[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
KEEP IT SIMPLE: SMALL BUSINESS TAX
SIMPLIFICATION AND REFORM, THE
COMMISSIONER RESPONDS
=======================================================================
HEARING
before the
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
__________
HEARING HELD
APRIL 13, 2016
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 114-055
Available via the GPO Website: www.fdsys.gov
______
U.S. GOVERNMENT PUBLISHING OFFICE
99-834 WASHINGTON : 2016
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Publishing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800;
DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC,
Washington, DC 20402-0001
HOUSE COMMITTEE ON SMALL BUSINESS
STEVE CHABOT, Ohio, Chairman
STEVE KING, Iowa
BLAINE LUETKEMEYER, Missouri
RICHARD HANNA, New York
TIM HUELSKAMP, Kansas
CHRIS GIBSON, New York
DAVE BRAT, Virginia
AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
STEVE KNIGHT, California
CARLOS CURBELO, Florida
CRESENT HARDY, Nevada
NYDIA VELAZQUEZ, New York, Ranking Member
YVETTE CLARK, New York
JUDY CHU, California
JANICE HAHN, California
DONALD PAYNE, JR., New Jersey
GRACE MENG, New York
BRENDA LAWRENCE, Michigan
ALMA ADAMS, North Carolina
SETH MOULTON, Massachusetts
MARK TAKAI, Hawaii
Kevin Fitzpatrick, Staff Director
Emily Murphy, Deputy Staff Director for Policy
Jan Oliver, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Steve Chabot................................................ 1
Hon. Nydia Velazquez............................................. 2
WITNESS
Hon. John Koskinen, Commissioner, Internal Revenue Service,
Washington, DC................................................. 3
APPENDIX
Prepared Statement:
Hon. John Koskinen, Commissioner, Internal Revenue Service,
Washington, DC............................................. 23
Questions for the Record:
Questions from Chairman Chabot and Congressman Cresent Hardy
to Hon. John Koskinen and Responses from Hon. John Koskinen
from Chairman Chabot and Congressman Cresent Hardy......... 29
Additional Material for the Record:
None.
KEEP IT SIMPLE: SMALL BUSINESS TAX
SIMPLIFICATION AND REFORM, THE
COMMISSIONER RESPONDS
----------
WEDNESDAY, APRIL 13, 2016
House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 2:30 p.m., in Room
2360, Rayburn House Office Building. Hon. Steve Chabot
[chairman of the Committee] presiding.
Present: Representatives Chabot, Luetkemeyer, Huelskamp,
Gibson, Brat, Radewagen, Curbelo, Hardy, Kelly, Velazquez,
Hahn, Lawrence, and Adams.
Chairman CHABOT. The meeting will come to order. Good
afternoon and thank you all for being here and a special thanks
to our witness, IRS Commissioner Koskinen, who has taken time
out away from his very busy schedule during an especially busy
week. We are 2 days before April 15, so we appreciate him being
with us here today and, by the way, me and--my wife and I filed
our taxes several weeks ago; timely so we are legal. Earlier
today our Subcommittee on Economic Growth Tax and Capital
Access heard from a panel of small businesses and experts who
serve the small business community.
We hear from small business folks here all the time, we
hear from individuals, from folks all over the country who
repeatedly tell us that the Tax Code is just too complicated.
People want to obey the law, however, the Tax Code gets more
and more complicated every year and it makes it harder and
harder for small companies to get it right and to take full
advantage of provisions designed to help them. The complexity
of our tax laws steals valuable resources, both time and money,
from these businesses. It hinders their ability to grow,
succeed, and create the jobs we need.
Making the Tax Code simpler is particularly important for
American small business owners as they are disproportionately
affected by tax complexity. The GAO testified before this
Committee in July of last year that small businesses with one
to five employees face an estimated tax compliance burden of
more than $4,000 annually per employee.
The problem is a combination of substantive and
administrative complexity, meaning that not only is the law
itself complicated, but the entire process of compliance is
complicated as well. Tax laws alone come in at close to 3,000
pages. Regulations promulgated by the IRS add at least another
9,000 pages, and when you add in case law the total increases
exponentially up to around 70,000 pages. Our country's small
businesses just cannot keep up.
We need to get our Tax Code working for small businesses
instead of against them and that is what we are here to talk
about today. We look forward to hearing the Commissioner's
ideas as well as our members' on how we can work together on
this. This Committee takes seriously its responsibility to
listen to America's small businesses and work with them to make
the Tax Code simpler and easier to understand. Again, we want
to thank Commissioner Koskinen for joining us here today and I
would now like to yield to the Ranking Member Ms. Velazquez for
her opening statement.
