[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
FULL COMMITTEE HEARING ON
IRS OVERSIGHT: ARE TAX COMPLIANCE COSTS SLOWING DOWN THE ECONOMIC
RECOVERY?
=======================================================================
HEARING
before the
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
APRIL 1, 2009
__________
[GRAPHIC] [TIFF OMITTED]
Small Business Committee Document Number 111-014
Available via the GPO Website: http://www.access.gpo.gov/congress/house
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HOUSE COMMITTEE ON SMALL BUSINESS
NYDIA M. VELAZQUEZ, New York, Chairwoman
DENNIS MOORE, Kansas
HEATH SHULER, North Carolina
KATHY DAHLKEMPER, Pennsylvania
KURT SCHRADER, Oregon
ANN KIRKPATRICK, Arizona
GLENN NYE, Virginia
MICHAEL MICHAUD, Maine
MELISSA BEAN, Illinois
DAN LIPINSKI, Illinois
JASON ALTMIRE, Pennsylvania
YVETTE CLARKE, New York
BRAD ELLSWORTH, Indiana
JOE SESTAK, Pennsylvania
BOBBY BRIGHT, Alabama
PARKER GRIFFITH, Alabama
DEBORAH HALVORSON, Illinois
SAM GRAVES, Missouri, Ranking Member
ROSCOE G. BARTLETT, Maryland
W. TODD AKIN, Missouri
STEVE KING, Iowa
LYNN A. WESTMORELAND, Georgia
LOUIE GOHMERT, Texas
MARY FALLIN, Oklahoma
VERN BUCHANAN, Florida
BLAINE LUETKEMEYER, Missouri
AARON SCHOCK, Illinois
GLENN THOMPSON, Pennsylvania
MIKE COFFMAN, Colorado
Michael Day, Majority Staff Director
Adam Minehardt, Deputy Staff Director
Tim Slattery, Chief Counsel
Karen Haas, Minority Staff Director
.........................................................
(ii)
STANDING SUBCOMMITTEES
______
Subcommittee on Contracting and Technology
GLENN NYE, Virginia, Chairman
YVETTE CLARKE, New York AARON SCHOCK, Illinois, Ranking
BRAD ELLSWORTH, Indiana ROSCOE BARTLETT, Maryland
KURT SCHRADER, Oregon TODD AKIN, Missouri
DEBORAH HALVORSON, Illinois MARY FALLIN, Oklahoma
MELISSA BEAN, Illinois GLENN THOMPSON, Pennsylvania
JOE SESTAK, Pennsylvania
PARKER GRIFFITH, Alabama
______
Subcommittee on Finance and Tax
KURT SCHRADER, Oregon, Chairman
DENNIS MOORE, Kansas VERN BUCHANAN, Florida, Ranking
ANN KIRKPATRICK, Arizona STEVE KING, Iowa
MELISSA BEAN, Illinois TODD AKIN, Missouri
JOE SESTAK, Pennsylvania BLAINE LUETKEMEYER, Missouri
DEBORAH HALVORSON, Illinois MIKE COFFMAN, Colorado
GLENN NYE, Virginia
MICHAEL MICHAUD, Maine
______
Subcommittee on Investigations and Oversight
JASON ALTMIRE, Pennsylvania, Chairman
HEATH SHULER, North Carolina MARY FALLIN, Oklahoma, Ranking
BRAD ELLSWORTH, Indiana LOUIE GOHMERT, Texas
PARKER GRIFFITH, Alabama
(iii)
Subcommittee on Regulations and Healthcare
KATHY DAHLKEMPER, Pennsylvania, Chairwoman
DAN LIPINSKI, Illinois LYNN WESTMORELAND, Georgia,
PARKER GRIFFITH, Alabama Ranking
MELISSA BEAN, Illinois STEVE KING, Iowa
JASON ALTMIRE, Pennsylvania VERN BUCHANAN, Florida
JOE SESTAK, Pennsylvania GLENN THOMPSON, Pennsylvania
BOBBY BRIGHT, Alabama MIKE COFFMAN, Colorado
______
Subcommittee on Rural Development, Entrepreneurship and Trade
HEATH SHULER, Pennsylvania, Chairman
MICHAEL MICHAUD, Maine BLAINE LUETKEMEYER, Missouri,
BOBBY BRIGHT, Alabama Ranking
KATHY DAHLKEMPER, Pennsylvania STEVE KING, Iowa
ANN KIRKPATRICK, Arizona AARON SCHOCK, Illinois
YVETTE CLARKE, New York GLENN THOMPSON, Pennsylvania
(iv)
C O N T E N T S
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OPENING STATEMENTS
Page
Velazquez, Hon. Nydia M.......................................... 1
Graves, Hon. Sam................................................. 2
WITNESSES
Shulman, Hon. Douglas, Commissioner, Internal Revenue Service.... 3
Smith Mr. Christopher, S.T.O.P.--Northland LLC, Pleasant Valley,
MO............................................................. 17
APPENDIX
Prepared Statements:
Velazquez, Hon. Nydia M.......................................... 21
Graves, Hon. Sam................................................. 23
Shulman, Hon. Douglas, Commissioner, Internal Revenue Service.... 25
Smith Mr. Christopher, S.T.O.P.--Northland LLC, Pleasant Valley,
MO............................................................. 35
Statements for the Record:
American Institute of Certified Public Accountants............... 38
(v)
FULL COMMITTEE HEARING ON
IRS OVERSIGHT:
ARE TAX COMPLIANCE COSTS SLOWING DOWN THE ECONOMIC RECOVERY?
----------
Wednesday, April 1, 2009
U.S. House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 1:00 p.m., in Room
2360 Rayburn House Office Building, Hon. Nydia Velazquez
[chairman of the Committee] presiding.
Present: Representatives Velazquez, Dahlkemper, Schrader,
Altmire, Clarke, Graves and Luetkemeyer.
Chairwoman Velazquez. I call this hearing of the House
Small Business Committee to order.
Every American circles April 15 on their calendar, but
outside of a few eager CPAs, most people do not look forward to
tax day. While this time of year brings an annual headache for
us all, it is especially daunting for our nation's
entrepreneurs. Historically, tax code complexity has been the
greatest source of frustration for small businesses. No
surprise there, the tax code contains over 200 small business
provisions.
Simplification is key, and this Committee has held hearings
on this issue, but today in light of historic economic
challenges, that matter has taken a back seat to more immediate
concerns.
This afternoon we will explore ways in which the IRS can
help entrepreneurs meet tax obligations during a recession. We
will also discuss the role of the agency in handling incentives
within the stimulus.
In February small businesses finally got their stimulus.
Within that bill were critical tax incentives from bonus
depreciation to net operating loss extensions. This is the kind
of relief entrepreneurs need, but like most tax policies, these
initiatives are complex.
