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






                  KEEP IT SIMPLE: SMALL BUSINESS TAX 
                    SIMPLIFICATION AND REFORM, THE 
                         COMMISSIONER RESPONDS

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

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD
                             APRIL 13, 2016

                               __________

                               
                               
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]







            Small Business Committee Document Number 114-055
              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
                         CHRIS GIBSON, New York
                          DAVE BRAT, Virginia
             AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
                        STEVE KNIGHT, California
                        CARLOS CURBELO, Florida
                         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
             Emily Murphy, Deputy Staff Director for Policy
                       Jan Oliver, 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

                                WITNESS

Hon. John Koskinen, Commissioner, Internal Revenue Service, 
  Washington, DC.................................................     3

                                APPENDIX

Prepared Statement:
    Hon. John Koskinen, Commissioner, Internal Revenue Service, 
      Washington, DC.............................................    23
Questions for the Record:
    Questions from Chairman Chabot and Congressman Cresent Hardy 
      to Hon. John Koskinen and Responses from Hon. John Koskinen 
      from Chairman Chabot and Congressman Cresent Hardy.........    29
Additional Material for the Record:
    None.
 
                  KEEP IT SIMPLE: SMALL BUSINESS TAX 
                    SIMPLIFICATION AND REFORM, THE 
                         COMMISSIONER RESPONDS

                              ----------                              


                       WEDNESDAY, APRIL 13, 2016

                  House of Representatives,
               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 2:30 p.m., in Room 
2360, Rayburn House Office Building. Hon. Steve Chabot 
[chairman of the Committee] presiding.
    Present: Representatives Chabot, Luetkemeyer, Huelskamp, 
Gibson, Brat, Radewagen, Curbelo, Hardy, Kelly, Velazquez, 
Hahn, Lawrence, and Adams.
    Chairman CHABOT. The meeting will come to order. Good 
afternoon and thank you all for being here and a special thanks 
to our witness, IRS Commissioner Koskinen, who has taken time 
out away from his very busy schedule during an especially busy 
week. We are 2 days before April 15, so we appreciate him being 
with us here today and, by the way, me and--my wife and I filed 
our taxes several weeks ago; timely so we are legal. Earlier 
today our Subcommittee on Economic Growth Tax and Capital 
Access heard from a panel of small businesses and experts who 
serve the small business community.
    We hear from small business folks here all the time, we 
hear from individuals, from folks all over the country who 
repeatedly tell us that the Tax Code is just too complicated. 
People want to obey the law, however, the Tax Code gets more 
and more complicated every year and it makes it harder and 
harder for small companies to get it right and to take full 
advantage of provisions designed to help them. The complexity 
of our tax laws steals valuable resources, both time and money, 
from these businesses. It hinders their ability to grow, 
succeed, and create the jobs we need.
    Making the Tax Code simpler is particularly important for 
American small business owners as they are disproportionately 
affected by tax complexity. The GAO testified before this 
Committee in July of last year that small businesses with one 
to five employees face an estimated tax compliance burden of 
more than $4,000 annually per employee.
    The problem is a combination of substantive and 
administrative complexity, meaning that not only is the law 
itself complicated, but the entire process of compliance is 
complicated as well. Tax laws alone come in at close to 3,000 
pages. Regulations promulgated by the IRS add at least another 
9,000 pages, and when you add in case law the total increases 
exponentially up to around 70,000 pages. Our country's small 
businesses just cannot keep up.
    We need to get our Tax Code working for small businesses 
instead of against them and that is what we are here to talk 
about today. We look forward to hearing the Commissioner's 
ideas as well as our members' on how we can work together on 
this. This Committee takes seriously its responsibility to 
listen to America's small businesses and work with them to make 
the Tax Code simpler and easier to understand. Again, we want 
to thank Commissioner Koskinen for joining us here today and I 
would now like to yield to the Ranking Member Ms. Velazquez for 
her opening statement.
    Ms. VELAZQUEZ. Thank you, Mr. Chairman, thank you, 
commissioner, for being here today. This is a very valuable 
hearing which follows up on the subcommittee's session from 
this morning. During that hearing small businesses testified 
about the challenges they faced in complying with the American 
tax code and its regulations. It is my hope that during this 
hearing we can get perspective on what the IRS is doing to 
address this problem, and what steps Congress can take to 
improve this situation.
    Make no mistake, the complexity of our tax code makes 
complying with the law more difficult and expensive and that 
burden hits America's entrepreneurs hardest. Individuals and 
businesses spend 6.1 billion hours annually complying with the 
filing requirement of the code. These efforts constitute $163 
billion in costs. With nearly a third of small businesses 
reporting that they spend more than 80 hours each week on tax 
compliance, it is clear simply adhering to tax laws is a 
challenging and expensive undertaking. At the same time the tax 
compliance is becoming increasingly complex and expensive. It 
appears some services from the IRS meant to provide businesses 
with assistance are being reduced.
    During the 2015 tax season the IRS answered a little over 
one-third of telephone inquiries with an average wait time of 
47 minutes. Half of written correspondence to the agency is not 
responded to within 90 days of being received. If, as the 
saying goes, time is money, this can only be a further drain on 
entrepreneurs' resources. Of course these statistics on wait 
time and response rates are not meant only to criticize the 
IRS. The agency has a daunting challenge, especially this time 
of year. It is important that Congress provide the resources 
the IRS needs to serve all taxpayers, especially small firms. 
These challenges bring us to something that everyone on this 
committee can likely agrees upon: the importance and value in 
reforming our tax code. Of course doing so will be a 
significant undertaking and the devil will be in the details, 
but successful tax reform that simplifies the code will give 
small businesses greater certainty and allow them to spend 
their time and resources on what they do best: launching new 
products and creating new jobs in their local communities. 
There have been areas of progress that suggest we may be able 
to find other common ground in reforming the tax code.
    This committee was particularly supportive of making 
permanent a number of tax extenders such as the R&D tax credit 
in section 179 expensing. Making this change permanent gave 
small businesses the certainty that they will be able to 
utilize these provisions in coming years allowing them to plan 
for the future. As we look forward there are areas that I hope 
tax reform will eventually tackle. As just one example, many 
small businesses struggle to track and comply with different 
state tax laws. With employees who travel to multiple states 
this can create a tangle of different rules to contend with. 
Likewise the proliferation of online sales has raised issues 
about sales tax concerns.
    Bringing uniformity to these rules could help small firms 
and self-employed harness the Internet to reach new customers 
and markets. Mr. Chairman, I think all of us on both sides of 
the aisle and the commissioner understand the vast array of tax 
compliance challenges facing entrepreneurs. The difficulty for 
us will be identifying valuable solutions we can all get behind 
and implement. This will not be an easy task but I do hope 
there is room down the road for cooperation and progress. In 
that regard I thank the witness greatly for testifying and 
adding his perspective to this conversation. I yield back.
    Chairman CHABOT. Thank you, the gentlelady yields back and 
if members have opening statements prepared we asked that they 
be submitted for the record. Mr. Commissioner, I would like to 
explain very briefly our rules relative to timing. You get 5 
minutes, we get 5 minutes. There is a lighting system. The 
yellow light lets you know that you have a minute to wrap up 
and at the red light you are supposed to stop, but since we 
have one witness, if need a little extra time we would be more 
generous than normal, so we are happy if you do have a little 
bit more to say. I would now like to introduce our principal 
and only witness here this afternoon.
    We are pleased to be joined by the IRS Commissioner John 
Koskinen. Mr. Koskinen is the 48th Commissioner of the IRS. He 
began his tenure in December 2013, and his term expires in 
November 2017. Prior to his most recent government service Mr. 
Koskinen joined the Palmieri Company which specialized in 
turnaround management and served as the president and CEO. He 
also served as the non-executive chairman of the board for 
Freddy Mac. He was deputy mayor and city administrator for the 
District of Columbia and earlier he was deputy director for 
management at the Office of Management and Budget.
    Perhaps most importantly he has an Ohio connection having 
been, I believe, born in Cleveland, and his first job I believe 
was with the Cleveland News, not running the paper but 
delivering it, and he has that in common with our director of 
this Committee, Mr. Kevin Fitzpatrick, although his first job 
was delivering for the Cleveland Plain Dealers. Mr. Koskinen 
holds a B.A. in physics from Duke University and a law degree 
from Yale, and we are very honored to have you here today, and 
you are recognized for 5 minutes.