Ms. VELAZQUEZ. Thank you, Mr. Chairman, thank you,
commissioner, for being here today. This is a very valuable
hearing which follows up on the subcommittee's session from
this morning. During that hearing small businesses testified
about the challenges they faced in complying with the American
tax code and its regulations. It is my hope that during this
hearing we can get perspective on what the IRS is doing to
address this problem, and what steps Congress can take to
improve this situation.
Make no mistake, the complexity of our tax code makes
complying with the law more difficult and expensive and that
burden hits America's entrepreneurs hardest. Individuals and
businesses spend 6.1 billion hours annually complying with the
filing requirement of the code. These efforts constitute $163
billion in costs. With nearly a third of small businesses
reporting that they spend more than 80 hours each week on tax
compliance, it is clear simply adhering to tax laws is a
challenging and expensive undertaking. At the same time the tax
compliance is becoming increasingly complex and expensive. It
appears some services from the IRS meant to provide businesses
with assistance are being reduced.
During the 2015 tax season the IRS answered a little over
one-third of telephone inquiries with an average wait time of
47 minutes. Half of written correspondence to the agency is not
responded to within 90 days of being received. If, as the
saying goes, time is money, this can only be a further drain on
entrepreneurs' resources. Of course these statistics on wait
time and response rates are not meant only to criticize the
IRS. The agency has a daunting challenge, especially this time
of year. It is important that Congress provide the resources
the IRS needs to serve all taxpayers, especially small firms.
These challenges bring us to something that everyone on this
committee can likely agrees upon: the importance and value in
reforming our tax code. Of course doing so will be a
significant undertaking and the devil will be in the details,
but successful tax reform that simplifies the code will give
small businesses greater certainty and allow them to spend
their time and resources on what they do best: launching new
products and creating new jobs in their local communities.
There have been areas of progress that suggest we may be able
to find other common ground in reforming the tax code.
This committee was particularly supportive of making
permanent a number of tax extenders such as the R&D tax credit
in section 179 expensing. Making this change permanent gave
small businesses the certainty that they will be able to
utilize these provisions in coming years allowing them to plan
for the future. As we look forward there are areas that I hope
tax reform will eventually tackle. As just one example, many
small businesses struggle to track and comply with different
state tax laws. With employees who travel to multiple states
this can create a tangle of different rules to contend with.
Likewise the proliferation of online sales has raised issues
about sales tax concerns.
Bringing uniformity to these rules could help small firms
and self-employed harness the Internet to reach new customers
and markets. Mr. Chairman, I think all of us on both sides of
the aisle and the commissioner understand the vast array of tax
compliance challenges facing entrepreneurs. The difficulty for
us will be identifying valuable solutions we can all get behind
and implement. This will not be an easy task but I do hope
there is room down the road for cooperation and progress. In
that regard I thank the witness greatly for testifying and
adding his perspective to this conversation. I yield back.
Chairman CHABOT. Thank you, the gentlelady yields back and
if members have opening statements prepared we asked that they
be submitted for the record. Mr. Commissioner, I would like to
explain very briefly our rules relative to timing. You get 5
minutes, we get 5 minutes. There is a lighting system. The
yellow light lets you know that you have a minute to wrap up
and at the red light you are supposed to stop, but since we
have one witness, if need a little extra time we would be more
generous than normal, so we are happy if you do have a little
bit more to say. I would now like to introduce our principal
and only witness here this afternoon.
We are pleased to be joined by the IRS Commissioner John
Koskinen. Mr. Koskinen is the 48th Commissioner of the IRS. He
began his tenure in December 2013, and his term expires in
November 2017. Prior to his most recent government service Mr.
Koskinen joined the Palmieri Company which specialized in
turnaround management and served as the president and CEO. He
also served as the non-executive chairman of the board for
Freddy Mac. He was deputy mayor and city administrator for the
District of Columbia and earlier he was deputy director for
management at the Office of Management and Budget.
Perhaps most importantly he has an Ohio connection having
been, I believe, born in Cleveland, and his first job I believe
was with the Cleveland News, not running the paper but
delivering it, and he has that in common with our director of
this Committee, Mr. Kevin Fitzpatrick, although his first job
was delivering for the Cleveland Plain Dealers. Mr. Koskinen
holds a B.A. in physics from Duke University and a law degree
from Yale, and we are very honored to have you here today, and
you are recognized for 5 minutes.
STATEMENT OF JOHN KOSKINEN, COMMISSIONER, INTERNAL REVENUE
SERVICE
Mr. KOSKINEN. Thanks very much Chairman Chabot, Ranking
Member Velazquez, and members of the Committee. I appreciate
the opportunity to discuss with you the IRS's ongoing efforts
in the area of small business tax simplification. The IRS
recognizes the critical role small businesses play in our
country as engines of economic growth and we want to do our
part to help them flourish. We do not have a direct role in tax
law simplification since tax policy is the domain of the
Congress, White House, and Treasury Department, but the IRS can
and does contribute to tax simplification in important ways.
