenge for IRS is 
that they must minimize taxpayer burden while encouraging, and 
as the chairman pointed out with his reference to his 
constituent Scott, making possible voluntary compliance with 
the tax code.
    My remarks today highlight the key findings of our report. 
I know you have seen it, so in the interest of brevity I will 
just hit four very key points on that.
    First, most small businesses are individuals, but most 
small business income is generated by partnerships and 
corporations. According to Treasury analysis, small businesses 
make up about 99 percent of businesses in the United States. 
Treasury defines a small business for this purpose as 
individuals or entities with business activity that is less 
than $10 million in total income and deductions. Approximately 
69 percent of small businesses, or about 1-6 million, are 
individual taxpayers who report business income. The remaining 
31 percent, or roughly 7.3 million, are partnerships or 
corporations.
    On the other hand, in 2010, individuals generated 23 
percent of total income of all small businesses. This equates 
to about $1.4 trillion into the economy. Small business 
partnerships, S corps, and C corporations accounted for the 
remaining 77 percent of small business income, and that 
represented $4.5 trillion in income.
    My second point. Tax compliance burdens vary across small 
businesses. The variance is driven by factors such as business 
asset size, by type--for example, is it a sole proprietor or a 
C corporation--number of employees and industry type. Our 
report details how certain tax compliance-related activities 
create burden. The report groups these into general categories, 
such as income tax activities, employee-related tax activities, 
and third-party information reporting.
    As the chairman mentioned, SBA and IRS data has shown that 
there are very real costs both in terms of time and money with 
small businesses in order to be able to comply with the various 
requirements.
    My third point this morning is that IRS does consider small 
business compliance burden in its decision making, but 
improvements are clearly needed. We interviewed small business 
representatives, including those from the AICPA, who said that 
IRS's outreach efforts have been effective in identifying 
opportunity to reduce compliance burden. As one example, IRS 
worked with stakeholders to develop a simplified method for 
small businesses to calculate the home office deduction. That 
change was introduced in January 2013. Previously, businesses 
had to complete a complex property depreciation calculation. As 
I am sure you have heard from your constituents over many 
years, that had been a very real pain point for small 
businesses.
    Nevertheless, and despite that real and important progress, 
stakeholders also pointed to a number of areas where IRS burden 
could be further reduced. These are areas of IRS customer 
service. Among others, those open recommendations that the 
chairman mentioned. We have recommendations in these areas that 
we believe need aggressive action from IRS and, that if 
effectively implemented, could improve service and help reduce 
the tax gap.
    Fourth and finally, IRS's evaluation of its payment card 
pilot has strengths but needs to be more fully developed. This 
is obviously a point that Ms. Velazquez was making in her 
statement. IRS began this pilot program in 2012, and what it 
does is it compares payment data from payment settlement 
entities, such as credit card companies, with income reported 
by small businesses. The evaluation plan that IRS has for the 
pilot has many elements of a well-designed evaluation, which is 
a bit of an anomaly for IRS. They typically do not do that good 
of a job with their evaluations. I mean that as a positive 
statement I should say.
    As a result, IRS has been able to make rapid and ongoing 
assessments of pilot activities and to make changes based on 
lessons learned. However, the overall evaluation lacks key 
performance measures for the pilot's goals--so we do not know 
whether or not it should be implemented more broadly, clear 
evaluation criteria, and other elements.
    With that, let me end at that point and obviously take any 
questions that the Committee may have.
    Thank you, Mr. Chairman.
    Chairman CHABOT. Thank you very much. We appreciate that.
    Mr. Williamson, you are recognized for five minutes.

     STATEMENTS OF DONALD WILLIAMSON, PROFESSOR, AMERICAN 
 UNIVERSITY, EXECUTIVE DIRECTOR, KOGOD TAX CENTER; TROY LEWIS, 
   VICE PRESIDENT, HERITAGE BANK; LES VITALE, PARTNER, LOCAL 
MARKETS GROUP MCGLADREY, LLP; STEPHEN F. MANKOWSKI, PARTNER, EP 
                    CAINE & ASSOCIATES, LLC

                 STATEMENT OF DONALD WILLIAMSON

    Mr. WILLIAMSON. Chairman Chabot, Ranking Member Velazquez, 
and members of the Committee, thank you for the opportunity to 
offer my suggestions for reducing the tax compliance burden on 
small businesses when preparing their tax returns.
    My name is Don Williamson, and I am a professor of Taxation 
at American University's Kogod School of Business, where for 
the past 30 years I have directed the school's Master's in 
Taxation degree program. The MST program at American offers 
graduate courses in federal taxation to CPAs, experienced 
accountants, attorneys, and others who wish to expand their 
knowledge of our nation's tax law. As part of my 
responsibilities at American, I am also the executive director 
at the Kogod Tax Policy Center, which conducts nonpartisan 
research on tax issues affecting small businesses and emerging 
entrepreneurs that will enhance compliance while reducing 
compliance costs. And, for the past 25 years, I have had my own 
tax preparation and tax planning practice for small businesses 
in Falls Church, Virginia.
    My written testimony describes some of the tax compliance 
burdens imposed on small businesses that consume time and 
resources that cannot be employed in their businesses to create 
more jobs. Specifically, today, in my testimony, I want to 
recommend to the Committee that our tax code be amended to 
permit more small businesses to adopt the cash method of 
accounting on their tax returns. Generally, a taxpayer using 
the cash method of accounting recognizes income or deductions 
when cash is received or paid. An accrual basis taxpayer, on 
the other hand, must recognize income or expenses when all 
events fixing the right or obligation have occurred, regardless 
of when cash is paid or received.
    As detailed in my written testimony, I believe that more 
small businesses should be allowed to adopt the cash method of 
accounting, rather than the current law requirement imposing 
the accrual method that is uniformly considered more complex 
and offers few advantages to small businesses whose chief 
concern with regard to their financial condition is their cash 
flow. It is important to note that the method of accounting 
adopted by a business, whether the cash method or the accrual 
method only affects the timing of when a business reports 
income or deductions on its tax return. The accounting method a 
business uses does not determine whether an item of income is 
taxable or expense is deductible, and does not affect the total 
income and deductions a business will recognize over its 
lifetime.
    However, despite the greater simplicity and better fit of 
the cash method for small businesses, the entire revenue code 
continues to deny the cash methods to corporations with average 
gross receipts exceeding $5 million. As discussed in the 
Senate's Bipartisan Tax Working Group Report on business income 
tax issued this month, I urge Congress to increase the current 
threshold for use of the cash method to $10 million. Raising 
the threshold to $10 million will mean that 99 percent of all 
businesses in the United States could adopt the cash method.
    But even when the cash method is available to a small 
business, certain judicial doctrines, such as constructive 
receipt for the recognition of income, impose unnecessary 
complication on a small business simply to accelerate the 
reporting of income by, in most cases, a few months before 
actual cash is received. Also, the requirement that a cash 
method small business may not deduct its cash outlay to 
purchase or produce inventory until that product is sold may 
satisfy accounting theorists but offers no immediate tax 
benefit to small businesses that expend considerable sums 
creating jobs.
    To further reduce the compliance burden on small business 
therefore, I urge Congress to go beyond the proposals discussed 
in the Senate's Bipartisan Tax Working Group Report, and enact 
a simplified cash method of accounting described in detail in 
my written testimony. Under this method of accounting, a small 
business would simply look to its checkbook to determine its 
taxable income. It sounds simple and it is. Permitting small 
businesses to elect a simplified cash method of accounting will 
reduce tax compliance costs, ease the burden of tax 
administration, and clarify the measurement of taxable income.
    Thank you again for the opportunity to testify, and I would 
welcome any questions from the Committee.
    Chairman CHABOT. Thank you very much.
    Mr. Lewis, you are recognized for five minutes.

                    STATEMENT OF TROY LEWIS

    Mr. LEWIS. Chairman Chabot, Ranking Member Velazquez, and 
members of the Committee, thank you for the opportunity to 
testify today.
    My name is Troy Lewis. I am the vice president and chief 
enterprise management risk management officer at Heritage Bank 
in St. George, Utah. I am also a tax practitioner, adjunct 
faculty member at BYU, and chair of the Tax Executive Committee 
of the American Institute of CPAs. I am pleased to testify 
today on behalf of the AICPA.
    We applaud the leadership taken by the Committee to 
consider ways to reduce the complexity faced by small 
businesses when preparing their taxes. Small businesses are the 
foundation of the U.S. economy, employing over half of the 
private sector workforce and creating nearly two-thirds of this 
nation's new jobs.
    Unfortunately, compliance with federal tax laws can act as 
a roadblock. Unlike large corporations, time spent by small 
businesses in complying with tax laws is much more costly 
because they do not have the luxury of a large customer base 
with which to spread those costs.
    We need to keep in mind that time devoted to tax law 
compliance has an impact on business creation, job growth, and 
economic prosperity. First, it is imperative that small 
businesses and their tax return preparers have the ability to 
communicate with the IRS when preparing their taxes and 
addressing compliance issues. However, there has been 
increasingly limited access to the agency. Through an informal 
survey we conducted earlier this year, we learned that over 
half of our members were either somewhat dissatisfied or very 
dissatisfied with the services they received from the IRS. This 
is no surprise considering that only 17 percent of our members 
said that the agency answered their telephone calls within a 
half hour. Most of our members were on hold for extended 
periods of time or did not have the time to wait that long.
    Let me share with you one member's experience. ``I was on 
hold for over an hour and a half. When the IRS agent finally 
picked up the call, they needed to transfer to another agent. I 
had to wait on hold for another hour. Finally, I received a 
recorded message that the office was now closed and I needed to 
call again the following day.''
    Unfortunately, this is not a unique experience. Many 
taxpayers also experience the IRS's so-called courtesy 
disconnects where the IRS disconnects a call without taking a 
message if the caller has been on hold for two hours. Nothing 
is more discouraging, frustrating, or inefficient for a caller 
than being hung up on after waiting for nearly two hours.
    We understand the IRS has new initiatives and obligations, 
but taxpayer services must remain a high priority in order for 
small businesses to receive the assistance they so desperately 
need.
    Another challenging tax compliance obligation that small 
businesses recently dealt with was the tangible property 
regulations. These rules, which address how businesses should 
report the purchase and improving a property are almost 500 
pages of technical guidance and procedures. Now, to be fair, 
the regulations clarify some rules. However, they were still 
significantly burdensome for small businesses. The AICPA pushed 
hard for relief and stressed that time was of the essence. The 
IRS finally issued partial relief on February 13th, well into 
the filing season. Unfortunately, some small businesses and 
their tax practitioners had already spent time and resources 
attempting to comply with the regulations. If the IRS had acted 
sooner, small businesses could have been spared some 
administrative burden.
    There are other issues that remain open in regards to the 
repair regulations. Currently deducted amounts in excess of the 
Safe Harbor threshold, taxpayers must prove that expensing such 
amounts in the current year clearly reflects income.
    However, the clear reflection of income test can be 
challenging for any taxpayer, but especially for small 
businesses. These rules force taxpayers to depreciate the cost 
of items, such as a computer or a printer, over a number of 
years. To provide meaningful relief, Congress should increase 
the $500 Safe Harbor threshold to $2,500 and index the amount 
annually for inflation. To further reduce burden, we also 
suggest that you allow taxpayers with reviewed financial 
statements to use the higher $5,000 threshold.
    Finally, we encourage you to examine all aspects of the 
code to reduce the complexity faced by small businesses when 
preparing their taxes. For example, penalty provisions need to 
consider their effect on voluntary compliance, and employers 
operating across state lines need a uniform, national standard 
for nonresident income tax withholding rules. The income tax 
deadline should also promote an efficient flow of taxpayer 
information to provide small businesses sufficient time to file 
accurate returns.
    In summary, small businesses and tax practitioners are 
interested in, and so desperately need, tax reform to reduce 
the burden that hinders growth.
    Again, with that, Mr. Chairman, thank you for the 
opportunity to testify, and I would be happy to answer any 
questions.
    Chairman CHABOT. Thank you very much.
    Mr. Vitale, you are recognized for five minutes.

                    STATEMENT OF LES VITALE

    Mr. VITALE. Thank you. Thank you, Mr. Chairman, Ranking 
Member Ms. Velazquez, and members of the Committee.
    My name is Les Vitale. I am a partner at McGladrey, a 
national firm. I work out of the Boston office, which is 
comprised of about 650 professionals. McGladrey is a firm that 
has 8,000 professionals that practice in 80 cities across the 
country. In addition to that, the group I practice in 
specifically is a small practice group called the Local Market 
Group. The Local Market Group is made up of about 50 
professionals, including five partners. My client base in 
particular represents about 40 small businesses with sales 
ranging from under five million to up to 100 million in revenue 
with employees from 10 to just about 200. All of my clients are 
privately owned and many are family owned. The majority of my 
client companies are S corporations.
    In preparation for today's testimony, I determined that it 
was best that I poll the practice group so that it was 
representational of the members of my firm. In trying to come 
up with some common themes, we did so, and we came up with 
three challenges that I would like to present to the Committee 
today. And those subjects include the TARS legislation relative 
to depreciation, privacy and security, and also S corporation 
basis.
    So the rules with regards to TARS legislation in a word are 
onerous. The depreciation rules were originally set out to 
spread the timing of a deduction so there really is no question 
about the fact that something is deductible. So it is a 
question of not if, but when. So one of the items that was 
pointed out by my colleague, Mr. Lewis, was that there are 
differences between small and large companies and what they are 
allowed to do under these regulations, which has created a 
burden for the small client. Many of my companies do not have 
what is referred to as an applicable financial statement. Large 
companies, in particular large public companies, so very large 
companies that have audits due, the rules therefore are 
different. They are allowed larger thresholds up to $5,000. The 
small clients in our practice unit, the small S corporations, 
the family-owned businesses, have a $500 de minimis exception 
amount only if they elect it.
    When polled, the members of my practice unit said that one 
of the things they have spent the most time on this year is the 
administrative and compliance requirements related to the TARS 
legislation. That legislation and those rules required and are 
requiring the filing of a Form 3115. 3115 could take on average 
from 10 to 15 hours of time. Larger corporations, even longer.
    One of the suggestions and one of the recommendations that 
we would make in our firm, and we have talked about this 
internally, is the simplification of the election requirements 
in electing safe harbor for the de minimis rules. One method 
would be to simply modify the current Form 4562, which is the 
current depreciation form. It could simply be redesigned to 
include the questions that are asked of the 3115, and really 
reduce down the time requirements to prepare that form.
    We would also suggest that the safe harbor amounts be 
revisited and consider raising those levels to $5,000. One of 
the things that the laws do not take into account is the degree 
of differences between companies. Service companies versus 
innovation companies are very different. Their needs and their 
investment in capital and there is really nothing in the code 
and the current constitution of the forms that allows for that 
flexibility.
    In addition to that I wanted to cover briefly the privacy 
issues. In our firm, we have had over 20 breaches in the last 
four or five months. I have two going on right now. Those have 
required a significant amount of time, and I know I am not here 
to suggest that I have the answers to security and privacy 
breach, but the time that is spent on the phone, as also 
pointed out by my colleague, has been significant, and I 
personally have spent probably 15 to 20 hours trying to resolve 
two cases.
    The last item that I wanted to cover was S corporation 
basis. I have a client case right now that is under audit. The 
client has closed the business. They have been in business for 
about five years. They lost money each year, and the auditor 
has spent three days on the audit right now at great expense to 
the client, and it is all about the amount of basis that the 
client had. The basis rules and my dialogue are contained in my 
testimony feeder review.
    Thank you very much for your time to present these.
    Chairman CHABOT. Thank you very much.
    Mr. Mankowski, you are recognized for five minutes.

