[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
LESS IS MORE: THE INCREASING BURDEN OF TAXPAYER PAPERWORK
=======================================================================
HEARING
before the
SUBCOMMITTEE ON REGULATORY AFFAIRS
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
MAY 25, 2005
__________
Serial No. 109-35
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
______
U.S. GOVERNMENT PRINTING OFFICE
22-202 WASHINGTON : 2005
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
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COMMITTEE ON GOVERNMENT REFORM
TOM DAVIS, Virginia, Chairman
CHRISTOPHER SHAYS, Connecticut HENRY A. WAXMAN, California
DAN BURTON, Indiana TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida PAUL E. KANJORSKI, Pennsylvania
GIL GUTKNECHT, Minnesota CAROLYN B. MALONEY, New York
MARK E. SOUDER, Indiana ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio DENNIS J. KUCINICH, Ohio
TODD RUSSELL PLATTS, Pennsylvania DANNY K. DAVIS, Illinois
CHRIS CANNON, Utah WM. LACY CLAY, Missouri
JOHN J. DUNCAN, Jr., Tennessee DIANE E. WATSON, California
CANDICE S. MILLER, Michigan STEPHEN F. LYNCH, Massachusetts
MICHAEL R. TURNER, Ohio CHRIS VAN HOLLEN, Maryland
DARRELL E. ISSA, California LINDA T. SANCHEZ, California
GINNY BROWN-WAITE, Florida C.A. DUTCH RUPPERSBERGER, Maryland
JON C. PORTER, Nevada BRIAN HIGGINS, New York
KENNY MARCHANT, Texas ELEANOR HOLMES NORTON, District of
LYNN A. WESTMORELAND, Georgia Columbia
PATRICK T. McHENRY, North Carolina ------
CHARLES W. DENT, Pennsylvania BERNARD SANDERS, Vermont
VIRGINIA FOXX, North Carolina (Independent)
------ ------
Melissa Wojciak, Staff Director
David Marin, Deputy Staff Director/Communications Director
Rob Borden, Parliamentarian
Teresa Austin, Chief Clerk
Phil Barnett, Minority Chief of Staff/Chief Counsel
Subcommittee on Regulatory Affairs
CANDICE S. MILLER, Michigan, Chairman
GINNY BROWN-WAITE, Florida STEPHEN F. LYNCH, Massachusetts
CHRIS CANNON, Utah WM. LACY CLAY, Missouri
MICHAEL R. TURNER, Ohio CHRIS VAN HOLLEN, Maryland
LYNN A. WESTMORELAND, Georgia
Ex Officio
TOM DAVIS, Virginia HENRY A. WAXMAN, California
Ed Schrock, Staff Director
Dena Kozanas, Counsel
Lauren Jacobs, Clerk
Krista Boyd, Minority Counsel
C O N T E N T S
----------
Page
Hearing held on May 25, 2005..................................... 1
Statement of:
Everson, Mark W., Commissioner, Internal Revenue Service; and
John D. Graham, Ph.D, Administrator, Office of Information
and Regulatory Affairs, Office of Management and Budget.... 9
Everson, Mark W.......................................... 9
Graham, John D........................................... 36
Steinberg, Leonard, the Steinberg Group; Keith Hall, Hall and
Hughes, PLLC; and Larry Gray, Alfermann, Gray and Co....... 58
Gray, Larry.............................................. 77
Hall, Keith.............................................. 68
Steinberg, Leonard....................................... 58
Letters, statements, etc., submitted for the record by:
Everson, Mark W., Commissioner, Internal Revenue Service,
prepared statement of...................................... 12
Graham, John D., Ph.D, Administrator, Office of Information
and Regulatory Affairs, Office of Management and Budget,
prepared statement of...................................... 38
Gray, Larry, Alfermann, Gray and Co., prepared statement of.. 79
Hall, Keith, Hall and Hughes, PLLC, prepared statement of.... 70
Miller, Hon. Candice S., a Representative in Congress from
the State of Michigan, prepared statement of............... 3
Steinberg, Leonard, the Steinberg Group, prepared statement
of......................................................... 60
LESS IS MORE: THE INCREASING BURDEN OF TAXPAYER PAPERWORK
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WEDNESDAY, MAY 25, 2005
House of Representatives,
Subcommittee on Regulatory Affairs,
Committee on Government Reform
Washington, DC.
The subcommittee met, pursuant to notice, at 2 p.m., in
room 2154, Rayburn House Office Building, Hon. Candice Miller
(chairwoman of the committee) presiding.
Present: Representatives Miller, Lynch, and Souder.
Staff present: Ed Schrock, staff director; Dena Kozanas,
counsel; Lauren Jacobs, clerk; Krista Boyd, minority counsel;
Cecelia Morton, minority office manager.
Ms. Miller. I would like to call the hearing to order. I
welcome you all today.
We are here today to discuss the ongoing oversight of the
Internal Revenue Service in its taxpayer paperwork burden
reduction efforts, particularly in relation to the provisions
under the Paperwork Reduction Act. Like paying taxes, paperwork
is an inevitable part of an American adult's responsibilities.
Each year, Federal agencies collect a variety of information
from individuals. This information might be helpful for the
agencies, but it can also be a huge nuisance for individuals
and businesses.
For many individuals, tax paperwork is confusing and very
time consuming. In 2001, the Joint Committee on Taxation
released a study that stated individual taxpayers filing Form
1040 could encounter 79 lines on their return, 144 pages of
instructions, 19 separate worksheets, as well as the
possibility of filing numerous other forms.
For small businesses, the burden is equally troublesome. In
2001, the Small Business Administration Office of Advocacy
released a report on the regulatory costs of tax paperwork
compliance faced by small firms. At that time, they found that
a typical small business faced a burden of over $1,200 per
employee, actually, to comply with tax paperwork, recordkeeping
and reporting requirements.
Small businesses, of course, make up 99 percent of all U.S.
business and employ over one-half of our American work force.
Yet the tax compliance burden for them is more than twice that
which is faced by large firms.
Paperwork burden is not a new problem. The desire to reduce
it has long been recognized by this Congress and others before
it. In fact, in 1980, the Congress enacted the Paperwork
Reduction Act and established the Office of Information and
Regulatory Affairs within the Office of Management and Budget,
whose primary responsibility is paperwork reduction. In 1986
and then again in 1995, Congress passed amendments to the PRA
and set Government-wide paperwork reduction goals of 10 percent
for fiscal years 1996 and 1997 and then a 5 percent reduction
for each of the next 4 fiscal years, and annual paperwork goals
thereafter that reduced burden to ``maximum practical
opportunity.''
Unfortunately, to this date, these goals have not been
realized, and we certainly hope that today's hearing will help
us understand how the Congress can assist the agencies in
achieving these goals. By the end of fiscal year 2001, these
reduction goals would have placed the Government-wide burden at
4.5 billion hours. But these burden levels were a significant
contrast to the mandated 35 percent reduction goal of 7.6
billion hours.
And now the burden is about 8 billion hours. Interestingly
enough, one agency is accountable for 80 percent of this
figure--of course, the Internal Revenue Service.
Information collected as part of the tax system is a
principal ingredient in a very overstuffed pot of paperwork
burden imposed by the Federal Government. Present estimates
show that nearly 6.5 billion hours of paperwork burden is a
result of the IRS. Even though the IRS accounts for 80 percent
of the burden, it does not account for 80 percent of the
information collections. In fact, the current estimates show
that out of nearly 8,000 information collections Government-
wide, IRS collections only account for approximately 800, which
is roughly 10 percent. Of those 800 forms, only 10 are culpable
for producing about 80 percent of the burden. Of course, the
basic tax returns, Form 1040 and its associated schedules,
measure at 1.6 billion hours or 24 percent of all IRS burden.
Certainly to be fair, much of the IRS challenge in reducing
taxpayer burden is a complex Internal Revenue Code passed by
Congress. However, the Code's complexity also underscores the
importance of creating tax forms and instructions that are as
clear as possible and as understandable as possible. Moreover,
even though a statute may require the IRS to take certain
action, the agency does have the discretion in the manner and
the frequency with which the information is collected, and even
if it needs to be collected.
The IRS has taken its own initiatives to curb the rise in
its paperwork burden. In 2002, the IRS created the Office of
Taxpayer Burden Reduction. And the IRS has also expanded the E-
government projects that it has by creating an interactive
customer service link on the Web site, and increasing efforts
for e-filing. Although the IRS administrative and E-government
initiatives are a huge step in the right direction, it will
certainly take much more to tackle this 6.5 billion hour
goliath. So we're hoping that today's hearing will examine how
Congress may need to make adjustments to the PRA to make
significant changes to the burden.
I certainly look forward to working with all of you today
and hearing the testimony of our witnesses. And at this time, I
would like to yield to the ranking member, Representative
Lynch, for his opening statement.
[The prepared statement of Hon. Candice S. Miller follows:]
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Mr. Lynch. Thank you, Madam Chairwoman.