The IRS needs to insure their meanings are clear before
small firms can take advantage of incentives. They need to
understand how they work. Otherwise the benefits of these
provisions and of the stimulus overall may be diminished.
Unfortunately, clarification has never been an IRS strong
point. After all, we are talking about the agency that handles
the 54,000 page tax code, but with new stimulus policies on the
books, the IRS will have to improve communications. Part of
that improvement process should include increased outreach and
enhanced client services.
Entrepreneurs need to know they can count on the IRS to
answer their tax question quickly and accurately. In an era of
growing uncertainty, those kinds of resources are critical,
especially considering recent increases in small businesses'
audits. Unlike big businesses, small firms do not have an army
of tax attorneys and accountants. As a result, they are largely
defenseless against the IRS, making them easy targets.
In the two years between 2005 and 2007, small business
audits shot up 41 percent. Meanwhile, investigation of the
biggest companies plummeted 40 percent. It does not matter who
you are or how big your business is. No one had the right to
skirt their taxes. But at a time when small business audits are
up and big business audits are down, you have to wonder where
are the priorities.
Small firms have been battered enough by the recession. The
last thing they need is the added nightmare of an IRS
investigation. In the face of deepening recession, tax policies
should be a means for small business growth and not the straw
that breaks the camel's back.
I would like to thank today's witnesses and especially the
Commissioner of the IRS, and in advance for the testimony. I
know this is an especially busy time of the year, and I am
pleased that they both can join us.
With that I would like to yield to Ranking Member Graves
for his opening statement.
Mr. Graves. Thank you, Madam Chair, and thank you for
calling this hearing on tax compliance costs for small
businesses.
I also want to extend my special thanks to our witnesses,
Commissioner Shulman, and the witness on the second panel,
which is Kit Smith, a constituent from Missouri whom I am going
to introduce later.
Every day it seems that we hear more bad news for
entrepreneurs. The faltering economy, federal bailouts of big
companies that owe back taxes, studies showing that small
companies are increasingly targeted for audits. Our nation's
small company owners are in the trenches day in and day out
working hard during the recession to keep their businesses
afloat, contribute to the economy, purchase equipment, and
create the majority of new jobs, and of course, pay their
taxes.
According to the Internal Revenue Service's National
Taxpayer Advocate, tax issues present the single most
significant set of regulatory burdens for small firms. The
Small Business Administration's Office of Advocacy reports that
firms with less than 20 employees spend more than $1,200 per
employee to comply with tax paperwork, record keeping, and the
reporting requirements that go along with it.
This is twice the cost of compliance for larger firms, and
surveys by the National Federation of Independent Business
consistently ranked federal taxes among the top five issues of
greatest concern to entrepreneurs. Small businesses have good
reasons to be concerned. Most of them pay their taxes and on
time, and they want others to do so as well. We have heard
about the tax gap, or the difference between what is legally
owed and what is actually paid voluntarily and on time.
One prong of the IRS strategy to reduce the tax gap is to
increase enforcement. And it appears the IRS has small
businesses in its crosshairs. A 2008 Syracuse University study
revealed that small businesses were 41 percent more likely to
be investigated than large firms, while the audit rate for the
nation's largest corporations fell to the lowest level in 20
years. One can only surmise that this is because small firms
are less able to hire high-priced attorneys and accountants to
fight back.
Today we will hear from one of my constituents, Mr. Smith,
who is going to describe the horrific IRS audit of his small
business. If small firms did not have enough stress trying to
run a small company in a recession, we burden them with
countless laws, regulations, reporting requirements, and we
continue to do so every year. We must simplify our tax code and
require the IRS to do a better job of helping small businesses
comply. Small businesses deserve better.
Madam Chairman, again, I appreciate your work on this and
the hearing you are having today.
Chairwoman Velazquez. Thank you.
And now I welcome the Honorable Douglas Shulman, IRS
Commissioner. Mr. Shulman is Commissioner of the Internal
Revenue Service. He is the 47th Commissioner and began his
five-year term on March 24th, 2008.
Prior to joining the IRS, he worked for the Financial
Industry Regulatory Authority, the private sector regulator of
all security firms doing business in the United States. The IRS
collects approximately $2.4 trillion in annual tax revenue that
funds most government operations and public services.
Welcome.
STATEMENT OF THE HONORABLE DOUGLAS SHULMAN, COMMISSIONER,
INTERNAL REVENUE SERVICE
Mr. Shulman. Thank you, Chairwoman Velazquez. I very much
appreciate being at this hearing. Ranking Member Graves, other
members of the Committee, I am happy to have an opportunity
today to testify about the Internal Revenue Service's efforts
to assist America's small businesses, particularly during the
current economic downturn.
As President Obama recently observed, our recovery in the
present and our prosperity in the future depend upon the
success of America's small businesses and entrepreneurs. I
believe, and I have been very public in this belief, that the
IRS has two equally important parts of its mission: service and
enforcement. We need to provide world class service to the
small businesses, the individuals who are out there trying to
wrestle with an incredibly complex tax code, and we have to
have enforcement programs for those who aren't paying their
taxes across the spectrum.
I have started two small businesses personally in my
career, and therefore I am acutely aware of the many problems
confronting a small business. From struggling with the economic
environment to securing a loan, to hiring employees, to getting
sales, to the obligation to pay their taxes.
I have included information in my written testimony about a
number of issues. Let me highlight a couple of things we are
doing now to try to help small businesses during this
recession.
It is inevitable during these kinds of times that taxpayers
may fall behind in their taxes. As the IRS Commissioner, I am
very committed to striking the right balance between collecting
the revenues needed to fund the government and using all the
tools that we have available to work with small businesses who
find themselves unable to pay. I have told our people, from the
most senior to those working on the front lines, that we need
to be flexible, principled, and that we need to empower all of
our people to use their judgment when they are working with
taxpayers.
As the economy got worse last summer, I sat down with our
senior team and said what can we do for taxpayers and where are
we going to find stress in our system between us and taxpayers.
We did a number of things that benefit small businesses. Let me
take you through a few.
First, our employees were reminded of their ability to
offer install agreements at the end of an audit when taxpayers
are having difficulty satisfying their obligations to pay
immediately.
Second, I gave IRS employees more flexibility to suspend
collection actions in certain hardship cases.
Third, we gave employees more flexibility to work with
previously compliant taxpayers in an existing installment
agreement who cannot pay because of an economic hardship.
Fourth, taxpayers unable to meet the payment terms of an
accepted offer in compromise are now being informed of the
options available to them to help them avoid a default.
And, fifth, we are speeding up levy releases by easing
requirements on taxpayers who request expedited levy release.