               STATEMENT OF STEPHEN F. MANKOWSKI

    Mr. MANKOWSKI. Chairman Chabot, Ranking Member Velazquez, 
and members of the Committee, thank you for inviting me to 
testify today.
    My name is Stephen Mankowski, and I am a CPA. I am the 
executive vice president and tax policy chair of the National 
Conference of CPA Practitioners.
    Tax compliance burden has been defined in the GAO Report on 
Small Businesses as the time and money spent by the taxpayer to 
meet tax obligations, not the associated liabilities. An 
objective of the administration and the IRS has been to 
minimize taxpayer burdens and eliminate unnecessary ones.
    There has been a decided change in how business is 
transacted. Credit cards have become the norm. Business owners 
have had to accept the payment processing, compliance, and 
equipment rental costs as cost of doing business. Online sales 
have caused the IRS to question the voluntary compliance of 
reporting all revenue.
    As a result of a 2008 law, payment card processors had to 
begin reporting credit card receipts of the IRS and the 
merchant in 2011 and added the number of monthly transactions 
for 2012. Once a merchant annually has 200 transactions and 
sales of at least $20,000, they will receive Form 1099-K, 
Merchant Card and Third Party Network Payments. Initially, 
1099-K results were to be placed directly on the specific lines 
on tax returns. This changed as many issues arose. 
Specifically, there was confusion on how sales tax gratuities 
and merchandise returns were handled on 1099-K. Those same 
concerns still exist and are just some of the reasons that the 
IRS has not taken a stronger stance on the use of the 
information on these forms.
    Business owners track revenue by specific categories, such 
as sales, consulting, or rental income. They do not track 
revenue based on how they are paid. Trying to accurately track 
revenue to match the 1099-K would actually result in an 
accounting nightmare. To further complicate the recordkeeping, 
businesses receive a 1099-K for each specific payment 
processor--one for MasterCard/Visa, one for American Express, 
one for PayPal, and another for Discover. And even a second 
round if they change processing firms during the year.
    From the IRS viewpoint, this form has helped increase 
voluntary compliance among small businesses. Many virtual 
businesses that had previously flown under the radar are now 
filing income tax returns and paying taxes. In addition, the 
1099-K has allowed the IRS to establish a database whereby they 
can obtain a better understanding of the revenue sources within 
particular industries.
    The IRS instituted a pilot program for the 2015 filing 
season called the Payment Mixed Comparison tool that utilizes 
database. NCCPAP was invited to participate in this program, 
which allows our members to enter selected data from the 
client's 1099-K. The tool accesses the IRS database by a 
specific merchant category code (MCC) and compares various 
ratios for a business. The result tells the CPA if the results 
are within the specifications of the database. A common flaw 
with the 1099-K is that if the payment processor enters an 
incorrect MCC code for a business, the results could be beyond 
the standard deviation, which may result in an IRS notice. The 
results from the tool have been strictly for the benefit of the 
taxpayer and for informational purposes only.
    Currently, the IRS is not capturing data from this tool. 
The database will continue to improve as the volume of 1099-K 
data is input into the tool. Unfortunately, the tool did not 
get the expected usage due to practitioner concerns. 
Specifically, many practitioners did not believe that the IRS 
was not tracking results, the name of the tool was not the 
best, and the tool did not go live until February 2015, after 
most CPAs had already completed their training and had begun 
preparing tax returns. In addition, many felt there should be a 
better results besides typical or unusual. Hopefully, this 
program will continue and improve next year and we will see 
more uses by tax professionals. If used properly, this tool 
could actually reduce taxpayer burden by addressing issues of 
credit card revenue while the data is still fresh in the 
business owner's mind.
    The form 1099-K program also has the potential to be a 
disaster. This is a repeat of warnings from NCCPAP and others 
in the practitioner community when the form 1099-K matching 
program was first proposed. The IRS should use all tools 
possible to ensure tax compliance and close the tax gap. 
However, as the GAO has correctly indicated, this is a flawed 
system with no reliability of matching gross income with the 
1099-K reports.
    I would like to thank Chairman Chabot, Ranking Member 
Velazquez, and all members of the Committee for the opportunity 
to present this testimony today. I will be happy to answer any 
questions. Thank you.
    Chairman CHABOT. Thank you very much. I think it was 
excellent testimony by all the witnesses here this morning, so 
we thank you for that. And we will go ahead and open up the 
questions, and I will yield myself five minutes to begin.
    I will start with you, Mr. Mihm, if I can. In your report, 
you identified around 25 past GAO recommendations that if 
implemented could help reduce compliance burden on small 
businesses. How seriously do you feel that the IRS has taken 
the GAO's recommendations thus far?
    Mr. MIHM. I think on the whole, Mr. Chairman, the IRS does 
take our recommendations seriously. I mean, they have wide 
ranging and very difficult responsibilities. We are always 
making recommendations.
    Chairman CHABOT. Have they implemented any of them?
    Mr. MIHM. They implement quite a few. The ones that we are 
talking about today are ones that we believe they have not yet 
implemented, and there are still plenty of opportunities on 
that.
    Just as an example, the telephone answering over the last 
year. 2014, if you called 67 percent of the time you could get 
through. 2015, you were getting through 59 percent of the time. 
I am sorry, 39 percent of the time. These are the courtesy 
disconnects. What an Orwellian term that Mr. Lewis has 
mentioned. The wait times----
    Chairman CHABOT. The courtesy disconnect as it was referred 
to, if you have been waiting on there for two hours, their 
courtesy is to basically hang up on you?
    Mr. MIHM. They hang up on you. Yeah.
    Now, very often though you beat them to the punch because 
the hang-up rate in 2014, the individual saying I cannot take 
this anymore was 29 percent of the calls. It was 57 percent 
this year. And that is also explained by the wait time. The 
wait time in 2014 was about 17 minutes and about 28 minutes 
this time. And these are averages.
    What we have urged IRS to do is a couple of things. One is 
that they need to benchmark their telephone assistance service. 
They are not the only organization in the United States that 
has a call center, and so there are plenty of other places that 
they can benchmark against.
    Second is that they need to then also be thinking of an 
integrated strategy that considers how they can provide service 
and information to taxpayers using both the phone and then also 
using and augmenting the IRS website and having more of an 
Internet-based strategy for getting information out there.
    And then finally, they need to engage the Congress. As 
their resources have been going down in recent years, they need 
to make sure that they take a strategic approach, sit down with 
the Congress and say these are the tradeoffs that are being 
made. If there are different tradeoffs that we should be 
making, please give us guidance on that. But those are all open 
recommendations.
    Chairman CHABOT. Thank you very much.
    Mr. MIHM. Yes, sir.
    Chairman CHABOT. Mr. Williamson, I will turn to you next.
    Now, you are a professor and you also have a tax 
preparation service yourself. What is the biggest one or two 
complaints that you hear from the small businesses that you do 
their taxes for?
    Mr. WILLIAMSON. Well, they do not understand the law. And 
when taxpayers do not understand the law, they come to 
disrespect the law. And we all know what happens next, and that 
is fraud, that is cheating. So what we need is simpler rules 
that I, as a tax return preparer, can explain to my clients and 
they can accept me to prepare the return and pay their fee to 
pay their tax. I think all of us here today have said taxpayers 
want to pay their tax. I hail from Utica, New York. I know the 
people in Utica, New York, want to pay their tax. But the 
problem is they do not understand the law.
    Chairman CHABOT. And you indicated that you feel strongly 
that going to a simplified cash method of accounting----
    Mr. WILLIAMSON. Absolutely, sir.
    Chairman CHABOT.--would be one of those critical things we 
could do to make it more understandable?
    Mr. WILLIAMSON. The clients I represent, and I represent 
the smallest of the small probably at this table, where 
$300,000 or $400,000 a year of sales on a Schedule C is a 
living for your family. Those folks do not need to do 
depreciation schedules and be on the accrual method and do cost 
of goods sold. They know what they need. They need cash in the 
bank, and they are willing to take some of that cash and pay 
their tax with it.
    Chairman CHABOT. Thank you.
    Mr. Lewis, you said something which I agree with very much, 
and if you want to expand upon it briefly, you said that the 
time spent by your average small business person in compliance 
with the tax code is time that they are not spending on what 
their basic business is and having a successful business so 
they can perhaps expand and create more jobs for more people. 
Is that accurate, and did you want to comment on that?
    Mr. LEWIS. Yes, it is accurate. And I think one thing to 
keep in mind is any one particular provision when it starts out 
has a reason. These tax code laws that we are talking about, at 
one point there was either a motivation or something. But when 
added upon the ones from last year and adding upon the ones 
from last year and the last year and the last year, you find 
that you have got these layers. And what we have done is we are 
not taking everything away. So every single year you find 
yourself getting more and more. So even if you say this 
particular provision is not that burdensome, you have to take 
it in context of what about the last 20 years and all of that 
added together. It is simple. They have so much time in a day. 
If you are taking their time by making them comply with 
regulations, you are taking time away from what they do.
    Chairman CHABOT. Thank you.
    I will be real brief in my last question, Mr. Vitale.
    Do you think it has reached the point where it is almost 
impossible for a small company nowadays to do their own taxes?
    Mr. VITALE. Yes. We have some very small clients similar to 
the professor, and even the smallest of small clients, they 
have access to TurboTax and a lot of tax programs that 
supposedly could make their life easier, but we get calls all 
the time from small, small companies that still need help with 
that.
    Chairman CHABOT. Thank you.
    Mr. Mankowski, I apologize. I ran out of time, but I am 
sure you will get more questions.
    So I now yield to the ranking member for questions.
    Ms. VELAZQUEZ. Thank you, Mr. Chairman.
    Mr. Mihm, the payment card pilot essentially compares 1099 
forms from payment processors with tax returns to identify 
underreporting and inconsistencies. If the information on the 
forms does not match, the IRS sends out notices. What is the 
benefit of a notice if it leads honest companies to have to put 
in additional work to reconcile forms that may be mismatched 
for unrelated reasons such as self-tax, tips, so forth?
    Mr. MIHM. Yes, ma'am. There are actually two benefits. One 
is before the notice goes out, you would hope that the 
knowledge that IRS is receiving this payment card information 
and that this matching is taking place will be an incentive to 
get them to do that. IRS has seen some very early data that 
they believe is showing that that is the case. Again, this is a 
minority of taxpayers we are talking about.
    For the other taxpayers, it is, as clearly you are implying 
in the question, it is not much of an advantage for them if 
they have to, in a sense, go back and correct an IRS record on 
this. This gets to why we think it is so important for IRS to 
have a good evaluation strategy. The potential for this pilot, 
like a lot of third-party information reporting, is that it can 
really reduce burden, can help improve compliance, so it could 
be a big deal. And I realize that all three of those were 
conditionals that I used--could, could, could. But they have to 
make sure that they implement it the right way. They have to 
make sure that they reach out to the stakeholders and engage 
them in the design of the program, and they need to make sure 
that they are actually measuring the performance so that they 
know if they are actually getting more benefit for this program 
or are we sending out bogus notices to people that is actually 
causing more headaches for honest taxpayers.
    Ms. VELAZQUEZ. An important element, of course, is the type 
of outreach that the IRS will do.
    Mr. MIHM. Absolutely, ma'am.
    Ms. VELAZQUEZ. So when you look at tax compliance and the 
effect it could have on small businesses, did you also look at 
the fact that since 2010, the IRS lost 18 percent of its 
budget? Does that have anything to do----
    Mr. MIHM. Yes, ma'am. And that was the reference I was 
making to the question of the chairman, is that the IRS needs 
to engage with the Congress, given how much their budget has 
gone down. Now, this has all been with added responsibilities. 
You know, both in the growth of the number of taxpayers, 
Affordable Care Act implementation responsibilities, other 
changes to the tax laws. They are in a very difficult position 
as an agency, and I realize there is not a lot of appetite to 
be looking to plus up the IRS budget.
    Ms. VELAZQUEZ. Right.
    Mr. MIHM. Which means why do we have to engage in that?
    Ms. VELAZQUEZ. But we need to understand that by cutting 
the budget so that it punishes the agency, in reality, it 
punishes small businesses because they will not get the type of 
services needed, such as when you place a call and expect for 
someone to be able to answer that call.
    Mr. Mankowski, you describe how accepting credit cards and 
their related fees is becoming the norm and just another cost 
of doing business. However, as you stated, the complexity of 
accepting different cards with different rules about deposits 
and deductions adds to taxpayers' burden, how does the rising 
popularity of electronic payments impact your firm's typical 
small business client?
    Mr. MANKOWSKI. Thank you. It has been a major impact on the 
clients. They are finding that in the past where they have just 
been able to just accept cash and checks, that more and more of 
the population, for whatever reason, has an aversion to 
carrying cash, and they are paying with credit cards even if it 
is for a two dollar soda at the convenience store or wherever 
else they are transacting business. So it is something that 
they have really been having to assume the burden of. And with 
that, they have added fees, not just with the processing fees 
that are going to vary based on the type of credit card that is 
being used, whether it is a points card or so forth that tend 
to have higher rates, in addition to the different rates that 
MasterCard/Visa, versus American Express or Discover. But now 
they are also finding that in addition, because of credit card 
fraud that has also been going on, that now they also have 
added compliance burdens that they are required to go through, 
whether it is some sort of training and annual webinars or 
seminars that they need to undergo to be aware of compliance 
and whether there are different rates and different services 
that they are required to do if the card is present or if the 
card is not present, to make sure that they are not 
participating in the fraud that they are trying to prevent.
    Chairman CHABOT. Thank you.
    The gentlelady's time has expired.
    The gentleman from Missouri, Mr. Luetkemeyer, who is Vice 
Chairman of this Committee, is recognized for five minutes.
    Mr. LUETKEMEYER. Thank you, Mr. Chairman. I am way over 
here on the corner.
    Mr. Williamson, you mentioned in your testimony cash 
accounting, accrual accounting. You do business with a lot of 
small businesses, and there is a thought process of lowering 
the amount where you have to start going to accrual accounting. 
What would that do to a lot of the small businesses you deal 
with?
    Mr. WILLIAMSON. It would make it a lot easier for them to 
file their tax returns.
    Mr. LUETKEMEYER. If you lower it to----
    Mr. WILLIAMSON. Lower it? No, we are advocating raising the 
threshold that would permit you to drop the cash method to $10 
million. To lower that, I think you would have serious 
compliance problems.
    It alludes to the point I was making a moment ago about 
disrespect for the system. And if people do not feel that 
filing their tax return adds any value other than having their 
money confiscated by the federal government, I do not know if 
you would get very many correct tax returns as a result.
    Mr. LUETKEMEYER. You were talking about noncompliance. I 
was reading the problem with Greece this past month or so here 
that they have 95 percent noncompliance with regards to 
paying----
    Mr. WILLIAMSON. Well, I sincerely hope we never----
    Mr. LUETKEMEYER. I do not know how in the world their 
economy can exist if they have got 95 percent noncompliance.
    Mr. WILLIAMSON. I think we see it is not.
    Mr. LUETKEMEYER. They have got a one percent problem, do 
they not?
    Mr. WILLIAMSON. Yes, sir.
    Mr. LUETKEMEYER. You also made a comment, and I want to 
follow up on this which is quite interesting, that your clients 
do not understand the law.
    Mr. WILLIAMSON. Yes, sir.
    Mr. LUETKEMEYER. If you have small business people who do 
not understand tax law, how can they make good plans? How can 
they make good business decisions? How can they make good 
judgments on how they want to run their business? Are you 
advising them on this? Are you taking an advisory role? Or are 
they just out there like a ship without a rudder? Because if 
you do not understand the tax implications of the business 
decisions you make, you can really mess up your business pretty 
quickly.
    Mr. WILLIAMSON. Precisely, Congressman. And too often that 
is the case. People make business decisions without 
understanding the tax consequences of them. And I like my 
clients to always know they can call me and ask a question and 
will not necessarily get a bill off the top, not like the 
lawyers. But I would hope that they would call me. But the 
problem is the law is so complex.
    Chairman CHABOT. The chair will strike that last remark 
from the record. Just kidding.
    Mr. WILLIAMSON. But you are absolutely right, Congressman. 
Businesses do not understand tax law, and too often make the 
wrong decision.
    Mr. LUETKEMEYER. And the complexity of it just adds to the 
problem.
    Mr. WILLIAMSON. Yes, sir.
    Mr. LUETKEMEYER. So we are adding to that problem every 
year as we go about our business here.
    Mr. Lewis, you are in the banking business. I have got a 
quick question for you here. We have created fewer businesses 
in the last six years than we have lost, so we have actually 
gone backwards. And of course, when you are talking about 
creating businesses, it is small businesses that we are talking 
about creating. And so have you seen in your business world, 
that the tax code and the complexity of it and the cost of 
compliance, all of this is a factor that has caused fewer 
businesses to actually be created?
    Mr. LEWIS. Yes, and that is a great question. I think the 
answer in short is yes. Again, it goes back to simple algebra. 
At some level there is only so many hours----
    Mr. LUETKEMEYER. You better make simple algebra very simple 
for me.
    Mr. LEWIS. There are only so many hours in a day, and there 
is only so much time and there is only so much revenue coming 
in. And again, look at the banking, look at the financial 
services, for instance. The last decade there has been all this 
bank regulation that has come upon us. Just look at the bank 
itself. What you find is you find all this additional level of 
compliance that is required, and any one particular provision 
makes sense. There is a reason for it. But taken as a whole, it 
becomes problematic because in the end, really, as was 
mentioned here, a small business owner, what really matters to 
them is what they can put in their pocket at the end of the 
day. It is the cash in their pocket. It is what they can do. It 
is what they can consume. It is to take that money and pay for 
tuition for their child. It is to take a vacation. It is to pay 
a mortgage. That is what really matters. And all the rest of 
this that we are discussing is getting to that bottom line.
    So you asked the question, what kind of an impact does it 
have? First of all, I cannot advise a client right now on the 
tax law for the current year because we have the extenders that 
are still out there. How can I go to somebody and tell them 
what is going to happen with bonus depreciation? Or 179? They 
are going out to make a decision right now. They want to make a 
decision but instead they are paralyzed because they do not 
know. Tell me what the law is they will say, and then I will 
know how to react. You can help me, because after that it is an 
Excel spreadsheet. You can run it. But before then, without 
certainty, without permanency, you run into this problematic 
situation where, yeah, it does impact those businesses.