First of all, I want to begin by thanking you for your
willingness to look at this issue. I want to thank Dr. Graham
and Commissioner Everson for your willingness to come before
the committee and help us out.
I do share in the spirit of this hearing in terms of the
overarching goal of reducing the paperwork for U.S. taxpayers
in this process. I do understand that sometimes the actions
that we take as Members of Congress, we actually make that
problem worse rather than help it. So I do not see it as your
responsibility alone, I think it is a shared responsibility
between we in the Congress and yourselves. You have just been
given a more specific role in this, I think. I understand I'm
not holding anyone here to blame for what we have been unable
to do in the Congress, which is to sort of simplify the whole
process on our end.
I am concerned, however, that while we go at this goal, and
it is a laudable goal and we should stay at it, of reducing the
paperwork and the time burdens on Americans who just want to
file their tax returns and pay their tax obligations, while
we're in this process, it seems that the progress is slow.
Again, that is not your fault, it is our shared responsibility.
However, I do see across the country in various IRS
offices, and because 80 percent of this, of the paperwork
instituted by Government activity is the responsibility of the
IRS or in their jurisdiction, that seems to be where we can
realize the greatest gains, I guess, in our mission. I see that
across the country we are reducing staff would who otherwise be
available to help taxpayers either in call centers or in walk-
in centers to help them with the process, which remains fairly
complicated for the average taxpayer.
Until we can reduce this to a level where hopefully people
can handle it on their own without professional help, I would
like to express my concern about sort of a premature reduction
in work force for those who would help taxpayers within the IRS
grapple with the forms and with the whole process.
But I do appreciate both of you coming before us and
working on this problem. I think this is a bipartisan effort.
That is the way we approach it here in terms of a mutual goal,
shared by both Republicans and Democrats here in the Congress.
Thank you, Madam Chairwoman.
Ms. Miller. Thank you. If I could just remind the
witnesses, in the interest of time here, we try to keep your
oral comments to about 5 minutes. In fact, you've got these
little boxes in front of you, when you see the yellow light it
shows you have 1 minute remaining, then the red light of
course, says that 5 minutes is up. If you are still speaking at
that time, just try to wrap it up if you could.
It's the process of our committee here that we swear in all
of our witnesses, so if you could rise, please, and raise your
right hands.
[Witnesses sworn.]
Ms. Miller. Thank you very much.
Our first panelist today is Commissioner Mark W. Everson.
He is the Commissioner for the Internal Revenue Service, of
course. Commissioner Everson was actually confirmed in May
2003. Prior to coming to the IRS, Commissioner Everson served
as the Deputy Director of Management for the Office of
Management and Budget. He is the 46th Commissioner of the IRS.
Commissioner Everson, we want to thank you very much for
attending the hearing today. We look forward to your comments,
sir.
STATEMENTS OF MARK W. EVERSON, COMMISSIONER, INTERNAL REVENUE
SERVICE; AND JOHN D. GRAHAM, PH.D, ADMINISTRATOR, OFFICE OF
INFORMATION AND REGULATORY AFFAIRS, OFFICE OF MANAGEMENT AND
BUDGET
STATEMENT OF MARK W. EVERSON
Mr. Everson. Madam Chairwoman, Mr. Lynch and members of the
subcommittee. Thank you for the opportunity to testify on the
Internal Revenue Service's continuing efforts to reduce
unnecessary paperwork burdens on the taxpayer.
As this committee well knows, individuals and businesses
spend more than 6 billion hours a year on tax paperwork and
other tax challenges. Together, the Internal Revenue Code and
regulations run for millions of words. In terms of pages, that
is twice as many pages as 20 years ago.
Burden is a direct result of the complexity of the Code.
Not only does complexity cause economic burden, it also
obscures understanding. Complexity in the Tax Code compromises
both our service and enforcement missions. Taxpayers who seek
to comply but cannot understand their tax obligations may make
inadvertent errors or may ultimately throw up their hands and
say, why bother?
In the enforcement context, complexity facilitates
behaviors at variance with those intended by Congress. Our goal
is to impose the least amount of burden necessary for taxpayers
to meet their tax responsibilities.
A certain amount of paperwork, of course, is essential to
tax collection. Taxpayers must report what they make to the
IRS. Their incomes and businesses can be complex. Their
deductions and credits can be complex. So the paperwork can be
complex. That having been said, we seek to reduce unnecessary
paperwork and make the filing process as simple and convenient
as possible.
The Office of Taxpayer Burden Reduction at the IRS has
aggressively pursued burden reduction initiatives. Since the
Office was launched in January 2002, we have reduced taxpayer
burden by over 200 million hours. One area of our initiatives
involves filing thresholds. We recently increased the Federal
unemployment tax deposit threshold from $100 to $500, reducing
burden for over 2.6 million employers.
We also increased the threshold for filing Form 1040EZ and
Form 1040A from $50,000 to $100,000, decreasing taxpayer burden
by more than 5 million hours. And for small businesses, we
increased the threshold for business expenses reported on Form
1040CEZ from $2,500 to $5,000. This enabled about 500,000 more
taxpayers to file this simpler form.
We are also working to reduce burden through other means.
For example, we are simplifying forms and instructions. We
simplified the Schedules K-1 for partnerships and S
Corporations, reducing burden by an estimated 95 million hours
for the 20 million taxpayers who file these forms. In addition,
we are actively considering allowing very small employers to
file their employment taxes returns annually instead of
quarterly. We estimate that this action alone could reduce
burden on approximately 1 million businesses by some 50 million
hours.
The revolution in electronic filing also helps to reduce
the paperwork burden. Electronic filing of taxes requires less
paper and is more accurate. Computers catch mistakes that would
have been made on paper and required more time to correct. This
year for the first time more than half of all individual
taxpayers have filed electronically. Starting next year, we
have mandated that all larger corporations file electronically.
This will reduce significant amounts of paperwork and speed up
audits.
Congress has a key role to play in reducing the paperwork
burden. Dealing with complexity and paperwork is easier if the
Tax Code is stable. But tax laws change quite frequently. I'm
sure you saw this last week, but take for example the Jobs Act
that you passed last year. It brings important benefits to the
economy and does much to strengthen the Government's hand in
combating abusive shelters. But it also adds complexity to the
Code. The Jobs Act has 193 provisions, 178 of these require IRS
actions like the issuance of guidance, and the creation of new
forms.
Before I close, let me briefly discuss tax reform, the real
opportunity for significant simplification and burden
reduction. Earlier this year, the President created a
bipartisan panel to examine ways to ``simplify Federal tax laws
to reduce the costs and administrative burdens of compliance
with such laws.'' In March, I appeared before the panel and
made five suggestions concerning tax reform.
First, our economy is constantly evolving with change
seemingly ever-accelerating. Examples of change include
transformation of the work force to more self-employed
individuals, businesses contracting out activities they had
previously done themselves, the relatively greater portion of
economic growth generated through smaller, non-manufacturing
businesses and increasing globalization. It is vital to
construct a tax system that recognizes this dynamic and is
built for the 21st century, not the 1960's.
Second, policy options should be carefully assessed for
their potential impact on attitudes toward compliance. Fairness
and a perception of fairness are essential, as the President
has recognized in his charge that the reform proposals be
``appropriately progressive.''
Third, administerability is also an important
consideration. Bolting on new programs to the Tax Code without
significantly simplifying or eliminating existing elements may
in fact make it more difficult to collect the $2 trillion we
need to fund the Government. Fourth, there needs to be an
apples to apples comparison. We should not compare a sub-
optimized existing system to a perfect theoretical system. I
can assure you from my conversations with counterpart tax
administrators that there are administrative and compliance
issues in all systems.
Finally, we must recognize the transitions issues
associated with migration to a new system or systems merit
close attention. If the transition is not properly planned and
managed, the new system will get off to a rocky start. After
such a start, it may take decades to recover.
I wish to emphasize that these points are not offered to
suggest inaction. That would be perhaps the worst option. I
strongly support the President's call for simplification.
Simplification is essential to burden reduction. Thank you.
[The prepared statement of Mr. Everson follows:]
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Ms. Miller. Thank you very much.
Our next witness is Dr. John Graham. He is the
Administrator of OMB's Office of Information and Regulatory
Affairs. Born and raised in Pittsburgh, Dr. Graham found and
led the Harvard Center for Risk Analysis from 1990 to 2001. He
was confirmed in July 2001. He is on leave from the faculty at
Harvard School of Public Health, where he taught graduate
students the method of risk analysis and cost-benefit analysis.
Dr. Graham, we certainly appreciate your coming today as
well, and look forward to your testimony, sir.
STATEMENT OF JOHN D. GRAHAM
Mr. Graham. Good afternoon, Chairwoman Miller and
Congressman Lynch. I am pleased to be here this afternoon to
summarize for you our recent report to Congress on the
paperwork burden of the Federal Government on the American
people. This report we have shared with you has some good news
and it has some bad news. And I will summarize a little bit of
both of that.