  STATEMENT OF JOHN KOSKINEN, COMMISSIONER, INTERNAL REVENUE 
                            SERVICE

    Mr. KOSKINEN. Thanks very much Chairman Chabot, Ranking 
Member Velazquez, and members of the Committee. I appreciate 
the opportunity to discuss with you the IRS's ongoing efforts 
in the area of small business tax simplification. The IRS 
recognizes the critical role small businesses play in our 
country as engines of economic growth and we want to do our 
part to help them flourish. We do not have a direct role in tax 
law simplification since tax policy is the domain of the 
Congress, White House, and Treasury Department, but the IRS can 
and does contribute to tax simplification in important ways. 
They include simplifying tax forms and notices, streamlining 
policies and procedures, providing regulatory relief, easing 
recordkeeping requirements and abating penalties wherever 
appropriate.
    We rely on feedback from a variety of sources in the tax 
industry and in the small business community to help us 
determine what actions we can take that would be most helpful. 
Let me give you a few examples of recent actions we have taken 
to help small businesses. We have increased an expensing 
threshold so small businesses can take immediate deductions on 
more items they buy for business and avoid having to expense 
these items over many years. This was in response to feedback 
that the old threshold was too low to allow for things like 
personal computers, smart phones, and machinery and equipment 
parts.
    We set up a voluntary compliance program offering penalty 
relief to certain small business owners who failed to file 
annual retirement plan returns after we found that many owners 
did not realize they had a filing requirement. We streamlined 
the process for small organizations applying for tax exempt 
status creating a 3-page application they can use instead of 
the full 26-page application.
    We developed a simplified method for claiming the home 
office deduction to make it possible for more home-based 
businesses to take advantage of that tax break. While the IRS 
works to provide top-quality service to small business 
taxpayers, we also must carry out a robust enforcement program. 
Enforcing the tax laws helps maintain a level playing field for 
all businesses. It ensures that small business owners who 
comply with the law and pay the taxes they owe are not 
disadvantaged by others who may be cutting corners.
    One major focus of our enforcement efforts involves 
employment taxes. In many cases actions taken to improve 
enforcement can also help taxpayers and increase voluntary 
compliance. An excellent example is our new employment tax 
Early Interaction Initiative which was launched last December. 
Under this initiative we identify employers who appear to be 
falling behind on their employment tax obligations and offer 
them helpful information and guidance. That way the problem can 
be corrected before unpaid taxes accumulate and we have to 
assess penalties.
    We are also working to make sure that small business owners 
are not defrauded when they outsource their tax obligations. 
While most of these providers do a good job, businesses 
sometimes can fall prey to unscrupulous providers that have 
absconded with their payroll tax deposits. We continually look 
for ways to protect employers from these criminals and to 
provide assistance when fraud does occur.
    Our efforts to continue assisting small business taxpayers 
are challenged by the difficult budget environment we are in. 
The IRS's funding was cut significantly for the 5 years from 
2011 to 2015, and those reductions have taken a toll in both 
taxpayer service and enforcement programs.
    Therefore, we urge the Congress to approve the President's 
fiscal 2017 budget for the IRS which requests an increase of 
about a billion dollars over 2016, which would bring the 
agency's funding back up to the level of almost 7 years ago and 
would help the IRS across a wide range of tax enforcement and 
tax service categories.
    Along with providing adequate funding Congress also has 
another important role to play by passing proposals to simplify 
tax administration for small business. The President's fiscal 
2017 budget has a number of proposals in this area. These 
include increasing the section 179 expensing limit, allowing 
new businesses to deduct more start-up costs and improving the 
small businesses' healthcare tax credit. Chairman Chabot, 
Ranking Member Velazquez, members of the Committee, this 
concludes my statement and I would be happy to answer your 
questions and yield back my 28 seconds.
    Chairman CHABOT. Excellent, well done. I will recognize 
myself for 5 minutes. Last May, the IRS discovered a data 
breach that exposed the data from approximately 700,000 
accounts. What has the IRS done since that time to secure 
taxpayer data, and how can small businesses be assured going 
forward that their data is safe with the IRS?
    Mr. KOSKINEN. The application that was accessed was our Get 
Transcript application, which allowed taxpayers to get copies 
of previous years' tax returns. So the access was not into our 
basic database so that basic taxpayer information was not let 
go. What it represented was a problem we have of identity 
theft--dealing with increasingly sophisticated criminal 
syndicates around the world who had information already, not 
from the IRS, that allowed them to masquerade as the taxpayer.
    They knew Social Security numbers, names, addresses, and 
they could answer successfully, in some of the cases, answer 
their out-of-wallet questions that the taxpayer should have 
been the only one who knew. So we took the application down and 
we are testing now a much more secure application to protect 
that application in our ongoing ``Future State,'' as we call 
it, as people deal with us more and more online.
    It is the same challenge financial institutions have. The 
challenge we have is as you get the protection better to keep 
criminals out it makes it more difficult for taxpayers to get 
in. Even under the old system 22 percent of taxpayers could not 
answer their out-of-wallet questions and get access online to 
their transcript. But we are concerned about it for small 
businesses as well as individuals. A lot of small businesses 
really file as individuals and we think that as we try to give 
people better service so that when they would like to they can 
deal with us online, we need to make sure that that is secure. 
We need to have taxpayers feel comfortable that the data and 
the information they provide us is going to be protected.
    Chairman CHABOT. Were you able to determine who the people 
were that were able to hack in there?
    Mr. KOSKINEN. These were clearly, as we tracked them down, 
criminal syndicates from foreign countries, primarily Eastern 
Europe. Our systems get attacked and I have asked our CTO if 
this is the right number and he said it is actually worse than 
that. We have a million attacks a day on our system, trying to 
probe and get into it, and in one of the systems where we 
caught people trying as we shut them down, you could see the 
attacks move from country to country. So it is a much more 
sophisticated enemy than we have ever had to deal with before.
    Chairman CHABOT. Thank you. Can you tell us about the 
Future State and how it will help small businesses comply with 
the Tax Code?
    Mr. KOSKINEN. We have been working toward the Future State 
for the last 10 or 12 years but we have pulled it together now 
in that framework of the Future State.
    In the Future State, what we say is, ``what should the 
taxpayer experience be?'' Rather than looking at it from our 
standpoint, what should the taxpayer--what can we do to help 
taxpayers? And again, it is focused on primarily individuals in 
small businesses filing as individuals. And the goal is our 
surveys show the vast majority of taxpayers would rather deal 
with us online than have to call or show up in person.
    And so the goal is to move as many of our interactions with 
taxpayers as we can into an online relationship, much like the 
online relationship you have with your financial institution 
and your bank today where people pay bills online and they make 
transactions online. So for small businesses especially it 
would be possible for them not only to file online but if we 
had questions or issues we would be able to send them a secure 
message, they could make the correction without having to file 
an amended return and it would be much more efficient for them. 
But I would stress we recognize we have an obligation to all 
taxpayers and there will always be some taxpayers who either do 
not have access to online digital equipment or who are not 
comfortable online, who will want to deal with us on the phone 
and in person, and so we will always provide those services. 
But as I say, if we can get people off the phone who would 
rather not be on the phone, then our phone service and our in-
person service will be that much better.
    Chairman CHABOT. Thank you. I think I have time for one 
more question. You mentioned in your written testimony the 
tension between providing taxpayer service and tax liability 
enforcement. What specific steps are you taking to work with 
small businesses constructively earlier in the process to 
ensure voluntary compliance rather then having to resort to 
enforcement action?
    Mr. KOSKINEN. We spend a significant amount, probably if I 
had somebody add it up for me, we spend about 40 percent of our 
budget trying to help taxpayers, provide taxpayer service 
because the vast majority of taxpayers want to be compliant. So 
the message we are trying to put out is that if you are trying 
to be compliant we really want to work with you. You do not 
have to hire somebody off late-night TV to deal with us. If you 
are trying to be compliant we have online installment 
agreements, we have offers in compromise, and we have a lot of 
different ways to try to help people be compliant and 
especially those who are having difficulties. As I said on our 
tax deposit initiative it is designed to consult with small 
businesses before they get farther behind because oftentimes, 
when it is tempting if you are having trouble to say, well, I 
will hold off on my federal tax deposit until later, well, if 
you hold off too long, the number gets to be far beyond what 
you can control. So it is kind of a combination of enforcement 
and taxpayer service.
    Our thought was in this pilot we are now trying to say if 
we reach out to you quickly and say you should be careful 
because it is going to get to be more of a problem. Even though 
we usually do not talk to you until the end of the year, our 
experience is that taxpayers will then make sure they are 
paying attention to it and we will be able to nip it in the 
bud, and so they will not have a compliance problem. So 
wherever we can it is in our interest and I think in the 
taxpayer's interest to try to figure out how can we make it as 
easy and straightforward as possible for people to figure out 
what they owe and how to pay it.
    Chairman CHABOT. Thank you very much. My time has expired. 
The ranking member gentlelady from New York, Ms. Velazquez, is 
recognized for 5 minutes.
    Ms. VELAZQUEZ. Thank you, Mr. Chairman. Commissioner, this 
morning we heard from a small business about the complexity of 
the tax forms and he suggested the forms be written in plain 
language so that any small business taxpayer can understand. Is 
the IRS considering any such changes to forms or a way to help 
translate forms for taxpayers?
    Mr. KOSKINEN. Going back to my last answer it is a critical 
part of what we do. I say having only been here for about 2-1/2 
years, if you go back about 5 years and look at our website, it 
was a terrific website if you were a lawyer and liked to read 
tax regulations. It did not help you very much if you were 
someone trying to find answers. So we have written and have 
continued to rewrite the vast amount of information on that 
website.
    We actually won a plain writing award a couple of years ago 
because we do feel that that is a fair comment, that wherever 
we can, we sometimes have to get the lawyers out of the way. We 
need to be able to write the forms and instructions in a 
language that the average person can understand so they can be 
compliant.
    Ms. VELAZQUEZ. Have you taken any steps to gather input 
from these stakeholders regarding online self help?
    Mr. KOSKINEN. Actually we do surveys as the Restructuring 
Act of 1998 requires us to do, surveys of taxpayers, but we 
also meet regularly with the Chamber of Commerce, the National 
Federation of Independent Businesses, and others to try to get 
their views of what are the biggest obstacles they are facing, 
what is it we could do to be more helpful. Again, increasingly 
more and more individuals and companies are doing their 
business online, and to the extent that they could deal with us 
online and file taxes and communicate with us, the feedback we 
get from them is it would be much better for them if we could 
do more of that.
    Ms. VELAZQUEZ. In its 2015 Report to Congress, the 
Taxpayers Advocate highlighted the need to bring taxpayer 
service to the small business owner. It found that the needs of 
populations that are geographically clustered in certain 
regions are often neglected due to the more centralized 
structure of the IRS. In fact, the report pointed out that 
there is no outreach staff dedicated to small business and 
self-employed taxpayers in 13 states and D.C. Does the IRS have 
any immediate plans to provide increased local assistance for 
these types of small businesses?
    Mr. KOSKINEN. Yes, we think again one of the advantages of 
developing more and more online services for taxpayers is that 
it will make it easier for them wherever they are. We are also 
developing virtual service delivery, so in areas where we do 
not have a walk-in center we are talking preliminarily with the 
Social Security Administration, which has offices all around 
where you could go in and, with a television monitor, you could 
actually, sort of like Skype, talk with an IRS person, person-
to-person, even if they are not physically there.
    Ms. VELAZQUEZ. What about those who have no access online?
    Mr. KOSKINEN. If they do not have any, the virtual service 
delivery does not require online. Actually you would go to the 
office and you would actually communicate directly with an IRS 
employee who could answer your questions and provide you 
service. The fact that they were not sitting there physically 
with you would not make much difference because you would be 
talking with them wherever they happened to be located. We 
think that technology would be available to people in rural 
areas and areas that otherwise are underserved.
    Ms. VELAZQUEZ. Okay, the IRS budget has been cut by 18 
percent since 2010, which in turn weakens your ability to 
provide customer assistance and collect critical revenue. In 
cutting the budget some experts claim the government is 
foregoing more than $5 billion each year. How could an adequate 
budget improve small business taxpayers' compliance?
    Mr. KOSKINEN. Well, an adequate budget--first of all, our 
taxpayer service this year is much better than last year as a 
result of the additional funding, we appreciate, we got from 