Turning to the American Recovery and Reinvestment Act that
you mentioned, Madam Chairwoman, the IRS announced last month
that small businesses with deductions exceeding their income in
2008 can use a new net operating loss tax provision to get a
refund of the taxes paid in prior years. This new provision
enables small businesses with a net operating loss in 2008 to
offset losses against income earned and allows a carry back of
up to five years instead of the normal two years.
This could throw a lifeline to struggling businesses with
an infusion of cash. I have made sure that we have the
resources to move quickly to get cash into the hands of small
businesses when they apply for such a refund. We are going to
be monitoring this on a daily basis, and if we find a backlog
or any clogging in the system, I am going to apply more
resources so that we can implement this smoothly and
seamlessly.
Madam Chairwoman, the IRS is always looking for ways to
better serve taxpayers through outreach and education. As you
said, a lot of small businesses do not have all of the high
priced lawyers and accountants and other sort of service
providers, and so we are acutely aware that we need to be
directly helping small businesses.
Last year we participated in more than 2,600 meetings with
small businesses, reaching directly 162,000 small businesses
through outreach efforts. We hold national and local small
business forums to have an avenue of communication with the
IRS. At the local level we have special business units that
work with Chambers of Commerce, small business development
centers, better business bureaus, and other groups that assist
small business owners.
We also work with the Small Business Administration to get
the word out to taxpayers. We are also very focused that we are
never going to be able to get to all of the taxpayers
ourselves, and so we try to work with associations to reach
taxpayers.
Finally, we recognize that we are not going to be able to
reach everybody through direct contact. We have phone-in
forums. People can call our 1-800 number if they have questions
or concerns.
We also have an E-newsletter for small businesses with
140,000 small businesses subscribing.
Let me just say that again I want to thank you for the
opportunity to testify about what we're doing to help small
businesses, as we are all trying to be on this road to
recovery. We have made some progress, but I am a believer that
institutions can always get better, and you have my assurance
that I am going to push the institution to work with small
businesses.
I look forward to working with you, other members of the
Committee, and the staff to make sure that this great engine of
economic growth and prosperity of the country continues to
operate at its full potential.[The prepared statement of Mr.
Shulman is included in the appendix at page 25.]
Chairwoman Velazquez. Thank you.
I recognize Mr. Schrader.
Mr. Schrader. Thank you, Madam Chair. I appreciate that.
Commissioner Shulman, I will not blame the IRS for all of
the rules and regulations you have to deal with because
obviously they came from somewhere, and oftentimes that is this
great, august body as we try and help people, but recognize
fully that things are very complex. There has been a lot of
interest in simplifying the tax code. As Chairman of the
Subcommittee on Tax and Finance, I am interested in your
thoughts on for particularly small businesses, let's say, under
that $15 million gross threshold. Are there certain ways one
could really simplify their filing of taxes and make it very,
very simple?
Mr. Shulman. Let me say a couple of things about it. One is
I could not agree with you more. The tax code is incredibly
complex, and we certainly can do better in administering it,
but a lot of the complexity is in the law, not in the
administration of it, and so I appreciate the observation.
As you know, the President has appointed a working group to
look at a variety of tax issues, and certainly simplification
is one of the things on the agenda. We are going to keep trying
to do everything we can to simplify our forms to things like,
for very small businesses, we have recently said that you do
not need to file quarterly employment taxes. You only have to
file annually. We can do things like that.
I do not have big, broad policies to announce around
simplification. Clearly, the administration is going to be
working with Congress on those kinds of things.
Mr. Schrader. There has been interest, and it has been
articulated by different small business groups, members of this
Committee with regard to some sort of flat tax for very small
businesses. What are your comments on that extreme
simplification?
Mr. Shulman. I will reserve judgment. I recognize there has
been a lot of debate about all of the taxes, including the flat
tax, and I will not make any comments on it.
Mr. Schrader. I guess I will defer my questions then at
this point.
Thank you, Madam Chair. I yield back.
Chairwoman Velazquez. Mr. Graves.
Mr. Luetkemeyer.
Mr. Luetkemeyer. Thank you, Madam Chair and Ranking Member
Graves.
Just kind of quickly, thank you for your service. I know
you have a difficult task, and sometimes I am sure it is
maligned in many instances, but I would just ask you to
continue to do the good job you are doing. Obviously most
taxpayers are more concerned with fairness. I think that is the
issue that most are most concerned with, from the standpoint
that while they do not like to pay taxes, they are more than
willing to do so as long as they believe that their neighbor
and everybody else that they are acquainted with pays their
fair share as well.
And I think it is incumbent on us as legislators to make
sure we pass laws that do not impact things in an unfair way,
and hopefully you will enforce those laws in a fair manner as
well.
Along that line, I have an E-mail here, if you will bear
with me just a moment. One of my constituents E-mailed me this,
and we were talking about instances where we have concerns with
impacts on small business, and he's a stock broker. He is with
Morgan Stanley, and his CPA filed his tax return the 24th of
March electronically and did not get his refund back in a
timely fashion and tried to check with the IRS office, and the
only explanation was that because he had a Morgan Stanley tax
ID, it must have been flagged because of the TRAP funds.
Are we flagging certain businesses for oversight, for
further audits? I mean this an isolated instance where somebody
just shot an opinion off the top of their head, or is that kind
of stuff going on?
Mr. Shulman. Oh, I do not think anyone would have said
that. So I am happy to look into that, and I encourage you to
send it to my office. We are not targeting any individuals
because of any broad government program. So that is a surprise
to me.
Mr. Luetkemeyer. Okay. Well, I was just curious because
obviously the Morgan Stanley folks do have some TARP funds. I
am just wondering if that is a broad category that you are as
well looking at a little bit differently.
Mr. Shulman. We certainly are not looking at any
individuals. There are a lot of new moving pieces that are
happening as the federal government is getting involved in
trying to shore up financial institutions and lots of pieces of
the economy. We are quite aware that when people or
institutions are given support by the federal government, they
have got an obligation to pay their taxes, but we are not doing
anything to target any individuals of institutions with any
sort of other piece.
And so if they filed on March 24, if you file
electronically and get a direct deposit, you usually get a
refund within about ten days. If you file using paper and you
get a check, it can be up to six weeks, and so I am assuming
this person, if they filed electronically, is trying to use
direct deposit. I encourage them to call our 800 number and
find out where they are in the process. They can let them know.
Mr. Luetkemeyer. All right. Thank you.
To follow up further, I noticed one of the things I think
is important, we are talking about small businesses today, and
many of them are partnerships, S corps. who oftentimes run
those dollars through their personal income taxes.
And I am just kind of curious if you have some thoughts. I
know that the administration, the tax policy in the new budget
is indicating they are going to try and tax those individuals
over 250,000, which would put a lot of these partnerships and S
corp. folks directly into the category of being taxed.