On the good news side, in fiscal year 2004, we saw Federal
agencies take steps to slash paperwork burden by 96.8 million
hours. While that roughly 100 million hour reduction is small
compared to the billions of hours of total burden, for those
people who have less burden that they have experienced as a
result of these actions, we owe them, the agencies, applause
and an encouragement to do more.
The bad news I must share with you is that new statutory
requirements passed by Congress, and I'm sure some of them were
supported by the administration, caused an increase in the
burden of 119 million burden hours. The result of these two
program changes, reductions in discretionary paperwork,
increase in congressionally mandated paperwork, is that the net
change in paperwork burden has been up in fiscal year 2004.
However, lurking behind these numbers, and we focus on the
agency of concern here, the Internal Revenue Service, is some
more good news. That is, much of the Government-wide reduction
in paperwork burden due to agency actions is attributable to
the agency that Commissioner Everson runs. Program changes at
IRS reduced burden by 137 million hours, a significant fraction
of that from a simplified individual income tax return. In this
particular area of IRS paperwork, there were adverse trends
from statutory changes from Congress which increased burden by
101 million hours.
But notice, for IRS the success of Commissioner Everson's
people in reducing paperwork burden has overwhelmed the
increases passed in the Tax Code. This net accomplishment is 36
million fewer hours of paperwork burden for the American
taxpayer.
Now, I don't mean to criticize necessarily these statutory
changes passed by Congress and supported by the administration.
But I want to explain to you how well-intentioned legislation
may increase paperwork burden. An example is the recent tax
benefit provided to school teachers. The Tax Code now allows
teachers to subtract up to $250 from their taxable income for
the purchase of classroom supplies. To implement this tax
benefit, IRS had to provide a new explanation on the 1040 about
their eligibility. That is additional paperwork.
They also had to provide a separate worksheet which is
needed to be provided so school teachers seeking to claim this
benefit can document their eligibility and their need. This
separate worksheet increases paperwork burden.
So the illustration I'm giving you is just one concrete
example why, if we go provision by provision in the Tax Code
and try to reduce burden, we're going to have a long haul ahead
of us. That is of course why the President is deeply interested
in a substantially simplified Tax Code.
Our role at OMB in this area is an oversight one. Our desk
officers at OIRA review over 3,200 information collections from
Federal agencies each year. As you can imagine, with a couple
dozen staff, we focus our energies on some key areas. We look
at new information collections or revised information
collections with particular priority.
During my tenure, we have devoted a specific attention and
priority to slashing agency violations of the Paperwork
Reduction Act. A typical agency violation is when they impose
on citizens or taxpayers a requirement to fill out paperwork
when they don't have approval from OMB to engage in that
activity. We have adopted, in this administration, a zero
tolerance policy toward these paperwork violations. I am proud
to say that since 1998, the number of these violations has gone
from 325 to zero in 2004, our most recent report to this
subcommittee.
Of course, we have a lot of work ahead of us. We now need
to work with agencies to prevent these violations from
occurring in the first place rather than fixing them after the
fact, and much work remains to be done in this subject.
So in conclusion, we're making progress. But at the same
time, we are creating more paperwork burden with the laws we
pass, sometimes well-intentioned and constructive laws. It is a
complex problem and does not lend itself to easy solution.
Thank you very much.
[The prepared statement of Mr. Graham follows:]
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Ms. Miller. Thank you both, very, very much.
Commissioner Everson, every time you hold that book up, I
want to dive under the desk, since I did vote yes for the ETI.
Mr. Everson. I can tell you, I have not read it all myself.
Ms. Miller. A little evening reading there. [Laughter.]
I think certainly a way that, in part your testimony
articulated this, how we are ever going to get away from some
of this paperwork burden is by using newer technologies. So I
certainly applaud you with the e-filing and some of these kinds
of things. In fact, actually before I got this job, I was the
Michigan secretary of state where we have all the DMV there. We
had gone in a couple of years period actually from having
almost a 2-hour average wait time in our branch offices to
about 5 minutes after we started initiating registration
renewal by using technologies, fax, phone, Internet, etc. It's
somewhat of an analogy to what you are trying to do there with
e-technology, or e-filing.
Maybe you could flesh this out a little bit, some of the
different efforts. You did talk about that a bit, but some of
the efforts your agency has made to encourage that and how you
can educate, I think particularly various demographics of our
society. I sometimes say perhaps senior citizens are a little
hesitant, although some of these studies say they are more on
the Internet than anybody.
Mr. Everson. Yes.
Ms. Miller. I think people who perhaps have a language
barrier or some of these kinds of things might be hesitant to
use the Internet or e-filing. How can we assist them?
Mr. Everson. I would make a couple of points here. Last
year, a little shy of 62 million individuals filed returns
electronically. That was something like 47 percent. This year,
the filing season is not quite finished, we get something like
8 or 9 million returns that come in after the 15th for
extensions. But we are well over 50 percent, we expect as time
goes on we will still be over 50 percent, I think it's 66 or 67
million returns already filed electronically.
There are a couple of pieces of that. There are the pieces
that come in, the portion that comes in from paid preparers.
The fastest growth is the portions coming in from software
where people are doing the returns themselves. They buy a
product and bring it home and do it. The other thing that is
grown very rapidly is something called the Free File Alliance.
This is an initiative that John and I both worked on from OMB
earlier, when the President's management agenda was launched to
work on electronic government. Over 5 million returns have been
sent in through a consortium of some 20 companies that provide
free access to the Internet. You go to IRS.gov and then you
pick a product and you can actually file your Federal return
for free.
So that was set up to help middle income and disadvantaged
folks and it's grown like a weed this is the third and final
year of the initial launch on it. We are now going to
renegotiate with these companies and I hope that it will stick
around and continue to grow.
I have been surprised at the growth of the electronic
filing. I thought it might peter out. It's just the opposite.
It's become the way of doing business. There are beta sites, we
have 14,000 beta sites around the country, they are using it.
Lots of different players, all interact with communities. So we
are not going to get everybody over time, but we are doing more
and more this way. It is good. The refunds come in half the
time. It cuts down on the need for these RALs, the refund
anticipation loans that are a predatory practice by the
preparers and others. This is all good for taxpayers.
Ms. Miller. Just following up on that, you mentioned, I
think, that there was a decrease in 5 million hours, I wrote
that down, a reduction when you went from a threshold of
$50,000 to $100,000. How do you determine even $100,000, a sort
of arbitrary number? Why not a million? How do you get to that
number?
Mr. Everson. I think that what our folks do is they
analyze, we have some pretty good data from our research people
about who qualifies for what kinds of deductions or what is
typical of a taxpayer that has $100,000 of income or $200,000
of income. Then you make a straight-out comparison as to who is
more likely to qualify or not. And it's professional judgment
that goes into that kind of a decision.
Ms. Miller. Let me just ask you one more question here.
Also, you were mentioning that you were looking at a pilot
program or initiative where you would allow small businesses to
file annually rather than quarterly. In one of my former lives,
I also did the books in a family marina business. It was always
such a pain to be doing that on a quarterly basis. We always
said, well, the Government wants us to do this so they can get
the float on our money rather than us having it.
So I really like the idea of going to an annual filing for
some of the small businesses. In fact, you could even make an
argument, I think, it's a tax cut for small businesses, besides
the paperwork reduction burden and all these kinds of things.
Where are you in the process with that?
Mr. Everson. I think it's 2 years away. Next year, pardon
me, I'm corrected. We expect to get it in by next year. It's
exactly the kind of thing that we like to do. And again, let me
make the argument, for whatever we had with the new system,
stability really helps you in an instance like this. Because
the same people who have to design new forms are the ones who
come up with the best ideas about simplifying things. If our
teams of people are working on implementing the 173 provisions
from this, they can only worry to a certain degree about where
else they might simplify things.
So if we can get some stability in the system, maybe we can
mine some more ideas like that. I know you have another panel,
we get a lot of good ideas from small business groups and
others about where to head with these. We're very receptive to
that. We work with OMB, they provide a good frame of reference
and hold us accountable as we do these efforts, as do you.
But give us a little breathing room here and I think we can
do better.
Ms. Miller. Great.
I'd like to recognize the ranking member, Representative
Lynch, for his questions.
Mr. Lynch. Thank you, Madam Chairwoman.
Commissioner, I realize that the electronic filing is on
the increase. Are there certain areas where we have made it
less likely that people would file electronically? Are there
certain types of returns that don't lend themselves to the way
we have things set up right now, such as amended returns? Are
those all non-electronic, and are we doing anything to increase
the simplicity for people who have maybe there in that outlier
group that is not currently coming into the electronic filing
process?
Mr. Everson. I would say that the tear line is not within
the family of individual returns. It is more importantly, the
issue of corporations and non-individual filers. We are, as I
indicated in my statement, we have mandated for corporations to
file electronically next year, the larger corporations and the
larger tax-exempts. Tax-exempts are a different animal, because
there is total transparency there, as you know. Their annual
returns are actually public. That is not the truth for
corporations or individuals.