Congress and I think it demonstrates the algorithm if we had 
more funds, the service would get better. On the same side, on 
the enforcement side, we are down about 5,000 revenue agents, 
officers, and criminal investigators since 2010. If you have 
5,000 fewer people you are going to do fewer audits. On the one 
hand, some people say that would be fine, but if you are a 
legitimate taxpayer and you are a legitimate small businessman, 
if your competitor is not paying their taxes, they are going to 
offer services or goods at a lower price and they will have an 
unfair competitive advantage.
    So everybody has a stake in the taxpaying public in having 
a fair system where everyone pays their fair share. So 
enforcement we think is an important support for legitimate 
taxpayers and legitimate small businesses.
    Chairman CHABOT. The gentlelady yields back. The gentleman 
from Virginia, Mr. Bra,t is recognized for 5 minutes.
    Mr. BRAT. Thank you, Mr. Koskinen. I ran on what is called 
the Republican Creed down in Virginia. One of the points in the 
creed is I promise to ensure that everyone gets equal treatment 
under the law, and we are a Nation of laws that try to be fair 
to each individual and so this is just a positive question. I 
know you are in the hot seat, but do we have a tax system that 
treats individuals fairly as individuals under the law?
    Mr. KOSKINEN. I think we do. One of our highest commitments 
is to, in fact, make sure that everybody is treated fairly. As 
I have said, people need to feel comfortable that if they hear 
from us it is because of something in their return. We have no 
interest in what party they belong to, who they voted for, what 
meeting they went to. The system needs to be fair in terms of 
its application. It is a policy matter, but also for tax 
administration it is critical to the system for people to feel 
comfortable.
    Mr. BRAT. That is great and so it is at the system level, I 
see what you are saying, procedurally there is fairness. And 
this is, you said, Treasury and the Congress who are 
responsible for the Tax Code. Do you think that individuals are 
being treated that way? Kind of the Warren Buffett story, 
right? The different taxes different people pay, depending on 
different sometimes minute circumstances with vastly different 
tax payments, do you think we can do a better job at creating a 
fair system in that sense?
    Mr. KOSKINEN. With my caveat that it is not our domain. 
Usually when I say it is somebody else's responsibility I am 
about to talk to you about it. I do think, first, 
simplification would be a great gain for everyone, including 
the IRS, but certainly for taxpayers and small business. I 
think the point that people have made is on occasion we pass 
tax laws and do not understand the impact of them, and so it 
may be a perfectly good law for a large corporation and create 
a lot of problems administratively or burden-wise for smaller 
corporations and individuals. So to that extent I think it is 
important to try to understand the implication of the Tax Code 
and, as I say, what works for General Motors may not work for 
the corner grocer.
    Mr. BRAT. Lastly, I just received an email earlier and I 
guess yesterday on the Senate side in response to some 
questions you had in the Finance Committee. Someone pressed you 
on an issue and you replied. And let me know if this is 
accurate because I want to figure this out because it has to do 
with fairness, too, under the law. What happens in these 
situations is someone is using a Social Security number to get 
a job, but they are filing their tax return with their taxpayer 
identification number. What that means, you said, is that they 
are undocumented aliens. They are paying taxes, it is in 
everyone's interest to have them pay the taxes they owe. As 
long as the information is being used only to fraudulently 
obtain jobs, Koskinen said rather then to claim false tax 
returns the agency has an interest in helping them. Can you 
help clarify that? That is what I'm trying to get to, equal 
treatment under the law here. If folks are here illegally, I 
get that you want to collect tax revenues and I applaud that 
aspect, but should any agency go along with what it knows to be 
illegal activity?
    Mr. KOSKINEN. Our responsibility is to the administration 
of the Tax Code and it has been made clear. And not everybody 
who has an ITIN as it is called is an illegal alien and for 
some reason they cannot get a Social Security number. And so 
the Tax Code is set up and our enforcement is that people who 
are earning money have an obligation to pay taxes. And we do 
everything we can to make sure they pay those taxes to the 
extent that they get employment because they have borrowed or 
somehow gotten a Social Security number, that is not an issue 
we have jurisdiction over.
    In other words, our responsibility is to make sure they pay 
their taxes. We have Social Security and immigration 
authorities and others who enforce that part of the law, and if 
we start looking behind the system and doing their job for 
them, we are going to discourage a lot of people from paying 
the taxes they owe.
    And so as I said, the division of responsibility that is 
our job is to make sure people pay the taxes they owe from the 
earnings they have had. To the extent that they are here under 
circumstances that do not meet the immigration laws or do not 
correspond with Social Security Administration, it is really 
those agencies job to pursue that.
    Mr. BRAT. You would never pursue the course if you knew you 
had someone engaging in illegal activity, if you knew that you 
would not pursue trying to gather tax revenues just for the 
sake of pure economics over the rule of law?
    Mr. KOSKINEN. No, that is exactly right. Although you will 
recall the famous case of Al Capone who was actually brought up 
on tax charges, not on all of his criminal activity, so 
ultimately the IRS's basic responsibility is collection of 
taxes. We actually chase people and cooperate with justice and 
drug enforcement and everybody else on people who are engaged 
in illegal activities.
    Mr. BRAT. Great, thank you, my time has expired.
    Chairman CHABOT. When you hear Al Capone's name, we 
appreciate that. The gentlelady from California, Ms. Hahn, is 
recognized for 5 minutes.
    Ms. HAHN. Thank you, Chairman Chabot, Ranking Member 
Velazquez, for holding this hearing. Tax day certainly is fast 
approaching and I cannot speak for everyone here, but I know my 
office, particularly in my district, we get requests for help 
with taxes around this time every year and we actually hold 
workshops to help individuals and small business owners 
complete their tax forms. It should come as no surprise that 
what I hear from people is that the Tax Code is too confusing, 
which, as you said, is Congress' job to reform the Tax Code, 
not yours.
    But what is especially upsetting to me is when I hear that 
my constituents try to comply and reach out to the IRS to 
resolve their issues they often cannot even get ahold of 
someone over the phone, it takes weeks for them to get a 
response in the mail, which is why they usually come to members 
of Congress. This feels like it could be something that is your 
responsibility and that you could really work on because 
obviously involuntary mistakes for people can lead to major 
penalties and consequences. Additionally, many individuals and 
small business rely on returns to pay for their day-to-day cost 
and cannot afford to wait. Some businesses have fewer resources 
and already spend more than twice as much per employee to 
comply with the Tax Code than larger firms. They deserve to 
receive help easily and directly from the IRS. Despite these 
trends Congress has continued to cut funding for the IRS, and 
that is where I think it really does not make sense.
    So, Commissioner, I do believe, again, and I think Congress 
should and it has a responsibility to simplify the Tax Code. At 
the same time, we should ensure that the IRS has the proper 
funding to make sure that small business owners receive the 
service they need to file taxes. Last year Congress provided 
the IRS with an additional 290 million in funding for fighting 
fraud and taxpayer services, and as a result we have seen wait 
times improve this tax season over previous years.
    However, last month in your annual National Press Club 
speech you said that only 47 percent who call your agency this 
year will get through to a live person. The IRS small business 
and self-employed tax center page provides resources but I 
worry that because of the complexity of the types of taxes of 
credits that small businesses may qualify for, reading and 
watching videos online may not be enough for many people. I 
want to make sure that when a small business from my district, 
the business and specialty tax line, they will be able to speak 
to someone.
    So is it possible to achieve that goal with the resources 
that you have been given, the goal being that everyone, in a 
reasonable amount of time, could speak to a live person to help 
resolve their issues? And if not, how much funding and staff 
would the IRS need in order to ensure that all callers will be 
able to speak to a live representative in a reasonable amount 
of time? Is the President's request enough to make that happen? 
I know we are moving to online and we are trying to get more 
people, there are so many people in my district that just are 
not there yet, and I really would hope that we could 
accommodate those who still use the old-fashioned method of 
calling.
    Mr. KOSKINEN. Well, I hope we are able to establish that 
with the additional funding this year. Of the 290 million, we 
put 178 million of it into taxpayer service and that was 
primarily hiring over a thousand people in the filing season to 
answer the phones. So during this filing season the level of 
service is about 72 or 73 percent, so it is almost twice what 
it was during the last filing season. The problem the way we 
get the 47 percent for the year is that at the end of filing 
season the money is going to run out for paying those people 
and plus we did not have any money at the first 3 months. So 
the average for the year will be 47 percent, still a 
significant increase above 37 percent last year.
    But during the filing season we marshaled all of that 
funding so we would actually provide as much service as we 
could. The President's budget for 2017 provides another----
    Ms. HAHN. What do you consider--how many months?
    Mr. KOSKINEN. Filing season is basically January to the end 
of April.
    Ms. HAHN. Okay.
    Mr. KOSKINEN. So the President's budget provides for $130 
million additional for taxpayer service next year, which would 
get us to a level of 70 percent for the year. Now, what we 
finally refer to as the good old days in the mid 2000's, our 
level of service was 80 percent and we think at some point we 
should be--you do not want to be at 100 because then you have 
people sitting around waiting, but we ought to be as we used to 
be, in the 80 to 85 percent level and you should only spend a 
minute or two waiting to get an answer. But if we could get the 
President's 2017 budget in this area, having 70 percent for the 
year would mean we would probably be able to be 80 percent 
during the filing season.
    Ms. HAHN. Okay, thank you very much.
    Chairman CHABOT. Thank you very much. The gentlelady's time 
has expired.
    Gentlelady from American Samoa, Ms. Radewagen, who is the 
chairwoman of the Subcommittee on Health and Technology, is 
recognized for 5 minutes.
    Mrs. RADEWAGER. Thank you, Mr. Chairman, and I, too, would 
like to welcome you, Commissioner. This morning we heard that 
many small businesses self censor and do not claim the research 
and experimentation or indeed tax credit even though they may 
qualify for it. Two years ago, IRS made an improvement to the 
regulations to allow small businesses to claim the alternative 
simplified credit or ASC on an amended return. Are you aware of 
any changes of this type that could be made to improve the 
credit's availability to small businesses?
    Mr. KOSKINEN. I am not, although we continue to look at it. 
I think again it is one of those situations where the credit 
itself everyone thinks is very valuable, but it is a lot easier 
for a large corporation to work its way through the 
requirements than it is for a smaller corporation. So one of 
the issues is whether there is a way to have a broader sort of 
safe harbor, much as we did with the expensing regulations and 
the capitalization issues where we went from a $500 safe harbor 
to $2,500. One of the legislative proposals we have would be to 
allow start-up costs to have effective broader safe harbors. So 
I think for small businesses the answer would be to see if we 
could not get a broader safe harbor where you would be able to 
actually take that deduction without going through all the 
complications.
    Mrs. RADEWAGER. I see. As a follow-up, can these 
improvements carry over to the U.S. territories and are you 
aware of any other credits that are available to the small 
businesses in the U.S. territories but not being utilized?
    Mr. KOSKINEN. You have now gone beyond my level of 
expertise. I would be delighted to get back to you with an 
answer of how the credits apply in the territories and are 
there areas where small businesses in the territories are not 
taking advantage of them.
    Mrs. RADEWAGER. Thank you. And lastly, we understand from 
this morning's testimony that many small businesses do not 
claim section 199 domestic manufacturing deduction despite 
being eligible. Do you have any ideas about how to improve the 
compliance burden to make this benefit administratively easier 
to claim?
    Mr. KOSKINEN. We have looked at that. In fact, one of our 
legislative proposals would be doing that, but we have already 
made some improvements in the ability to take that deduction by 
simplifying it actually in the last year. And so we are waiting 
to see how that works, but, again, with the feedback we get 
from business groups, if they think that the changes we have 
made need to be improved, we would be delighted to hear from 
them and take another look at it.
    Mrs. RADEWAGER. Thank you, Mr. Chairman. I yield back.
    Chairman CHABOT. Thank you. The gentlelady yields back. The 
gentlelady from Michigan, Ms. Lawrence, is recognized for 5 
minutes.
    Ms. LAWRENCE. Thank you, Commissioner, for being here 
today. My question is twofold, but it is the same area of 
concern. Each year there is numerous tax scams and many 
targeted small business owners because they are more 
vulnerable. The IRS tries to do their part by releasing their 
annual lists of the ``dirty dozen,'' they call them, tax 
schemes, but I am not sure for small business and for women-
owned businesses and those minority-owned businesses if it is 
enough.
    To kind of tap into my next concern is that when we look at 
the startups and those new businesses I just always think that 
there is more that we should be doing. Tell me what is your 
plan or your vision to make sure that those businesses that are 
not sophisticated, the startups, the minority, and the women 
are getting the actual resources that they need and not just 
the standard list of the dirty dozen?