    Mr. LUETKEMEYER. That is interesting. You talk about 179 
depreciation. Last year we did the extender I think two weeks 
before the end of the year, and I have got a good friend of 
mine who runs a business that he sells a lot of rock crushers 
and drills and things like that for quarries. And he, over the 
course of the year, sold 11 different drills. Sold 11. But he 
sold six of them in the last two weeks of the year. Now, these 
things cost between $100,000 and $125,000. And I can tell you 
the same story with regards to farmers buying tractors and farm 
equipment. They waited until the last two weeks of the year in 
order to make that decision because they were looking for this 
opportunity.
    Mr. LEWIS. It certainly was not because of Christmas; no.
    Chairman CHABOT. The gentleman's time is expired, but if 
you wanted to comment.
    Mr. LEWIS. I was going to say and the reality is the 
commentary would be if the tax law has a shorter shelf life 
than say a carton of milk, it is probably something we ought to 
look at. That is going to impact them.
    Chairman CHABOT. The gentleman's time is expired.
    The gentlelady from North Carolina, Ms. Adams, who is the 
ranking member in the Investigations, Oversight, and 
Regulations Subcommittee, is recognized for five minutes.
    Ms. ADAMS. Thank you, Mr. Chairman, Ranking Member 
Velazquez, for hosting this hearing.
    Tax burden on small businesses buried in the complexities 
of the tax system is something that we must tackle head on. The 
state of North Carolina is home to more than 800,000 small 
businesses, which means that there are more than 800,000 small 
firms in my home state that potentially have tax compliance 
issues, including cost burdens associated with tax compliance.
    Mr. Williamson, how should the current tax code be altered 
to reduce that cost burden for small businesses?
    Mr. WILLIAMSON. Well, in terms of the tax return itself, we 
could make that a lot simpler. All of us have advocated here 
with respect to advancing more cash method of accounting so you 
do not have the need to compute your inventory, cost of goods 
sold, the depreciation schedules you have to keep. Basically, 
treat everything as 179 as was alluded to earlier, or as bonus 
depreciation, 100 percent depreciation. And so it is simply to 
prepare your tax return based upon your checkbook and the cash 
that comes in, the cash that goes out, and we net the two and 
that is your taxable income. That makes a very simple tax 
return.
    Ms. ADAMS. Okay.
    Estimates by Internal Revenue Service of the size and the 
composition of the federal tax gap indicate that small 
businesses organized as a pass-through entity account for a 
substantial share of that gap. Their contributions are thought 
to be the result of honest mistakes born of the complexity of 
the code and tax evasion tied to cash payments for goods and 
services. How should the federal tax code be reformed to reduce 
noncompliance by small businesses?
    Mr. Williamson?
    Mr. WILLIAMSON. Well, as far as the pass-through entities 
go, and as was already pointed out here in the testimony, most 
revenue for small businesses is coming through pass-through 
entities. We can, again, through the cash method of accounting, 
easily determine what the net profit is of the business and 
allocate it to your partners or to your S company shareholders 
on the K1s. The complication that arises is they need to 
separately account for all the items on a partnership return or 
S company return because they might impact an individual 
partner or individual S company shareholder differently. That 
is a problem in terms of the pass-through entities.
    I would offer, and again, I think a proposal has been made, 
for earlier filing of pass-through entity returns so that the 
information forms through the individual partners or 
shareholders would be in their hands a lot sooner, and that way 
they would have more time to prepare their tax returns and that 
would increase compliance.
    Ms. ADAMS. Okay. I have one final question.
    Minority firms often have an even harder time getting off 
the ground and then staying afloat than other demographics of 
small businesses, particularly as it relates to lending.
    For Mr. Williamson and Mr. Mihm, have you studied the 
impact that tax compliance has on minority-owned firms, and if 
so, what is the rate of minority-owned firms closing their 
businesses as a result of the difficulty in the tax compliance 
compared to white-owned firms?
    Mr. WILLIAMSON. Congressman Adams, I do not have those 
statistics in front of me. I can be happy to do my best to try 
to find some of that information for you but I have no 
information on the relative closures of minority firms versus 
nonminority firms at my fingertips. I am sorry.
    Ms. ADAMS. Would either of the other gentlemen like to 
respond?
    Mr. MANKOWSKI. Ma'am, we do not have that information 
either, but we would be happy to work with Mr. Williamson and 
others to make sure we answer your needs on that.
    Ms. ADAMS. Okay.
    One challenge to tax compliance for small businesses may be 
that the tax code has no uniform definition of a small 
business, so how should small businesses be defined for tax 
purposes?
    Mr. WILLIAMSON. What we have done in the Tax Policy Center 
is to define them as $10 million of gross receipts. If you look 
at provisions of the Internal Revenue Code, Uniform 
Capitalization Rules, some of the other provisions regarding, 
$10 million seems to be a generally accepted threshold. And I 
think that is what the GAO study used as well.
    Ms. ADAMS. Would either of the other gentlemen like to 
respond?
    Mr. MANKOWSKI. Yes, ma'am. We have used, taking Treasury's 
lead, we use $10 million, although as you point out, there are 
a variety of different ways that you can do it. Number of 
employees. But we use the $10 million. I should also point out 
that the way IRS is organized implicitly assumes that the $10 
million, their small business unit has a $10 million threshold 
to the organizations or entities that it looks at.
    Ms. ADAMS. Thank you.
    Mr. Chair, I yield back.
    Chairman CHABOT. Thank you. The gentlelady yields back.
    The gentleman from New York, Mr. Hanna, who is chair of the 
Subcommittee on Contracting and Workforce is recognized for 
five minutes.
    Mr. HANNA. Thank you, Chairman.
    The tax cap that you spoke of, Mr. Mihm, and everybody 
alluded to in one way or another, I would like to talk to you 
about the underground economy and the propensity for it to grow 
over time through difficulty in the tax code and what you see 
on the ground. It is a concern to a lot of people. I mean, 
there are all kinds of incentives not to pay your taxes. One of 
them is other people are not. In the aggregate nature of the 
1099s and collecting credit cards, that is pretty subjective. 
It certainly can be. I am curious how it is fair.
    And Mr. Williamson, one of the problems with going from 
five to 10 on a cash basis, and what the IRS does now is if you 
buy inventory on a cash basis, then basically, you are mixing 
your accrual system with your cash system.
    So Mr. Mihm, if you could address my question about the 
underground economy and its growth. If you are prepared to do 
that a little bit, or anybody who would like to.
    Mr. MIHM. Yes, sir. The tax gap as you are mentioning is 
enormous. I mean, IRS estimates--this is based on 2006 data--
but it is about $450 billion a year. And this is the difference 
between legally owed and actually paid in a timely manner. Some 
of that is clearly the underground economy, meaning that it is 
nonfilers. In the technical term, this is people that ought to 
be filing that just are not.
    Mr. HANNA. Do you have any idea? How could anyone have an 
idea what that is? But do you have one?
    Mr. MIHM. Well, they have a national research program so it 
is an enormously complex estimation that they do. The size of 
the underground economy is probably the weakest aspect of that 
estimate. A lot of that, also the tax gap source is 
underreporting of people who do actually report but do not 
report the full amount.
    Mr. HANNA. But so much happens with compliance on the 
margin.
    Mr. MIHM. Yes, sir.
    Mr. HANNA. Virtually everything, right?
    Mr. MIHM. Right.
    Mr. HANNA. So marginally, difficulty with filing, as Mr. 
Williamson talked about, the cash basis, which is certainly 
easier, what do you think that looks like today?
    Mr. MIHM. Well, your point, sir, about it being marginal is 
exactly right, and it gets to what one of the key strategies 
needs to be, which is assuming that most people do want to pay 
their taxes--now, we are not talking about the underground 
economy in this case, but assuming that most people do want to 
pay their taxes, and then making it easier for them to do so, 
because in many cases where there is underreporting, the amount 
of underreporting makes it hard to justify going after any one 
individual. I mean, you have to in some senses to get a 
deterrent effect to make sure that people always know that they 
have to, but you do not want to spend a million dollars going 
after $5,000. You cannot do that in all cases.
    Mr. HANNA. But is that not part of the problem?
    Mr. MIHM. Yes, sir.
    Mr. HANNA. I mean, because what you are really doing is you 
are sending a message that you are incentivizing smaller 
taxpayers' amounts of money because you are only after those 
people where the money is. Right? Willie Sutton.
    Mr. MIHM. Yes, sir.
    Mr. HANNA. But when you look at the aggregate number, you 
mentioned $450 billion, that would draw you towards an opposite 
conclusion. It might.
    Mr. MIHM. Well, that is why good customer service is so 
important. That is why third party reporting that makes 
compliance relatively easy for people is so important. Because 
obviously, you are making exactly the right point here. Trying 
to chase the money after the fact is ultimately not going to be 
very good. It is not going to be good for the businesses 
because of the mistakes that could be made as the ranking 
member mentioned. It is not going to be good for the IRS 
because of the cost benefit of that. We need to make sure that 
we have in place the right independent third party reporting. 
We make sure we have the customer service.
    Mr. HANNA. So even though the money is not there, the value 
of going after those people who fall completely under the 
radar, not paying at all, the underground economy, there is 
value in that?
    Mr. MIHM. Yes, sir. You cannot do that in all cases but we 
need to do enough of it so that as the vice chair was 
mentioning in his questions, is that we do not get basically a 
sucker tax system where the people who are paying their taxes 
are the criminals.
    Mr. HANNA. Mr. Williamson, how do you reconcile, if you got 
to 5 to 10 on a cash basis and get rid of accrual for everybody 
under that, how do you reconcile--and I have got about 38 
seconds--the inventory?
    Mr. WILLIAMSON. That is the point. That was the point in my 
written testimony, Congressman. We would eliminate cost of 
goods sold and that the purchases or construction of inventory 
would be deducted as those costs are incurred regardless of 
when the product is actually sold.
    Mr. HANNA. But are you not giving bonus depreciation to 
everything that used to be called inventory?
    Mr. WILLIAMSON. That is what we were saying. In a world 
that we would be advocating, bonus depreciation would be 
extended to inventory.
    Mr. HANNA. Thank you. My time is expired.
    Chairman CHABOT. Okay. Thank you very much. The gentleman 
yields back.
    The gentlelady from American Samoa, Ms. Radewagen, who is 
the Subcommittee chairman on Health and Technology is 
recognized for five minutes.
    Ms. RADEWAGEN. Thank you, Mr. Chairman.
    My question is for Mr. Vitale. Is it safe to say that the 
higher cost associated with the tax compliance obligations that 
tax professionals endure push small business owners to waste 
their time preparing their own complicated taxes instead of 
growing their business?
    Mr. VITALE. Great question. There is probably an element of 
truth to that. The fundamental problem is going to remain until 
the code is simplified and clarified. The person who has 
invested in their business and has a lot at stake is, more 
often than not, going to eventually reach out to the 
professional to try to get the right answer and the best answer 
possible. And that is an expensive proposition. But the cost of 
them not doing that and going the other way at the end of the 
day could probably be much more costly by their failure to 
comply.
    Ms. RADEWAGEN. Thank you.
    Thank you, Mr. Chairman. I yield back.
    Chairman CHABOT. The gentlelady yields back.
    I now recognize the gentleman from South Carolina, Mr. 
Rice, who is chairman of the Subcommittee on Economic Growth, 
Tax, and Capital Access for five minutes.
    Mr. RICE. Gentlemen, thank you so much for being here 
today. I heard directed stated or allusions to the fact in all 
of your testimony that small businesses are the backbone of the 
economy and the backbone of job creation in this country; 
right? Pretty much everybody agrees with that.
    Beginning in 2009, for the first time since it has been 
recorded, more American businesses are closing than are 
opening. Do you think this outdated and burdensome tax code has 
anything to do with that, Mr. Mihm?
    Mr. MIHM. That is something, sir, that we really have not 
looked at directly, so I will have to defer to my colleagues on 
the panel if I may.
    Mr. RICE. Okay. Well, do you think overburdening government 
regulation, do you think that has anything to do with it?
    Mr. MIHM. Well, there are certainly, as we pointed out in 
this testimony, other findings looking at regulations in 
general. There are costs associated with the implementation of 
regulations. There are costs to small businesses. And we have a 
table that shows that for corporations, if you have less than 
five employees, it can be between, you know, around $4,500 per 
employee in order to comply. That is a substantive cost that is 
imposed.
    Mr. RICE. Do you think the complexity of our tax code 
creates a barrier to formation of small business?
    Mr. MIHM. Certainly, the complexity of the tax code creates 
a barrier to any economic activity. It creates a barrier to 
compliance. It creates a barrier to economic growth.
    Mr. RICE. Mr. Williamson, for the first time, beginning in 
2009 and continuing through today for the first time more 
American businesses are closing than forming. Do you think our 
complicated tax code has anything to do with that?
    Mr. WILLIAMSON. In my personal experience, what it is 
usually about is ``I better get out of business because I 
cannot pay my payroll taxes for my employees.''
    Mr. RICE. Mr. Lewis, do you think--same question to you. Do 
you agree our tax code is a burden to formation of small 
business and to continuing small business?
    Mr. LEWIS. I think the tax code is certainly a contributor. 
One of the things that I think is missing in most of our 
regulation, which is in essence what tax law is, is we failed 
to adequately address the cost benefit. I know I hear it. I see 
it. People talk about it. But are we really looking at cost 
benefit from the small business lens? That is the question. 
Right? I mean, you will hear people, they will espouse from the 
floor this is a good thing and it weighs, outweighs, but I 
think the real issue is from a small business lens. One of the 
things we have is a fundamental----
    Mr. RICE. Mr. Lewis, it is not that I do not want to hear; 
I do want to hear, but I only have five minutes left to keep 
going.
    Mr. LEWIS. All right.
    Mr. RICE. Mr. Vitale, I am going to shift questions on you.
    Since 2010, notably the date that Dodd-Frank was enacted, 
bank formations have slipped from an average of 100 per year to 
three per year. Do you think that will have any effect on small 
business given that new banks are typically small banks and 
they are typically the ones who lend to small business?
    Mr. VITALE. I believe the answer is yes based upon--I will 
affirm in our client base, we are a $1.6 billion revenue firm. 
Sixty, 70 percent of our business is labeled as small to 
midmarket, and with the reduction in the number of banks that 
we have seen--community banks, local banks, we have seen many 
of our clients go to alternative markets for their financing. 
That financing is often much more expensive.
    Mr. RICE. But the really small businesses, those 
alternative markets are not really available to them, are they?
    Mr. VITALE. The alternative market is usually an angel 
investor or private investor, and that money is even more 
expensive.
    Mr. RICE. Mr. Mankowski, do you think that the slippage of 
an average of 100 bank formations to three, which these new 
banks are typically the lenders to new banks, do you think that 
will have an effect--to small businesses, excuse me--do you 
think that will have an effect on business formation?
    Mr. MANKOWSKI. I think as far as business formation, not 
necessarily, because a lot of the businesses, recently they 
have been the byproduct of the overall economy where they have 
been downsized out of their current opportunities, and now they 
have exhausted their unemployment benefits and they have kind 
of been forced into their own businesses. So the bank 
formation, not so much of causing people to not form their 
businesses, but I think it hurts them if they are looking for 
additional revenue because I do agree that the smaller banks 
and the community banks seem to be the ones that really are 
more in tune to lending to the small businesses.
    Chairman CHABOT. The gentleman's time has expired.
    The gentleman from Nevada, Mr. Hardy, who is chair of the 
Subcommittee on Investigations, Oversight, and Regulations, is 
recognized for five minutes.
    Mr. HARDY. Thank you, Mr. Chairman.
    I just happen to be a small business owner myself, or at 
least I used to be. And Mr. Williamson made the statement, Mr. 
Lewis, just a few minutes ago, the fact that people, businesses 
want to pay their taxes. And I agree. As a small business 
person, I want to pay my taxes. Would you agree the reason we 
want to pay our taxes is because we have to have a good, sound 
foundation to make sure we are profitable in paying taxes in 
order to receive revenue from banks?
    Mr. LEWIS. Yeah. I mean, one way to look at it is that 
small business owner is in a partnership with the federal 
government. There are a lot of services, a lot of economic 
ability to make money. And so there is this agreement. And the 
tax code is sort of like the partnership agreement. It defines 
how we are each going to behave with each other, and I think 
the majority of Americans that own these small businesses are 
hard-working, they are entrepreneurial, and they want to do 
what is right. It is when you start adding in complexity, the 
lack of certainty, the perception of inequality, I think that 
is where you start getting the fringes where people start to 
take a step back and either through overt or covert actions 
maybe are a little less complaint. But I think the majority 
want to comply.
    Mr. HARDY. I believe there are a number of things that are 
causing small businesses to fail, but in 2012, 64 percent of 
all employees working were working for small businesses. Today, 
we have the lowest number of small businesses in the last three 
decades or further. Is it because of our tax regulations? Do 
you think it is a combination of a number of things? Anybody 
care to address that?
    Mr. WILLIAMSON. Well, I will just say that it is very 
difficult for my clients when they decide whether they are 
going to take the next step and hire someone. As we have seen 
here today, it is very expensive. Just the tax compliance costs 
are very expensive. The 941s, the W-2s, the payments every two 
weeks or a month. That is very intimidating for a small 
businessman to take on that first, second, or third employee, 
and then to have the cash flow, of course, to be able to pay 
them their wage.
    So regarding small businesses, that, in my practice, holds 
them back as to whether they are going to hire those first two 
or three people. That is a big, big deal with them, and the tax 
rules impede that.
    Mr. HARDY. Some months ago we had a hearing here and they 
discussed other tax causes to small businesses, and once you 
grow just even your business a little bit, the average, I think 
it was, about $1.2 to $1.5 million per year for people to get 
their taxes done once they reach a certain threshold. Have you 
seen that, Mr. Williamson, on your avenues? That is just to 
prepare it to get it to you folks.
    Mr. WILLIAMSON. That is true. To assemble the books and 
records to put them on my desk so I can do the return is quite 
a procedure for them. And to ask me, or anyone at this table to 
do that kind of work can be very, very expensive, and it is 
very hard to find people that have the skills to assemble that 
financial information for them in order to have me even begin 
the tax return. No question about that.
    Mr. HARDY. The 1099 form, Mr. Mankowski, why does the 1099 
requires so much for small businesses, is such a burden? Can 
you go into a little deeper process of what your discussion was 
there?
    Mr. MANKOWSKI. Yes, there are two aspects. First is that 
there is common belief that there are items that to go onto the 
credit card receipts that are not revenue to the business 
owner, such as sales tax, gratuities, and even if someone has a 
return of merchandise that they purchased.
    Take a restaurant as an example. If you put your gratuity 
onto your credit card, that will show up on the 1099-K, but 
that is not revenue to the business owner. Another concern from 
a 1099-K perspective is if you have one of your vendors that 