There is a tremendous savings in time, particularly for us,
and the help of processing everything as you go that way. With
individuals, what's happening now is as I indicated,
practitioners more and more, they get on this bandwagon, you
have somebody who prepares 50 or 100 returns, if they haven't
done it, once they do it they never go back. I talk to
practitioners, and the whole office goes electronic, they don't
have as much paper any more in their offices.
But there are still some individuals who prefer to file by
paper. I get letters, you mentioned the elderly, I get several
letters a week from the elderly that share with me about some
question and someone's been doing his or her return for decades
and they still do it by hand. Usually it's a simple return. The
more complex you get, the more complicated sources of income or
rental income, the harder it is for people to do it by hand now
of course.
Mr. Lynch. I'm just wondering, the other part of this, and
the Chair has already mentioned small businesses.
Mr. Everson. Yes.
Mr. Lynch. And the burden, No. 1, on small businesses right
now is significant.
Mr. Everson. Yes.
Mr. Lynch. What have we done, it was already suggested
about the time period for filing, but what are we doing now to
help small businesses deal with their burden in filing?
Mr. Everson. This is a part of our--as you indicate, this
is the bulk of the burden issue, if you will. We are constantly
looking at things. We simplified the mileage deduction in the
past year, where people could just take a standard rate for a
higher number of vehicles than was the case before. We are
always looking for opportunities here to increase the
thresholds, if we have the latitude. Sometimes we don't. Or I
would say we take ideas from the various groups, NFIB and
others who represent small businesses.
What the IRS did 7 years ago, in 1998, was it reorganized
under the new statute so that it is organized around four
taxpayer groupings. One is small business and self-employed
individuals. So we have a group within that organization that
is constantly interacting with them and working to get these
ideas and to make changes where we can. So it is an active part
of the program that we run, the Burden Reduction Office is a
part of that unit. It reports directly to the Commissioner of
the Small Business unit so it gets his personal attention, as
it does mine from time to time.
Mr. Lynch. OK. Thank you, Commissioner. Thank you, Madam
Chairwoman.
Mr. Everson. If I could respond to one point that the
ranking member made in your opening statement, we are committed
to service. We believe strongly that we have a balanced program
on services. We are doing some belt tightening here in line
with the President's budget request.
But we believe particularly with the much higher level of
services that we have on the phones that has been recovered
over the years in terms of both access to our people and also
an improvement in tax law accuracy, answering questions about
the code, the complexities of the code, that we are getting a
better result here.
I think you are referring to the closing of some of our
walk-in centers. Those are the highest cost facilities that we
have. You are also less likely to get the best answer there,
because when you call on the phone, sir, you get routed to
someone who knows about home office deductions or charitable
contributions or whatever the issue may be. The subject matter
expert, as opposed to when you walk into an office, you're
dealing with an individual who then has to use more general
knowledge and go to certain scripts as well.
But that is why we are doing this. GAO in fact has
suggested that if you have to take cuts and balance your
services, that the walk-in centers are a place to look, and
that is what we have done.
Mr. Lynch. Just in response to your statement, how was that
determination made in terms of what offices get cut? I have
heard them all over the country. So I know it is fairly
widespread.
Mr. Everson. Yes.
Mr. Lynch. I just want to know what the criteria were.
Mr. Everson. We expect to make this announcement, in fact,
later this week. We used five broad categories, a couple were
costs, employee costs, facilities costs. One was demographics,
one was geography and workload was another. So we weigh things
like how many EITC returns are there in the region serviced by
the TAC, how close is the TAC to a beta center. As I mentioned,
we have 14,000 beta centers around the country.
It is a whole variety of factors weighted more heavily
toward taxpayer issues, if you will, in terms of volumes of the
services, are there forms being asked for or is it tax law
questions. It is actually 32 factors.
Mr. Lynch. Madam Chairwoman, if I may, are we outsourcing
any of this prep work? Is the IRS off-shoring it?
Mr. Everson. No. None of our work is off-shore. If you mean
to other countries. That issue comes, it has been raised by
Representative Markey. There are some preparers of returns that
have had some of their work done overseas. That is not
something we regulate directly. But we have said that we think
in terms of transparency, anybody who is buying that service
ought to understand, ought to know that is being done. But none
of the work being done by the IRS under law can be done
overseas. That is all done here.
Mr. Lynch. Thank you.
Ms. Miller. Closing these offices is your version of the
BRAC, I suppose? Not looking for a comment there.
Mr. Everson. We would be lucky to get an up or down vote, a
yes or no vote on this, I think. [Laughter.]
Ms. Miller. Representative Souder.
Mr. Souder. Certainly Thomas Freedman's new book is going
to raise this outsourcing outside the country question. Many of
us strongly favor the ability to go to the private sector for
collection and other types of things. But as it goes overseas,
it becomes a little more complicated on privacy questions and
legal questions.
I want to address, I brought a question. First off, and
then narrow it in, as a case in my district, that you can get
back to me on.
Mr. Everson. Yes, sir.
Mr. Souder. First off, I think there has been tremendous
progress since I came in in 1994. I can tell over the last few
years our case work, which many of our offices do, if it is not
immigration, many of the others are either Social Security or
IRS.
Mr. Everson. Right.
Mr. Souder. The ability to get back more rapidly on more
cases and in a satisfactory way has been a pleasing change. In
the first couple of years, it was hard. We have seen it more
frequently. It does not mean everybody is always happy with it.
But we have seen that improvement.
I use e-filing myself now. But it illustrates several of
the problems, I know a witness on our next panel is going to
talk about the home office. In many cases, like mine, my
sisters and I have a partnership, so that is running through
our personal returns, so we have to have that. My wife has a
job at the house, so we go through this difficulty of how much
of the desk can be deducted and how much of this section, how
much of the energy bill, because she only works part-time at
this job and it is only in one room of the house.
Clearly, one of the challenges that you face as is even
pointed out in these regs, and yesterday in meeting with CPA
people as they were up on the Hill, that complexity versus
vagueness, the more complex the Code, the less vague it is, the
more simple the Code is, the more vague it is and the more
regulations you have to have to enforce it. That is part of our
dilemma here. If we micro-manage and make huge, complex codes,
then theoretically it is less vague.
But in the case that I have been dealing with for a couple
of years, and it is important to my district, Napanee Ford, if
you could have your staff look at the materials we gave you,
because it illustrates a number of problems. It is clear on
trucks, it is clear on trailers. I have the No. 1 RV
manufacturing district in the United States, close to three-
quarters of them are made there. There are vehicles that are
used to pull smaller trailers. In fact, if you think in terms
of elephant ears at fairs or people selling you lemonade at a
fair or a hot dog, if you think in terms of gardeners who have
these little white things that they pull behind them when they
work on a lawn, the top 17 manufacturers of those are in my
district, in addition to the RVs.
Many of the dealers around the country sell kind of in
between not a Kenworth truck and not a pickup that haul these
types of equipment around. I have one dealer in my district
that is being hammered and being treated like a Kenworth truck,
but his competitors are not. Part of the question is, how do
you reconcile interpretation where you have a zone where
Congress in fact is not necessarily clear in the law, and that
different IRS agents interpret this differently, which gives a
competitive advantage to one dealer over another, not to
mention I do not think, and if there is a clear change in
policy, where all of a sudden this law is enforced at a given
point, how we in Congress can then look at that as to whether
we intended this to be addressed in that fashion.
Mr. Everson. You have covered a fair amount of ground
there. First, I agree with what you said in terms of the
general situation on the Code. It is a delicate balance between
setting general principles or bright lines, bright lines are
always helpful, but the more bright lines you set actually
gives greater opportunity for the attorneys and accountants to
find the little tear lines. It is a complicated question.
Returning to excise taxes, and I was briefed on this a
little bit this morning, if you look at excise taxes generally
they account for something like 3\1/2\ percent of the total
revenue stream of the Government that it is the $2.52 trillion
we expect to take in this year, some $70 odd billion. The
excise taxes associated with trucks, I gather, are just a
little over $2 billion.
We did issue a new ruling that we felt clarified the
standard here. It really relates to some of the vehicles that
are now being used, as you say, to tow other vehicles. I guess
this grew out of changes in recreational vehicles where they
got larger and larger and then you had to basically have, I am
told it is called a fifth wheel. I said what was that, and they
gave me a picture of it.
So this is a change to a vehicle. The question is, is this
a tractor or not. We have said that yes, this is.
Now, we issued those rulings, I gather this is a fairly new
one last year, 2004, I think it is, in terms of enforcement,
which is the second piece of your question. We select our
audits based on either a generalized criteria, what we see on
returns, or we do get leads. If your people in your district
feel that somebody is getting away with something they should
not get away with, please tell us that. We respond to leads
like that.