They include simplifying tax forms and notices, streamlining
policies and procedures, providing regulatory relief, easing
recordkeeping requirements and abating penalties wherever
appropriate.
We rely on feedback from a variety of sources in the tax
industry and in the small business community to help us
determine what actions we can take that would be most helpful.
Let me give you a few examples of recent actions we have taken
to help small businesses. We have increased an expensing
threshold so small businesses can take immediate deductions on
more items they buy for business and avoid having to expense
these items over many years. This was in response to feedback
that the old threshold was too low to allow for things like
personal computers, smart phones, and machinery and equipment
parts.
We set up a voluntary compliance program offering penalty
relief to certain small business owners who failed to file
annual retirement plan returns after we found that many owners
did not realize they had a filing requirement. We streamlined
the process for small organizations applying for tax exempt
status creating a 3-page application they can use instead of
the full 26-page application.
We developed a simplified method for claiming the home
office deduction to make it possible for more home-based
businesses to take advantage of that tax break. While the IRS
works to provide top-quality service to small business
taxpayers, we also must carry out a robust enforcement program.
Enforcing the tax laws helps maintain a level playing field for
all businesses. It ensures that small business owners who
comply with the law and pay the taxes they owe are not
disadvantaged by others who may be cutting corners.
One major focus of our enforcement efforts involves
employment taxes. In many cases actions taken to improve
enforcement can also help taxpayers and increase voluntary
compliance. An excellent example is our new employment tax
Early Interaction Initiative which was launched last December.
Under this initiative we identify employers who appear to be
falling behind on their employment tax obligations and offer
them helpful information and guidance. That way the problem can
be corrected before unpaid taxes accumulate and we have to
assess penalties.
We are also working to make sure that small business owners
are not defrauded when they outsource their tax obligations.
While most of these providers do a good job, businesses
sometimes can fall prey to unscrupulous providers that have
absconded with their payroll tax deposits. We continually look
for ways to protect employers from these criminals and to
provide assistance when fraud does occur.
Our efforts to continue assisting small business taxpayers
are challenged by the difficult budget environment we are in.
The IRS's funding was cut significantly for the 5 years from
2011 to 2015, and those reductions have taken a toll in both
taxpayer service and enforcement programs.
Therefore, we urge the Congress to approve the President's
fiscal 2017 budget for the IRS which requests an increase of
about a billion dollars over 2016, which would bring the
agency's funding back up to the level of almost 7 years ago and
would help the IRS across a wide range of tax enforcement and
tax service categories.
Along with providing adequate funding Congress also has
another important role to play by passing proposals to simplify
tax administration for small business. The President's fiscal
2017 budget has a number of proposals in this area. These
include increasing the section 179 expensing limit, allowing
new businesses to deduct more start-up costs and improving the
small businesses' healthcare tax credit. Chairman Chabot,
Ranking Member Velazquez, members of the Committee, this
concludes my statement and I would be happy to answer your
questions and yield back my 28 seconds.
Chairman CHABOT. Excellent, well done. I will recognize
myself for 5 minutes. Last May, the IRS discovered a data
breach that exposed the data from approximately 700,000
accounts. What has the IRS done since that time to secure
taxpayer data, and how can small businesses be assured going
forward that their data is safe with the IRS?
Mr. KOSKINEN. The application that was accessed was our Get
Transcript application, which allowed taxpayers to get copies
of previous years' tax returns. So the access was not into our
basic database so that basic taxpayer information was not let
go. What it represented was a problem we have of identity
theft--dealing with increasingly sophisticated criminal
syndicates around the world who had information already, not
from the IRS, that allowed them to masquerade as the taxpayer.
They knew Social Security numbers, names, addresses, and
they could answer successfully, in some of the cases, answer
their out-of-wallet questions that the taxpayer should have
been the only one who knew. So we took the application down and
we are testing now a much more secure application to protect
that application in our ongoing ``Future State,'' as we call
it, as people deal with us more and more online.
It is the same challenge financial institutions have. The
challenge we have is as you get the protection better to keep
criminals out it makes it more difficult for taxpayers to get
in. Even under the old system 22 percent of taxpayers could not
answer their out-of-wallet questions and get access online to
their transcript. But we are concerned about it for small
businesses as well as individuals. A lot of small businesses
really file as individuals and we think that as we try to give
people better service so that when they would like to they can
deal with us online, we need to make sure that that is secure.
We need to have taxpayers feel comfortable that the data and
the information they provide us is going to be protected.
Chairman CHABOT. Were you able to determine who the people
were that were able to hack in there?