pays you with a credit card, where normally they would issue 
you a 1099-MISC depending on the type of service, if you pay 
with a credit card, you no longer have that responsibility to 
issue that person the 1099-MISC if their only payments were 
credit cards in excess of $600 total for the year. If you now 
have payments under the $600 that were totaled under with cash 
or checks, you are relying on the credit card processor to 
issue the 1099-MISC. In essence, it falls on the 1099-K, not 
through the 1099-MISC, a form that the government is not really 
using for full verification of the income for the business 
owner.
    Mr. HARDY. Okay. Let me ask one last question.
    Mr. Vitale, as far as the IRS, can you elaborate how they 
can and should be providing us better security for small 
businesses and all businesses in their businesses to make sure 
we are protecting that security of those tax returns?
    Mr. VITALE. Sure. One of the things that I highlighted in 
my written testimony was the use of PINs. We have some experts 
in the office that specialize in security, cybersecurity, and I 
believe the way the world is going towards a PIN-based system, 
the current Social Security Number is very vulnerable, very 
easy to get at. It is very easy to hack, and that is the 
gateway to a lot of theft. And I believe the transition has to 
happen sooner rather than later.
    Chairman CHABOT. The gentleman's time has expired.
    We are going to move into a second round, and we are going 
to start off with Ranking Member, Ms. Velazquez, for five 
minutes.
    Ms. VELAZQUEZ. Thank you, Mr. Chairman.
    Mr. Williamson, we know that there has been a movement away 
from businesses organizing as C corporations in favor of pass-
through entities. Today, corporate tax revenue makes up less 
than 10 percent of our federal revenue. What is it about pass-
through entities that make them such an attractive business 
structure, and what is the effect on small firms when our tax 
policy hinders their use?
    Mr. WILLIAMSON. Well, that is an excellent question, and 
obviously, the answer is, of course, C corporations are subject 
to two levels of tax, once at the C corporation and then a 
second tax when any sums are distributed to the shareholders. 
That is why you have a continuing decline in C corporations, 
particularly when you have S corporations available that are 
corporations for all purposes other than the IRS revenue code. 
And also, now you have the LLC, the limited liability company, 
that provides the same limitation on personal liability of the 
owners of the business. So that is why you see C corporation 
numbers go down and pass through numbers go up.
    Ms. VELAZQUEZ. Thank you.
    Can you elaborate on whether individual tax rates influence 
business decisions?
    Mr. WILLIAMSON. Well, that goes in, again, and my written 
testimony referred to that, is that if we are going to reduce 
the corporate tax rate in this country, some consideration must 
be given to small businesses; that the LLC, the S corporation, 
indeed the sole proprietor, will be paying effectively higher 
rates than C corporations. And C corporations do not have to 
pay dividends. And the owner of a C corporation can sell the 
stock rather than take distributions. So some consideration 
must be given to the sole proprietorship and partnership and 
LLC industry.
    Ms. VELAZQUEZ. Thank you.
    Mr. Mankowski, you mentioned the PMCT pilot program had 
some drawbacks, including an overly simplistic, typical, or 
initial response when comparing a client's data to the 
database. What recommended changes would you make to better 
implement the program this coming tax season?
    Mr. MANKOWSKI. Thank you. As far as the implementation, if 
the IRS really wants to maintain the anonymity for the users, 
they really can have some of the specific results that many of 
us practitioners would be looking for to know where their 
ranking is inside of the usual or the unusual. So it is almost 
a catch-22. How much information do you really want to get to 
see where you are at in the specific categories? I think having 
the ability to have it rolled out earlier this year as year two 
to the practitioner community, at least for those who have been 
in the pilot program already, will just add on to the number of 
users that are going to be familiar with the tool that now when 
they are doing their preseason training, it will be more at the 
forefront that this tool exists, even to the extent to go back 
and look at the 2014 tax data and see where the results came 
in, meet with their business owners and say, ``Here is where 
some of the results were coming out.'' Use it as a preseason 
tool and potentially have the ability to advise our clients and 
work with them so that they can avoid that love letter from the 
IRS that they get usually about a year, year and a half after 
the fact, that at least if it is addressed and have some 
general information and answers when they get a letter from the 
IRS if their results were out of spec, you can pull the results 
out of your file and say, ``Mr. Business Owner, remember we 
talked about this last year? Here is some of the information. 
We have done the leg work.'' And then they are better able to 
answer the notices at that point.
    Ms. VELAZQUEZ. Thank you.
    Thank you, Mr. Chairman. I yield.
    Chairman CHABOT. Thank you. The gentlelady yields back.
    In my five minutes, I would like to do something a little 
bit different. We have had some great answers to some, I think, 
very good questions as well. But rather than ask specific 
questions, I would just like to, you know, we are making a 
record here. If there is just one point that you would like to 
leave with the Committee, something you would like us to 
implement, or act upon, or consider, you know, I would be happy 
to hear. And since I did not get to you, Mr. Mankowski, maybe I 
will begin with you and we will just go down the line. But you 
have got about a minute each. You do not have to take it all up 
but I would ask you not to probably go any further than that.
    You are recognized.
    Mr. MANKOWSKI. Thank you.
    As far as one parting comment, I think that the IRS has 
almost been in a catch-22 recently. They have been asked to do 
more and more between implement the Affordable Care Act last 
year along with repair regulations, and for the current year, 
also implement the Employer Shared Responsibility portions. 
They are doing this with, I believe, one of the congressmen had 
mentioned that their budget has been down 17 or 18 percent over 
the last few years, and that is an annual decrease that they 
have been getting. So they have been getting--having to do more 
and more with less resources. And even now they are looking at 
saying, ``Well, how come you have not done more with the 1099-
K.'' You reach a point where they are in a hiring freeze, they 
cannot bring on staff, and as not bringing on staff, they are 
also having the attrition from the higher level people. The 
people who are not coming on now are the ones that may be a 
little bit more tech savvy that can really take the service to 
the next level to make it a better service for all the 
practitioner and taxpayer community.
    Chairman CHABOT. Thank you.
    And maybe I will just--one quick thing in response. If 
perhaps they should not use at least some of the resources for 
targeting groups who have a certain political persuasion and 
wasting resources on that, and then having to have their people 
come and testify and defend themselves and records are lost and 
all the rest, too. But I hear what you are saying and tend to 
agree with it.
    Mr. Vitale?
    Mr. VITALE. Sure. I think to that point, the one 
observation I have and the recommendation would be to have the 
service reevaluate how it deploys its resources, where it 
spends its time. With my clients with businesses, those that 
are very successful have good strategic plans. They have a 
plan. They invest the right time and money into the areas that 
yield the best benefit.
    As a case in point, in my written testimony I spoke at the 
end of a client that I have under audit. The client has lost 
money, restaurant business, five years, very difficult, two 
partners put all their own money in, lost it, borrowed money, 
paying that off, lost it. And the auditor has spent three days 
auditing a company where even if she makes a change, it is not 
going to make a difference. So I think those three days, 24 
business hours, could be spent by people at the service doing 
better things than that.
    Chairman CHABOT. Thank you.
    I have only got two minutes left. Mr. Lewis?
    Mr. LEWIS. I will be quick.
    Chairman CHABOT. You have got 45 seconds.
    Mr. LEWIS. Two things. Number one, what can Congress do? 
Congress can support small businesses by reforming the tax 
code. It needs to be simple, it needs to be fair, and it needs 
to be equitable. You give that to small business owners and 
they will respond. They want it, they need it, you can give 
that to them. That would be wonderful.
    Second thing, IRS services. There is no substitute, there 
is no additional reference point or no additional source that 
we can go to to serve those clients and to serve those 
taxpayers.
    Chairman CHABOT. And the third one real quickly?
    Mr. LEWIS. That is the second one. That is the two. Just 
IRS services, focus on those.
    Chairman CHABOT. Very good. Thank you.
    Mr. Williamson?
    Mr. WILLIAMSON. Yes. Strategically, you can have carve outs 
for small businesses. You are considering international tax 
reform as we speak. You can have carve outs for small 
businesses of under $10 million so they do not have the same 
level of compliance. They will not go overseas. Take a look at 
the forms. Take a look at the requirements. Tactically, and I 
think it has been mentioned here, the $2,500 increase to the 
allowance to simply deduct anything and not have to depreciate 
it.
    Chairman CHABOT. Thank you very much.
    And you have got my last 50 seconds.
    Mr. MIHM. I will do my best not to take the full 50, Mr. 
Chairman.
    I think you have got excellent ideas, so I will not repeat 
them, but just align myself with those and go off on a bit of a 
different direction, and that is on the identity theft at IRS. 
It costs them about $5.8 billion in 2013, IRS estimates, in 
which they pay to identity thieves. Now, they stopped or 
recovered, they estimate, about $24 billion before it goes out. 
That is a real target of opportunity for them to be more 
strategic in going after--and it is a priority area for them to 
reduce the amount of identity theft as it affects IRS.
    Chairman CHABOT. Thank you. My time is expired.
    The gentleman from New York, Mr. Hanna is recognized.
    Mr. HANNA. Mr. Williamson, I will get back to your cash 
basis.
    How do you manage? I mean, we know even if you are on 
accrual now, you are on accrual. It does not matter the size 
necessarily. I mean, the $5 million point for cash. But how can 
you--how do you avoid cheating on your--by essentially buying 
inventory, growing your business, or maybe that is what you 
want to happen. How do you----
    Mr. WILLIAMSON. I agree, Congressman. That is not cheating; 
that is growing.
    Mr. HANNA. Right. Right. But I mean does it not become 
manipulative if you are essentially, with 179, you are saying 
go out and buy a piece of equipment, which may or may not be 
good. You have to hope the owner does that smartly. On the 
other hand, you could conjecture that the same thing would 
happen with inventory simply to avoid paying taxes. But I guess 
that is part of your point, is it not?
    Mr. WILLIAMSON. Frankly, I cannot think of anything less 
manipulative than a totally cash basis of accounting, and 
simply use the checkbook as we are advising.
    Now, clearly, it may not be as financially accurate, and I 
am not here to say that if you are filing SEC reports you need 
to be on the cash basis. Certainly not.
    Mr. HANNA. What you are suggesting though is ultimately it 
works itself out.
    Mr. WILLIAMSON. Oh, yes.
    Mr. HANNA. Over time, whether you do something more one 
year or not as much the next year, over a period of time----
    Mr. WILLIAMSON. Over the life of the business you recognize 
the same amount of income and have the same amount of expenses.
    Mr. HANNA. I understand.
    Mr. WILLIAMSON. It is all timing.
    Mr. HANNA. Mr. Mihm, do you want to speak to that at all?
    Mr. MIHM. No, sir. That is not an issue that we looked at 
in any detail.
    Mr. HANNA. So with the IRS cutting back on their budget, I 
mean, it really is kind of, you know, everyone here has 
complaints with the IRS for one reason or another. But back to 
the 1099-K, I am guessing, Mr. Mankowski, that you do not like 
it that much. You do not like aggregating, turning a lot of it 
into guesswork, comparing businesses on the aggregate, and then 
coming up with conclusions that this person or that person, 
company or not, has complied or not?
    Mr. MANKOWSKI. I do not believe, I mean, the form itself, 
at least in my estimation, was kind of created to get a lot of 
your people who have been conducting business on the Internet. 
Your eBay sellers. And from that perspective, I think the form 
has been very successful. There are clients that have come in 
that have no idea that they had a million dollars worth of 
business that they had done on eBay. So it does not mean they 
made a million dollars, they just sold goods to that level.
    So from that perspective, it has been accurate. 
Unfortunately, the majority of businesses are not conducting 
their business on the Internet, and it has really been--they 
are collateral damage because they are out there reporting 
their revenue as it is, and they have been doing that all 
along, but they are the ones that are getting the notices.
    Mr. HANNA. The ones being like Dragnet. You throw this 
giant net in the water and some people deserve to be caught, 
others do not.
    Mr. MANKOWSKI. Right.
    Mr. HANNA. But everybody may be inconvenienced based on 
some subjective notion that the IRS has about the general idea 
of what that business ought to be paying or this business.
    Mr. MANKOWSKI. Right. Unfortunately, a lot of those 
businesses that are getting the large credit card sales through 
their online businesses--I will take someone, a client who is 
on eBay. By the time they have their listing fees, their 
shipping fees, their PayPal fees, and then their cost for the 
product, they do not make a lot of money.
    Mr. HANNA. I am going to take a rare moment to defend the 
IRS. If you were them and your budget was going down every 
year, this would be exactly what you would want to try to do, 
to aggregate businesses based on numbers from 1099s, come up 
with broad conclusions about who is good and who is bad.
    Mr. MANKOWSKI. From that perspective, yes. I think time 
will hash out what needs to be adjusted out of this form, 
specifically the restaurant owner with gratuities, sales tax, 
and how that is going to be affected and how they are looking, 
because the IRS is sending out soft notices that as long as the 
taxpayer responds, here is my brief reconciliation, here is my 
gratuities, and this is my number I reported, they are fine 
with that. It is just a lot of extra work on the business owner 
to really go back and try to figure out whether it is right or 
wrong because they do not track their revenue based upon 
whether it is credit card, cash, or checks.
    Mr. HANNA. Right. And if the IRS published those numbers I 
suppose it would be another problem, what they are looking for, 
what they are not looking for.
    My time is expired. Thank you, Chairman.
    Chairman CHABOT. Thank you. The gentleman yields back.
    The gentleman from South Carolina, Mr. Rice, is recognized 
for five minutes.
    Mr. RICE. Mr. Mankowski, you were talking a minute ago, 
just when I was speaking in my first five minutes, I was 
talking about maybe some of the reasons why for the first time 
in American history we are seeing business dissolutions outpace 
business formation. And you said earlier that the IRS has had 
to implement Obamacare in the last two years and we did not 
give them any more resources to do that. Has not small business 
had to implement Obamacare in the last two years, too?
    Mr. MANKOWSKI. If you look under the IRS description of 
small business being the $10 million and less, they have been 
because they are the business----
    Mr. RICE. Okay, they did have to implement, too.
    Mr. MANKOWSKI. Yes.
    Mr. RICE. Did we give them any additional resources to do 
that with?
    Mr. MANKOWSKI. I do not know the answer to that, sir.
    Mr. RICE. Could that have something to do with the slowdown 
in formation of small businesses?
    Mr. MANKOWSKI. Yes.
    Mr. RICE. Okay. The tax code, I was a tax lawyer and a CPA 
for 25 years. This stuff is fun to me. The tax code was 
designed 50-60 years ago and it was competitive at the time. 
Does anybody up there believe that our tax code remains 
competitive in the world?
    Mr. MANKOWSKI. I will use an example that a friend of mine 
recently had a baby and she was saying, ``Oh, well, over in 
France, as an example, they get paid so many months of 
childcare or maternity leave.'' And a quick search said, 
``Well, that is great, but based on your income level, you 
would be paying 40-plus percent in annual tax just to the 
government compared to what you are paying now.'' So, yeah, you 
may get an extra two months or so of paid maternity leave, but 
every year you would be paying in 10 to 15 to 20 percent more 
in tax.
    Mr. RICE. Okay. I have got to keep going.
    Do you think our tax code is competitive for American--does 
our tax code make American business more or less competitive? 
More or less?
    Mr. MANKOWSKI. I would say less just from a compliance 
perspective.
    Mr. RICE. Do you agree with that across the board?
    Mr. MANKOWSKI. Yes.
    Mr. RICE. Thank you.
    Do you think that that has something to do with the decline 
in business formation in America? Mr. Mankowski? And I have to 
ask an answer quick.
    Mr. MANKOWSKI. Yes, I do.
    Mr. RICE. Okay.
    Next question. Did each of you have the chance--I assume 
all of you had the chance to review Dave Camp's tax reform 
proposal last year. I want to know just a one-word answer from 
you all, would that make the United States Tax Code more or 
less competitive in the world.
    Mr. Mihm?
    Mr. MIHM. I cannot give you a bottom line on that. We did 
review it. I mean, we worked with the Committee and they used a 
lot of our work as they were putting it together, but we did 
not come to a bottom line decision.
    Mr. RICE. You do not think it would be preferable to what 
we have now?
    Mr. MIHM. I really cannot speak to that, sir.
    Mr. RICE. Mr. Williamson?
    Mr. WILLIAMSON. I have not looked at it in quite a while 
but I would say it would make American more competitive.
    Mr. RICE. Mr. Lewis?
    Mr. LEWIS. Representative, Dave Camp should be commended 
for what he did. It showed us what real reform would look like, 
and that effort itself, I know we will have issues with any 
particular provision, but that overall effort, that is exactly 
what we are talking about.
    Mr. RICE. Mr. Vitale?
    Mr. VITALE. I believe that is a better start.
    Mr. RICE. And Mr. Mankowski?
    Mr. MANKOWSKI. I believe it is a good start but it would 
also complicate things a lot as well.
    Mr. RICE. Okay. And that came out of the House Ways and 
Means Committee.
    Mr. Mihm, have you had a chance to review the president's 
tax reform proposal?
    Mr. MIHM. No, sir, we have not.
    Mr. RICE. Have you seen it, Mr. Williamson? Have you gone 
through it?
    Mr. WILLIAMSON. I have not gone through it. I have seen 
portions of it. Most notably, regarding the cash method of 
accounting rules, that he will take the $25 million with some 
carve outs for some qualified personal service corporations, I 
think.
    Mr. RICE. Mr. Lewis?
    Mr. LEWIS. Yeah. The same thing as Mr. Williamson. I have 
just seen particular provisions, and some of those were not 
necessarily small business favorable.
    Mr. RICE. Have you seen the whole package put together?
    Mr. LEWIS. No, I would not say the whole package. No.
    Mr. RICE. I have not either. I do not think there is one.
    Mr. LEWIS. I have seen parts of it.
    Mr. RICE. My point in this is I do not think the president 
has made a specific proposal. I think Dave Kamp and the House 
Ways and Means Committee made one. I do not think the president 
has put one forward. And if we are going to get tax reform 
done, we have got to have leadership. And when you look at 
these things that I have been talking about, between the 
imposition of Obamacare, between Dodd-Frank, ancient tax code, 
you can understand, if you look at the statistics on the 
decline in formation of small businesses, you can understand 
why this is happening, just to put a perspective on it.
    Thank you very much.
    Chairman CHABOT. The gentleman yields back.
    And we want to thank our distinguished panel for being here 
this morning and now this afternoon. We appreciate it. I think 
the GAO report has certainly confirmed that small firms are 
having a tough time dealing with the tax code and we need to 
simplify it and reform it. I would like to say we are close to 
that. However, I like to be truthful, and I do not think we are 
close to that, although we are working on it. But you all have 
given us, I think, some very good ideas. And particularly as it 
would affect small business folks, so thank you for that.
    And I would ask unanimous consent that members have five 
legislative days to submit statements and supporting materials 
for the record. And if there is no further business to come 
before the Committee, we are adjourned. Thank you.
    [Whereupon, at 12:37 p.m., the Committee was adjourned.]
    