Do you have any idea of how many businesses that would be
or how many individuals file partnerships and S corps. as a
percentage of the small businesses in this country?
Mr. Shulman. Yes, small businesses come in a number of
forms, and that is why sometimes when you look at our
statistics, it is hard to get a grasp on small businesses. The
vast majority actually come in 1040 Schedule C, sole
proprietors and others. Then there are a number of C corps.,
which are small corporations, which if you look at our
statistics there, and then there are lots of people who have
flow-throughs, S corps., partnerships, LLCs.
I do not have the exact number on me now. I can get back to
you. What I will tell you though is since 2000 the number of
flow-through entities, filing returns for those entities, so S
corps., LLCs, partnerships, has increased about 50 percent
while the number of C corporations has been relatively flat.
For us that is an interesting phenomenon because if you think
about us doing our job, my belief is any time you are running a
regulatory agency or government agency, there are all sorts of
incorporations that make a difference, but what really matters
is the economics that you are looking at. So it makes our job
much harder, I will tell you, because it is much more complex
to look at a partnership where it is really a network of lots
of other activities happening flowing through that partnership
than it is C corporation where the taxes and the entity all
stops right there.
Mr. Luetkemeyer. I see my time is up. Thank you, Madam
Chair.
Chairwoman Velazquez. Mr. Altmire.
Mr. Altmire. Thank you, Madam Chair.
And, Commissioner Shulman, thank you for being here.
Last week the IRS stated that COBRA provisions in the
stimulus plan are a top priority, and I understand that one of
the outstanding items for the IRS is defining involuntarily
terminated to determine that eligibility.
When does the IRS expect to issue guidance on this matter
that affects COBRA obligations and rights?
Mr. Shulman. We issued the first set of guidance several
weeks ago. Today some questions and answers were put up on the
IRS Website to try to answer a lot more of those pieces. The
COBRA provision is one of the most complex for us to administer
because right now when an employer sends their form 941 into
us, we actually do not have individual taxpayer information.
They just send gross employment tax to us. And so really the
employer is going to have to do all of the true-up with the
individuals, which we recognize them, and it is the way the law
was written. The decision was to provide this medical benefit
through the employment tax system. We have tried to simplify
it.
Your specific issue, I will check and see if it is on the
Q&As that went out to day. If not, I can get back to you with
the information.
Mr. Altmire. Okay. Thank you.
I wanted to ask a question about home-based businesses. For
many entrepreneurs running a home-based business, the home
office deduction is simply too complex and time consuming. It
is clear that something needs to be done since only nine
million of the nearly 30 million home-based businesses even
took that deduction.
Is the IRS considering writing new regulations that would
make it easier for small businesses to take that deduction?
Mr. Shulman. Yes. I will tell you when I said I have
started a couple of small businesses, the first one I started,
started in my home, and then we moved, and then we put phones
in, and then we got employees, et cetera. So I am well aware of
the complexity of that deduction.
I know it is very hard for taxpayers. It is very hard for
the IRS. The law is pretty clear about it. We are trying to
administer the law, but I am interested in this issue, and
these are broader conversations within the administration and
with Congress. I would encourage Congress to simplify it and
create a safe harbor, but it would not be out of the question
for us to at least explore if there is a way to have some sort
of safe harbor because we recognize this is a very complex area
of the law.
Mr. Altmire. Great. I want to ask one more question to what
Mr. Luetkemeyer was asking. You may not have these numbers in
front of you, I realize.
With regard to the flow-through that you were talking about
and that $250,000 income threshold, you were addressing the
question that you were asked, which was how many total small
businesses are there that fall into that category. How many are
there that would be over that $250,000 threshold that would
actually be subject to that new level of taxation?
Mr. Shulman. I am going to have to come back to you on
that. There are a lot of small business owners, the ones who
are fortunate enough to make $250,000, and obviously if you are
a flow-through, it shows up on your individual tax return.
Mr. Altmire. Do you have any idea of the percentage with
regard to businesses?
Mr. Shulman. I do not. I am sorry, but I can get back to
you with those numbers.
Mr. Altmire. Okay. Thank you.
Thank you, Madam Chair.
Chairwoman Velazquez. Mr. Graves.
Mr. Graves. Thank you, Madam Chair.
I want to follow up on Jason Altmire's point, I appreciate
what you said about trying to make the IRS do a better job, and
you can always do a better job, and I very much appreciate
that. And I know you understand, but do your auditors and the
folks below you understand, the people who are making the
decisions, you know, what it is like to start a small business
and run a small business?
Then I also wanted to ask you, too, I mentioned the
Syracuse study from 2007. I did not know if you were aware of
it, but my curiosity is, is it more likely for small businesses
to get audited than larger businesses?
The study was pretty clear, but you know, I would just ask
you to comment on that.
Mr. Shulman. A couple of things. One, on your question
about people understanding small businesses, one of the first
things I did when I came in because I am a big believer that if
you are going to run a government agency and if you are going
to operate with the power and authority of law that a
government agency has, you need to be very focused on
understanding the impact on the people that you affect.
And so the phrase I always use with our people is we need
to walk a mile in the taxpayer's shoes, and we talk a lot about
that. You know, the fortunate thing that we have is everybody
who works at the IRS is a taxpayer. So I think everyone files
every year and has to wrestle with the code. So they understand
that.
And I am very focused on doing what we can to increase
outreach, increase dialogue and make sure people are really
kind of stepping out of their mind and sitting on the other
side of the table and feeling what it is like.
So I cannot say we are all the way there. No business or
government entity is all the way there, but it is a big focus
of mine while I am here.
Let me give you a couple of numbers that I think are
interesting and tell you, one, if you looked at any of the
public comments I have made in the last year in any of my
testimony, I have talked about three focus areas. One is
international tax evasion. Two is large business, and three is
high net worth individuals. And so that is where my emphasis
has been.
If you look at businesses with less than $10 million of
assets, and this is kind of how we break it down, we are eight
times more likely to audit a business between ten and $250
million of assets than we are a business with less than ten
million of assets, and we are 18 times more likely to audit a
business with over 250 million of assets, so the big
businesses, than we are a business with less than ten million
of assets.
And so, you know, I am the IRS Commissioner. One of my jobs
is to have every American feel like we are keeping an eye on
everyone so that your neighbor is paying and your competitor is
paying. So I would not say that we do not have good audit
coverage everywhere. I would not be doing my job if I said
that. But I really do not believe that we are unfairly
targeting small businesses, and the numbers pretty much speak
for themselves. You are a lot more likely to get audited, 18
times more if you are a very big business, than you are if you
are a very small, and you are eight times more likely if you
are a mid- size business than a very small business.
Mr. Altmire. Thank you, Madam Chair.