Mr. KOSKINEN. These were clearly, as we tracked them down,
criminal syndicates from foreign countries, primarily Eastern
Europe. Our systems get attacked and I have asked our CTO if
this is the right number and he said it is actually worse than
that. We have a million attacks a day on our system, trying to
probe and get into it, and in one of the systems where we
caught people trying as we shut them down, you could see the
attacks move from country to country. So it is a much more
sophisticated enemy than we have ever had to deal with before.
Chairman CHABOT. Thank you. Can you tell us about the
Future State and how it will help small businesses comply with
the Tax Code?
Mr. KOSKINEN. We have been working toward the Future State
for the last 10 or 12 years but we have pulled it together now
in that framework of the Future State.
In the Future State, what we say is, ``what should the
taxpayer experience be?'' Rather than looking at it from our
standpoint, what should the taxpayer--what can we do to help
taxpayers? And again, it is focused on primarily individuals in
small businesses filing as individuals. And the goal is our
surveys show the vast majority of taxpayers would rather deal
with us online than have to call or show up in person.
And so the goal is to move as many of our interactions with
taxpayers as we can into an online relationship, much like the
online relationship you have with your financial institution
and your bank today where people pay bills online and they make
transactions online. So for small businesses especially it
would be possible for them not only to file online but if we
had questions or issues we would be able to send them a secure
message, they could make the correction without having to file
an amended return and it would be much more efficient for them.
But I would stress we recognize we have an obligation to all
taxpayers and there will always be some taxpayers who either do
not have access to online digital equipment or who are not
comfortable online, who will want to deal with us on the phone
and in person, and so we will always provide those services.
But as I say, if we can get people off the phone who would
rather not be on the phone, then our phone service and our in-
person service will be that much better.
Chairman CHABOT. Thank you. I think I have time for one
more question. You mentioned in your written testimony the
tension between providing taxpayer service and tax liability
enforcement. What specific steps are you taking to work with
small businesses constructively earlier in the process to
ensure voluntary compliance rather then having to resort to
enforcement action?
Mr. KOSKINEN. We spend a significant amount, probably if I
had somebody add it up for me, we spend about 40 percent of our
budget trying to help taxpayers, provide taxpayer service
because the vast majority of taxpayers want to be compliant. So
the message we are trying to put out is that if you are trying
to be compliant we really want to work with you. You do not
have to hire somebody off late-night TV to deal with us. If you
are trying to be compliant we have online installment
agreements, we have offers in compromise, and we have a lot of
different ways to try to help people be compliant and
especially those who are having difficulties. As I said on our
tax deposit initiative it is designed to consult with small
businesses before they get farther behind because oftentimes,
when it is tempting if you are having trouble to say, well, I
will hold off on my federal tax deposit until later, well, if
you hold off too long, the number gets to be far beyond what
you can control. So it is kind of a combination of enforcement
and taxpayer service.
Our thought was in this pilot we are now trying to say if
we reach out to you quickly and say you should be careful
because it is going to get to be more of a problem. Even though
we usually do not talk to you until the end of the year, our
experience is that taxpayers will then make sure they are
paying attention to it and we will be able to nip it in the
bud, and so they will not have a compliance problem. So
wherever we can it is in our interest and I think in the
taxpayer's interest to try to figure out how can we make it as
easy and straightforward as possible for people to figure out
what they owe and how to pay it.
Chairman CHABOT. Thank you very much. My time has expired.
The ranking member gentlelady from New York, Ms. Velazquez, is
recognized for 5 minutes.
Ms. VELAZQUEZ. Thank you, Mr. Chairman. Commissioner, this
morning we heard from a small business about the complexity of
the tax forms and he suggested the forms be written in plain
language so that any small business taxpayer can understand. Is
the IRS considering any such changes to forms or a way to help
translate forms for taxpayers?
Mr. KOSKINEN. Going back to my last answer it is a critical
part of what we do. I say having only been here for about 2-1/2
years, if you go back about 5 years and look at our website, it
was a terrific website if you were a lawyer and liked to read
tax regulations. It did not help you very much if you were
someone trying to find answers. So we have written and have
continued to rewrite the vast amount of information on that
website.
We actually won a plain writing award a couple of years ago
because we do feel that that is a fair comment, that wherever
we can, we sometimes have to get the lawyers out of the way. We
need to be able to write the forms and instructions in a
language that the average person can understand so they can be
compliant.
Ms. VELAZQUEZ. Have you taken any steps to gather input
from these stakeholders regarding online self help?
Mr. KOSKINEN. Actually we do surveys as the Restructuring
Act of 1998 requires us to do, surveys of taxpayers, but we
also meet regularly with the Chamber of Commerce, the National
Federation of Independent Businesses, and others to try to get
their views of what are the biggest obstacles they are facing,
what is it we could do to be more helpful. Again, increasingly
more and more individuals and companies are doing their
business online, and to the extent that they could deal with us
online and file taxes and communicate with us, the feedback we
get from them is it would be much better for them if we could
do more of that.