The one part of your statement that I found distressing was
the assertion that two different revenue agents would be
interpreting the same set of facts differently. I am very
concerned to hear that. We have trained people working on
excise taxes. It is a relatively small group of people and I
would imagine within Indiana it would be the same person or
persons who are calling around here.
So I will raise that when I go back. We will followup on
the cases you have raised. We do try to be consistent.
Mr. Souder. We will followup on how in effect a small
vehicle got turned into a truck. But the second thing is, these
vehicles are sold all over the United States.
Mr. Everson. Yes.
Mr. Souder. And the competition is all over the United
States, and this particular dealer is right in the heart of the
center, and may have been picked as an example to test the
enforcement. What I believe is there ought to not be selective
enforcement. It ought to be universal. We also need to know
when there is a significant policy change that can affect a
whole industry. Because this changes the nature of the cost of
the vehicles that people purchase, to know there are going to
be sudden excise taxes on hauling something home that they did
not believe was covered by the law previously. That is pretty
much a policy change, to just having it be a simple reg change.
Mr. Everson. I think you could go back and forth as to
whether it is a policy change or it is something that is
reflecting a change in the industry where Detroit or your
people who fabricate changes here make a very real change,
because they are dragging along these much bigger recreational
trailers and needed to redesign the vehicles. I am told here
the question gets down to, do you disadvantage trucks
ultimately of a certain size who may be paying the tax, and
then if you exempt others, if you view the two operating
together.
There is a lot of complexity here. I will check on the
circumstances here. You are entirely right, if we are doing
something that is specialized, we need to communicate it.
People need to understand why we are doing it. I agree with
that point as well.
Mr. Souder. It illustrates the danger in paperwork here,
because I think it was 80 percent of the cases wind up, even as
you reduce the paperwork, into these few cases that then drag
on for years. In this case, yes, they have altered it, but we
are talking 17,000 pounds versus 34,000 pounds on a Kenworth.
It is more of a pickup on steroids, so to speak, although we
are going to ban steroids. [Laughter.]
But an oversized pickup, and yes, there may be a few up
here, and it is how do you distinguish between pulling a
trailer for lemonade and elephant ears and a gardener from a
huge almost full-size RV. That is what we are trying to work
through.
I thank you for your indulgence with this. I thank the
Chairwoman. It is a dilemma, clearly, in how you get tons of
paperwork, because this has been generating a pile. This dealer
is going around saying, I have all this paperwork with IRS.
What happens is, when there is this type of change and how it
is implemented is exactly how we get into these situations.
Mr. Everson. Sure. I appreciate your raising it. I have
already told you more than I know. I will take it up when I get
back to the office.
Ms. Miller. Before we excuse you both, I have one question
for Dr. Graham, I think, but perhaps both of you could answer
it. I have been trying to understand the methodology that the
IRS used, I think you used something called the A.D. Little. I
am not quite sure if that is the right term, but the
methodology that you use.
Dr. Graham, in your written statement, you were saying that
there would be a one-time shift in estimated burden to the
taxpayers when the IRS goes to a different kind of methodology.
Perhaps you could enlighten me a little bit about what your
thoughts are on that. One-time shift, which direction is the
burden going to be going in, and hopefully in a positive trend
line then, and then what is the timeframe for implementing that
kind of analysis with the new methodology utilization?
Mr. Graham. Thank you very much for that question.
We have been meeting quarterly with IRS on the development
of their new model for estimating paperwork burden. I do not
really know the answer to your question about what the overall
direction of the effect will be. But one of the things that is
very valuable about the new modeling effort that they have put
together is they will be able to look at paperwork burden and
estimate by sub-groups within both individuals and the business
sector, so you can estimate changes due to regulation or policy
on different segments of the tax-paying public.
This modeling investment they have made over several years
is going to bring the measurement of paperwork burden at IRS in
terms of quality considerably beyond what we have in all the
other Federal agencies. I think that makes sense, given the 80
percent figure that you noted at the beginning of the hearing,
80 percent of this burden is at Treasury, mostly IRS.
Mr. Everson. I will just add one or two points on this. The
old model, it really, I do not think it held water, because
what it did, it just counted up the number of words and lines
on a form. The new methodology, what it does is it looks at
that, but then it also looks at the various attributes, is this
going to result in more recordkeeping, is it going to result in
calculations, it has something like 21 different attributes
that are collected so that you make an overall calculation.
We have done that, it does show a spike up, a one-time
adjustment. I think the piece for individuals went from 2.5
billion hours to 3 billion hours or something of that
magnitude. So it is not insignificant. But it will really help
us, as Dr. Graham has indicated, going forward, to have a much
better calibration of impacts. It will take a while as we work.
We have not used this on a form yet. As we go to work with OMB,
there is some sort of indication that each form takes a certain
amount of time. We have to now go through that process of
updating those forms. So while we have an overall estimate, we
will roll it through at greater levels of detail over the next,
I think, 1 to 2 years.
Ms. Miller. I will ask the ranking member if he has any
additional questions.
Mr. Lynch. Just one last one, it might be a loaded
question. You mentioned earlier, Commissioner, about the real
elephant in the room, so to speak, is the issue of tax reform.
We continue in this exercise, and we are doing our best here,
but at the end, ultimately maybe a better approach would be
toward fundamental tax reform.
Excluding the whole issue of equity and all that, from a
paperwork and efficiency standpoint, what in general terms
would be the best approach to tax reform in terms of just
addressing the narrow issue that we are talking about here
today in terms of paperwork reduction and the simplicity of
filing? Is it more of a consumption type arrangement or what
are your thoughts on that?
Mr. Everson. That is a great question. One of the
President's charges to the tax panel is to make sure that they
look not just at the VAT or sales taxes, but that they look at
the existing income tax scheme and reach a proposal there,
along the lines of addressing just what you suggested.
When I testified before the tax panel in March, I mentioned
a couple of things. There are numerous credits now. There is
something like seven different educational credits. Really
tough for somebody to figure out where they qualify for or
where they do not qualify for. That is a reduction in
complexity and burden.
There is the AMT that has received a lot of discussion. I
think that is a burden. Somebody goes through a whole
calculation, you get down to the bottom and we go, aha, we've
got you. That is not your real tax, it is actually $2,200 more.
That is a form of complexity that breeds confusion, and I would
suggest ultimately erodes respect for the law. Those are two
areas.
I look particularly at corporate income tax. I do not think
that is something that you worry about per se. I think you are
thinking more of small businesses, the majority of which are
organized, they are not incorporated, they are not C-corps. I
am thinking about that in terms of the large corporations where
complexity is now in this increasingly global world, it works
against compliance for the IRS, people hide behind it.
I would like to see us reconcile this dynamic, this tension
between the desire to increase book earnings, which drives
shareholder valuations and decreased taxable earnings, because
you get some incongruities there that are a function of
complexity, which hurt compliance. Those are three areas I
would mention.
Mr. Lynch. Dr. Graham.
Mr. Graham. Your question runs to the heart of one of the
charges of the President's tax panel. It is going to be
fascinating to see when they rank those various systems how
they stack up, just as you say, in this narrow area but then
weighing that against the other requirements.
Just to give a feel for the complexity of that, as I
mentioned the tax benefit for school teachers in my oral
statement, some simplified versions of the tax system will not
have that benefit. So simplification may reduce paperwork, but
it is going to draw some attention when those proposals come
out.
Mr. Lynch. Thank you. Thank you, Madam Chairwoman.
Ms. Miller. I certainly want to thank both the witnesses
today. We appreciate your time and consideration and your very
thoughtful testimony as well. We will excuse our first panel
and take a few minutes recess while our second panel gets
themselves situated there. Thank you both very much.
[Recess.]
Ms. Miller. We will call the hearing back to order. Next,
the subcommittee will hear from Leonard Steinberg. Mr.
Steinberg is the president of the Steinberg Group, which is a
consulting practice that concentrates in the area of
accounting, financial and administrative operations and
taxpayer representation. He is also a member of the Small
Business and Entrepreneurship Council. Mr. Steinberg is a
former member of the Taxpayer Advocacy Panel, which is an
organization created by the IRS that provides a forum for
citizens to make suggestions regarding IRS decisionmaking.
Mr. Steinberg, we appreciate your coming today. We look
forward to your testimony, sir.
STATEMENTS OF LEONARD STEINBERG, THE STEINBERG GROUP; KEITH
HALL, HALL AND HUGHES, PLLC; AND LARRY GRAY, ALFERMANN, GRAY
AND CO.
STATEMENT OF LEONARD STEINBERG
Mr. Steinberg. Thank you, Madam Chairwoman, Mr. Lynch and I
am sorry the other members of the subcommittee are not here. I
thank you for the invitation to participate in today's hearing.
My testimony is based on my work with the Taxpayer Advocacy
Panel and also my work, my professional work in my consulting
and tax practices. Basically taxpayer burden really begins with
enactment. Congressman Lynch, you had stated this very early in
your remarks.