Chairwoman Velazquez. Ms. Dahlkemper.
Ms. Dahlkemper. Thank you, Madam Chair.
Mr. Shulman, I want to go back to the COBRA issue because I
have had a calls from small business owners regarding this, and
although they agree with it and they think it is a great way to
cover some of their employees that they have had to let go,
they are concerned about the up-front payment.
And how long currently under your current guidance, how
long until they can be reimbursed for their out-of-pocket
expenses on that 65 percent?
Mr. Shulman. Yes. I have heard this issue. I think you are
referring to people usually have to reimburse for premiums and
pay premiums monthly, but do not get reimbursed until the end
of the quarter, and so the time that you can take the 65
percent out of your payroll taxes is when you file your 941
quarterly returns.
This is a timing issue that is in the law. There is not a
lot we can do about it. What we have done is while it was going
through the legislative process first we made sure Congress
knew that this was going to be a problem.
Two, we actually pushed back and we think we eliminated
some complexity. One of the issues that was on the table is to
make this reporting on the W-2, which would have made payroll
processors and employers all have to change their W-2s, which
we pushed back and did not do.
We are well aware that this is an issue for small
businesses. We have looked at it. We are going to do what we
can, but some of these timing issues are really through the
legislation, and there is not a lot we can do.
Ms. Dahlkemper. And I know it is quite a financial burden
on a lot of companies who are just living on a shoestring right
now. Anyway, I appreciate your answer on that.
My other question is regarding, you know, the meetings and
the forums that you had, you know, for small business
communities. Often we have these meetings and we have forums
and everyone voices their concerns, but that does not lead to
any reforms. Can you tell me some specifics, some action that
the IRS has taken as reforms as a result of the meetings and
the forums that you had last year or any time in recent
history?
Mr. Shulman. Yes, there are a couple of things. One, a big
purpose of these meetings is because a lot of small businesses
are not hiring accountants and lawyers and others; it is
literally to give them face-to-face advice. So a lot of what we
are doing is saying how do you open a business, how do you
close a business, how do you work through an audit, what kind
of information and record keeping do you take. So it is not all
feedback. A lot of it is education and outreach.
A few examples of things that have happened because of
feedback from small business community in recent years. One is
when there is a lifetime exchange of property. A small business
sells a building and then buys another building, and it is a
lifetime exchange of property. They have to actually hold the
proceeds in an escrow account.
The law allows that the proceeds in the escrow account to
pay interest, and if they are not paying a certain amount of
interest, there is imputed interest to the small business. We
heard a lot of small business owners say that I was not getting
any interest and then there is this imputed interest. I have to
pay a tax.
We have created an exemption for under $2 million. The
other thing we heard is there are a lot of people who are very
small businesses who were having to file quarterly employment
taxes. We extended that. We heard from a lot of small
businesses that when you filed an extension of your income tax,
especially Schedule C filers, you had to file a four-month
extension and then another two-month extension. Through hearing
from many people, including small businesses, we made that a
one time six-month extension.
The other thing we have done is we increased the threshold
to file the Schedule C EZ to $5,000 of business expenses, and
so we tried through the dialogue to hear from people. Do we do
a perfect job of it? Absolutely not. Could we do better? Yes.
But we are quite committed to trying to hear and do what we
can, again, within the confines of knowing we also have a job
to fund the government.
We need to work with the Treasury Department on these
pieces, and there are a lot of issues that are really purely
legislative.
Ms. Dahlkemper. I appreciate that, and I think, you know,
listening to the people who are out there every day trying to
create jobs and keep this economy going and seeing what you can
do within the constraints that you have is important because I
think a lot of people who are doing their job in your agency
really do not know what small businesses are going through
every day. So I appreciate your listening to them.
Thank you. I yield back.
Mr. Shulman. Thank you.
Chairwoman Velazquez. Thank you.
And now the Committee is going to stand in recess until we
finish up voting on the floor.
[A recess was taken.]
Chairwoman Velazquez. The Committee is called back to
order.
Thank you, Mr. Commissioner, for your indulgence.
I will recognize Ms. Clarke.
Ms. Clarke. Thank you, Madam Chairwoman and Ranking Member
Graves, for holding this hearing on tax complying costs and
whether it is slowing this country's economic recovery.
As I have always stated, as we move forth in the 21st
Century, small businesses will become more and more an
essential element in driving the U.S. economy. About 30 million
small businesses operate in the U.S., which employs virtually
80 million workers.
When it comes to tax compliance issues, small businesses
benefit from greater flexibility and fewer bureaucratic
controls. But today during these tough economic times, small
businesses are having difficulty staying open. Now, is the time
for the IRS to do much more in outreach and education to small
businesses to answer the many questions and address their
legitimate concerns.
For small business the tax code is simply too complex and
burdensome, and I hope that our conversation here today will
enable us to come out with recommendations to assist in those
outreach efforts.
So, Mr. Shulman, a lot of the tax issues are not merely
about the money, but about the compliance problems when dealing
with the government, especially when it comes to reporting.
Most sole proprietorships have to pay federal and state payroll
taxes, as well as unemployment insurance, and therefore have to
meet so many deadlines. And yet when the IRS alleges that a
small business tax return is incomplete, they attempt to
reprimand the small business without any inquiry to determine
what may have happened.
If that is the temperament and culture of the IRS, do you
think that the burden of proof should then be on your agency to
show paper work was, indeed, not reported by a small business?
Mr. Shulman. Thanks for all of your comments and I could
not agree with you more that in this tough time everyone is
counting on small businesses bouncing back. The President has
been very clear that small businesses and entrepreneurs are an
essential part of the engine that is important for the country.
I talked quite a bit in my oral testimony about the
outreach efforts we have, about the things that I ask every
person in the agency to do around making sure we are flexible
with businesses who are experiencing hard times.
I guess I have not experienced the culture that you are
talking about. We have got a lot of employees, and there are
always going to be exceptions, but in general, our people I
think try to work with taxpayers. They have a job to do,
obviously, to make sure that they audit businesses and
individuals, nonprofits to make sure they are abiding by the
law.
When it comes to paper work, one of the things that I know
for sure, I have talked with our Commissioner of Small
Business, who is here today, who has actually gone out and done
round tables with our agents. We seldom disallow expenses
because records are not there for small businesses. Our agents
usually work with the taxpayer to try to reconstruct those
records.
So I guess I would not necessarily agree with the
characterization, but I very much agree with the sentiment that
you put forward, which is that we need to go out, we need to be
reasonable, we need to work with taxpayers. We need to assume
that the majority of small businesses are wrestling with an
incredibly complicated code and just trying to get it right.