    Mr. KOSKINEN. With regard to our outreach and advice to 
small businesses, we have a continually, I think, improving 
section on the website, and, in fact, one newspaper recently 
said it was the best place for somebody to go to if they were 
going to start a business because it gives you advice about how 
to start a business. Not only what the tax implications are, 
but what it takes to get organized, what kind of records you 
need to have, on how you should deal with the IRS.
    With regard to the tax scams, they continue to be a problem 
for us. We are most concerned at this point about phone scams 
that affect a lot of small businesses as they are individually 
owned and those are threatening calls from somebody claiming to 
be from the IRS, saying if you do not pay your taxes 
immediately, you owe money, and we are going to throw you in 
jail, seize your business.
    And we have spent 2 years working with the press, working 
with our partners around the country trying to get everybody to 
understand kind of a relatively straightforward symbol: If you 
are surprised to be hearing from us, you are probably not 
hearing from us. So if you have not gotten a notice or you do 
not have some other reason to expect a call, then it is not a 
call from us.
    The second thing we want people to understand is we would 
never--it is never part of our policy to threaten anyone that 
they will get arrested, they will go to jail, and that anything 
is going to happen in the next 24 hours if they do not respond.
    The third most important thing is if you are going to pay 
taxes, you write the check to the United States Treasury. You 
do not put the money in a debit card, you do not put the money 
in some bank account somewhere, you write a check to the United 
States Treasury. And I think as we keep pushing this out, if we 
can get more people to understand that we will protect them, 
but it is a low cost of entry scam. People have phone numbers 
and they just robodial them and then they, a lot of times, have 
a 202 area code so it looks like it is coming from IRS 
headquarters. We are concerned about it, we have worked with 
the Inspector General to track it and our goal is to try to, in 
fact, protect people to the extent that we can.
    Mrs. RADEWAGER. If I could just add this and it kind of 
goes back to what my colleague said, I have numerous small 
business forums in my district and when I bring in the small 
businesses I have all the usual suspects there. I have never 
had the IRS in one of my small business forums. It is such a 
critical part of the successes of the small businesses knowing 
how to pay their taxes and have the resources. So with that 
being said, I will invite you to our next one.
    Mr. KOSKINEN. Invite us, whether I can come personally, I 
think you are exactly right, we should be there. It is a great 
outreach.
    Mrs. RADEWAGER. You should be there and to transform the 
position of the IRS from the person that comes to get you to 
the resource that you need to be successful is a challenge that 
I feel we need. A lot of times people are ignorant because they 
are so intimidated by the IRS because if I ask a question they 
are going to come back and get me. I think the transformation 
that I hear from you and that the agency is taking steps to 
provide information to make sure that people can reach 
compliance in their taxpaying responsibilities, I think we 
could do a better job.
    Mr. KOSKINEN. I could not agree more and, on the one hand, 
it is important for people to know that if you are cutting 
corners and trying to cheat, we are not going to be happy and 
we will track you down. But, on the other hand, as I said, if 
you are trying to be compliant, while it may take me awhile to 
convince people we are from the IRS and we are here to help 
you, people need to understand we really do spend a lot of time 
and have a lot of people dedicated to trying to make it as easy 
as possible for people to be compliant. So I think you are 
exactly right. If we could get people to understand that there 
are two sides of our job, but it is all designed to try to 
create a fair tax system where everybody pays what they owe. 
Nobody wants to pay more than they have to, but where everybody 
is paying everything that they ought to.
    Mrs. RADEWAGER. Thank you for that. I will be calling your 
office.
    Mr. KOSKINEN. Okay.
    Chairman CHABOT. Thank you, the gentlelady's time has 
expired. The gentleman from Florida, Mr. Curbelo, who is 
chairman of the Subcommittee on Agriculture, Energy and Trade, 
is recognized for 5 minutes.
    Mr. CURBELO. Thank you, Mr. Chairman, for this opportunity, 
and thank you, Commissioner, for your testimony and for being 
here today. You mentioned fraud and we have discussed it 
extensively here. I wanted to ask you how are you balancing 
this issue of suppressing fraudulent refund payments and, at 
the same time, doing your best to ensure that those validly 
overwhelming majority of refund claims are paid expeditiously? 
Has this been difficult given the growing level of 
sophistication of some of these criminals that are presenting 
false claims?
    Mr. KOSKINEN. It is. I think one of the things that is 
going to happen is that on the online authentication to get 
online responses from us, you will have to meet a higher 
threshold of authentication and we expect that that means more 
will not get through. We will still mail you transcripts, we 
will mail you information, but it will take you a few days 
longer. One of the best things we have done is, a year ago, as 
this problem continued to become more complicated, I brought 
together the CEOs of the major tax preparers, H&R Block, 
Intuit, and others, the software developers, payroll providers, 
and the tax administrators and commissioners from the States. I 
told them that the reason for this meeting was not for me to 
tell them what to do. The reason was to create a real 
partnership between the private sector, the States, and the IRS 
to deal with fraud and identity theft and refund fraud. It has 
been very successful.
    In fact, it is interesting to me the most enthusiastic 
participants are the private sector members who went beyond 
asking and began to sort of request and demand that we make it 
permanent, which we are doing. Because what it allows us all to 
do, the States, tax preparers, and the software developers and 
us, is exchange information in real time during the tax season, 
which we have done this year, which allows us to spot 
suspicious patterns of activity much earlier, but it also 
allows us to develop more and more sophisticated filters and 
authentication.
    So this year I was told by one of the preparers, well, you, 
the IRS, have to set standards. And I said, well, I am happy to 
set the standards if you help design because I do not want to 
tell you what to do. So this year everyone who used software or 
everyone who went to a preparer had a higher level of 
authentication than they had last year set by the industry. All 
of the industry participants have agreed to a higher level of 
security. Many of them were already at that level, so we would 
have a standard level of security.
    We have 40 states who are cooperating with us and so our 
goal is, as I told them, the reason for creating that 
partnership was because no one of us can solve this problem on 
our own and it has been a great example of what happens if you 
get a public-private partnership where it is a real partnership 
of what you can accomplish.
    And so I think the most significant step forward we are 
going to be able to make is taking what we call the entire tax 
ecosystem, from the time you actually use the software or use a 
preparer until the time you file, and we are now working with 
financial institutions, that the time the refund is deposited, 
if we can have that entire circle sharing information, tracking 
down criminals, it will allow us to, in fact, let legitimate 
taxpayers through with more security.
    A big step forward and, again, I appreciate the support 
from Congress, is the requirement that goes into effect next 
year that we get W-2s at the same time the employees do. 
Historically, we have not gotten the W-2s until March or April, 
well after the time refunds go out. It will allow us to detect 
fraud, but also it allows us to detect legitimate taxpayers. 
Last year we stopped over 4 million suspicious returns about--
of the 150 million. Well, a chunk of those, about a million and 
a half, were clearly fraudulent and where about $8 billion of 
refunds were stopped, but obviously a couple million were 
legitimate taxpayers. Getting the W-2s earlier will allow us to 
authenticate taxpayers so many of them will not be delayed very 
much in their refunds at all, but it is sort of a complicated 
picture, but I think we are making progress.
    Mr. CURBELO. I thank you and I also want to commend you on 
really trying to change the perception and perhaps the culture 
of the agency making it more approachable so that people feel 
comfortable knowing that the IRS is actually going to help them 
file their taxes as opposed to somehow get them in trouble or 
confuse them or discriminate against them.
    So I certainly do commend you for that because, as you 
know, many small business owners, many individual filers feel 
like they have to hire someone just because they do not feel 
the agency is approachable just because they are paranoid, they 
are scared. So I certainly commend you on your work to change 
that. Thank you, Mr. Chairman, I yield back.
    Chairman CHABOT. Thank you, the gentleman yields back. The 
gentlelady from North Carolina, Ms. Adams, who is the ranking 
member of the Subcommittee on Investigations, Oversight and 
Regulations, is recognized for 5 minutes.
    Ms. ADAMS. Thank you, Mr. Chairman, and thank you, Ranking 
Member Velazquez, and, Commissioner, thank you so much for your 
testimony and for being here. I just have a couple of 
questions. You talked a little bit about scams. How do you 
educate companies about them and help them recover if they are 
victimized by that?
    Mr. KOSKINEN. As I said regularly putting out notices, 
releases--one of the advantages of the partnership just talked 
about is we now have direct access to all the tax preparers in 
all the States, so we share all of those concerns. They then 
publicize them.
    We had a big meeting last September, talking about taxpayer 
protection with the States and the private sector. I have been 
struck by the phone scams' persistence because for the last 2 
years, every press availability I have had, we have talked 
about if you are surprised to be hearing from us, you are 
probably not hearing from us. We have coverage locally, 
nationally across the country. We have started to arrest 
people, which gets some visibility, and I am still dismayed at 
the number of people who actually fall for the scam.
    It is a declining percentage, but the Inspector General 
works with us and tracks it and each week we get reports of 15- 
to 18,000 reporting that they have gotten one of these calls 
and that is just obviously the tip of the iceberg. So I think 
it is why we keep putting out the dirty dozen list, we keep 
putting out warnings.
    We have been putting out warnings this year. We learned 
from one of our partners that one of the latest scams is what 
appears to be an email from the CEO of an organization, goes to 
the payroll department that says I need the information on our 
employees, their Social Security numbers, and it turns out that 
is not an email from the CEO, it is an email from a criminal.
    Ms. ADAMS. Wow, I get calls occasionally that the IRS says 
that we are having all these break-ins in my neighborhood, 
trying to sell me security. But thank you for your comments. So 
what procedures are you using to operate overall more 
efficiently?
    Mr. KOSKINEN. Well, what we have done, especially in light 
of the fact that we have 10 million more taxpayers and a 
billion dollars less in funds, so we have no choice but to try 
and prioritize and become more effective and efficient. We are 
responding to the taxpayers' request that we provide more 
digital services, but obviously it is in our interest to do 
that as well. It costs $40 to $60 for us to answer a phone call 
or deal with someone in person. It costs well less than a 
dollar to give them the same information online. So to the 
extent that we can be more efficient and convenient for 
taxpayers it actually makes us more efficient.
    On the Get Transcript App that was accessed last filing 
season, over 7 million taxpayers downloaded 23 million tax 
returns online. Those people used to have to call. We have an 
app called ``Where is My Refund'' that thus far this tax season 
has 250 million hits on it. Now, we do not have 250 million 
taxpayers, some of them just love to push the button and find 
out how their refund is doing. But even if it is only 30 or 40 
million taxpayers those people used to have to call to find out 
the status of their refund. So to the extent that we can meet 
taxpayers' expectations it also makes us more efficient.
    Ms. ADAMS. So I do have until Monday to file my taxes?
    Mr. KOSKINEN. You do have until Monday. It is Emancipation 
Day in the District on Friday, so everybody gets until Monday.
    Ms. ADAMS. Okay, I just wanted to verify that. Mr. 
Chairman, I am going to yield back.
    Chairman CHABOT. The gentleman from Missouri, Mr. 
Luetkemeyer, who is vice chairman of the Full Committee, is 
recognized for 5 minutes.
    Mr. LUETKEMEYER. Thank you, Mr. Chairman. Welcome, 
Commissioner. I have a couple of quick questions for you. With 
regard to the GAO study that was done recently, my 
understanding is there were 211 recommendations that are 
currently open with 11 being designated as the highest 
priority. Can you elaborate on that a little bit in where we 
are and find some solutions to those problems?
    Mr. KOSKINEN. As the chairman gave my background, I spent 3 
years chairing the intergovernmental agency for Inspectors 
General and in the private sector I thought internal auditors 
were your best friends. So I am a very strong supporter----
    Mr. LUETKEMEYER. As somebody who is a former bank examiner 
and lived on the other side of the fence for 30 years, I am not 
sure I go along with that, sir, but that is okay, I know where 
you are coming from.
    Mr. KOSKINEN. So we take very seriously their 
recommendations, both the IG and GAO. In fact, we have counted 
up, we have had over 2,000 recommendations in the last 3 or 4 
years from the 2 agencies----
    Mr. LUETKEMEYER. Okay, so what are we doing with them?
    Mr. KOSKINEN. So what we are doing with them is we have 
implemented about 80 percent of those 2,000. GAO has done us a 
great service over the year by prioritizing them as which ones 
they think are the most important for us to address. Our goal 
is to address them all. We track them and since I have been 
there we have consolidated the monitoring of those because I 
think it is important for us to implement them.
    Mr. LUETKEMEYER. Can you give an example of the top two or 
two of the five?
    Mr. KOSKINEN. They have been working with us and, in fact, 
we are now--one of the things is the ability to monitor our 
systems in real time to monitor for----