In my previous testimony to the Small Business Committee,
chaired by Congressman Don Manzullo, I discussed the
implications of tax law complexity and its associated
disproportionate burden on small business. I look at this
opportunity as to expand upon that testimony.
As an example, the revised W-4 form, which was put out for
2005, the information regarding the Paperwork Reduction Act is
printed in extremely small print on page 2 of the form. The
form states that the time needed to complete this form will
vary depending upon individual circumstances. The estimated
average time is recordkeeping, 45 minutes, learning about the
law, 12 minutes, preparing the form, 58 minutes. For 2004, the
estimated times for all of these were only about a minute
longer for 2005, and yet all of this information is printed on
the form for a minute more.
The total time for this form is 115 minutes, almost 2
hours. This form is a prime example of how burden is not
reduced. From experience, both as a tax professional and
someone who does consulting to small businesses, I know that
learning about the tax laws associated with this form takes a
great deal longer than the estimated 12 minutes.
In addition, there are many employees who require multiple
W-4 forms due to changes in their personal circumstances and
more often, when they work at second or even third jobs. The
Government does not employ a measurement tool to determine the
cost to small business employers in lost productivity. This
lost productivity can only be made up by additional hours spent
by the employer or passing the costs on to the consumer. This
additional time affects the employer's quality of life and
associated family issues as well, especially for the small
business entrepreneur.
The Paperwork Reduction Act language on these forms states
an average amount of time to correctly complete the forms. But
these times are arbitrary, in my opinion, and based on the
ability of the preparer. Once again, many small businesses must
rely on paid professionals and their assistance in order to
comply with the tax laws.
Now you have the issue of errors. When errors occur, the
IRS must spend the resources to notify the small business that
a correction is necessary. These additional communications add
significant burdens to small business owners, since the letters
sent by the IRS are difficult to understand. Once again, the
business owner is required to pay for professional assistance
in order to comply with the notices.
In measuring burden, the Congressional Joint Committee on
Taxation scores tax law changes only for dollars and not for
complexity on burden. This is a critical issue that Members of
Congress must understand.
One issue that neither the Commissioner nor Dr. Graham
mentioned which is in my written testimony is the burden the
tax code puts on individuals in their State compliance. There
is no connectivity or communication, satisfactory
communication, between the IRS forms and the States. Therefore
every State has developed its own system of taxation, whether
it is for income tax or Federal unemployment. This only
increases the burden on the small business taxpayer.
In my testimony I have given many additional examples of
where the Taxpayer Advocacy Panel worked on issues directly
related to paperwork reduction, and Michael Chessman is here
from the office from which our committee worked on, and I am
very appreciative of the work and support that Michael and his
office gave us. But we analyzed issues of the payroll deposit
penalties, the revised K-1, the Schedule D, the 940, and I
listed in my written testimony approximately another 10 issues
for which we were involved in.
In conclusion, I would like to say that the issue of burden
on small business falls squarely with the domain of Congress.
The IRS can only implement the will of Congress. The Paperwork
Reduction Act, if it is not going to be done away with, it
really should be modified to ease the burden on small
businesses tax compliance. Remember, good intentions do not
always lead to the expected outcomes. Thus we have the reality
of unintended consequences. That is what the small business
community is experiencing--the unintended consequences of the
burden of all of this additional work that has to do in order
to maintain compliance.
Thank you.
[The prepared statement of Mr. Steinberg follows:]
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Ms. Miller. Thank you very much. The subcommittee is going
to hear now from Mr. Keith Hall. Mr. Hall is a member of Hall
and Hughes. He is a CPA and also a member of the National
Association for the Self-Employed, which is the Nation's
leading resources for the self-employed and micro-businesses.
Mr. Hall also participates in the NASE Tax Talk Service, where
he answers specific personal questions for thousands of small
business owners every year.
Mr. Hall, we appreciate your attendance at today's hearing
and look forward to your testimony, sir.
STATEMENT OF KEITH HALL
Mr. Hall. Thank you very much, Chairwoman Miller, Ranking
Member Lynch. I appreciate the opportunity to be here today,
both as a small business owner and as a member of the National
Association for the Self-Employed.
As such, I represent the over 250,000 NASE members and more
broadly, the 18 million micro-business owners which are those
that employ less than 10 people. In 1980, lawmakers much like
yourselves recognized the increasing burden of Government
regulations and paperwork on all businesses and passed the
Paperwork Reduction Act of 1980. This act, and its expansion in
1995, have had a positive impact on what we are discussing here
today. But I don't think the job is finished, especially for
small business owners.
Even after the efforts of the last 25 years, the Small
Business Administration estimates that a small business owner
incurs about $7,000 per employee per year just to keep up with
taxes, paperwork, reporting requirements. For many, this is
like paying for another employee that never shows up for work.
Further, the IRS estimates that taxpayers will spend about
19 hours completing their 2004 tax return. For a small business
owner with a Schedule C, they will spend more time than that.
There are certainly a lot of numbers that we can throw
around. But the key point is that regulatory compliance and
excess paperwork is still an issue for small business owners
like me. Now, I know we're here to talk about paperwork
reduction and not paperwork elimination, so hopefully there is
a medium somewhere that we can find. In fact, during the last 5
years, the IRS has made a tremendous effort and had success in
helping small business owners like me in managing the nightmare
that is called the Internal Revenue Code.
Their education and outreach efforts and their work within
their Office of Burden Reduction has been very good. Their
commitment to their Web site and availability of forms and
information online has been exceptional. The changes that Mr.
Everson mentioned on threshold requirements, of the ability to
file a 1040A up to $100,000, those things are a tremendous help
to small business. And I wanted to make it clear to the IRS
that small business does appreciate their efforts, especially
since I haven't gotten my refund yet. [Laughter.]
Really, they have done a great job. But again, I don't
think the work is done. It is very easy to generalize about the
problem and then kind of sit back and hope somebody else can
fix it. So please allow me to be specific, both to issue and to
solution.
Many small business owners operate out of their home and
most likely qualify for home office deduction. But many lose
that deduction just because they can't handle the form. They
have to know the difference between indirect expenses and
direct expenses, what type of mortgage interest they have,
there are two different lines for casualty losses, and as I
mentioned in my written testimony, on the one-page form, the
words ``see instructions'' appear 16 times, just on the form.
A solution would be to provide a standard deduction for the
use of a home office. The form could be two yes or no questions
and then pick a number from a chart. The net deduction would be
about the same, the net tax impact would be about the same, but
the taxpayer would save 2 hours and probably two Advil.
Another example is the current confusion related to worker
classification. The small business owner knows they use an
individual to help in the business, but they don't know if it
is an employee or an independent contractor. The IRS has a 20
point checklist to help, but many of those items are
subjective, and it is difficult to get to a yes or no answer.
The solution is to simplify the process for identifying who
is an employee and who is not an employee. Developing a clear
set of rules will help all employers make the right decision on
who is an employee and who is not.
There are a lot of other examples to talk about, but again,
the common thread is the overall complexity of both the
Internal Revenue Code and the paperwork required to maintain
compliance with that Code. The sheer volume of the forms and
related calculations can be overwhelming. This is particularly
true for the small business owner, since they do not typically
have the same access to accountants, attorneys and other
professionals that big businesses do.
I believe that the most immediate solution is to continue
to strengthen the Paperwork Reduction Act and the Office of
Information and Regulatory Affairs. Expanding OIRA with more
funding and more staff would make sure that the efforts
continue. Expanding the oversight authority of OIRA is also
critical. Currently the IRS is not subject to the review
process of OIRA, so that the biggest paper eater of all does
not have the same rules that other agencies do.
Additionally, the IRS Office of Burden Reduction should
have more funding and staff as well. This office has done a
very good job, as I mentioned, in helping redesign and simplify
many tax forms, but the job is bigger than they are.
On behalf of the NASE and for me personally, it is my
request that this subcommittee continue in the spirit of the
Paperwork Reduction Act and in promoting the efforts of OIRA to
reduce the burdens of regulatory compliance on small business.
Every hour that is not spent filling out a form can be spent
creating a new job. And I believe that's what small business is
all about.
Thank you very much.
[The prepared statement of Mr. Hall follows:]
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Ms. Miller. Thank you very much.
Our next panelist this afternoon is Larry Gray. Mr. Gray is
the managing partner for Alfermann, Gray and Co. He served on
the IRS Commissioner's Advisory Group from 1992 to 1994 and
various subcommittees as well, including compliance and small
business. Mr. Gray is also a member of the National Association
of Tax Preparers.
Mr. Gray, we appreciate your coming to Washington. We
certainly look forward to your testimony as well, sir.
STATEMENT OF LARRY GRAY
Mr. Gray. Thank you, Madam Chairwoman, and Ranking Member
Lynch.