Ms. Clarke. Fair enough, Mr. Shulman. The hope is that
there can be that level of engagement sustained in terms of
quality across the span of the agency. As you have said, you
know, you send forth a certain culture within the agency, and
you hope that is followed through to the end, and certainly
there are nuances with each individual business that you may
confront.
So we are looking for that consistency and quality,
commitment to small business, and I am glad to hear that that
is your goal, your aim, your philosophy within the agency.
I understand that recently you held a program called Super
Saturdays, and this program provided free tax help to
communities nationwide. My question is why has there been no
Super Saturday directly focused on small business, especially
during these tough economic times.
Mr. Shulman. Yes. Last year actually was the first year we
did Super Saturday, while we were trying to get 120 million
stimulus checks out to the American people. There was a whole
category of seniors and veterans who usually would not have to
file a tax return but did last year because of the stimulus.
It was such a success, and frankly, we had employees from
all over the agency work directly with taxpayers. One of the
things I talked about before is a key and a focus of mine is to
make sure we walk in the shoes and we understand what it is
like to be the taxpayer.
So having our executives from across the country deal face
to face with taxpayers was a great experience. So we did it
again. We opened up on Saturdays. We had people come in. This
was open to individuals; it was open to small businesses, to
any taxpayer.
Last year we actually held 2,600 seminars, education
events, forums for small businesses, and I will refer to my
written testimony so that I do not go through it again, but I
think we have a lot of outreach for small businesses. We could
always have more, and one of my jobs is to triage the resources
between our phone people, people who make the Internet work,
people who do service, people who do enforcement around small
businesses, large businesses, individuals, both service and
enforcement, and so we are just trying to balance that.
But you have my commitment that we are very focused on
trying to give support to small businesses.
Ms. Clarke. Thank you very much.
My time has expired and I yield back.
Chairwoman Velazquez. Mr. Commissioner, the IRS procedures
require consideration of whether a collection against a
taxpayer will impose an economic hardship. In a March 11
release, the IRS stated it would be flexible when considering
collectability during these times. Could you be more specific?
And you mentioned that you are telling your staff to be
more flexible, to even suspend collection or work out
agreements. Can you be more specific regarding any procedures
the IRS plans to implement in light of the economic downturn?
Mr. Shulman. Yes. So a couple of things we did. When I
mentioned postponing collection, we give thresholds which are
not public about how much tax is due, where the front-line
employee who is talking to the taxpayer can actually take that
collection case and put it back to the queue because of
economic hardship. We actually raised those thresholds, meaning
it can be a larger amount of tax and our front-line employee
has that flexibility. So that is one of the things we did.
In the past, if you missed one payment, if you either had
had an offer-in-compromise or an installment agreement, it was
an automatic default. We actually gave, again, flexibility to
people that you could miss more than one if you show some
economic hardship.
We gave some flexibility that that can be a discussion with
people because, as you have all mentioned, at the end of the
day you have got to trust the judgment of your people out in
the field. If you are going to tell them to use their judgment,
you have got to trust them, and so we gave them more
flexibility and less rigorous documentation requirements.
With liens, we actually have now made it clear. A lot of
small businesses, the way they get a loan is they actually have
the security be their house, and so we have actually made it
that if somebody in this down real estate market is either
trying to refinance their house or renegotiate or sell their
house, that our lien will not stand in the way of that action.
There is more which I would be happy to give you. What we
have tried to do is do all of this, but also we have to protect
against a flood of people who can pay their taxes saying they
cannot pay their taxes, and so we are just trying to get this
balance right.
I think some have criticized and said I have leaned too far
towards the taxpayer. I think in these times it called for
extraordinary measures, and that is why we took some of them.
Chairwoman Velazquez. Okay. You mentioned that you are
going to pay more attention to recoup some of the money in
terms of international tax evasion, do more audits of
international tax evasions; is that right?
Mr. Shulman. Yes, yes.
Chairwoman Velazquez. So do you have the manpower, the
resources to go after this type of tax evasion?
Mr. Shulman. A couple of issues. One is once you leave our
border and we do not have all of the authorities we have inside
the border to follow the money trail, we have to coordinate
with other governments. There is a lot of diplomacy that is
needed, and it is easier to hide money. So this is some of the
toughest work that we do.
When we started a continuing resolution at the end of last
September, we essentially had a freeze on staffing. What I did
was move some staffing from other areas so that we could keep
staffing up in international, and you might have seen in
President Obama's budget he put a line item for robust
international enforcement efforts from the IRS, and we
anticipate getting significant increases in agents, both civil
and criminal, for international lawyers so that we can work
through some of the complex issues, et cetera.
Chairwoman Velazquez. Well, you are saying you are
reprogramming the manpower that you have so that you are going
to use the staff for international compliance?
Mr. Shulman. It is a priority. I have already done some
shifts, and we are certainly as we get more staff going to lean
towards international.
Chairwoman Velazquez. So my concern is how then will you
have the people in your staff, the numbers that are required to
be able to answer the questions coming up from small businesses
who need to call the IRS or for you to process some of the
returns in an appropriate manner.
Mr. Shulman. Yes. So we have three appropriations. We have
a support appropriation, we have an enforcement appropriation,
and a service appropriation. This is in our enforcement
appropriation. We are not planning on taking people out of
service roles. We really triage our enforcement people.
And so it is a perennial issue. I mean, just an interesting
statistic, we have had a nine percent decline in staffing over
the last five years and a ten percent increase in returns
filed. We have had a 23 percent increase in productivity.
Technology and electronic filing helps. The Web helps, but we
are always having to manage resources.
But a lot of people ask you when you become the IRS
Commissioner are you going to focus on enforcement, are you
going to focus on service. I have been very clear. I am going
to focus on both. By no means am I going to overemphasize
enforcement at the expense of service.
Chairwoman Velazquez. Okay. So we know that so many
businesses are experiencing a downturn and many will be taking
advantage of the expanded net operating loss provision in the
recovery bill. What special steps has the IRS taken to insure a
timely processing of returns so many small businesses can get
an infusion of capital?
Mr. Shulman. Yes. Right when this conversation started
around increasing net operating losses we brought together our
teams who work on this. We assigned an executive to review the
procedures and make sure there were not any clogs in the
system.
There are two ways to get these expedited returns. One is
by filing form 1139 for the Schedule C filers or for
corporations, and one is form 1045 for the Schedule C filers.
We have actually staffed up. So some of these areas we have
been triaging we have made sure there is enough staff there. I
am very confident that we are going to get these out quickly.
We have made a commitment that all of them will get out within
45 days, but I have challenged the staff to get it sooner, and
that is quicker than these usually get processed, and I am
going to be monitoring it daily.
If we see a surge beyond what we are expecting, we will put
more staff. We are going to make sure that we do this right. We
recognize how important it is.