    Mr. LUETKEMEYER. How are you fixing the problem?
    Mr. KOSKINEN. One of the things we have done is we have 
used part of the $290 million we got this year from the 
Congress to acquire state-of-the-art software that allows us to 
increase our ability to monitor the systems in real time.
    Mr. LUETKEMEYER. What is another one?
    Mr. KOSKINEN. Another one is we have moved--we have 
identity cards that now instead of worrying about changing 
passwords every 90 days, one of the IG recommendations is to 
make sure we did that, you cannot run my computer without not 
only my number, but without putting this into the computer. One 
of the things we have been recommended to do by GAO and IG is 
to worry not only about our computer operations, but about our 
servers and access to our servers. And again, if we get some of 
the additional funding in the 2017 budget, we want to move to 
PIV cards to access to any piece of IRS IT equipment. So you 
could not use a piece of IT server or otherwise without having 
what is called a PIV card as well as a number.
    Mr. LUETKEMEYER. Do you have a system in place by which you 
are monitoring and addressing all of these with timelines on 
your expectation of trying to solve these problems?
    Mr. KOSKINEN. Yes.
    Mr. LUETKEMEYER. What is the longest timeline you have and 
what is the shortest you have?
    Mr. KOSKINEN. I would have to take another look at it for 
you but the longest timeline is probably in to next year and 
that is a resource-related thing. The shortest timelines----
    Mr. LUETKEMEYER. So if we had you back a year and a half 
from now all these 200, including the high priority ones, you 
would hope to have them all done.
    Mr. KOSKINEN. Yes. My goal is to--again, we get as you move 
down the list of priorities we run into resource constraints.
    Mr. LUETKEMEYER. IRS has got a perception problem with the 
American people with regards to how you do your job. In my 
district there is a city named Jefferson City. It is the 
capital city of Missouri, and there is not another office 
within 120 miles that is staffed by an IRS person. The 
Jefferson City office only has one person in it. And during the 
time period from January 25 to February 12 nobody was in the 
office. The notice on the window said that they were going off 
for training. That is wonderful, the staff has to be trained, 
but you train them in the middle of the season and then not 
leave the office occupied by somebody that can help. And we 
wrote to you about this and you sent back a letter, which is 
fine and you explained that you can go online and get some of 
the questions answered, but by your own admission over 50 
percent of the calls do not get through.
    Mr. KOSKINEN. Now we are up to 70 percent getting through, 
but we are doing better. You are right we should not train 
people in the middle of filing season.
    Mr. LUETKEMEYER. It certainly has a perception problem for 
you. There is a lot of discussion with regards to the flat tax. 
I realize that is a policy decision, but from the standpoint of 
the IRS and being able to implement a flat tax, how much would 
it save you from people being hired and the money being 
expended because of the simplification of that would you 
estimate that it would help your budget problem here?
    Mr. KOSKINEN. I do not think I have a number for you but 
clearly if you had a two-page form or a one-page form where you 
got rid of all the deductions and everything else, people just 
paid in effect either a flat tax or a graduated flat tax, it 
would be simpler for taxpayers and it would be much simpler for 
us. Somebody would have to make sure that the numbers are right 
and we have to follow up with people, we have to answer 
questions, but there would be far fewer questions.
    Mr. LUETKEMEYER. What is the total budget that you have for 
the IRS?
    Mr. KOSKINEN. The total budget this year is $11.2 billion.
    Mr. LUETKEMEYER. Can you give me a percentage of what you 
would anticipate saving of the 11.2 if you went to a flat tax?
    Mr. KOSKINEN. I have not looked at the numbers but we would 
save a lot.
    Mr. LUETKEMEYER. Thank you, Mr. Commissioner.
    Chairman CHABOT. Thank you, the gentleman's time has 
expired. The gentleman from Kansas, Mr. Huelskamp, who is the 
chairman of the Economic Growth Tax and Capital Access, who 
held the hearing this morning that the Commissioner testified 
before the Committee, and he is recognized for 5 minutes.
    Mr. HUELSKAMP. Thank you, Mr. Chairman. I appreciate the 
opportunity to ask the Commissioner some questions. We had a 
great Subcommittee hearing this morning talking about tax 
simplification and how I think all of our four witnesses agreed 
the Tax Code was biased against small businesses and was 
obviously not helpful and they spent a lot more per employee 
per business for tax compliance then otherwise.
    The one question I had for then that I direct to you, 
Commissioner, first of all, is what in the IRS what reassurance 
can we have? What process is at the IRS and here is how we look 
out for small businesses rather than the large corporations, 
who certainly have a Tax Code that they are able to understand 
and use, but not our smallest businesses across America?
    Mr. KOSKINEN. Well, as I have noted, we have gone out of 
our way to develop what has been viewed as a very positive 
website with as much instruction in understandable language for 
small businesses about how to start a business, what the 
obligations are, how you file your return, how you are 
answering as many questions, and giving them as much advice in 
advance as to how to actually work their way through it. We put 
up frequently asked questions and answers. We have tax forms 
for preparers. We get about 10,000 preparers every summer in 
which we spend--and most of their clients are individuals and 
small businesses and we spend time with in sessions. There are 
three or four sessions a day. We do five of them across the 
country and we take their feedback as to what it is we should 
be providing to give them better information so they can better 
provide advice to their clients.
    The vast majority of small businesses use preparers, so 
that is one way we can actually provide service. We continue to 
get feedback from business organizations and others as to where 
there are difficulties with forms, where there are areas where 
we could make improvements because they are a significant part 
of the population and we take their concerns seriously.
    Mr. HUELSKAMP. I appreciate that. We heard testimony today 
and it has gone out that academic research as well has a 
significantly higher tax compliance cause for small businesses. 
How do we bring that down? When the tax compliance costs us 
three, four, five, six, seven, eight times I mean, there are 
certain tax credits, certain things they are not going to do, 
not going to take that the largest corporations with a whole 
assembly of tax lawyers and accountants to take care of it. How 
do we make certain they get a fair shake in that system? I 
understand taking input, but at the end of the day it is still 
not working for them.
    Mr. KOSKINEN. No. I think as we discussed a little earlier, 
but briefly, and let me just elaborate, I think from the 
standpoint of the Tax Code and tax laws when we pass those we 
need to pay more attention to the impact on small businesses. 
One of the things we have done wherever we have the regulatory 
authority is to increase the safe harbors so that we, in fact, 
allow you to take deductions or not capitalize expenses without 
having to do a lot of complicated calculations, even change 
your accounting systems in a straightforward way.
    We have made some proposals for instance to try to 
standardize the definition of small businesses because you go 
through the Tax Code and you are eligible and some places you 
are not eligible and other places it would make a helpful tax 
simplification there if everybody knew whatever the Code 
provision is, I am a small business or I am not a small 
business. I think if we could have more recognition of whenever 
a piece of legislation or a regulation even is passed, it is 
one thing for a large corporation like the General Motors of 
the world, it is another for somebody with 12 employees. If we 
could bear that in mind, I think we could build more cushion 
into the system for small organizations.
    Mr. HUELSKAMP. I would encourage you to continue to develop 
those and simplify those for small businesses because they 
believe the system is loaded against them and I think they are 
right. A couple things, privately we visited about--Mr. 
Commissioner, I think about a month ago, we talked about the 
political activity definition which Congress has done more work 
on that. What do you anticipate, if we do not adopt a language 
that restricts your activity on that and proceeding ahead with 
that redefinition, what could we expect as Congress come 
October 1?
    Mr. KOSKINEN. Well, as I have said and talked to you, we 
would not do anything that would surprise anyone. So we would 
continue to keep everybody advised. The Inspector General said 
that part of the problem is or focus was that the facts and 
circumstances in all of the examples in the regs are just too 
complicated. So one of the things we have made clear in our 
discussions with members on the Hill is that the goal is not to 
change the rules of the game, the goal is to try to make them 
clearer.
    So basically it would try to make it easier for an 
organization to be comfortable when they apply for a 
determination, but, more importantly, when they are operating 
that they have a pretty good rule of the road and rules have 
been made as clear as they can and they do not have to worry 
about somebody looking over their shoulder after the fact, 
disagreeing with them because they have a different view of the 
facts. So the goal there would be to simplify, not make more 
complicated, the rules but not to change the basic fundamental 
way that the system has been operating since the 1950's.
    Mr. HUELSKAMP. And I appreciate that. We have heard 
testimony from conservative groups they thought the definition 
was pretty clear until about 2012, but all of the sudden it 
looked like they were targeted and I think there is plenty of 
evidence of that. One thing we did talk about that I have not 
got from you yet, you had identified to me and claimed IRS had 
fired over 1,000 individuals in the last year and I wonder if 
you could provide that listing on behalf of the Committee?
    Mr. KOSKINEN. We will get you that answer in the next few 
days because we did commit we would do that for you.
    Mr. HUELSKAMP. I appreciate that. Thank you, Mr. Chairman, 
I yield back.
    Chairman CHABOT. Thank you, the gentleman yields back. I 
just had one final concluding question here. We had talked in 
my office about people getting those calls saying that you have 
not paid your taxes, you are going to jail unless you send this 
money, et cetera, and how common that was. You have already 
addressed that I think quite well.
    The other scam that I do not think we have brought up here 
this afternoon is how common is it that people file their taxes 
and then find out that some scam artist or criminal has already 
filed a bogus tax return and gotten their refund and then Mr. 
or Mrs. Taxpayer has to go through the process to prove who 
they are and that they did not get it and it was some criminal 
that got it rather than them. Does that happen frequently?
    Mr. KOSKINEN. Thus far, cumulatively, we have sent about 
2.7 million IP PINs which are identity protection PINs we give 
to people who have been victims of identity theft. It is 5- to 
600,000 taxpayers a year which, on the one hand, is small 
percentage of 150 million, but our sense is it is far too many 
in the sense that there is nothing more angst producing.
    Chairman CHABOT. So you are saying a half-million it 
happens to each year?
    Mr. KOSKINEN. Right.
    Chairman CHABOT. Now, in the scheme of things that might be 
1 out of 300 or so?
    Mr. KOSKINEN. Yes, but, again, our view is not to minimize 
it for any individual taxpayer. There is nothing more anxiety 
producing then filing and discovering somebody has got your 
Social Security number and has filed in advance of you. So we 
continue to try, as I say, to protect taxpayers from having 
that happen. We have also gotten much better about streamlining 
our process of dealing with taxpayers.
    In fact, increasingly, we are able to stop those returns 
before they get posted so that we can work the taxpayer through 
the legitimate filing of their return in a matter of a few 
weeks rather than several months, which was the system before.
    Chairman CHABOT. And how successful have you been in 
actually then criminally prosecuting those individuals that 
have put the taxpayer into that unnecessary situation?
    Mr. KOSKINEN. We have put about 2,000 people in jail thus 
far. We have about 1,700 investigations underway now. Part of 
our problem is it started out with a lot of individuals. There 
are still some of those in the United States and that is a lot 
of people put in jail. Increasingly, as I said, we are now 
dealing with organized crime syndicates around the world and 
finding them and prosecuting them is obviously much more 
difficult.
    So our goal there is to simply stop them to the extent we 
can or at least make it so difficult and complicated that it 
limits their ability to have an adverse impact on individual 
taxpayers. But I would stress our concern is if we had it down 
to 10, it would be 10 too many because it is a terrible thing 
for a taxpayer to have that happen to them.
    Chairman CHABOT. If you want any advice from the chair of 
this Committee, throw the book at them.
    Mr. KOSKINEN. Yes, we do. The courts have been good. The 
average sentence is about 3-1/2 years in jail.
    Chairman CHABOT. Because I do think that the person who has 
been violated in that manner, it is probably a huge deal to 
them, and understandably so, so they need to be protected and 
we are in a position to do everything we can to try to protect 
them, so we appreciate your cooperation in going after those 
folks. We appreciate your testimony here this afternoon.
    The Committee on Small Business remains dedicated to 
helping small businesses and their hard-working employees by 
reducing any unnecessary complexity in the Tax Code, and there 
is certainly more than ample evidence that there is that 
complexity. And it is our responsibility, ``our'' being the 
members and elected representatives of the American people, 
because we are the ones that enact the Tax Code.
    It is not your fault. You enforce it, so we need to get our 
act together and it is our duty to identify these problems, 
call attention to them, and pursue appropriate solutions. And, 
Commissioner, we look forward to working with you in that 
endeavor as we move forward, so thank you for your testimony 
here this afternoon.
    I would ask you now to consent that members have 
legislative days to submit statements and supporting materials 
for the record. Without objection, so ordered.
    And if there is no further business to come before the 
Committee, we are adjourned.
    [Whereupon, at 3:46 p.m., the Committee was adjourned.]
                            A P P E N D I X