Ms. VELAZQUEZ. In its 2015 Report to Congress, the
Taxpayers Advocate highlighted the need to bring taxpayer
service to the small business owner. It found that the needs of
populations that are geographically clustered in certain
regions are often neglected due to the more centralized
structure of the IRS. In fact, the report pointed out that
there is no outreach staff dedicated to small business and
self-employed taxpayers in 13 states and D.C. Does the IRS have
any immediate plans to provide increased local assistance for
these types of small businesses?
Mr. KOSKINEN. Yes, we think again one of the advantages of
developing more and more online services for taxpayers is that
it will make it easier for them wherever they are. We are also
developing virtual service delivery, so in areas where we do
not have a walk-in center we are talking preliminarily with the
Social Security Administration, which has offices all around
where you could go in and, with a television monitor, you could
actually, sort of like Skype, talk with an IRS person, person-
to-person, even if they are not physically there.
Ms. VELAZQUEZ. What about those who have no access online?
Mr. KOSKINEN. If they do not have any, the virtual service
delivery does not require online. Actually you would go to the
office and you would actually communicate directly with an IRS
employee who could answer your questions and provide you
service. The fact that they were not sitting there physically
with you would not make much difference because you would be
talking with them wherever they happened to be located. We
think that technology would be available to people in rural
areas and areas that otherwise are underserved.
Ms. VELAZQUEZ. Okay, the IRS budget has been cut by 18
percent since 2010, which in turn weakens your ability to
provide customer assistance and collect critical revenue. In
cutting the budget some experts claim the government is
foregoing more than $5 billion each year. How could an adequate
budget improve small business taxpayers' compliance?
Mr. KOSKINEN. Well, an adequate budget--first of all, our
taxpayer service this year is much better than last year as a
result of the additional funding, we appreciate, we got from
Congress and I think it demonstrates the algorithm if we had
more funds, the service would get better. On the same side, on
the enforcement side, we are down about 5,000 revenue agents,
officers, and criminal investigators since 2010. If you have
5,000 fewer people you are going to do fewer audits. On the one
hand, some people say that would be fine, but if you are a
legitimate taxpayer and you are a legitimate small businessman,
if your competitor is not paying their taxes, they are going to
offer services or goods at a lower price and they will have an
unfair competitive advantage.
So everybody has a stake in the taxpaying public in having
a fair system where everyone pays their fair share. So
enforcement we think is an important support for legitimate
taxpayers and legitimate small businesses.
Chairman CHABOT. The gentlelady yields back. The gentleman
from Virginia, Mr. Bra,t is recognized for 5 minutes.
Mr. BRAT. Thank you, Mr. Koskinen. I ran on what is called
the Republican Creed down in Virginia. One of the points in the
creed is I promise to ensure that everyone gets equal treatment
under the law, and we are a Nation of laws that try to be fair
to each individual and so this is just a positive question. I
know you are in the hot seat, but do we have a tax system that
treats individuals fairly as individuals under the law?
Mr. KOSKINEN. I think we do. One of our highest commitments
is to, in fact, make sure that everybody is treated fairly. As
I have said, people need to feel comfortable that if they hear
from us it is because of something in their return. We have no
interest in what party they belong to, who they voted for, what
meeting they went to. The system needs to be fair in terms of
its application. It is a policy matter, but also for tax
administration it is critical to the system for people to feel
comfortable.
Mr. BRAT. That is great and so it is at the system level, I
see what you are saying, procedurally there is fairness. And
this is, you said, Treasury and the Congress who are
responsible for the Tax Code. Do you think that individuals are
being treated that way? Kind of the Warren Buffett story,
right? The different taxes different people pay, depending on
different sometimes minute circumstances with vastly different
tax payments, do you think we can do a better job at creating a
fair system in that sense?
Mr. KOSKINEN. With my caveat that it is not our domain.
Usually when I say it is somebody else's responsibility I am
about to talk to you about it. I do think, first,
simplification would be a great gain for everyone, including
the IRS, but certainly for taxpayers and small business. I
think the point that people have made is on occasion we pass
tax laws and do not understand the impact of them, and so it
may be a perfectly good law for a large corporation and create
a lot of problems administratively or burden-wise for smaller
corporations and individuals. So to that extent I think it is
important to try to understand the implication of the Tax Code
and, as I say, what works for General Motors may not work for
the corner grocer.