Chairwoman Velazquez. It is important since small
businesses right now are having problems getting access to
capital. You know, the credit crunch is incredible and it is
impacting them. So this is a tool that would help get money
back to small businesses, and I hope that our offices would not
be inundated with phone calls telling us that they are not
getting the rebates that were promised to them.
Mr. Shulman. No, I do, too. I know a lot of this came
through with your leadership. Clearly, the President has asked
every agency to prioritize the Recovery Act and making sure we
implement it well. The Treasury Secretary has asked me this as
well, and this is something that I am personally engaged in.
If your office gets any information to the contrary, please
reach out because we are focused on this.
Chairwoman Velazquez. Thank you.
Mr. Graves.
Mr. Graves. Thank you, Madam Chairman.
I just want to follow up again on Representative Altmire, I
too am concerned about the possible consequences to small
business when it comes to the tax rates of $250,000 for couples
and $200,000 for individuals, how many small businesses that is
going to affect. You had said before that you were going to get
that information, and I definitely want to make sure that we
get it. I think it is something that is very important, and I
would like to know just how many small firms that is going to
affect.
Mr. Shulman. Absolutely. We will follow up.
Chairwoman Velazquez. Ms. Clarke, any other questions?
Ms. Clarke. Thank you, Madam Chair.
Mr. Shulman, I guess we keep reiterating how hard these
times are for small businesses, but I guess it is a point that
is worth driving home because they are really having a hard
time paying tax liabilities, which not only impacts their
businesses, but their families, too.
You know, I believe that this is a time when some of the
reporting responsibilities really need to be reexamined when it
comes to small businesses. For example, credit card companies
can report to the IRS sales of small businesses, such as
restaurants, which in the past was a chronic source of
noncompliance. Do you agree that the IRS should be trying to
reduce the noncompliance burden on small businesses?
And what is your agency doing to come up with new guidance
to address this matter?
Mr. Shulman. A couple of things. One is, I think the
biggest compliance burden is the law, very complicated. My
favorite statistic is that the tax code is four times as long
as War and Peace, and we are going to do everything we can
within the confines of the laws that are passed by Congress and
debated to make things simpler.
We have done a number of things that I walked through
earlier that I would be happy to go through with you and meet
with you individually or send you a letter about, that we have
done to try to reduce the burden on the administrative side.
You mentioned the credit card reporting. A lot of
information and all of the statistics show there is always
higher compliance when there is third party reporting. The best
compliance is the teacher or the firemen or the employee who
has a W-2 because they know we are going to get information,
and they get reported to them in a simple format exactly what
their wages are. They copy it onto their 1040. They send it in
to us. It is much easier.
My hope is that information reporting like credit cards,
first of all, that reporting is not going to happen until 2012.
So there is plenty of time to get a lot of input from the
community as we do that.
But more importantly, my hope is third party reporting
actually can simplify and get the information in a simple
format for people, and so that is always my hope.
Ms. Clarke. Thank you very much, Commissioner.
Thank you, Madam Chair. I yield back.
Chairwoman Velazquez. Sure. Commissioner, I have a last
question, and that is a major concern for some taxpayers is the
lack of review of certain civil penalties, and one of the most
draconian penalties is found on 6707(a). This section imposes
mandatory penalties of up to $200,000 for failure to make
disclosures of certain listed transactions.
Mr. Shulman. Yes.
Chairwoman Velazquez. Unfortunately, there is no regulatory
process or public comment period involved in determining what
should be listed, a listed transaction. So is it possible for
the IRS to suspend these penalties until a better review
process is implemented?
Mr. Shulman. Yes. We have actually looked at this. I would
agree with you. Let me just step back for a minute. The listed
transactions were an important thing that the IRS did, which
was to put taxpayers on notice that there are certain
transactions designed for big corporate tax evasion kind of
transactions, tax shelters that we are going to be looking at
that you need to file information on.
We recognize that some taxpayers have gotten caught up in
this that the law never presented. We are trying to have
dialogue about that. Right now we think our hands are tied,
that the legislation, if I have this correct, and I will come
back to you, is actually we do not have a lot of leeway for us
to suspend it. But this is something that we are going to want
to talk about. You know, we are in discussions and the
administration is going to need to be discussions with Congress
because we recognize this is an issue.
Chairwoman Velazquez. Very good. Thank you. And let me take
this opportunity to thank you, and I am sorry that we have so
many votes on the floor, but this is the way it goes here.
Mr. Shulman. The people's business.
Chairwoman Velazquez. Okay. So thank you so much.
Mr. Shulman. Thank you very much.
Chairwoman Velazquez. The gentleman is dismissed.
So now we call on the second panel, and that will be Mr.
Christopher Smith.
Are you going to introduce him?
Mr. Graves. Thank you, Madam Chair.
I am pleased to introduce Kit Smith. He is a constituent
and owner of S.T.O.P. Restoration, LLC, and S.T.O.P.--
Northland, LLC, in Pleasant Valley, Missouri. Mr. Smith is
certified in fire and water restoration, mold remediation, door
and window installation. He is also a certified restoration,
remediation, and recovery instructor.
He is a non-combat disabled veteran. Mr. Smith served six
years in the United States Navy. He has been an entrepreneur
and owner of his own small business since he was 16 years old.
Mr. Smith, thanks for coming. We want to welcome you to the
Committee, and we appreciate your coming here to Washington to
tell us your story.
STATEMENT OF CHRISTOPHER ``KIT'' SMITH, S.T.O.P.--NORTHLAND,
LLC
Mr. Smith. Chairwoman Velazquez and Ranking Member Graves,
my name is Kit Smith, and I am owner of a small business in
Pleasant Valley, Missouri. I am pleased to be here today to
testify of the burden of tax compliance for small businesses.
My company has been battling with the IRS since 2007 on a
matter that generated an audit going back to 1989. It started
because an employee had embezzled $58,000. She was trying to
hide this by switching my EIN numbers around and making
deposits with them to the State of Missouri and the IRS. This
encompassed a sole proprietary, a corporation, and two LLCs.
The deposits owed for the taxpayer in question were, in
fact, paid. The IRS person who received the deposits placed the
money where they deemed needed and not where it was supposed to
go per the forms that the deposits accompanied. The agent and I
proceeded to uncover the fact that the payments were made. They
were misplaced, and the agent would locate and identify where
to correctly put the payments.
After a short period of 30 to 45 days, I received a call
from the agent and was informed that there was a small refund
from past years and that the payments would need to be placed
correctly if I agreed, and of course, I did.
I was then informed that there was a slight overpayment on
my part and did I wish a refund or place it on account. I chose
the refund.
After about a month or so I received a call from the agent
stating that there was a mistake by them in the calculations
placement of the funds, and I needed to repay approximately
$2,300. I gave the agent the check number and wrote the check
for the amount and put it in the night mail.