As I go into my remarks, my remarks are based on being a
practitioner in the field. But also currently, I am on the
Electronic Tax Administration Advisory Council. Then on a
monthly basis, as the Commissioner referred to earlier, we are
one of the groups that meets in Washington with the Small
Business, Self-Employed, National Public Liaison. So my views
today, as my two predecessors, they spoke more on specifics and
looking at paper. What I would like to do is do a little
different twist. I do get the opportunity to look at the burden
reduction through Michael Chessman's office, and I believe
that's doing a very good job.
But I want to put a flavor on more of the technology, where
we need to move to. With that, my first comment is on the
Paperwork Reduction Act. I believe it has failed its purpose.
In my written report, I cite some of the same numbers that you
started out today with, Madam Chairwoman. So in order to not
take time there, I want to move on and look at some of the
failures.
The first one I would like to look at is that the failure
of the Paperwork Reduction Act can be attributed in large part
to the law changes in the recent years and because of the
additional forms, instructions, administrative pronouncements,
rulings that are required to implement that new law. Also if
you look in my written report, you can see that the
implementation of the last two major law changes in 2001 and
2003 resulted in additional burden hours of 330 million and 113
million respectively.
Now, I would like to describe areas that need reform. I am
going to look specifically at e-file, form management,
documentation requirement, IRS communications and record
retention. The e-filing allows taxpayers to file taxes
electronically instead of by paper. The system not only saves
paper but is more efficient for both the taxpayer and the IRS.
It is estimated that if the e-filing system accommodated all
taxpayers, the paperwork caused by tax preparation would be
slashed by a third.
But the current e-filing system has flaws that decrease its
usage. For example, a taxpayer with an amended tax return, a
taxpayer with more than one form 2106 to report unreimbursed
employee expenses, cannot e-file. Moving all return types to
one platform, XML platform, would resolve many of the e-file
issues. Along with that, the continued development of e-pay, e-
services, would move us more to a transparent e-system.
Another area that needs improvement is form management. The
sheer volume of forms is startling. The National Taxpayer Union
policy paper 110 states that the IRS now prints over 1,100
publications, forms and instructions that total over 16,300
pages in length. Taxpayers and tax professionals are hindered
by the vast amount of time required for forms, spending
considerable amounts of time reading instructions and
publications to determine the proper way to complete the
required form.
Form management could be accomplished by eliminating forms
that are not necessary for the effective administrative of the
tax laws. An example includes the forms that require taxpayers
who wish to get an automatic extension of time to file their
tax return. Currently, form 7004 is required for corporations,
the 4868 for individuals and form 8736 for partnerships and
trusts. Why are these forms required when these extensions are
automatic and require no IRS approval?
Another area for improvement would be the reduction in
documentation required to be filed when the IRS already has the
information that is being submitted. To illustrate, when an
amended tax return is filed, the taxpayer submits not only form
1040X, but a copy of the original, which is wasteful.
The IRS communications with taxpayers need to be changed.
Taxpayers receive notices that are triggered automatically and
result in a taxpayer receiving a notice just after they have
responded to a notice sent earlier. The automatically triggered
notice requires a taxpayer to respond again, and results in
more paper and time wasted for the taxpayer.
Taxpayers who participate in offering compromises are often
asked to submit the same information multiple times. IRS
communication could be vastly improved if a two-way system of
communications via e-mail were implemented as a communication
channel. And I really stress the two-way. If you have it
electronically, then don't put it back to paper. E-file would
facilitate faster responses to the taxpayer inquiries and would
be an effective method for the taxpayers to contact the IRS.
Another area of change is in the area of record retention.
Currently, taxpayers are advised to keep copies of original tax
returns for 6 years. Practitioners are required to keep them
for 3 years. And then when we go and look at audits in order to
support documentation there, it can be many years. A more
practical approach would be to place the burden of storage on
the IRS, since they already retain the information anyway.
Paper burden has also been a cause for the sheer complexity
of the Tax Code. While the hope is that the Presidential tax
force will make proposals for simplification, there is much to
be done in the interim.
While the time I have to speak is limited, there is much
more that could be communicated on this topic. I have only been
able to speak to a few of the more pressing issues. I thank you
for the time and consideration of my comments, Chairwoman
Miller and Ranking Member Lynch. I look forward to our dialog
and to your questions on this issue. Thank you.
[The prepared statement of Mr. Gray follows:]
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Ms. Miller. Thank you very much. I appreciate that. I
actually was going to ask you all whether or not you thought
the PRA was actually working, and in your comments you said it
had failed its purpose. So I assume, Mr. Gray, you do not think
it is working well. I would ask you to talk about that a little
bit more, and to the other two panelists as well, what is your
thought about the practical reality.
Mr. Steinberg. As a practitioner, the PRA is not working at
all. When people come in to have their taxes done, they have no
idea really what the tax law is. I know that the Commissioner
spoke about the increase in electronic filing. I will tell you
that as someone who does electronic filing for my clients, the
issue is not electronic filing. The issue is understanding the
tax law.
I had three cases this past tax season where people were
using off-the-shelf software to try to do their own taxes. And
because of the complexity of the tax law, they were not able to
complete their taxes using this off-the-shelf software and
therefore, they came to my office and asked for help.
So here again, even though they went to the literature,
such as in the cases involved, the incentive stock options that
were cashed in, which is a major problem, because of the
taxability of the incentive stock options, the tax law was so
confusing to them, they did not know how to correctly place it
on the form. What happened was that they wound up, or they
thought they were going to wind up paying a great deal of tax.
While in understanding the tax law as I do, they wound up not
paying any tax, because tax had already been taken out of their
compensation for the incentive stock options.
There was another one where an individual did not
understand the laws regarding depreciating or amortizing a
franchise fee. So he wanted to deduct the entire franchise fee,
and all of a sudden he was getting back this huge refund. He
came to me and said, no, this can't be right. I said, you're
correct, you have to amortize the franchise fee. And here
again, this is something where the complexity of the tax law,
even though there is off-the-shelf software, that's not the
panacea. That is only a tool. It is the understanding of the
tax law that actually helps the taxpayer. From my perspective,
every time Congress passes a new tax law, it's called the Tax
Preparer Full Employment Act. [Laughter.]
Only for the simple reason that the complexity gets greater
and greater. And the Commissioner had the volume of the new
Jobs Act for 2004, one of the major problems that happened with
that was that the law was passed in October. Tax season begins,
for all intents and purposes, not in January, but February 1st,
and we have until April 15th, unless we file extensions, to get
all the information in.
In many cases, the IRS was incapable of answering some of
the questions that we had. They said, well, we'll deal with it
later, because of the amount of time between the passage of the
tax law to get the new forms ready as of January 1st. A very
inconsiderate move, in my opinion, by Congress to force the IRS
into this untenable situation.
So the Paperwork Reduction Act, Madam Chairwoman, to answer
your question specifically, is not working.
Ms. Miller. Mr. Hall, do you have any better news than
that?
Mr. Hall. Thank you. Well, I think I do. We will see. I
believe the PRA has had a beneficial impact. I think back
originally, the goal set by the OMB for the act was a 5 percent
to 10 percent reduction in the burden on taxpayers. I think
from a scorekeeping standpoint, if that is the standard, you
have to conclude that the act has failed. I do not think that
level of reduction has occurred.
But I think a lot of times, we like to talk in terms of
reducing the rate of increase. I think looking backward, which
is also easy to do, where we would be today without the
Paperwork Reduction Act might be a very scary thing. I think
one of the issues is that perhaps the IRS in its ability to
forego some of the review requirements of OIRA, such as OSHA
and EPA has, and that the OIRA reviews draft legislation, draft
changes to make sure it meets cost benefit analysis, make sure
it meets Paperwork Reduction Act, those things kind of help
keep those in check. The IRS is not subject to those rules.
So in evaluating just the impact on the IRS of PRA, it is
probably more devastating of a failure or of a lack to reach
that original goal than looking at the act as a whole. Because
in some of the other agencies, again, such as OSHA and EPA, I
think there has been a tremendous benefit.
A few changes, perhaps even if possible having the IRS come
under that advance review process. Five years from now we might
have a different answer as to the success of that act. But I do
believe the act has had a positive impact over the last 25
years.
Ms. Miller. Thank you. Mr. Gray.
Mr. Gray. Actually, I will go back and try to divide into
two areas. I think to show how the act is not working, first is
in the paper side. For example, I actually work with Michael
Chessman's office for burden reduction on the K-1s that the
Commissioner mentioned. That was effective, but that was in one
area.
But when you go global and look at all the laws and all the
changes, it is not just Congress, not just the IRS, but it is
also our court system. Because I go across the country
teaching, and I have to watch because in one circuit the case
is one way and it's different in another.
Well, if you go to prepare the return it has to be prepared
differently. So we really have to look at the big rule.
But the other thing I would like to talk about on burden
reduction I think could be very effective, dollars spent. Mr.