Mr. BRAT. Lastly, I just received an email earlier and I
guess yesterday on the Senate side in response to some
questions you had in the Finance Committee. Someone pressed you
on an issue and you replied. And let me know if this is
accurate because I want to figure this out because it has to do
with fairness, too, under the law. What happens in these
situations is someone is using a Social Security number to get
a job, but they are filing their tax return with their taxpayer
identification number. What that means, you said, is that they
are undocumented aliens. They are paying taxes, it is in
everyone's interest to have them pay the taxes they owe. As
long as the information is being used only to fraudulently
obtain jobs, Koskinen said rather then to claim false tax
returns the agency has an interest in helping them. Can you
help clarify that? That is what I'm trying to get to, equal
treatment under the law here. If folks are here illegally, I
get that you want to collect tax revenues and I applaud that
aspect, but should any agency go along with what it knows to be
illegal activity?
Mr. KOSKINEN. Our responsibility is to the administration
of the Tax Code and it has been made clear. And not everybody
who has an ITIN as it is called is an illegal alien and for
some reason they cannot get a Social Security number. And so
the Tax Code is set up and our enforcement is that people who
are earning money have an obligation to pay taxes. And we do
everything we can to make sure they pay those taxes to the
extent that they get employment because they have borrowed or
somehow gotten a Social Security number, that is not an issue
we have jurisdiction over.
In other words, our responsibility is to make sure they pay
their taxes. We have Social Security and immigration
authorities and others who enforce that part of the law, and if
we start looking behind the system and doing their job for
them, we are going to discourage a lot of people from paying
the taxes they owe.
And so as I said, the division of responsibility that is
our job is to make sure people pay the taxes they owe from the
earnings they have had. To the extent that they are here under
circumstances that do not meet the immigration laws or do not
correspond with Social Security Administration, it is really
those agencies job to pursue that.
Mr. BRAT. You would never pursue the course if you knew you
had someone engaging in illegal activity, if you knew that you
would not pursue trying to gather tax revenues just for the
sake of pure economics over the rule of law?
Mr. KOSKINEN. No, that is exactly right. Although you will
recall the famous case of Al Capone who was actually brought up
on tax charges, not on all of his criminal activity, so
ultimately the IRS's basic responsibility is collection of
taxes. We actually chase people and cooperate with justice and
drug enforcement and everybody else on people who are engaged
in illegal activities.
Mr. BRAT. Great, thank you, my time has expired.
Chairman CHABOT. When you hear Al Capone's name, we
appreciate that. The gentlelady from California, Ms. Hahn, is
recognized for 5 minutes.
Ms. HAHN. Thank you, Chairman Chabot, Ranking Member
Velazquez, for holding this hearing. Tax day certainly is fast
approaching and I cannot speak for everyone here, but I know my
office, particularly in my district, we get requests for help
with taxes around this time every year and we actually hold
workshops to help individuals and small business owners
complete their tax forms. It should come as no surprise that
what I hear from people is that the Tax Code is too confusing,
which, as you said, is Congress' job to reform the Tax Code,
not yours.
But what is especially upsetting to me is when I hear that
my constituents try to comply and reach out to the IRS to
resolve their issues they often cannot even get ahold of
someone over the phone, it takes weeks for them to get a
response in the mail, which is why they usually come to members
of Congress. This feels like it could be something that is your
responsibility and that you could really work on because
obviously involuntary mistakes for people can lead to major
penalties and consequences. Additionally, many individuals and
small business rely on returns to pay for their day-to-day cost
and cannot afford to wait. Some businesses have fewer resources
and already spend more than twice as much per employee to
comply with the Tax Code than larger firms. They deserve to
receive help easily and directly from the IRS. Despite these
trends Congress has continued to cut funding for the IRS, and
that is where I think it really does not make sense.
So, Commissioner, I do believe, again, and I think Congress
should and it has a responsibility to simplify the Tax Code. At
the same time, we should ensure that the IRS has the proper
funding to make sure that small business owners receive the
service they need to file taxes. Last year Congress provided
the IRS with an additional 290 million in funding for fighting
fraud and taxpayer services, and as a result we have seen wait
times improve this tax season over previous years.
However, last month in your annual National Press Club
speech you said that only 47 percent who call your agency this
year will get through to a live person. The IRS small business
and self-employed tax center page provides resources but I
worry that because of the complexity of the types of taxes of
credits that small businesses may qualify for, reading and
watching videos online may not be enough for many people. I
want to make sure that when a small business from my district,
the business and specialty tax line, they will be able to speak
to someone.
So is it possible to achieve that goal with the resources
that you have been given, the goal being that everyone, in a
reasonable amount of time, could speak to a live person to help
resolve their issues? And if not, how much funding and staff
would the IRS need in order to ensure that all callers will be
able to speak to a live representative in a reasonable amount
of time? Is the President's request enough to make that happen?
I know we are moving to online and we are trying to get more
people, there are so many people in my district that just are
not there yet, and I really would hope that we could
accommodate those who still use the old-fashioned method of
calling.