    
    
    
    
    
                            A P P E N D I X
                            
                            
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                             Testimony of


                          Donald T. Williamson


                  Kogod Eminent Professor of Taxation


                    Howard S. Dvorkin Faculty Fellow


              Executive Director, Kogod Tax Policy Center


                        Kogod School of Business


                          American University


                            Washington, D.C.


                      Committee on Small Business


                 United States House of Representatives


                               Hearing on


                    ``How Tax Compliance Obligations


                     Hinder Small Business Growth''


                             July 22, 2015


    Chairman Graves, Ranking Member Velazquez and Members of 
the Committee, thank you for the opportunity to testify on the 
need to alleviate the federal tax compliance costs on small 
business.

    My name is Don Williamson and I am a professor of taxation 
at American University's Kogod School of Business where for the 
past thirty years I have been the Director of the School's 
Masters in Taxation degree program. The MST program at American 
University offers graduate courses in federal taxation to CPAs, 
experienced accountants, attorneys and others who wish to 
expand their knowledge of our nation's tax law. Our course 
offerings not only include traditional classes in subject areas 
such as the taxation of corporations and partnerships, 
international taxation and tax policy but also more specialized 
areas of the tax law such IRS practice and procedure that 
address the compliance issues of this hearing.

    In addition, for the past 25 years I have had my own tax 
preparation and tax planning practice, LaMonaca & Williamson, 
CPAs, in Falls Church, Virginia. In my professional practice I 
prepare many tax returns for small businesses and represent 
taxpayers daily before the IRS examination and collection 
divisions.

       I. Emerging Entrepreneurs and the Kogod Tax Policy Center


    As part of my responsibilities at American University, I am 
also the Executive Director of the Kogod Tax Policy Center 
which conducts nonpartisan research on tax issues affecting 
small business and entrepreneurs. The Center develops and 
analyzes proposed solutions to tax-related problems faced by 
small business and promotes public dialogue concerning tax 
issues critical to small businesses.

    Currently, the Center is focused on developing research on 
the tax and compliance issues impacting ``Emerging 
Entrepreneurs,'' who are America's latest iteration of small 
business owners. Emerging Entrepreneurs are the workers who are 
powering the evolving on-demand digital economy. These Emerging 
Entrepreneurs are renting rooms, providing ride-sharing 
services, running errands, and selling goods for consumers in 
business transactions coordinated online and through app-based 
platforms developed by companies such as Airbnb, Flipkey, 
Onefinestay, Uber, Lyft, Taskrabbit and Instacart. Emerging 
Entrepreneurs need maximum flexibility to grow their businesses 
and enhance their contributions to this dynamic new sector of 
the American economy. But, as reported by the Wall Street 
Journal earlier this year, some Emerging Entrepreneurs are 
facing penalty and audit exposure, despite the fact that in 
some cases income earned from short-term residential rentals 
coordinated through a platform provider (e.g., Airbnb, 
HomeAway, Onefinestay and Flipkey) is, in fact, tax free.

    Our preliminary research has identified these and other 
related issues as unnecessary burdens notwithstanding that most 
Emerging Entrepreneurs ``want to be honest and pay what they 
owe, but the tools and resources don't exist.'' Derek Davis, in 
discussion with the author, April 9, 2015. The predominantly 
electronic nature of transactions conducted by this new sector 
of our economy offers opportunities to reduce the burden on and 
increase the compliance of Emerging Entrepreneurs. In the 
coming months, we will publish tax research and corresponding 
policy recommendations for the Committee to review.

                       II. Complexity of the Law


    Over the course of my tenure as an academic and tax 
practitioner I have seen with dismay the Internal Revenue Code 
grow in complexity, becoming intrusive and pervasive in its 
reach and incomprehensible to all but those who devote their 
careers to its study. This complexity arises, in part, from the 
almost annual amendments to the Internal Revenue Code that has 
a profound, even paralyzing affect on small businesses 
resulting in their inefficient operation and impeding their 
ability to grow and create jobs.

    In fact, since 2001, there have been approximately 5,000 
amendments to sections of the Internal Revenue Code, about one 
per day on average. Consequently, not only small business 
persons but their tax advisers are overwhelmed by the 
complexity resulting in steady increases in fees these advisers 
charge to their small business clients.

    The National Taxpayer Advocate estimates that each year 
small businesses spend approximately 2.5 billion hours 
preparing tax returns or otherwise meeting tax filing 
requirements, the equivalent of 1.25 million full-time jobs. In 
meeting these requirements 70% of small businesses use paid tax 
return preparers at a cost of more than $16 billion for the 
services of attorneys, accountants and other professionals. 
While generating a lucrative ``cottage industry'' for tax 
professionals, our nation suffers from this burden that diverts 
time and resources to activities that neither encourages 
business growth nor creates jobs.

    Because most small business owners do not understand the 
law they increasingly turn their tax filing obligations to 
outside advisers for planning and return preparation of both 
their income taxes as well as their employment tax obligations. 
A survey conducted by the National Federation of Independent 
business found that professional tax return preparers prepared, 
at least in part, 91% of all tax returns filed by its members. 
When small business owners believe they are unable to file 
their own tax returns or understand the tax law, resentment 
towards the ``system'' arises creating a cynicism and 
disrespect toward our tax law that will foster non-compliance 
and ultimately fraud.

    Compounding this complexity and further increasing the cost 
of compliance and inefficiency upon small business is the 
annual crisis of the so called ``tax extenders.'' Over thirty 
business provisions of the Internal Revenue Code periodically 
expire, being reenacted, often retroactively, for an additional 
year or two. Rules relating to the treatment of qualified small 
business stock, bonus depreciation, S corporation built-in 
gains tax, and most importantly, Sec. 179 expensing are vital 
to the small business community and Congress should make these 
provisions permanent. In the case of bonus depreciation and 
Sec. 179 expensing, small businesses today must make decisions 
regarding the purchase of equipment without certainty of what 
the deduction will be for such acquisitions. Aside from the 
additional compliance costs associated with such uncertainty, 
tax planning is impossible thereby undermining growth in the 
small business economy that provides most of the new jobs in 
our country.

                    III. Legislative Recommendations


    To reduce the compliance costs of small businesses in the 
filing of their tax returns the Kogod Tax Policy Center 
advocates two legislative proposals, i.e. a simplified cash 
method of accounting and a unified rate schedule for all 
businesses regardless of their legal form.

    A. Simplified Cash Method of Accounting

    Liberalizing the law to permit more small businesses to 
adopt the cash method of accounting, rather than the more 
burdensome accrual method, will reduce record keeping and tax 
compliance costs with a minimal loss of accuracy or tax revenue 
to the government. Even where the law currently permits a small 
business to use the simpler cash method of accounting, the 
requirement to maintain inventory records creates compliance 
burdens that may only influence by a few months the timing of a 
small business's taxable income.

    Therefore, we urge Congress to not only expand the number 
of businesses eligible to use the cash method of accounting as 
discussed in the Senate Finance Committee Working Group Report 
on Business Income Tax but to enact a ``simplified'' cash 
method of accounting for small businesses that will further 
reduce unnecessary record keeping and compliance burdens. We 
believe such simplification will neither adversely affect the 
accuracy of tax returns nor impact the ability of the IRS to 
collect tax.

    1. Cash Method vs. Accrual Methods of Accounting

    Before describing our proposal for a simplified cash 
method, I would like to explain, for the benefit of the members 
of the Committee who may not be familiar with tax accounting 
rules, the two major tax accounting methods used by businesses, 
i.e. the cash method and the accrual method. I believe this 
explanation will highlight why for small businesses the accrual 
method is more burdensome than the cash method; and 
demonstrates that while the accrual method may in some cases 
more accurately measure economic net income, why the complexity 
and cost of any additional precision is unnecessary and 
ultimately provides no greater tax revenue for the IRS.

    Once a business adopts a tax year, and for most small 
businesses this will be the calendar year, it must adopt an 
accounting method which will determine the time at which the 
business recognizes an item of income or may deduct an expense. 
It is important to note that a business's accounting method 
only affects the timing of when a business reports income or 
deductions on a tax return. The accounting method a business 
uses does not determine whether an item of income is taxable or 
an expense deductible and does not affect the total income and 
deductions a business will recognize over its lifetime.

    Publicly traded corporations and many large businesses 
generate financial statements for the SEC or commercial banks 
based on generally accepted accounting principles (GAAP). Small 
businesses usually do not keep their books and records in 
accordance with GAAP, almost always relying upon their tax 
returns to provide lenders and owners with sufficient 
information to determine the success and credit worthiness of 
the business.

    Under the Internal Revenue Code a small business is only 
required to choose an accounting method that ``clearly reflects 
income'' and apply that method consistently from year to year. 
Consistent with this requirement, most small businesses adopt 
the cash method of accounting unless the law requires them to 
use the accrual method.

          a. Cash Method

    A business adopting the cash method of accounting 
recognizes income when it receives actual payment for the goods 
or services sold, regardless of when the business sells the 
good or performs the service. Similarly, a cash method business 
is entitled to a deduction on its tax return only when payment 
for an ordinary and necessary business expense is actually 
made. However, even cash method businesses may not deduct 
certain types of payments when made. For example where a 
business incurs a cash expenditure that creates an asset with a 
useful life of more than one year, the business must 
``capitalize' the cost and depreciate (deduct) that cost over a 
prescribed ``recovery period'' in which the tax law presumes 
the asset will be consumed in the business. There are other 
types of cash payments subject to similar treatment. Thus, even 
the cash method adopts certain principles of the accrual method 
described below resulting in a mismatch of the time an 
expenditure is made and the time at which it can be deducted.

                  (1) Judicial Doctrines of Income

    In addition to requirements to capitalize certain 
expenditures there are several other technical requirements for 
a business computing taxable income under the cash method that 
are unnecessarily complex. Under the judicial doctrine of 
``constructive'' receipt, a cash basis taxpayer must recognize 
income even when cash has not come into the physical possession 
of the business but is merely available to the business at its 
discretion. Similarly, the mere receipt of a promise results in 
recognizable income under the cash method if the promise is 
convertible to cash before it matures, in which case the fair 
market value (that is, the ``cash equivalent'') of the 
obligation is recognized at the time of receipt of the promise. 
Finally, under the ``economic benefit'' doctrine, a cash method 
business must immediately recognize income on the receipt of 
property whenever the business's right to the property is 
absolute, even if not immediately assignable and even though it 
cannot be immediately converted to cash.

    Such judicial theories that require a business using the 
cash method to pay tax on income deemed received prior to the 
receipt of cash unnecessarily imposes a severe cash flow 
problem on small businesses--a problem that creates only a 
marginal timing benefit to the IRS, since small businesses 
would most certainly receive the cash shortly after 
constructive receipt, economic benefit, or a cash equivalent 
arises. While these concepts offer comfort to theorists, small 
businesses must pay next month's bills, and the acceleration of 
any taxable income before the receipt of cash under these 
theories requires small businesses to use their operating cash 
to pay tax on amounts they have not yet received instead of 
using that cash to run their businesses.

                  (2) Accounting for Expenses

    An even more challenging problem encountered by small 
businesses using the cash method of accounting is the 
compliance costs and complexity associated with computing 
deductible expenses. Generally, the cash method permits a 
deduction for ordinary and necessary business expenses when 
actual payment is made. Thus, a promise to pay is not 
deductible until payment is actually made.

    In addition to the natural confusion surrounding when and 
if a payment has been made, small businesses confront even 
greater difficulties when computing allowable deductions under 
the cash method because of four exceptions to the general rule 
that a deduction is permitted when payment is made, i.e. 
prepayments, depreciation, inventory and capitalization of some 
expenses. Prepayments for property or services are not 
deductible if the goods or services are provided more than one 
year after the prepayment. Costs exceeding $5,000 associated 
with creating a new business are not deducted when paid but 
amortized over 15 years. For inventory, the costs of its 
acquisition or production are deducted only when the inventory 
is sold. Similarly, property with a useful life of more than 
one year is generally subject to depreciation, requiring its 
deduction be spread over recovery periods ranging from three to 
39 years.

    These examples demonstrate that the current cash method of 
accounting is too often not based upon cash receipts and 
disbursements, but rather on principles that attempt to match 
costs with income similar to the accrual method. For small 
businesses that have no government regulators to whom financial 
statements must be submitted and have no banks or other 
creditors in need of profit and loss determinations that 
conform to the rules of GAAP, tax rules based on the accrual 
method serve no practical purpose when economic success and 
taxable income can simply be measured on cash receipts and 
expenditures--that is, cash flow. In short, while the current 
cash method is substantially simpler than the accrual method, 
certain refinements to the current rules could make the cash 
method even simpler and more easily enable small businesses to 
comply with tax record keeping and reporting requirements 
without the loss of accuracy on their tax returns.

          b. Accrual Method

    The other major accounting method, the accrual method, 
attempts to determine the time at which ``all events'' occur 
that give rise to the right to income and the amount of that 
income can be determined with reasonable accuracy. Similarly, 
an expense may be deducted when the obligation to pay an 
expense is fixed, the amount of that obligation can be 
determined with reasonable accuracy and economic performance 
has occurred. Thus, businesses must report income on their tax 
returns when earned and may deduct expenses when incurred 
without regard to the receipt or payment of cash.