    INTRODUCTION
    Chairman Chabot, Ranking Member Velazquez and Members of 
the Committee, thank you for the opportunity to discuss the 
IRS's ongoing efforts in the area of tax simplification.

    Because tax law simplification requires changes in tax 
policy, which is the domain of Congress, the White House, and 
the Treasury Department, the IRS as tax administrator does not 
have a direct role in simplifying tax laws. We do, however, 
have a responsibility to make it as easy as possible for 
taxpayers to fulfill their tax obligations, and in that way, we 
can contribute to tax simplification.

    Against that backdrop, the IRS recognizes the critical role 
played by small businesses and self-employed taxpayers in our 
country as engines of economic growth, and we understand the 
need for the IRS to do its part to ensure these businesses can 
flourish. While the complexity of the tax code and the limits 
of our constrained resources create challenges for us in this 
area, I can assure this Committee that the IRS is committed to 
doing everything possible to help small businesses and self-
employed taxpayers fulfill their tax obligations.

    SIMPLIFYING TAX COMPLIANCE FOR SMALL BUSINESSES

    Small businesses, from sole proprietors who file Form 1040 
with a Schedule C to small corporations and partnerships, must 
not only familiarize themselves with complex aspects of the tax 
code but also keep up with tax code changes, creating 
challenges for them in complying with the tax laws. As a 
result, the IRS is continually seeking ways to help these 
business owners in their efforts.

    The compliance assistance the IRS provides to small 
businesses takes many forms, and includes: simplifying tax 
forms and notices; streamlining policies and procedures; 
providing regulatory relief, easing recordkeeping requirements; 
and voluntary compliance programs aimed at small business. We 
rely on feedback from a variety of sources in the tax industry 
and small business community to help us determine what actions 
we can take that would be most helpful.

    Following are just a few examples of recent actions the IRS 
has taken to reduce burden on small businesses and help them 
comply with the tax laws:

    Tangible Property Regulations. In February 2015, the IRS 
announced a simplified procedure for businesses to use to make 
it easier for them to apply regulations issued in 2013 
governing tangible property. The regulations clarify when 
expenses for tangible property are deductible repairs or 
capital improvements. The new procedure, requested by 
businesses owners and tax professionals, allows small 
businesses to change a method of accounting under the 
regulations on a prospective basis. The new simplified 
procedure is generally available to small businesses, including 
sole proprietors, with assets totaling less than $10 million or 
average annual gross receipts totaling $10 million or less.

    Increased Expensing Thresholds. In issuing the tangible 
property regulations described above, the IRS requested comment 
on the $500 safe harbor threshold on amounts spent to acquire, 
produce or improve tangible property that would normally 
qualify as a capital item. The threshold can be used by 
businesses without an applicable financial statement, and 
allows them to take an immediate deduction on such expenditures 
rather than depreciating them over many years. Small businesses 
told the IRS that the $500 threshold was too low to have its 
intended effect of reducing paperwork and recordkeeping 
requirements. In response, the IRS in November 2015 increased 
the threshold to $2,500.

    Voluntary Compliance Program for Certain Retirement Plan 
Sponsors. Since 2014, the IRS has been offering certain small 
business owners with unfiled retirement plan returns the 
opportunity to come into compliance and reduce potential 
penalties. The voluntary compliance program, which began as a 
pilot and was made permanent in 2015, is designed to help small 
businesses that may have been unaware of reporting requirements 
that apply to their plans. Businesses that fail to file 
required annual retirement plan returns can face stiff 
penalties--up to $15,000 per return. But under this program an 
eligible small business that voluntarily comes into compliance 
pays only $500 for each delinquent return filed, up to a 
maximum of $1,500 per plan for multiple delinquent returns. The 
voluntary compliance program is generally open to small 
businesses with plans covering a 100-percent owner or the 
partners in a business partnership, and the owner's or 
partner's spouse (but no other participants), and certain 
foreign plans.

    Streamlined Application Process for Tax-Exempt Status. The 
IRS created Form 1023-EZ, Streamlined Application for 
Recognition of Exemption Under Section 501(c)(3) of the 
Internal Revenue Code, in 2014 to give small organizations a 
less-cumbersome option for qualifying for tax-exempt status. 
Most organizations with annual revenue of $50,000 or less and 
assets of $250,000 or less are eligible to use the 1023-EZ, 
which is three pages long, compared with the standard 26-page 
Form 1023. Prior to introduction of the 1023-EZ, all 
organizations seeking tax-exempt status went through the same 
lengthy application process, regardless of size, creating 
delays for applicants. It now takes organizations using the 
1023-EZ an average of less than two weeks to receive a 
determination on their application, compared to several months 
before the form was introduced. Use of the 1023-EZ has also 
helped contribute to a decline in the inventory of pending 
applications for tax-exempt status. Open inventory at the end 
of Fiscal Year (FY) 2015 was 11,616, compared with 65,719 at 
the end of FY 2013, a reduction of approximately 82 percent.

    Home Office Deduction. In 2013, the IRS began offering 
taxpayers the option of using a simplified method to calculate 
the home office deduction, a tax break that is widely used by 
individuals who operate home-based businesses. Normally, 
taxpayers claiming the deduction are required to fill out a 43-
line form, Form 8829, Expenses for Business Use of Your Home, 
which often involves complex calculations of allocated 
expenses, depreciation and carryovers of unused deductions. 
Instead, taxpayers choosing the simplified method need only 
complete a short worksheet in the tax instructions and enter 
the result on their income tax return. This simplified method 
has substantially reduced the paperwork and recordkeeping 
burden for small businesses.

    ENFORCING THE TAX LAWS AND ENSURING FAIR TREATMENT

    Even as we seek to provide top-quality service to small 
business taxpayers, the IRS also must carry out a robust 
enforcement program. While the IRS has an obligation to make 
sure all individuals and businesses pay the taxes they owe, it 
is especially critical in the small business community, in 
order to maintain a level playing field for all business 
owners.