Lynch, your questions on the closing of the walk-ins and so on,
sometimes you have to do what you have to do in a budget. But I
think there is a real opportunity with the IRS working with
outreach groups. I am not talking about offshoring, I am
talking about practitioner groups. For example, in our area, I
have a staff person that has worked with VIDA locally.
So I think what you have to do is look at people-wise. You
look at these outside groups to say, how can we partner. But it
has to be a coordinated effort from the national, so we can be
communicating the same information.
The other thing you have to look at is when we get over in
technology. We are in a new world. I mentioned it briefly in my
talk, but to really have an impact, I believe, it is one thing
to criticize, but a critique has, I believe, some good
comments, maybe ideas that work. I think what we have to look
at is once an item or an event goes electronic, then if we are
going to say, let's e-file, and we e-file everything we can in
our office, if we are going to e-file that, then to reduce
burden, it should be to the point where we have an electronic
option communication back. It's not for all taxpayers, but you
have to start somewhere. Cell phones at one point in time
nobody had, and it is amazing how if it is easy and
transparent, it becomes just another tool you do not think
about.
So I think it is really important to have a business plan
or a business model to look at the e-systems, the e-world,
whatever you want to call it. But it is a two-way street. I
think that is how we can reduce it greatly.
Ms. Miller. Thank you, gentlemen. I will recognize the
Ranking Member, Representative Lynch.
Mr. Lynch. Thank you.
Just a couple of things. It is sort of counter-intuitive,
but I heard the American Jobs Creation Act of 2004 referred to
here, and I believe the Commissioner mentioned it in the
earlier panel. Ironically, that was a bill that was supported
very strongly and initiated by President Bush, who is, I think,
probably the high priest of paper reduction in terms of trying
to reduce the burden on taxpayers. He is really out there in
front.
So here is the President, and the impetus for a lot of the
Job Creation Act support was within the business community,
quite frankly. That is who I heard from in my district. So we
have people who are on the one hand complaining about the
increases in complexity and the additions of, in this one act,
174 revisions or additions to tax products by the time that act
is fully implemented. So they are asking for the changes and
then complaining about the changes.
So it is counter-intuitive that not everything is just
being self-generated by Congress. We are responding to the
small business community and the larger business community as
well, and this is something that we are working with, with the
Republicans and Democrats together. But the bottom line is to
create those exceptions and to create that relief, it requires
additions to the Tax Code.
I am just wondering if, as I said to the other panelists,
is it the model itself that we need to move away from? Can we
realistically accomplish what we are trying to do here,
notwithstanding the great improvements that have come in terms
of technology? Do we have to look at a more simplified,
although perhaps more blunt, instrument of taxation, the whole
model? I would like to hear from all three, please.
Mr. Hall. Well, I think that as has been heard several
times today, I think there is a magic bullet out there which is
overall simplification of the Tax Code. I think that will
answer a lot of the questions. Obviously there are a bunch of
levels of compromise involved in that.
I think the thing from a small business standpoint that is
very encouraging for me is to see the IRS making changes such
as those Mr. Everson mentioned today, changing the threshold
for 941 payroll tax limits, changing the reporting requirement
from quarterly reporting requirement to annual reporting,
simplification of the K-1 form. Those are all steps that do not
require an act of Congress to change the Tax Code, but have a
tremendous impact on small business.
At some point, though, you get to the point to where each
time you do a simplification, then you do have a period of time
where small business taxpayers have to get up to speed on the
change. So in the first year of change, it can even be more
cumbersome for them because it is something that they are not
used to. So they have to go back to instruction forms, go back
to literature, go back to an online research vehicle to figure
out how to use this new tax break or this new reporting form.
But over time, I think those changes have a tremendous
positive impact. I think that goes back to my comments about
the positive impact of the PRA in general. If you look at a
specific point in time, do we have a system now that is
manageable, that is not difficult, that is not cumbersome, I
think the answer is no. But without the efforts that have been
expended, would it be much worse today? I think the answer to
that is yes.
I certainly am in favor of a more simplified and less
complex Tax Code. But again, that is very easy to stand up and
say, let's just simplify things. There are many steps involved
in that.
Mr. Steinberg. I would like to just add to what Mr. Hall
has stated. Tax simplification is really the answer. If you
want compliance, which is the goal of the Internal Revenue
Service, to bring in revenue, by simplifying the Tax Code
structure, you will reduce the burden. Since small business,
Madam Chairwoman, as you stated in your opening remarks, shares
disproportionately in the burden of compliance and since small
business makes up 90 percent or more of all the businesses in
this country, you will have economic growth the likes of which
this country has not seen, because the resources can be
reallocated to job growth and entrepreneurship. What better way
to grow the economy, which the intended effect would be greater
income to the Government?
So why not go for simplification where the intended
consequence will be a fairer tax system, greater compliance and
everyone paying their proper amount to the Government to help
run the $2 trillion economy?
Mr. Lynch. The question was not whether or not we should
have simplification, just whether this process, where the
business community comes and asks us to make revisions and then
there is an increase, as you saw, in that one bill, one bill
alone, 174 revisions and additions.
Mr. Steinberg. Congressman Lynch, any time there is a
dialog between the public and Congress, it is only beneficial.
Because you hear from us that are actually out there with the
taxpayers, with the small business people, actually doing the
work day to day. Therefore, as I stated, any communication
which you receive from us, whether it be written or whether it
be oral or whether it be just coming into your office as a
member of a particular group. It is important that Members of
Congress understand the depth and breadth of the issue of this
and therefore the more communication, the better it is.
Mr. Lynch. OK. All I'm saying is that act, the Job Creation
Act of 2004 was us listening and us responding to the business
community. Now, because we responded in the way that we did, we
are hearing complaints from the same business community that
the tax laws have become more complex, which they requested
several months ago. That's all I'm saying, it's a conundrum.
Mr. Steinberg. Right. But Congressman Lynch, in 1986, when
President Reagan had signed the Tax Reform Bill at that point
in time, that drastically reduced burden and it simplified the
Tax Code structure. From 1986 through 2004, it has grown
disproportionately burdensome----
Mr. Lynch. I agree.
Mr. Steinberg [continuing]. Both to the individual and to
small business.
Mr. Lynch. I agree.
Mr. Gray. I think that simplification itself, as we all
know, is the Achilles heel to the complication. I think that
when small business comes and says, we need this and this,
maybe you step back and look and say, well, instead of throwing
the whole thing out the window, why don't we take an activity
like passive activities, which again 20 years ago was very
critical, it stopped what was a big problem, but now it's
filtered over into middle class America, people making under
$100,000. AMT started out to say, these corporations are going
to pay something. And now it gets to a person making into
$100,000 with a family can end up in AMT.
So maybe you step back and say, yes, it is OK for us to
come forward, small business, here are the ideas. But maybe
there are some areas of law, credits is another one, it is
called, maybe there needs to be a step-back and say, let's just
take this whole area, yank it and put something else back in.
Because if you change everything, then what happens, my theory
a minute ago about the cell phone, everybody using them now, if
you changed the technology and they had to do something
different, what happens is the learning curve goes extremely
high, non-compliance goes right with it.
So I think in the best interests of the tax system, maybe
instead of fine tuning, you need to do some retuning. Throw
some of those keys out and say we need something different.
This was good for a time, but it has outgrown its need.
Mr. Lynch. Thank you. Thank you, Madam Chairwoman.
Ms. Miller. Thank you very much. I think we are all
anxiously awaiting, the entire Nation anxiously awaiting the
end of July when the President's tax simplification committee,
we use that term, we cannot use the term reform, if we talk
about tax reform we are going to get another one of those 5
pound books. But tax simplification, when they actually do make
the recommendations, I think there will be a great amount of
interest in that, particularly when you contemplate the fact
that people estimate, guesstimate, whatever benchmark they are
using, that the cost of compliance annually for taxpayers in
our Nation, just to fill their forms out, is about $225
billion. It really is rather staggering.
But I think sometimes in Government, things really never
change. I often think, I was thinking about this actually when
we were putting this hearing together, about paperwork
reduction. My dad is an aeronautical engineer. He is in his
80's now, but he worked down at Redstone with Werner von Braun,
which he said were very exciting times, they used to set off
the rockets. He said once the Government got involved, they
never would let them set up a rocket until the weight of the
paperwork equaled the weight of the rocket. [Laughter.]
So there has been, as they say, some things never change.
I certainly appreciate all of you attending today. You have
given us some extremely specific recommendations about the
kinds of changes that we need to look at here and I am certain
that the committee staff has taken very good notes about many
of these things. We certainly will be working with the Internal
Revenue Service and some of the other agencies as well, but
particularly with the Internal Revenue Service, with your
recommendations to see about legislative changes, if that is
necessary. Certainly I think we could promulgate some rules and
the kinds of tools we need to give them to help our entire
Nation comply with the existing Code as we look forward.
We appreciate all of your time and your traveling to
Washington for our committee hearing. It has been very, very
interesting. Thank you so much.
[Whereupon, at 3:30, the subcommittee was adjourned.]
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