Mr. KOSKINEN. Well, I hope we are able to establish that
with the additional funding this year. Of the 290 million, we
put 178 million of it into taxpayer service and that was
primarily hiring over a thousand people in the filing season to
answer the phones. So during this filing season the level of
service is about 72 or 73 percent, so it is almost twice what
it was during the last filing season. The problem the way we
get the 47 percent for the year is that at the end of filing
season the money is going to run out for paying those people
and plus we did not have any money at the first 3 months. So
the average for the year will be 47 percent, still a
significant increase above 37 percent last year.
But during the filing season we marshaled all of that
funding so we would actually provide as much service as we
could. The President's budget for 2017 provides another----
Ms. HAHN. What do you consider--how many months?
Mr. KOSKINEN. Filing season is basically January to the end
of April.
Ms. HAHN. Okay.
Mr. KOSKINEN. So the President's budget provides for $130
million additional for taxpayer service next year, which would
get us to a level of 70 percent for the year. Now, what we
finally refer to as the good old days in the mid 2000's, our
level of service was 80 percent and we think at some point we
should be--you do not want to be at 100 because then you have
people sitting around waiting, but we ought to be as we used to
be, in the 80 to 85 percent level and you should only spend a
minute or two waiting to get an answer. But if we could get the
President's 2017 budget in this area, having 70 percent for the
year would mean we would probably be able to be 80 percent
during the filing season.
Ms. HAHN. Okay, thank you very much.
Chairman CHABOT. Thank you very much. The gentlelady's time
has expired.
Gentlelady from American Samoa, Ms. Radewagen, who is the
chairwoman of the Subcommittee on Health and Technology, is
recognized for 5 minutes.
Mrs. RADEWAGER. Thank you, Mr. Chairman, and I, too, would
like to welcome you, Commissioner. This morning we heard that
many small businesses self censor and do not claim the research
and experimentation or indeed tax credit even though they may
qualify for it. Two years ago, IRS made an improvement to the
regulations to allow small businesses to claim the alternative
simplified credit or ASC on an amended return. Are you aware of
any changes of this type that could be made to improve the
credit's availability to small businesses?
Mr. KOSKINEN. I am not, although we continue to look at it.
I think again it is one of those situations where the credit
itself everyone thinks is very valuable, but it is a lot easier
for a large corporation to work its way through the
requirements than it is for a smaller corporation. So one of
the issues is whether there is a way to have a broader sort of
safe harbor, much as we did with the expensing regulations and
the capitalization issues where we went from a $500 safe harbor
to $2,500. One of the legislative proposals we have would be to
allow start-up costs to have effective broader safe harbors. So
I think for small businesses the answer would be to see if we
could not get a broader safe harbor where you would be able to
actually take that deduction without going through all the
complications.
Mrs. RADEWAGER. I see. As a follow-up, can these
improvements carry over to the U.S. territories and are you
aware of any other credits that are available to the small
businesses in the U.S. territories but not being utilized?
Mr. KOSKINEN. You have now gone beyond my level of
expertise. I would be delighted to get back to you with an
answer of how the credits apply in the territories and are
there areas where small businesses in the territories are not
taking advantage of them.
Mrs. RADEWAGER. Thank you. And lastly, we understand from
this morning's testimony that many small businesses do not
claim section 199 domestic manufacturing deduction despite
being eligible. Do you have any ideas about how to improve the
compliance burden to make this benefit administratively easier
to claim?
Mr. KOSKINEN. We have looked at that. In fact, one of our
legislative proposals would be doing that, but we have already
made some improvements in the ability to take that deduction by
simplifying it actually in the last year. And so we are waiting
to see how that works, but, again, with the feedback we get
from business groups, if they think that the changes we have
made need to be improved, we would be delighted to hear from
them and take another look at it.
Mrs. RADEWAGER. Thank you, Mr. Chairman. I yield back.
Chairman CHABOT. Thank you. The gentlelady yields back. The
gentlelady from Michigan, Ms. Lawrence, is recognized for 5
minutes.
Ms. LAWRENCE. Thank you, Commissioner, for being here
today. My question is twofold, but it is the same area of
concern. Each year there is numerous tax scams and many
targeted small business owners because they are more
vulnerable. The IRS tries to do their part by releasing their
annual lists of the ``dirty dozen,'' they call them, tax
schemes, but I am not sure for small business and for women-
owned businesses and those minority-owned businesses if it is
enough.
To kind of tap into my next concern is that when we look at
the startups and those new businesses I just always think that
there is more that we should be doing. Tell me what is your
plan or your vision to make sure that those businesses that are
not sophisticated, the startups, the minority, and the women
are getting the actual resources that they need and not just
the standard list of the dirty dozen?
Mr. KOSKINEN. With regard to our outreach and advice to
small businesses, we have a continually, I think, improving
section on the website, and, in fact, one newspaper recently
said it was the best place for somebody to go to if they were
going to start a business because it gives you advice about how
to start a business. Not only what the tax implications are,
but what it takes to get organized, what kind of records you
need to have, on how you should deal with the IRS.