    The enforcement activities we conduct help ensure that 
those small bu8siness owners who are fulfilling their tax 
obligations are not disadvantaged by others who may be cutting 
corners, whether that involves income taxes, employment taxes, 
or the classification of workers as employees or independent 
contractors.

    In many cases, actions taken to improve enforcement can 
also help taxpayers and increase voluntary compliance. An 
excellent example is our new Employment Tax Early Interaction 
Initiative, which was launched last December.

    Under this initiative, the IRS seeks to identify employers 
who appear to be falling behind on their interim employment tax 
payments before they file their annual employment tax returns. 
We offer helpful information and guidance through contacts such 
as letters and automated phone messages. In the past, the first 
attempt by the IRS to contact an employer having payment 
difficulties often did not occur until much later in the 
process, after unpaid tax obligations were already beginning to 
mount. This initiative is designed to help employers stay in 
compliance and avoid interest and penalty charges. This 
initiative can be seen as a more efficient enforcement activity 
or a form of improved taxpayer service, but we believe it is 
both.

    Within the employment tax area, another important component 
of our efforts to ensure small businesses meet their 
obligations involves helping businesses that outsource some or 
all of their payroll and related tax duties to third-party 
payroll service providers (PSPs). While most PSPs do a good job 
of helping small businesses meet filing deadlines and deposit 
requirements, businesses sometimes can fall prey to 
unscrupulous PSPs that defraud clients and abscond with their 
payroll tax deposits, leaving the employer liable for amounts 
they thought had been remitted to the IRS but were not.

    We have taken many steps to help protect employers from 
becoming victims of unscrupulous PSPs, and to provide 
assistance when fraud does occur, including the following:

           Unscrupulous PSPs sometimes change the 
        address of their clients (without their clients' 
        consent) to that of the PSP, so that the client never 
        sees tax delinquency notices sent by the IRS. In 2015, 
        the IRS began sending identical notices to both the old 
        and new addresses on file for an employer after an 
        address change is received.

           In 2014, we created the Inquiry Personal 
        Identification Number (PIN), which is used by business 
        owners who use PSPs. They can use their Inquiry PIN to 
        access the Electronic Federal Tax Payment System 
        (EFTPS) to check whether tax payment submissions were 
        made timely on their behalf by their PSP. Additionally, 
        we are working to modify the EFTPS to allow for the 
        issuance of emails to business owners when their PSP 
        makes or cancels tax payments.

           We made changes to our offer-in-compromise 
        (OIC) program to make it easier for a business 
        defrauded by a PSP to obtain an OIC. Revised document 
        requirements for such offers allow our OIC specialists 
        to process offers submitted by these taxpayers more 
        expeditiously than they otherwise would be.

    In conducting our enforcement program, the IRS strives to 
ensure all taxpayers, including small businesses, receive fair 
treatment in their dealings with us. One important aspect of 
ensuring fair treatment involves raising taxpayers' awareness 
of their rights when interacting with the IRS, especially when 
tax disputes arise. In 2014 the IRS adopted a Taxpayer Bill of 
Rights that we believe is a cornerstone document that will help 
taxpayers, including small business owners, understand their 
rights in the tax process.

    The Taxpayer Bill of Rights contains 10 fundamental rights 
that every taxpayer should be aware of, such as the right to 
receive quality service from the IRS, the right to pay no more 
than the correct amount of tax, and the right to retain 
representation when a taxpayer has a disagreement with the 
Service. Each one of these 10 rights is in our tax code, but 
the length and complexity of the code make it difficult to 
understand these rights or even find where they are in the 
code. Our employees believe in these rights and are doing their 
best to advise taxpayers about them and to support them in 
their day-to-day activities. To further strengthen these 
efforts, the IRS is working expeditiously to implement the 
provisions passed in the Protecting Americans from Tax Hikes 
Act of 2015, which adds to the Commissioner's duties the 
requirement to ensure that employees of the IRS are familiar 
with and act in accordance with taxpayer rights as afforded by 
other provisions of the Internal Revenue Code.

    NEED FOR ADEQUATE RESOURCES AND LEGISLATIVE SOLUTIONS

    It is important to note that continuing initiatives like 
the ones that I have described in my testimony depends on the 
IRS receiving adequate resources to fund them. Our efforts to 
assist small business taxpayers are challenged by the difficult 
budget environment we are in. The IRS's funding was cut 
significantly for the five years from 2011 to 2015, and those 
reductions have taken a toll on both taxpayer service and 
enforcement programs.

    Congress did approve $290 million in additional funding for 
the IRS for FY 2016, which we appreciate. The additional funds 
were directed to be used to improve service to taxpayers, 
strengthen cybersecurity and expand our ability to address 
identity theft. This was a major step in the right direction. 
But even with this additional funding, we are still under 
significant financial constraints, as the IRS appropriation 
remains $900 million below the FY 2010 enacted level, and the 
reductions are more significant in inflation-adjusted terms.

    As a result, we will need to continue the exception-only 
hiring policy that began in FY 2011, leaving us unable to 
replace most employees we lose this year through attrition. In 
fact, we expect the IRS workforce to continue to shrink by 
another 2,000 to 3,00 full-time employees during FY 2016, 
equaling a loss of over 17,000 full-time employees since FY 
2010.

    Therefore, I continue to urge Congress to approve the 
President's FY 2017 Budget for the IRS, which requests a base 
increase of $530 million over the FY 2016 enacted level. This 
would support improvements to a wide range of taxpayer service 
activities and investments to help prevent identity theft and 
refund fraud and to reduce improper payments. The Budget also 
proposes a multi-year program integrity cap adjustment to 
restore and improve tax enforcement activities, including a 
$515 million investment in FY 2017 to reduce the deficit and 
narrow the tax gap. If approved, the cap adjustment would yield 
an estimated net taxpayer savings of $46 billion over the next 
10 years.

    As important as adequate funding is to improving our 
efforts to help small businesses, Congress also has an 
important role to play by passing legislative proposals that 
would simplify tax administration. In that regard, let me 
highlight several important legislative proposals in the 
President's FY 2017 Budget in the area of small business:

            Simplified Accounting Methods. Although 
        current law contains various provisions granting relief 
        to small businesses from complex tax accounting rules, 
        the eligibility requirements for these forms of relief 
        are not uniform. They rely on varying forms of gross 
        receipts tests, with widely different exception 
        thresholds, and different rules depending on the 
        classification of a taxpayer's business activities. 
        Therefore, a uniform definition of a small business for 
        determining applicable accounting rules would simplify 
        tax administration and taxpayer compliance. The 
        Administration's proposal would create a uniform 
        business threshold, set at $25 million in average 
        annual gross receipts and indexed for inflation, for 
        qualifying for exceptions from certain accounting 
        rules.

           Increased Expensing Limitation. Section 179 
        of the Internal Revenue Code allows taxpayers to elect 
        to deduct up to $500,000 of the cost of qualifying 
        depreciable property placed in service during a taxable 
        year, rather than depreciating the asset. The 
        Administration's proposal would increase the $500,000 
        limit to $1 million. This would not only reduce the 
        after-tax costs of tangible depreciable assets, but 
        also provide accounting simplification for many small 
        businesses, by allowing them to avoid the complexity of 
        tracking depreciation. As with the current limit, the 
        proposal $1 million cap would be adjusted for 
        inflation.

           Increased Deduction for Start-Up Expenses. 
        Current law allows new business owners to deduct $5,000 
        of start-up costs for the first year they are in 
        business. Businesses organized as corporations or 
        partnerships may also deduct $5,000 in organizational 
        costs in their first year. To support new business 
        formation and job creation, the Administration's 
        proposal would allow up to $20,000 of new business 
        expenditures, including organizational costs, to be 
        deductible in the first year. As under current law, 
        businesses would be allowed to amortize, over 15 years, 
        start-up costs that exceed the deductible limit. The 
        proposal would also consolidate various Code provisions 
        related to new business expenditures, reducing burden 
        on new business owners.

           Improving the Small Business Health Care Tax 
        Credit. The Affordable Care Act permits small employers 
        to take a tax credit for a portion of the cost of 
        providing health coverage for their employees. To be 
        eligible, employers must have no more than 25 full-time 
        equivalent employees and pay at least half of the 
        employees' health premiums. Also, the employees' 
        average annual wages must not exceed a specified level, 
        indexed for inflation. That amount for 2016 is $51,800. 
        The credit is phased out on a sliding scale between 10 
        and 25 full-time employees, as well as between an 
        average annual wage of $25,900 and $51,800 in 2016. The 
        administration's proposal would raise the 25-employee 
        limit to 50 and begin the phase-out at 20 employees, 
        rather than 10. The proposal would also change the way 
        the phase-out rules are coordinated to provide a more 
        gradual, combined phase-out.

    Chairman Chabot, Ranking Member Velazquez, and members of 
the Committee, this concludes my statement, and I would be 
happy to answer your questions.
      House Small Business Committee Hearing on ``Keep It Simple:


    Small Business Tax Simplification and Reform, the Commissioner 
                            Responds'' QFRs


    Chairman Steve Chabot

    You state in your testimony, ``We do not have a direct role 
in tax law simplification since tax policy is the domain of the 
Congress, White House, and Treasury Department . . .'' However, 
at least count, statutes passed by Congress accounted for fewer 
than 3,000 pages as compared to 9,000 pages of regulations.

    1. Is it your contention that regulations do not in any way 
affect tax policy?

          IRS response: Tax policy direction originates with 
        laws enacted by Congress. Treasury regulations 
        implement the law enacted by Congress and reflect tax 
        policy and tax administration decisions made by the 
        Treasury Department and the Internal Revenue Service. 
        Responsibility for tax policy decisions within the 
        Department of Treasury rests with the Assistant 
        Secretary for Tax Policy, and attorneys from the IRS 
        Office of Chief Counsel participate with Treasury 
        attorneys in the Office of Tax Policy in drafting 
        regulations that reflect these tax policy decisions. 
        Limiting the burden on taxpayers in ways that promote 
        sound tax administration is an important consideration 
        in that effort.