When we thought the audit was about done, up pops a new IRS
agent on the phone stating that I owed approximately $2,300. I
disagreed, and after two to three minutes on the phone, I asked
if the phone agent could give the particulars to my office
staff so that we could again research this.
To my complete amazement, my office staff came in and
proudly proclaimed she had my amount reduced to approximately
$1,800. How on earth can an employee negotiate with an IRS
agent the amount of a tax due when during an audit they ask
specific questions to qualify you as the appropriate person to
be liable?
I just paid this tax for the third time. The tax advocate
informed me of information that contradicted the supervisor's
statement made to me via my message machine. I informed the tax
advocate that they were hiding a big mistake. The agent was no
longer to speak with me, and I was informed this matter was
closed.
Who regulates this arm of government? What oversight do
they have? How far can they go? Why do they have immunity from
repercussions? They need checks and balances, one, to insure
the tax due is paid, but, two, that when they are wrong they do
not cover it up, destroy lives or businesses.
The burden placed on my business alone was over 150 hours
of my personal time at $175 an hour to keep my doors open. Well
over 100 hours of my staff time. The reams of paper and phone
bill time. I cannot even think of the amount of business I lost
focusing on this instead of my company. I will never get over
this loss.
We as small businesses need a flat tax so we can plan for
what tax is due instead of wondering what will be due. This
would take the unknown out of taxes. It's funny, but not too
long ago I had an IRS agent on the phone. She stated to me,
``Mr. Smith, the IRS does not make mistakes.'' And I still have
that tape! Can you believe the audacity? We are all human.
Heck, I may have made a mistake coming here.
The stimulus package: There is nothing in the stimulus
package for my business. I cannot afford to go further in debt,
period! Buy equipment? Get an SBA loan for 35,000? No to
further debt.
What the small businesses need , the available loan
opportunity to lower their loan payments. Lower taxes to be
able to afford and retain good employees instead of having to
lay them off. Lower taxes to afford to give themselves a raise,
I have not had one in five years. Lower taxes to insure the
benefits package available matches the larger institutional
ones. Lower taxes to be able to afford, without a loan,
improvements to facilities and equipment.
The stimulus package should not help mega companies that
affect our economy. They need to fail just like if I failed no
one would help me except me. If the big dogs fail, let them.
Then smaller entrepreneurial companies will sprout up and take
over where they failed. That is the spirit of America, freedom
and hard work!
The stimulus package should not be for earmarked projects.
They don't help small business. The package is wild spending of
money that is not even printed yet. We need Congress to control
spending and lower taxes. Small business will help pull us out
of this faster.
Government is in place to keep peace, not to create jobs!
They implement laws and govern, not dictate how much someone
can make. The government can help create jobs by helping people
who create jobs, us, the small business people of America who
give every day!
In my State of Missouri, 90 percent of the employed people
are employed by companies with fewer than 25 employees, small
businesses! Unbridle the small business community. Give them
the ability to rebuild the economy, and watch what we're
capable of, but do not give us more burden, more taxes, and
more administrative burdens such as more COBRA regulations.
Thank you for the opportunity to testify today.[The
prepared statement of Mr. Smith is included in the appendix at
page 35.]
Chairwoman Velazquez. Thank you, Mr. Smith.
Mr. Graves.
Mr. Graves. Thank you, Madam Chair.
I actually brought up a Syracuse University study that
small businesses are targeted because they do not have the
ability to hire expensive counsel or expensive representation
to work on the audit, and I was just curious if you were able
to do that and if you have heard of other small businesses that
have been targeted by audits who are not able to hire counsel
or get the expensive resources to be able to represent
themselves before the IRS.
Mr. Smith. Mr. Graves, with the amount of burdens placed on
by local taxes, increased property taxes, and the tax burden
that we already have, I couldn't afford an attorney. I hired an
attorney in the first place, and it came to no resolve. It was
not worth the money that I was spending. So I opted to go
through this myself with the agent, and it was successful.
And I know of other gentlemen and women in business who
have had this similar type of situation, not to this complete
amount, but they have had the same situation where they have
had employees that are embezzling, whether they have a gambling
problem or whatever it is, that embezzle money, and now we are
at a disadvantage because we do not have the capital to fight
the IRS.
Ms. Clarke. In your opinion, was it a situation where one
agent did not know what the other agent was doing, the left
hand does not know what the right hand is doing, or is it a
situation of as far as they were concerned you were guilty
until proven innocent, in your opinion at least?
How did you feel? You know, what could have made it a whole
lot more user friendly, I guess, approach, you know, in working
with you in this? What would you have done different if you
were on the other side?
Mr. Smith. I really appreciate that question. The original
agent that came into my office and flipped their badge was
awesome. She went back to 1989 like my testimony said, and she
uncovered where these payments went. She found them. She was
diligent in her job, and she did it well.
Where the breakdown came was when we got the phone call
from an agent on the phone that said mysteriously we owed this
money again, and I went and said, ``What is going on here?''
I tried to talk to that agent. I was not allowed to. I went
to the tax advocate, thanks to your office, and that is an
oxymoron because she is an employee of the IRS. Through her we
contacted this department again, and I was given conflicting
stories. I did talk to the agent very shortly and very briefly,
and I was told I had to go to the supervisor.
The supervisor told me that I had to go to the tax
advocate, and I told the tax advocate this, and she said, no,
that is not what he said, and he left a contradictory response
to that on my answering machine. So I could not figure out.
I am thinking, okay, why doesn't the IRS just, and I asked
them, ``Why don't you just bring this file that the original
agent did, let's sit down at a table, and let me see what you
have so that I can see where she went?''
And all they would divulge to me was this unknown,
unbeknownst jumble of figures that unless I was an IRS agent I
would not know how to discern what was there. But she went back
all the way to 1989 and covered money that they owed me from a
long time ago, but they did not give that up! But she found out
where I made the payments and where they were sidelined because
this person was trying to throw a smoke screen, and she found
that we, in fact, did make the payments, and then I found out I
had to do it again.
So I would say that in this case that they should have
brought the file, sat down with me and said, ``Mr. Smith, this
is what we found.'' They would not do it. They said you are not
allowed to talk to the agent and this matter is closed. And I
think that's wrong.
Mr. Graves. Thanks, Madam Chair.
Chairwoman Velazquez. Ms. Clarke, no questions?
Okay. So we have got some stuff here from the IRS, and I
guess there are some pending issues. We could use that
opportunity after the hearing to continue the conversation.
With that I ask unanimous consent that members will have
five days to submit a statement and supporting materials for
the record. Without objection, so ordered.
This hearing is now adjourned.
Thank you.
[Whereupon, at 3:14 p.m., the Committee meeting was
adjourned.]
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