    The accrual method and its ``all events'' test creates 
substantial complexity in an effort to better identify the 
financial success or failure of a business. This complexity 
calls for small businesses, whose every day well being centers 
upon its cash position, to determine its financial well-being 
in a manner that adds no value to its success. From the 
perspective of the IRS, while the timing of income and expense 
reported under the accrual method may provide some acceleration 
of tax upon income that must be recognized before any cash is 
received, such acceleration is clearly unfair if the cash is 
never received, and may only accelerate tax collection by no 
more than one year if the cash is subsequently receive shortly 
after the accrual.

    The complexity of the accrual method is illustrated by 
prepayments. In the case of prepaid rent or interest received, 
income must be reported immediately upon receipt even if ``all 
events'' entitling the business to the income have not 
occurred. Similarly, where goods or services have not been 
delivered but cash payment has been received, the general rule 
under the accrual method that delays reporting the cash 
receipts on the business's tax return until ``all events'' have 
occurred, i.e. the goods are delivered or services performed, 
is disregarded. Thus, in the case of prepayments a business 
otherwise on the accrual method finds itself using the cash 
method for prepayments. Not an easy concept for a small 
business owner to understand.

    Another complexity of the accrual method is the necessity 
to account for bad debts when a business reports as income an 
account receivable for which it never receives actual payment. 
Each year businesses on the accrual method must determine which 
previously reported receivables are uncollectible and claim 
them as tax deductions. This can be a time consuming, confusing 
and expensive process. Businesses using the cash method do not 
deduct bad debts because they do not include receivables in 
taxable income.

    Finally, even when a business on the accrual method meets 
the ``all events'' test with respect to an expense, a deduction 
may be claimed only when ``economic performance'' occurs. 
Therefore, in the case of receiving goods and/or services from 
another party, the business may deduct the obligation to pay 
the other party only as the goods or services are received 
regardless of when the business pays for the goods or services, 
subject to an exception permitting deduction in the year of 
prepayment if the other party provides the goods or services 
within three and one-half months of the next taxable year. 
Again, not an easy concept for small businesses to understand.

    The above illustrations of the complexity required by the 
accrual method of accounting demonstrate that in the case of 
small businesses the purported technical accuracy resulting 
from these rules offers no practical benefit to the business in 
measuring its economic performance, and over the life cycle of 
the business, offers no additional tax revenue to the 
government.

    2. Tax Accounting for Inventories

    Regardless of whether a business is on the cash or accrual 
method of accounting, if inventory is a material income 
producing factor, the business must account for gross profit, 
i.e. sales minus cost of goods sold, using the accrual method, 
even if they have adopted the cash method as their overall 
accounting method. Thus, a business cannot deduct the cost of 
the inventory (finished goods) to the extent it has not sold 
the product by the end of the business's taxable year. 
Businesses selling inventory must maintain records documenting 
their cost of unsold, finished goods, partially finished goods 
and ``raw'' materials on hand that will be used in the future 
to manufacture or product inventory. In addition, inventory 
cost accounting principles call for the deduction of indirect 
costs (overhead) associated with manufacturing or producing the 
inventory only when the inventory is sold.

    In determining its cost of inventory, a business must adopt 
an inventory costing method, i.e. the first-in, first-out 
(FIFO) method, the last-in, last-out (LIFO) method or the 
specific identification method. The FIFO and LIFO methods 
relieve businesses of the need to keep track of the cost of 
each item they sell, but where the items are unique or 
relatively high-cost, low volume products (e.g., jewelry, 
antiques, cars, etc.) the specific identification method is 
used.

    As an exception to the requirement to maintain inventory 
accounts, the IRS (not the Internal Revenue Code) permits a 
cash method business to use the cash method to account for 
their gross profit from the sale of inventory if the business's 
average annual gross receipts for the three year period prior 
to the current year do not exceed $10,000,000 and the 
business's primary activity is to provide services to customers 
but also offers a product for sale incidental to the 
performance of services. Thus, a veterinarian using the cash 
method of accounting need not use the accrual method to account 
for the sale of medicines or other goods associated with the 
business of caring for animals because such sales are 
incidental to the veterinarian's professional practice. But 
when the average gross receipts of the business exceeds 
$10,000,000, businesses must not only account for inventory 
using the accrual method, but also must apply certain ``uniform 
cost capitalization'' (UNICAP) rules that require an allocation 
to inventory of an array of indirect costs beyond those 
ordinarily associated with producing goods. Thus, under the 
UNICAP rules, a business must add to the cost of inventory a 
portion of compensation paid to employees who may not be 
involved in producing the inventory but may merely indirectly 
support the production process.

    A final illustration of the complexity of the accrual 
method deals with the perceived abuse of an accrual method 
business accruing (deducting) an amount owed to a related party 
using the cash method. In this case the business using the 
accrual method nay not deduct the amount owed to the related 
party until the amount is actually paid and recognized as 
taxable income by the cash method party. This issue frequently 
arises where a business employs the owner or a relative of an 
owner. Related parties, for this purpose, include family 
members and certain businesses owned by the same individual(s).

    3. Comparison of Cash and Accrual Methods

    As the above descriptions demonstrate, the primary 
advantages of the cash method over the accrual method are its 
clarity and flexibility in measuring income and expenses and 
its less cumbersome bookkeeping and record keeping 
requirements. While the accrual method is generally considered 
a more accurate reflection of a business's financial condition, 
the price of this accuracy is mind numbing complexity and 
inevitably increased compliance and record keeping costs.

    However, the Internal Revenue Code limits the adoption of 
the cash method to the following businesses: (1) sole 
proprietorships; (2) S corporations; (3) certain corporations 
engaged predominantly in the performance of services by their 
owners, (4) corporations with average gross receipts over the 
preceding three years of $5,000,000; (5) partnerships with no 
corporate shareholder whose gross receipts exceed $5,000,000; 
and (6) farms.

    Suggestions for simplifying and liberalizing the use of the 
cash method were made by the Treasury Department in 2007, the 
Bowles-Simpson Commission in 2010 and most recently the options 
proposed by former Senator Baucus and Representative Camp 
described in the Senate Finance Committee's Bipartisan Tax 
Working Group Report on Business Income Tax. These proposals 
simplify the reporting of income and expenses on tax returns 
filed by small businesses that will then reallocate resources 
otherwise spent on compliance to more productive purposes, 
ultimately stimulating job growth. In addition, the IRS 
Taxpayer Advocate has consistently recommended simplifying 
accounting methods for small business as a way to ease 
compliance burdens and reduce tax administration.

    4. Simplified Cash Method of Accounting (``SCM'')--The 
``Checkbook'' Method

    Based on this brief description of the accounting methods 
available to small businesses and the observations of Treasury, 
IRS and Congressional tax reform studies, small businesses 
clearly need and deserve legislative relief in measuring and 
reporting their taxable income and deductible expenses. 
Therefore, the Internal Revenue Code should be amended to not 
only permit the adoption of the cash method by more small 
businesses, but also the adoption of a ``simplified cash method 
of accounting'' (``SCM''). This proposed simplification of the 
existing cash method of accounting will reduce time-consuming, 
expensive administrative burdens on small businesses in keeping 
records and reporting their income and expenses on their 
returns, thereby unleashing resources that will create more 
productive, job creating activities.

    Besides reducing compliance costs the SCM will enable small 
businesses to better understand their tax returns, thereby 
reducing the general public's cynicism that the Internal 
Revenue Code is replete with loopholes only accessible to 
businesses with resources to employ expensive tax 
professionals. In short, simplifying reporting on tax returns 
will increase compliance, ease the burden of tax 
administration, increase tax revenue and ultimately reduce the 
gap between what taxpayers should pay and what the IRS actually 
collects.

    Under the SCM the computation of taxable income is reduced 
to the following formula:

    Cash Receipts

    Less: Cash Expenses including:

     Inventory

     Prepayments

     Materials/Supplies

     Depreciable Property

    Taxable Income

    In short, the derivation of taxable income is based solely 
on amounts actually received or paid during the tax year, by 
means of examining the business's checkbook for when checks 
were cut and deposits made. Under SCM, income consists only of 
cash, property or services received during the tax year without 
regard to imputed income under the constructive receipt, cash 
equivalence, or economic benefit doctrines. While determining 
and valuing the receipt of in-kind goods and services would 
continue to be a problematic, small businesses would otherwise 
be able to arrive at their income by adding up their bank 
deposits for the year. Any timing advantage to businesses from 
not being subject to the judicial doctrines just mentioned 
would be minimal given that small businesses cannot, as a 
practical matter, defer recognition of cash by more than a few 
months without creating severe cash flow problems for the 
payment of their own bills. The complexity of the judicial 
doctrines does not warrant their application to small 
businesses.

    SCM offers even greater simplification for the 
determination of deductible expenses. Under SCM, all current 
expenditures, including those for the acquisition or 
construction of inventory, would be deducted when paid. 
Although a technical violation of GAAP's matching principle of 
accounting, GAAP is not a particularly useful concept in 
measuring the ability of a small business to pay tax, or even 
stay in business. More than one small business that had a 
profit under GAAP has failed because of cash flow problems. 
Allowing for the immediate deduction of the cost of inventory 
simplifies small business record keeping at relatively little 
cost to the government. For a small business to say in 
business, inventory paid for and deducted in one year likely 
will be sold no later than the next year to ensure sufficient 
cash flow for business operations. Also, permitting the 
expensing of inventory before its sale recognizes the fact that 
by the IRS's own admission, small businesses are not following 
the rules for the computation of cost of goods sold, in that 
audits reveal more than 50 percent of cost of goods sold 
calculations are incorrect.
    Finally, permitting the immediate expensing of depreciable 
property simply adopts a 100 percent bonus depreciation 
approach for acquired property with a useful life in excess of 
one year and the current section 179 expense allowance for 
purchased depreciable property. Thresholds and limitations 
similar to the present $10,000,000 limitation for uniform 
capitalization rules and the current IRS allowance for the cash 
method may be adopted to restrict SCM to small businesses.

    With a $10 million threshold for the general adoption of 
the cash method coupled with an election to adopt the SCM, 
simplification would be available to approximately 99% of all 
businesses in the United States, thereby reducing the tax 
compliance burden for almost every person owning and operating 
a business in America.

    B. Single Business Tax Rate

    Perhaps even more important from the perspective of 
compliance costs, small businesses need a rate structure that 
is not dependent on the legal form they adopt. Currently sole 
proprietorships, partnerships and S corporations are taxed at a 
maximum rate of 39.6%, while the taxable income of a C 
corporation is taxed at a maximum rate of 35%. Most of the 
corporate tax reform proposals focus upon eliminating 
deductions and credits to broaden the tax base upon which a 
lower corporate tax rate would apply. If corporate tax reform 
simply reduces rates on C corporations, unincorporated small 
businesses will have an increased tax burden relative to C 
corporation. Additionally, such a result will increase the tax 
planning and compliance costs of every start-up business in 
analyzing the tax burden of operating in one legal form or 
another. Our tax system should not promote inefficiency by 
incentivizing small businesses to make decisions based on tax 
considerations, rather than for business reasons.

    Therefore, rather than reduce the tax rates only on C 
corporations, small businesses need a tax rate structure that 
applies to all businesses regardless of their legal form. While 
corporate earnings are subject to tax both at the corporate 
level and the shareholder level (when distributed) and earnings 
of unincorporated businesses are taxed only once, there are 
well documented approaches, e.g. integration, beyond the scope 
of this testimony to ensure tax neutrality in the decision of 
business entity choice.

    A single integrated business tax rate schedule could have 
graduated rates providing a lesser tax burden to businesses 
with less taxable income. A single integrated business tax rate 
schedule would not be difficult to administer because income 
from follow-through businesses (sole proprietorships, 
partnerships and S corporations) already separately appears on 
schedules on individual tax returns, Schedule C for income for 
sole proprietorships and Schedule E for income from 
partnerships and S corporations. Individuals would simply total 
their business taxable income and apply the ``business tax rate 
schedule,'' a practice no different from the special tax rate 
schedule that currently applies to qualified dividends and 
capital gains on Schedules B and D.

    In short, what is needed is ``business tax reform'' not 
corporate tax reform. A single business rate schedule will 
create a uniform, comprehensive system of business taxation 
that taxes all businesses equally without regard to their legal 
form thereby easing the tax burden on small businesses and 
increasing simplicity and fairness.

                             IV. Conclusion


    The burden of compliance costs on small business arises 
from the complexity of the tax law coupled with the almost 
exponential change in the Internal Revenue Code over the past 
few decades. As a result, small businesses have outsourced 
their tax planning and compliance responsibilities to tax 
professionals whose fees have added to the compliance burden.

    The Kogod Tax Policy Center recommends that increasing the 
availability of the cash method of accounting to small 
businesses and adopting a uniform tax rate schedule for all 
businesses regardless of their legal form will reduce the 
burden small businesses currently bear in complying with their 
filing responsibilities. These proposals will improve tax 
compliance at lower administrative costs to businesses with 
little or no loss of tax revenue to the government. Such 
reforms are needed for the continued viability of our voluntary 
tax compliance system.

                                 * * *

    Thank you for the opportunity to testify today. I welcome 
any questions from the Committee or its staff. In addition, I 
or any others at the Kogod Tax Policy Center would be pleased 
to respond to any other questions you may have in the future.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    INTRODUCTION

    Chairman Chabot, Ranking Member Velazquez, and Members of 
the House Committee on Small Business, thank you for the 
opportunity to testify today on ``How Tax Compliance 
Obligations Hinder Small Business Growth.'' My name is Troy 
Lewis. I am the vice president and chief enterprise risk 
management officer at Heritage Bank in St. George, Utah. I am 
also a sole tax practitioner, adjunct faculty member at Brigham 
Young University and Chair of the Tax Executive Committee of 
the American Institute of Certified Public Accountants (AICPA). 
I am pleased to testify today on behalf of the AICPA.

    The AICPA is the world's largest member association 
representing the accounting profession, with more than 400,000 
members in 145 countries and a history of serving the public 
interest since 1877. Our members advise clients on federal, 
state and international tax matters, and prepare income and 
other tax returns for millions of Americans. Our members 
provide services to individuals, not-for-profit organizations, 
small and medium-sized business, as well as America's largest 
businesses.

    The AICPA applauds the leadership taken by the Committee to 
consider ways to reduce the complexity faced by small 
businesses when preparing their taxes. Small businesses are the 
foundation of the U.S. economy, employing over half of the 
private-sector workforce and creating nearly two-thirds of this 
nation's net new jobs over the past decade and a half.\1\
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    \1\ Small Business Administration Office of Advocacy, Frequently 
Asked Questions, September 2012.

    Unfortunately, compliance with federal tax laws can act as 
a road block in the growth of small business. Unlike large 
multi-national corporations, the time spent by small businesses 
in complying with tax laws is much more costly because small 
businesses do not have the luxury of critical mass and a large 
customer base with which to efficiently spread non-value added 
compliance costs. Time devoted to complying with tax laws has 
an impact on business creation, job growth and economic 
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prosperity of these small businesses.

    At the same time, we recognize that tax compliance is 
necessary. However, to help small businesses grow, Congress and 
the Internal Revenue Service (IRS) should seek to lessen these 
compliance burdens on all small businesses. When evaluating 
whether or not a tax compliance requirement should be mandated 
for a small business, a cost/benefit analysis should first be 
considered. Nowhere is it more important to ask if the end 
result is worth the effort than in the area of tax compliance 
for small businesses.

    Using this cost/benefit approach, may I suggest a few areas 
where Congress can act to reduce the burden of tax compliance 
in a way that allows small businesses to grow without creating 
undue hindrances.

    IRS TAXPAYER SERVICES

    It is imperative that small businesses and their tax return 
preparers have the ability to communicate with the IRS when 
preparing their taxes and addressing compliance issues. 
However, there has been increasingly limited access to the 
agency and, as reported by IRS Commissioner John Koskinen, 
``abysmal' level of taxpayer service this year.\2\
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    \2\ Commissioner Koskinen, Prepared Remarks of John A. Koskinen 
Commissioner, Internal Revenue Service, Before the National Press Club, 
dated March 31, 2015.

    Our members have expressed their deep concerns regarding 
their ability to effectively represent small businesses and 
other taxpayers in an environment where the IRS service levels 
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are so degraded that:

           During the 2015 tax season, the IRS answered 
        only 37% of the telephone calls received from taxpayers 
        seeking to speak with an assistor;\3\

    \3\ National Taxpayer Advocate Report, Volume I: FY 2016 Objectives 
Report to Congress; Part II: Review of the 2015 Filing Season, dated 
July 14, 2015.