    2. Doesn't the IRS have at least some control over how 
lengthy or cumbersome to make these regulations?

          IRS response: The IRS recognizes regulations are 
        often lengthy and complex. There are several reasons 
        for that. The Internal Revenue Code is itself very 
        complex. When Congress enacts tax legislation it often 
        gives only a statutory framework, and then gives the 
        Secretary authority to provide more specific rules in 
        regulations. This often requires the Secretary to 
        address a myriad of types of specific transactions and 
        taxpayers to whom the statute applies, and to do so in 
        a manner that builds on that statutory framework to 
        carry out Congressional intent. The Office of Tax 
        Policy and IRS Chief Counsel attorneys consult with 
        those in the IRS who have responsibility for 
        administering the relevant Code sections during the 
        drafting process to ensure the regulations are 
        effective and administrable. The public is also given 
        the opportunity to comment on the length, complexity, 
        and burden of the regulations in accordance with 
        various statutory requirements, such as the Paperwork 
        Reduction Act. So although some tax regulations are 
        lengthy and complex, the IRS Office of Chief Counsel 
        and the IRS strive, in our coordination with Treasury's 
        Office of Tax Policy, to make them no longer or more 
        complex than necessary.

          It is important to note that in many instances it is 
        taxpayers and tax practitioners who ask for more 
        detailed regulations. In commenting on proposed tax 
        regulations, for instance, tax practitioners often 
        request more detailed guidance to provide taxpayers 
        with more certainty in complying with the very complex 
        statutory rules. Finally, even after regulations are 
        published, more detailed amendments to regulations are 
        sometimes necessary when, in the course of preparing or 
        auditing returns, gaps, ambiguities, or abuses are 
        discovered.

    Congressman Cresent Hardy

    According to a recent Office of Advocacy report, the United 
States has over 28 million small businesses.

    1. What are you and your agency doing to alleviate the 
ongoing tax concerns of these 28 million small businesses?

    IRS response: The IRS has a wide range of products, tools 
and initiatives designated to assist small business owners in 
understanding and meeting their federal tax responsibilities. 
Products and tools on IRS-gov include:

           Small Business Tax Center at https://
        www.irs.gov/Businesses/Small-Businesses-&-Self-Employed

                    Provides resources for taxpayers who file 
                Form 1040, Schedules C, E, F, or Form 2106, as 
                well as small businesses with assets under $10 
                million, including information on:

                           Employer ID Numbers (EINs)

                           Forms and Publications

                           Self-Employment Taxes

                           e-File Employment Taxes

                    Provides a direct link from practitioner or 
                small business organization websites to IRS.gov 
                information that is designed for their members' 
                specific needs

                    Provides easy access to numerous resources

           Online Learning

                    Small Business Taxes: The Virtual Workshop

                           Explains how small 
                        businesses can meet federal tax 
                        obligations in nine easy-to-understand 
                        lessons, including:

                                   What you need to 
                                know about federal taxes

                                   How to file and pay 
                                your taxes electronically, and

                                   How to manage 
                                payroll so you withhold the 
                                correct amount

                    IRS Video Portal--users can watch helpful 
                videos and webinars, including:

                           Navigating the Small 
                        Business and Self-Employed Tax Center

                           Business Taxes for the Self 
                        Employed

                           Avoiding the Biggest Tax 
                        Mistakes, and

                           Small Business Owners: Get 
                        All the Tax Benefits You Deserve

                    Online Tools and Educational Products

                    Small Business Events--ongoing IRS small 
                business workshops and events

           Penalties at a Glance webpage

                    Provides information about penalty relief 
                options, eligibility and instructions

           Recordkeeping Guidance

                    Provides detailed information, including a 
                YouTube video, to assist small business owners 
                in understanding recordkeeping requirements

           Free Information Webinars

                    For Small Business Week, May 1-7, 2016, the 
                IRS hosted four informational webinars for 
                small business owners:

                           May 2 - Tax Tips for your 
                        New Business

                           May 3 - Staying Afloat: 
                        Planning for Emergencies Before they 
                        Happen

                           May 4 - Worker 
                        Classification: Employee or Independent 
                        Contractor? - (in Spanish)

                           May 5 - Tip Reporting and 
                        Tips v. Service Charges

           Online Small Business Tax Calendar

                    Links due dates and events to help small 
                business owners meet tax deadlines

                    Includes an IRS Calendar Connector tool, 
                which allows access to calendar events from a 
                desktop

                    Allows users to have Calendar reminders 
                sent to their email inbox via RSS Feeds one or 
                two weeks in advance of when a form or payment 
                is due

                    North and South Carolina have partnered 
                with the IRS to create joint fed/state 
                calendars which are available on their 
                respective websites

    The IRS also provides e-News for Small Businesses. This 
electronic mail service provides tax information to over 
309,000 subscribers. E-News is used to increase awareness of 
the tools and products available. Taxpayers can sign up on 
IRS.gov.

    The IRS also develops and implements compliance assistance 
programs to assist under-served business start-ups and improve 
their knowledge of the tax code. Current efforts include:

           Providing the Small Business Tax Center 
        information and other available resources to users when 
        they apply for a new EIN via the EIN application page 
        on IRS.gov

           Leveraging IRS partnerships to deliver small 
        business tax information

           Providing small business tax workshop 
        training materials to our partners for use in 
        presenting these workshops. In calendar year 2015, 
        there were more than 916 English language Small 
        Business Workshops held by IRS partners and more than 
        73 Spanish language workshops

           Identifying small business issues for review 
        by federal advisory groups and implementing approved 
        recommendations

           Encouraging partners/stakeholders to market 
        Low Income Tax Clinics (LITCs) to small business owners 
        who can't pay for return preparation and tax 
        controversy resolution

           Partnering with LITCs to provide small 
        business owners with easy access to tax information, 
        online payment agreements and tools to combat business 
        ID theft

           Partnering with agencies that interact with 
        start-up businesses (e.g., SBA, Postal Service) to 
        prominently place the IRS Small Business Tax Centers on 
        their websites

           Increasing internal marketing of outreach 
        products for sharing with taxpayers

           Providing our outreach materials within the 
        IRS operating divisions

           Delivering business identity theft 
        prevention messages to startup businesses

    The IRS continues to support new entrepreneur outreach 
efforts by establishing relationships with entrepreneurial 
organizations so they can include IRS information in their 
curriculum and publications, and partnering with associations 
that assist new entrepreneurs. To date, FY16 activities 
include:

           Customized materials and coordinated message 
        delivery at:

                    114 in-person outreach events directly 
                reaching over 3,499 direct participants

                    52 virtual events with 1,971 participants 
                including many new business owners

           Materials distributed via 344 small business 
        email distribution lists, which reach thousands of 
        small business organizations

    As noted in the written testimony, even as we seek to 
provide top-quality service to small business taxpayers, the 
IRS also must carry out a robust enforcement program. While the 
IRS has an obligation to make sure all individuals and 
businesses pay the taxes they owe, it is especially critical in 
the small business community, in order to maintain a level 
playing field for all business owners.

    The enforcement activities we conduct help ensure that 
those small business owners who are fulfilling their tax 
obligations are not disadvantaged by others who may be cutting 
corners, whether that involves income taxes, employment taxes, 
or the classification of workers as employees or independent 
contractors.

    In many cases, actions taken to improve enforcement can 
also help taxpayers and increase voluntary compliance. An 
excellent example is our new Employment Tax Early Interaction 
Initiative, which was launched last December.

    Under this initiative, the IRS seeks to identify employers 
who appear to be falling behind on their interim employment tax 
payments before they file their annual employment tax returns 
and are so far behind that payment of the entire tax due at one 
time can be difficult. We offer helpful information and 
guidance through contacts such as letters and automated phone 
messages. In the past, the first attempt by the IRS to contact 
an employer having payment difficulties often did not occur 
until much later in the process, after unpaid tax obligations 
were already beginning to mount. This initiative is designed to 
help employers stay current and in compliance to avoid large 
tax bills and interest and penalty charges. This initiative can 
be seen as a more efficient enforcement activity or a form of 
improved taxpayer service, but we believe it is both.

    Within the employment tax area, another important component 
of our efforts to make it easier for small businesses to meet 
their obligations involves helping businesses that outsource 
some or all of their payroll and related tax duties to third-
party payroll service providers (PSPs). While most PSPs do a 
good job of helping small businesses meet filing deadlines and 
deposit requirements, businesses sometimes can fall prey to 
unscrupulous PSPs that defraud clients and abscond with their 
payroll tax deposits, leaving the employer liable for amounts 
they thought had been remitted to the IRS but were not.

    We have taken many steps to help protect employers from 
becoming victims of unscrupulous PSPs, and to provide 
assistance when fraud does occur, including the following:

           Unscrupulous PSPs sometimes change the 
        address of their clients (without their clients' 
        consent) to that of the PSP, so that the client never 
        sees tax delinquency notices sent by the IRS. In 2015, 
        the IRS began sending identical notices to both the old 
        and new addresses on file for an employer after an 
        address change is received.

           In 2014, we created the Inquiry Personal 
        Identification Number (PIN), which is used by business 
        owners who use PSPs. They can use their Inquiry PIN to 
        access the Electronic Federal Tax Payment System 
        (EFTPS) to check weather tax payment submissions were 
        made timely on their behalf by their PSP. Additionally, 
        we are working to modify the EFTPS to allow for the 
        issuance of emails to business owners when their PSP 
        makes or cancels tax payments.

           We made changes to our offer-in-compromise 
        (OIC) program to make it easier for a business 
        defrauded by a PSP to obtain an OIC. Revised document 
        requirements for such offers allow our OIC specialists 
        to process offers submitted by these taxpayers more 
        expeditiously than they otherwise would be.

    Also, beginning July 1, 2016, the IRS will begin accepting 
application materials under the new certified professional 
employer organization (CPEO) program. The Tax Increase 
Prevention Act of 2014, enacted Dec. 19, 2014, required the IRS 
to establish a voluntary certification program for professional 
employer organizations (PEOs). PEOs handle various payroll 
administration and tax reporting responsibilities for their 
business clients and are typically paid a fee based on payroll 
costs. Unlike PSPs, PEOs report and pay payroll taxes under 
their EINs, rather than the clients' EINs, and often hold 
themselves out as employers or ``co-employers,'' even though 
the latter is not recognized for federal tax purposes. To 
become and remain certified under the new program, CPEOs must 
meet tax status, background, experience, business location, 
financial reporting, bonding and other requirements described 
in the statute and regulations. As required by law, the IRS 
will publish lists (to be updated quarterly) of PEOs that have 
been certified under the program and of those whose 
certification has been revoked or suspended, which may help 
businesses locate reputable service providers.

    In the written testimony at http://smallbusiness.house.gov/
koskinen testimony, we also highlighted the following recent 
actions the IRS has taken to reduce burden on small businesses 
to help them comply with the tax laws, and some important 
legislative proposals in the President's FY 2017 Budget for 
small business:

    Recent examples of IRS actions to reduce burden on small 
businesses.

           Increased Expensing Thresholds

           Home Office Deduction

    Several important legislative proposals in the President's 
FY 2017 Budget for small business, including:

           Increased Expensing Limitation

           Expanding Simplified Accounting for Small 
        Businesses and Uniform Definition of Small Business for 
        Accounting Methods

           Increased Deduction for Start-Up Expenses

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