           The average hold time for the Practitioner 
        Priority Service telephone line reached 47 minutes;\4\ 
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        and

    \4\ Joint Operations Center, Customer Account Services, Account 
Management Paper Inventory Reports, Inventory Age Report, (Jan 1 - Apr 
6 statistics).

           According to the National Taxpayer Advocate, 
        the IRS's ability to process taxpayer correspondence in 
        a timely manner declined by 16% since 2014, leaving a 
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        backlog of almost 79,000 cases.\5\

    \5\ Id.

    Through an informal membership survey we conducted earlier 
this year, we learned that over half of our members were either 
somewhat dissatisfied or very dissatisfied with the services 
they received from the IRS this filing season. This is no 
surprise considering that only 17% of our members responded 
that the IRS generally answered their telephone calls within 30 
minutes. Most of our members were on hold for extended periods 
of time and other members noted that they generally had to end 
their own calls because they did not have the time to wait on 
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hold for an IRS agent to answer.

    As reported by one of our members, ``I was on hold for over 
an hour and a half. When the IRS agent finally picked up the 
call, they needed to transfer to another agent. I had to wait 
on hold for another hour. Finally, I received a recorded 
message that the office was closed and I needed to call again 
the following day.''

    Many of our members also experienced what the IRS refers to 
as ``courtesy disconnects.'' According to the IRS, they 
terminate telephone calls from small businesses and other 
callers, without taking a message or getting contact 
information, if the caller has been on hold for two hours. As 
of April 18th this year, approximately 8.8 million calls 
received by the IRS were subject to their ``courtesy 
disconnect'' policy, which represents an increase from 
approximately 544,000 over last year.\6\ Nothing is more 
discouraging, frustrating or inefficient for a caller (whether 
they are a small business or a tax preparer calling on behalf 
of a small business) than being hung up on by the IRS after 
waiting on hold for two hours.
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    \6\ National Taxpayer Advocate Report, Volume I: FY 2016 Objectives 
Report to Congress; Part II: Review of the 2015 Filing Season, dated 
July 14, 2015.

    Our survey also indicated similar, unacceptable patterns 
with regards to delays in written correspondence. On average 
over half of the correspondence sent to the IRS is not 
responded to within 90 days of receipt.\7\ Often small 
businesses are anxiously awaiting a response to a notice. 
Furthermore, the longer the response tine by the IRS, the more 
interest and penalties are accrued as the small business 
attempts to resolve their issue.
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    \7\ Joint Operations Center, Customer Account Service, Account 
Management Paper Inventory Reports, Inventory Age Report, (Jan 1 - Apr 
6 statistics).

    We appreciate and understand that the IRS has new 
initiatives and vital unmet obligations and responsibilities 
(such as addressing identity theft), but taxpayer service must 
remain a high priority in order for small businesses to receive 
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the assistance they need on tax issues.

    GOOD TAX POLICY

    In order to reduce the overall tax compliance burden on 
small businesses, the AICPA urges the Committee to consider 
comprehensive tax reform that focuses on simplification, 
transparency and other Principles of Good Tax Policy.\8\ We 
believe it is important to promote a tax system that is 
perceived as balanced, fair to all, administrable, economically 
efficient, transparent, and neutral in its effect on economic 
activity.
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    \8\ AICPA's Tax Policy Concept Statement No. 1: Guiding Principles 
for Good Tax Policy: Framework for Evaluating Tax Proposals, issued 
March 2001.

    Our current tax system is heavily burdened by complexity. 
Multiple and duplicative tax calculations, definitions, and 
preferences lead to taxpayer confusion and, thus, errors and 
frustration. Attempts to adjust tax liabilities through special 
rules affecting taxable income rather than the rate schedule 
add to complexity. Business provisions that require retention 
of records solely for tax purposes increase compliance costs. 
We urge consideration of removing duplicative rules and 
definitions, and reducing recordkeeping and calculations, to 
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achieve simplicity, without adding new complexities.

    It is also important for an effective tax system and 
informed citizenry that taxpayers understand the tax system and 
how it affects them. Clarity of the tax consequences of 
taxpayers' regular activities is a must. Transparency also 
helps improve voluntary compliance.

    Additionally, it is critical for taxpayers to have 
certainty to perform any long-term tax planning. Permanence of 
tax provisions can have substantial impacts on the growth of 
small businesses. The uncertainty of tax legislation creates 
unnecessary confusion, anxiety and administrative financial 
burdens. Without permanency in the Internal Revenue Code 
(``Code''), we are concerned about the following consequences:

           Impact on a company's financial accounting 
        and reporting;

           Complexity and administrative burden for 
        taxpayers and the IRS;

           Adverse impact on small businesses and 
        ultimately jobs and growth;

           Effect on economic decisions and tax 
        payments; and

           Lack of transparency and certainty with 
        short-term, retroactive extensions

    We recognize that it is not always possible for each tax 
provision and the overall tax system to equally meet each of 
the ten principles of good tax policy. However, it is important 
to carefully balance these principles to achieve a respected 
and administrable tax system.

    TANGIBLE PROPERTY REGULATIONS

    A challenging tax compliance burden that small businesses 
had to deal with this year was the new final tangible property 
regulations (TD 9636). These tax rules, which address how 
businesses should report the acquisition and improvement of 
tangible property, comprise almost 500 pages of technical 
guidance and procedures.

    While we appreciated that the regulations clarified some 
rules and provided several small business favorable provisions, 
we were concerned that they were significantly burdensome for 
many small business taxpayers because of the required 
retrospective analysis and reporting requirements.

    The AICPA pushed hard for relief and stressed that time was 
of the essence as a significant portion of the burdens placed 
on small businesses (and their tax practitioners) would occur 
prior to filing season. However, despite these pleadings, the 
IRS issued the much-needed relief, Rev. Proc. 2015-20, on 
February 13, well into the filing season. Unfortunately, some 
small businesses and their tax practitioners had already spent 
time and resources attempting to comply with the new 
regulations prior to the IRS's issuance of relief. If the IRS 
had acted in a timely manner, small businesses could have been 
spared some administrative burden.

    Currently, small businesses must prove that expensing such 
amounts ``clearly reflects income'' to deduct amounts higher 
than the $500 threshold. The clear reflection of income test 
can be challenging for any taxpayer, especially for small 
businesses. The test is based on the taxpayer's facts, 
circumstances, and interpretations of those facts and 
circumstances by the taxpayer and IRS. Thus, it is arbitrary 
and often difficult to apply. Large businesses (e.g., taxpayer 
with an AFS), however, are allowed the higher $5,000 threshold. 
Subjecting small businesses to the clear reflection of income 
test at merely $500, adds unnecessary complexity and compliance 
burdens to small businesses.

    There are other issues that remain open in regards to the 
repair regulations. The AICPA recommends that you take 
immediate action to increase the $500 de minimis safe harbor 
threshold for taxpayers without an AFS to $2,500, and provide 
for annual adjustments for inflation, to offer meaningful 
relief to small business taxpayers. To further reduce 
administrative burden on these rules, we also recommend that 
you expand the AFS definition to include a reviewed set of 
financial statements \9\ to permit more business to benefit 
from the higher $5,000 de minimis safe harbor threshold.
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    \9\ For a detailed explanation of the differences between a 
compilation, a review, and an audit, please reference the AICPA 
Comparative Overview document.

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    CIVIL TAX PENALTIES

    An additional concern \10\ for small businesses is the 
numerous unfair or untargeted penalty provisions in the Code 
pertaining to tax compliance. Penalties should deter bad 
conduct without deterring good conduct or punishing small 
businesses which are acting in good faith.

    \10\ AICPA comment letter on ``AICPA Tax Penalties Legislative 
Proposals,'' dated April 11, 2013; and AICPA report on ``AICPA Report 
on Civil Tax Penalties,'' submitted April 11, 2013.

    Targeted, proportionate penalties that clearly articulate 
standards of behavior and that are administered in an even-
handed and reasonable manner encourage voluntary compliance 
with the tax laws. On the other hand, overbroad, vaguely-
defined, and disproportionate penalties, particularly those 
administered as part of a system that automatically imposes 
penalties or that otherwise fail to provide basic due process 
safeguards, create an atmosphere of arbitrariness and 
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unfairness that is likely to discourage voluntary compliance.

    For example, penalties should apply prospectively to future 
conduct and not retroactively to conduct that was appropriate 
at the time the conduct occurred. Good tax policy would also 
suggest that we avoid strict liability provisions that do not 
grant the IRS discretion to take into consideration the facts 
and circumstances of a particular business' situation.

    The AICPA points out the following specific penalty-related 
issues with the current system below.

    Repeal Technical Termination Rule

    The AICPA recommends a repeal of section 708(b)(1)(B) 
regarding the technical termination of a partnership as it is a 
trap for the unwary.\11\ Under current law, when a partnership 
is technically terminated, the legal entity continues, but for 
tax purposes, the partnership is treated as a newly formed 
entity. The current law requires the partnership to select new 
accounting methods and periods, restart depreciation lives, and 
make other adjustments Furthermore, under the current law, the 
final tax return of the ``old'' partnership is due the 15th day 
of the fourth month after the month-end in which the 
partnership underwent a technical termination.\12\

    \11\ AICPA submitted letters and written statement on Option 1 and 
Option 2 of Chairman Camp's Small Business Tax Reform Draft: See Option 
1 comments at ``AICPA testimony on Small Business and Pass-through 
Entity Tax Reform,'' dated May 17, 2013; and Option 2 comments, ``AICPA 
Comments on Option 2 of Chairman Camp's Small Business Tax Reform 
Discussion Draft'' dated July 30, 2013.
    \12\ For example, a partnership that technically terminated on 
April 30 of the current year due to a transfer of 80% of the capital 
and profits interests in the partnership to be timely filed must file 
its tax return for that final tax year on or before August 15 of the 
current year.

    A technical termination most often occurs when, during a 
12-month period there is a sale or exchange of 50% or more of 
the total interest in partnership capital and profits. Because 
this 12-month time frame can span a year-end, the partnership 
may not realize that a 30% change (a minority interest) in one 
year followed by a 25% change in another year, but within 12 
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months of the first, has caused the partnership to terminate.

    In practice, this earlier required filing of the old 
partnership's tax return often goes unnoticed because the 
company is unaware of the accelerated deadline due to of the 
equity transfer. Penalties are often assessed upon the business 
as a result of the missed deadline. Although ignorance is not 
an acceptable excuse, this technical termination area is often 
misunderstood and misapplied. The acceleration of the filing of 
the tax return, to reset depreciation lives and to select new 
accounting methods, serves little purpose in terms of abuse 
prevention and serves more as a trap for the unwary.

    Late Filing Penalties

    Sections 6698 and 6699 impose a penalty of $195 per partner 
related to late-filed partnership or S corporation returns. The 
penalty is imposed monthly not to exceed 12 months, unless it 
is shown that the late filing is due to reasonable cause.

    The AICPA proposes that a partnership (or S Corporation), 
comprised of 50 or fewer partners/shareholders, each of whom 
are natural persons (who are not nonresident aliens), an estate 
of a deceased partner, a trust established under a will or a 
trust that becomes irrevocable when the grantor dies, and 
domestic C corporations, will be considered to have met the 
reasonable cause test and will not be subject to the penalty 
imposed by section 6698 or 6699 if:

           The delinquency is not considered willful 
        under section 7423;

           All entity income, deductions and credits 
        are allocated to each owner; and

           Each partner/shareholder fully reported its 
        share of income, deductions and credits of the entity 
        on its timely filed federal income tax return.

    Failure to Disclose Reportable Transactions

    Taxpayers who fail to disclose a reportable transaction are 
subject to a penalty under section 6707A of the Code. For 
penalties assessed after 2006, the amount of the penalty is 75% 
of the decrease in tax shown on the return as a result of the 
transaction (or the decrease that would have been the result if 
the transaction had been respected for federal tax purposes). 
If the transaction is a listed transaction (or substantially 
similar to a listed transaction), the maximum penalty is 
$100,000 for individuals and $200,000 for all other taxpayers. 
In the case of reportable transactions other than listed 
transactions, the maximum penalty is $10,000 for individuals 
and $50,000 for all other taxpayers. The minimum penalty is 
$5,000 for individuals and $10,000 for all other taxpayers.

    The section 6707A penalty applies even if there is no tax 
due with respect to the reportable transaction that has not 
been disclosed. There is no reasonable cause exception to the 
penalty. The Commissioner may, however, rescind all or a 
portion of a penalty, but only in the case of transactions 
other than listed transactions, where rescinding the penalty 
would promote efficient tax administration and only after the 
taxpayer submits a lengthy and burdensome application. In the 
case of listed transactions, the IRS has no discretion to 
rescind the penalty. The statute precludes judicial review 
where the Commission decides not to rescind the penalty.

    The AICPA proposes for an amendment of section 6707A to 
allow an exception to the penalty if there was a reasonable 
cause for the failure and the taxpayer acted in good faith for 
all types of reportable transactions, and to allow for judicial 
review in cases where reasonable cause was denied. Moreover, we 
propose an amendment of section 6664 to provide a general 
reasonable cause exception for all types of reportable 
transactions, irrespective of whether the transaction was 
adequately disclosed or the level of assurance.

    9100 Relief

    Section 9100 relief, which is currently available with 
regard to some elections, is extremely valuable for taxpayers 
who miss the opportunity to make certain tax elections. 
Congress should make section 9100 relief available for all tax 
elections, whether prescribed by regulation or statute. The 
AICPA has compiled a list \13\ of elections (not all-inclusive) 
for which section 9100 relief currently is not granted by the 
IRS as the deadline for claiming such elections is set by 
statute. Examples of these provisions include section 
174(b)(2), the election to amortize certain research and 
experimental expenditures, and section 280C(c), the election to 
claim a reduced credit for research activities. We do not 
believe small businesses are likely to abuse or exploit 
hindsight, as the IRS would continue to have discretion as to 
whether to grant relief for each specific request.
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    \13\ AICPA comment letter on ``Tax Reform Administrative Relief for 
Various Statutory Elections,'' submitted January 23, 2015.

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    Form 5471 Penalty Relief

    On January 1, 2009, the IRS began imposing an automatic 
penalty of $10,000 for each Form 5471, Information Return of 
U.S. Persons with Respect to Certain Foreign Corporations, 
filed with a delinquent Form 1120 series return. When imposing 
the penalty on corporations in particular, the IRS does not 
distinguish between: a) large public multinational companies, 
b) small companies, and c) companies that may only have 
insignificant overseas operations, or loss companies. This one-
size-fits-all approach inadvertently places undue hardship on 
smaller corporations that do not have the same financial 
resources as larger corporations. The AICPA has submitted 
recommendations \14\ regarding the IRS administration of the 
penalty provision applicable to Form 5471. Our recommendations 
focus on the need for relief from automatic penalties assessed 
upon the late filing of Form 5471 in order to promote the fair 
and efficient administration of the international penalty 
provisions of the Code.
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    \14\ AICPA comment letter on ``Recommendations - Automatic 
Penalties assessments Policy with the Late Filing of Form 5471,'' dated 
March 26, 2013.

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    MOBILE WORKFORCE

    Another burden on small businesses that Congress should 
address involves the tremendous burden of tracking and 
complying with the many different state non-resident employee 
tax withholding and reporting rules for just a few days of work 
by an employee in a non-resident state. The state personal 
income tax treatment of nonresidents is inconsistent and often 
bewildering to multistate employers and employees.

    H.R. 2315, the Mobile Workforce State Income Tax 
Simplification Act of 2015, introduced by Representative Bishop 
on May 14, 2015, addresses this issue. We are pleased that 
members of this Committee cosponsor this bill, and hope many 
others of you will also consider cosponsoring it. The AICPA 
strongly supports H.R. 2315 and urges Congress \15\ to enact 
this legislation to help small businesses in this country ease 
their non-resident state income tax withholding and compliance 
burdens.

    \15\ AICPA written testimony before the House Committee on the 
Judiciary Subcommittee, Regulatory Reform, Commercial and Antitrust Law 
on Nexus Issues: Legislative Hearing on H.R. 2315, The ``Mobile 
Workforce State Income Tax Simplification Act of 2015,'' H.R. 1643, the 
``Digital Goods and Services Tax Fairness Act of 2015,'' and 
H.R.--the ``Business Activity Tax Simplification Act of 
2015'', dated June 2, 2015.

    Small businesses must understand each of the states' 
treatment of non-resident employee withholding and assessment 
of taxes and the unique de minimis and definitions. Currently, 
43 \16\ states plus the District of Columbia impose a personal 
income tax on wages, and there are many different requirements 
for withholding income tax for non-residents among those 
states. There are seven states that currently do not assess a 
personal income tax.\17\ Employees traveling into all the other 
states are subject to the confusing myriad of withholding and 
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tax rules for non-resident taxpayers.

    \16\ Note that New Hampshire and Tennessee, which are included in 
the 43 states, do not tax wages and only subject to tax interest and 
dividends earned by individuals.
    \17\ The seven states with no personal income tax are Alaska, 
Florida, Nevada, South Dakota, Texas, Washington and Wyoming.

    A number of states have a de minimis threshold, or 
exemption for non-residents working in the state before taxes 
must be withheld and paid. Others have a de minimis exemption 
based on the amount of the wages earned, either in dollars or 
as a percent of total income, while in the state. Further 
complicating the issue is that a number of these states have 
reciprocity agreements with other, usually adjoining, states 
---------------------------------------------------------------------------
regarding the withholding of non-resident state income taxes.

    Where many businesses once tended to be local, they now 
have a national reach. This change has caused the operations of 
even small businesses to move to an interstate basis. Because 
of the interstate operations of these companies, many providers 
of services to these companies, such as certified public 
accountants (CPAs), find that they are also operating on an 
interstate basis. What once were local taxation issues have now 
become national in scope, and burdens must be eased in order to 
promote interstate commerce and ensure businesses run 
efficiently. These burdens take significant resources away from 
operating their business.

    The complex filing rules impact everyone who travels for 
work. The recordkeeping and the requirement of having to 
withhold and file many state non-resident tax returns for just 
a few days of work in various states is overly burdensome and 
too complicated for both employers and employees. Additionally, 
the amount of research that goes into determining what each 
state law requires is expensive and time-consuming. A small 
firm or business will often be required to engage outside 
counsel to research the laws of the other states on an ongoing 
annual basis.

    This issue affects all industries--retail, manufacturing, 
real estate, technology, food, services, etc. The current 
system as a whole unnecessarily creates complexity and costs 
for both employers and employees, without yielding a 
substantive benefit to most states. H.R. 2315 is needed to 
solve this problem and burden for small businesses.

    Having a uniform national standard for non-resident income 
taxation, withholding, and filing requirements, as H.R. 2315 
provides, will enhance compliance and significantly relieve 
these unnecessary administrative burdens on businesses and 
their employees. Additionally, H.R. 2315 provides a needed 30-
day de minimis exemption before an employee is obligated to pay 
taxes to a state in which they do not reside. Many small 
businesses need Congress to enact this legislation.

    TAX RETURN DUE DATE SIMPLIFICATION

    Another challenging compliance issue for small businesses 
is the current illogical order of due dates for various types 
of tax returns. Taxpayers and preparers have long struggled 
with problems created by the inefficient timeline and flow of 
information. Federal Schedules K-1s are often delivered late, 
sometimes within days of the due date of taxpayers' personal 
returns and up to a month after the due date of their business 
returns. Late schedules make it difficult, if not impossible, 
to file a timely, accurate return. The current inefficient 
timeline of tax return due dates is a problem for taxpayers as 
well as their tax practitioners.

    The AICPA strongly supports this provision. It would 
alleviate the problems mentioned above by establishing a 
logical set of due dates, focused on promoting a 
chronologically-correct flow of information between pass-
through entities and their owners. The proposal includes the 
changes as follows:

          Current Tax Due Dates:

           March 15: S corporation and C corporation 
        Forms 1120S and 1120; and

           April 15: Individual, Trust and Estate, and 
        Partnership Forms 1040, 1041, and 1065

        Proposed Tax Due Dates:

           March 15: Partnership Form 1065;

           March 31: S corporation Form 1120S; and

           April 15: Individual, Trust and Estate, and 
        C Corporation Forms 1040, 1041, and 1120

    The provision would also revise the extended due dates to 
be six months after the original filing due dates for all these 
forms, except the trust and estate Form 1041, which would be 
extended five and half months.

    The AICPA urges you to support this provision to change the 
dates for tax returns of partnerships, S corporations and C 
corporations because it would:

           Improve the accuracy of tax and information 
        returns by allowing corporations and individuals to 
        file using current data from flow-through returns that 
        have already been filed rather than relying on 
        estimates;

           Better facilitate the flow of information 
        between taxpayers (i.e., corporations, partnerships, 
        and individuals);

           Reduce the need for extended and amendment 
        tax returns; and

           Simplify tax administration for the 
        government, taxpayers, and practitioners.

    CONCLUDING REMARKS

    The AICPA has consistently supported tax reform 
simplification efforts and permanent tax legislation because we 
are convinced such actions will significantly reduce taxpayers' 
compliance costs and encourage voluntary compliance through an 
understanding of the rules. The uncertainty of tax legislation 
creates unnecessary confusion, anxiety and administrative 
financial burdens. Good tax policy would promote a tax system 
that is balanced, economically efficient and transparent.

    We encourage you to examine all aspects of the tax code to 
improve the current rules that have led to compliance hurdles 
for small businesses and administrative complexity. For 
example, additional relief is needed for small businesses with 
regards to the tangible property rules, penalty provisions need 
to consider their effect on voluntary compliance, and employers 
operating across state lines need a uniform standard on non-
resident income tax withholding rules. The income tax deadlines 
should also promote an efficient flow of taxpayer information 
to provide small businesses sufficient time to file timely, 
accurate returns.

    Finally, if small businesses are going to be allowed to 
grow, it is imperative that the IRS's taxpayer service issues 
are addressed. Small businesses and their tax preparers need to 
be able to contact the IRS regarding their compliance issues.

    Again, Mr. Chairman, thank you for the opportunity to 
testify. I would be happy to answer any questions.

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                NATIONAL CONFERENCE OF CAP PRACTITIONERS


    22 Jericho Turnpike, Suite 110          T: 516-333-8282

    Mineola, NY 11501                    F. 516-333-4099

    Mr. Chairman and members of the Committee, thank you for 
inviting me to testify today. My name is Stephen Mankowski. I 
am a Certified Public Accountant, member of the American 
Institute of CPAs (AICPA) and the National Executive Vice 
President and National Tax Policy Chair of the National 
Conference of CPA Practitioners, (NCCPAP - the countries' 
second largest CPA organization). NCCPAP is a professional 
organization that advocates on issues that affect Certified 
Public Accountants in public practice and their small business 
and individual clients located throughout the United States. 
NCCPAP members serve more than one million business and 
individual clients and are in continual communication with 
regulatory bodies to keep them apprised of the needs of the 
local CPA practitioner and its clients. Accompanying me is Ms. 
Sandra Johnson, National President of NCCPAP.

    My firm has been preparing tax returns for over 30 years. 
My firm annually prepares well over 2,000 small business and 
individual tax returns as well as sales tax, payroll tax 
returns, highway use tax returns and 1099 informational 
returns. We are in the trenches with clients discussing their 
tax, financial and personal issues, and the impact events and 
proposed tax law changes may have on them. Although our clients 
are mostly in the Pennsylvania, New Jersey and Delaware area, 
we serve clients in over 30 states and also provide services to 
clients in Canada and Europe. In this respect our practice is 
the same as many members of NCCPAP and other smaller CPA firms 
throughout the United States.

    Tax compliance burden has been defined in the GAO report 
``SMALL BUSINESSES IRS Considers Taxpayer Burden in Tax 
Administration, but Needs a Plan to Evaluate the Use of Payment 
Card Information for Compliance Efforts'' as the time and money 
spent by the taxpayer to meet tax obligations. This includes 
federal, state and local obligations, but NOT liabilities. The 
time spent on tax compliance related activities can include 
working with paid professionals, tax planning, record keeping, 
filing and submitting tax forms, learning tax laws, and working 
with the IRS and other jurisdictions on tax related issues. The 
monetary burdens can include the expenses of accounting and tax 
professionals, tax and accounting software, payroll services, 
and legal fees. An objective of the Administration and the IRS 
has been to minimize these burdens and eliminate unnecessary 
ones. For purposes of my testimony, I will simply use the term 
taxpayer burden to refer to tax compliance burden.

    My first exposure to taxpayer burden was in November 2012. 
I was invited to represent NCCPAP and participate in an IRS 
panel with other tax professionals at IRS headquarters to 
discussed compliance burdens for both individuals and small 
businesses. As a CPA, I had always viewed my role as one to 
reduce client burden. I had not viewed my role as a source of 
taxpayer burden as indicated in the GAO report, which says that 
CPAs and tax services are part of the monetary burden of 
business owners. We take many of the above tasks away from the 
business owner to allow him/her to focus on running their 
business. So it is easy to see how this team can be easily 
mistaken. This new appreciation of what comprises taxpayer 
burden has allowed me to be an even better resource for my 
clients.

    It seems that every year business owners are more in tune 
with how specific tax legislations could affect their business. 
Clients often ask how the Tax Extender legislation will affect 
their operations and what the Section 179 deduction limit is 
for the current year. While the answers tend to be similar--if 
you need a piece of equipment, you should buy it--that answer 
is not always the right answer for a business owner. Often the 
tax impact of the Sec. 179 deduction can be a deal-breaker. 
Equipment costing $100,000 could have a net cost of $60,000 
with these write-offs. The $40,000 tax savings is often the 
deciding factor when making the purchase. While the IRS does 
not have control over which of the Extenders are passed, it is 
still a significant factor in assessing taxpayer burden.

    Over the last few years, there has been a decided change in 
how business is conducted. As consumers have been more 
reluctant to carry cash, customers have forced the hand of many 
businesses that have historically limited payment options to 
cash or checks to now accept credit cards. Initially, business 
owners might have added a surcharge for these transactions, but 
with savvy consumers, credit cards and the related fees have 
simply become yet another cost of doing business. And another 
element of taxpayer burden. These business owners quickly 
realized that they cannot simply apply one rate for these 
transactions. Even after researching the processing firms to 
obtain the best processing rates, they learn that MasterCard 
and VISA have different merchant fees when compared to American 
Express and Discover. If the consumer uses a credit card that 
includes member programs or ``points'', an even higher 
processing rate may be charged by the merchant bank. In 
addition, there might also be monthly and compliance fees as 
well as equipment rental costs. And if that's not enough, the 
processing companies do not always deposit funds in the same 
manner. Most will simply deposit the gross amount of the charge 
and deduct the processing fees as a separate transaction. Yet 
many companies will deposit the net amount after deducting the 
processing fees, which makes the merchant's record keeping more 
complicated.

    Most business owners have accepted these changes in how to 
conduct their business and accurately report their income. The 
IRS questioned the voluntary compliance of reporting all 
revenue, especially with the surge in online sales through 
PayPal. Under a 2008 law, the processing companies had to begin 
reporting credit card receipts to the IRS and the merchant in 
2011 and had to add the reporting of the number of monthly 
transactions for 2012. This data appears on Form 1099-K, 
Merchant Card and Third Party Network Payments. This form must 
be issued once a payment processor once a merchant annually has 
200 transactions and sales of at least $20,000.

    Initially, the IRS had added rows onto personal returns on 
Schedule C and Schedule E as well as the business returns to 
incorporate the revenue information from Form 1099-K. However, 
prior to the start of the filing season, the IRS eliminated the 
requirement to complete these fields because too many issue 
arose creating much confusion. Specifically, there was 
confusion on how to treat sales tax, gratuities, cash back and 
returns on the 1099-K. Those same concerns still exist and are 
just some of the reasons that the IRS hasn't taken a stronger 
view on the use of the information on these forms.

    The Form 1099-K has been a new source of taxpayer burden 
for the small business owner. Business owners track revenue by 
specific categories (i.e. sales, repairs, consulting, rent, 
etc.). They have not needed to track revenue based on how they 
are paid. Trying to accurately track revenue in the same way as 
the 1099-K presents data would result in an accounting 
nightmare. To further complicate the record keeping, businesses 
receive a Form 1099-K for each specific payment processor. So, 
if the business accepts MasterCard/VISA and American Express 
they would receive a form from MasterCard/VISA and one from 
AMEX. If they also use Paypal, they would receive a third form. 
If they changed their payment processing company during the 
year, additional forms would be received from the new 
processing company. The overall burden to accurately track 
revenue by each credit card type can be significant and 
generate no results that benefit the owner.

    Another issue with the Form 1099-K revolved around payments 
for vendors that would receive a Form 1099MISC. Any payments 
related to these services would not be included on the Form 
1099MISC. This adds a different and unique level of taxpayer 
burden as this would relate to both the payer and recipient. 
Just as businesses are not setup to track revenue by payment 
source, the payer would have an additional burden to exclude 
credit card payments from the total payment they are required 
to report on Form 1099MISC to the recipient.

    From the IRS viewpoint, however, this form has helped 
increase voluntary compliance among small businesses. Many 
virtual businesses that had previously flown under the radar 
(part of the underground economy) are now filing income tax 
returns and paying taxes. In addition, the Form 1099-K has 
allowed the IRS to establish a database whereby they can obtain 
a better understanding of the revenue sources of a particular 
industry. Even though the IRS has not been able to assess 
taxpayers based solely on these databases, the IRS has been 
sending letters to taxpayers whom they feel have significantly 
under reported revenue. Initially, the IRS was accepting 
reasonable responses to these notices, but with the additional 
data in their databases, the IRS has a better understanding of 
the egregious filers, specifically those businesses reporting 
that 100% of their revenue was from credit card transactions.

    To assist tax professionals, the IRS instituted a pilot 
program for the 2015 filing season called the Payment Mix 
Comparison Tool (PMCT). NCCPAP was invited to participate in 
the program. This program allows our members to enter selected 
data from the client's Form 1099-K (Merchant Category Code 
(MCC), zip code, total transactions and total revenue) along 
with the total business income into a tool. PMCT accesses the 
IRS database and compares various ratios for a business with a 
specific MCC code against the Form 1099-K. The result tells the 
CPA if the results are within specifications of the database. A 
common flaw with the Form 1099-K is that if the payment 
processor applies an incorrect MCC code for a business, the 
PMCT results could be beyond the standard deviation which nay 
result in an IRS notice.

    The results from the PMCT have been strictly for the 
benefit of the taxpayer and is for informational purposes only. 
Currently, the IRS is not capturing data from this tool. The 
database will continue to improve as the volume of historical 
data input into the tool increases. The PMCT, unfortunately, 
did not get the expected usage due to a few practitioner 
concerns. Specifically, the name of the tool was not the best, 
many practitioners did not believe that the IRS was not 
tracking the results and the fact that PMCT did not go live 
until the beginning of February 2015 after most CPAs have 
completed their training and had already begun preparing tax 
returns. In addition, many felt that there should be a better 
result besides ``typical'' or ``unusual'' depending on where in 
the range their client's data fell. Hopefully, this program 
will continue next year and will see more usage by tax 
professionals. If used property, PMCT could actually reduce 
taxpayer burden by addressing issues of credit card revenue 
while the data is still fresh in the business owner's mind.

    In conclusion, taxpayer burden exists on two primary 
levels--time and money--to remain in compliance with today's 
complicated tax codes. Often, both components are viewed as 
one, except when contacting the IRS. Staffing and budgetary 
issues have resulted in longer than expected wait times and 
reaching IRS employees that are not able to address the 
caller's issues and concerns. Compliance with tax codes and 
dealing with new forms adds to taxpayer burden. New forms, such 
as Form 1099-K, are a prime example. The results may be of use 
to the IRS, but does not have any practical use for the 
business owner. Businesses do not tracked revenue by number of 
transactions or type of payment. Any attempt at verifying the 
data on the Form 1099-K would be fruitless, especially in 
industries, such as restaurants where customers charges often 
include gratuities and sales tax, neither of which are revenue 
to the business.

    Accepting credit cards has become the norm. Most businesses 
historically have included all of their sales, regardless of 
source. With the information on Form 1099-K, the IRS now has a 
means to ensure that all business, especially virtual ones, are 
tax compliant with regard to credit card sales. With this form 
comes additional burdens to the taxpayer including how to 
reconcile sales to the revenue reported on these forms. The 
question that the taxpayer needs to answer is how to best run 
his or her business. If the business owner has systems in place 
to accurately track all revenue, the burden of reconciling the 
Form 1099-K data should be minimal. It is extremely important 
that the IRS has the tools to determine tax compliance and 
reduce the tax gap.

    As various states learned that the IRS was beginning the 
income matching program, many decided to use this as a tool to 
understand the sales mix of credit cards vs. cash and checks. 
Currently these states have also indicated that they have no 
plans to use this information for audit selection or any 
purpose other than the collection of information. However, 
neither the IRS nor the participating states have assured the 
tax practitioners or business communities that this information 
will not be used in the future as a tool for audit selection 
despite its flaws.

    This program has the potential of a disaster. This is a 
repeat of warnings from NCCPAP and others in the tax 
practitioner community when the Form 1099-K matching program 
was first proposed. It is well understood that the IRS should 
use all tools possible to find tax cheats. However, as the GAO 
has correctly indicated, this is a flawed system with no real 
ability of matching gross income with Form 1099-K reports. 
Additionally, the ratio tools now being used are very imperfect 
as certain assumptions used (such as NAICS codes) will skew the 
information.

    Thank you for the opportunity to present this testimony.
    
    
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