With regard to the tax scams, they continue to be a problem
for us. We are most concerned at this point about phone scams
that affect a lot of small businesses as they are individually
owned and those are threatening calls from somebody claiming to
be from the IRS, saying if you do not pay your taxes
immediately, you owe money, and we are going to throw you in
jail, seize your business.
And we have spent 2 years working with the press, working
with our partners around the country trying to get everybody to
understand kind of a relatively straightforward symbol: If you
are surprised to be hearing from us, you are probably not
hearing from us. So if you have not gotten a notice or you do
not have some other reason to expect a call, then it is not a
call from us.
The second thing we want people to understand is we would
never--it is never part of our policy to threaten anyone that
they will get arrested, they will go to jail, and that anything
is going to happen in the next 24 hours if they do not respond.
The third most important thing is if you are going to pay
taxes, you write the check to the United States Treasury. You
do not put the money in a debit card, you do not put the money
in some bank account somewhere, you write a check to the United
States Treasury. And I think as we keep pushing this out, if we
can get more people to understand that we will protect them,
but it is a low cost of entry scam. People have phone numbers
and they just robodial them and then they, a lot of times, have
a 202 area code so it looks like it is coming from IRS
headquarters. We are concerned about it, we have worked with
the Inspector General to track it and our goal is to try to, in
fact, protect people to the extent that we can.
Mrs. RADEWAGER. If I could just add this and it kind of
goes back to what my colleague said, I have numerous small
business forums in my district and when I bring in the small
businesses I have all the usual suspects there. I have never
had the IRS in one of my small business forums. It is such a
critical part of the successes of the small businesses knowing
how to pay their taxes and have the resources. So with that
being said, I will invite you to our next one.
Mr. KOSKINEN. Invite us, whether I can come personally, I
think you are exactly right, we should be there. It is a great
outreach.
Mrs. RADEWAGER. You should be there and to transform the
position of the IRS from the person that comes to get you to
the resource that you need to be successful is a challenge that
I feel we need. A lot of times people are ignorant because they
are so intimidated by the IRS because if I ask a question they
are going to come back and get me. I think the transformation
that I hear from you and that the agency is taking steps to
provide information to make sure that people can reach
compliance in their taxpaying responsibilities, I think we
could do a better job.
Mr. KOSKINEN. I could not agree more and, on the one hand,
it is important for people to know that if you are cutting
corners and trying to cheat, we are not going to be happy and
we will track you down. But, on the other hand, as I said, if
you are trying to be compliant, while it may take me awhile to
convince people we are from the IRS and we are here to help
you, people need to understand we really do spend a lot of time
and have a lot of people dedicated to trying to make it as easy
as possible for people to be compliant. So I think you are
exactly right. If we could get people to understand that there
are two sides of our job, but it is all designed to try to
create a fair tax system where everybody pays what they owe.
Nobody wants to pay more than they have to, but where everybody
is paying everything that they ought to.
Mrs. RADEWAGER. Thank you for that. I will be calling your
office.
Mr. KOSKINEN. Okay.
Chairman CHABOT. Thank you, the gentlelady's time has
expired. The gentleman from Florida, Mr. Curbelo, who is
chairman of the Subcommittee on Agriculture, Energy and Trade,
is recognized for 5 minutes.
Mr. CURBELO. Thank you, Mr. Chairman, for this opportunity,
and thank you, Commissioner, for your testimony and for being
here today. You mentioned fraud and we have discussed it
extensively here. I wanted to ask you how are you balancing
this issue of suppressing fraudulent refund payments and, at
the same time, doing your best to ensure that those validly
overwhelming majority of refund claims are paid expeditiously?
Has this been difficult given the growing level of
sophistication of some of these criminals that are presenting
false claims?
Mr. KOSKINEN. It is. I think one of the things that is
going to happen is that on the online authentication to get
online responses from us, you will have to meet a higher
threshold of authentication and we expect that that means more
will not get through. We will still mail you transcripts, we
will mail you information, but it will take you a few days
longer. One of the best things we have done is, a year ago, as
this problem continued to become more complicated, I brought
together the CEOs of the major tax preparers, H&R Block,
Intuit, and others, the software developers, payroll providers,
and the tax administrators and commissioners from the States. I
told them that the reason for this meeting was not for me to
tell them what to do. The reason was to create a real
partnership between the private sector, the States, and the IRS
to deal with fraud and identity theft and refund fraud. It has
been very successful.
In fact, it is interesting to me the most enthusiastic
participants are the private sector members who went beyond
asking and began to sort of request and demand that we make it
permanent, which we are doing. Because what it allows us all to
do, the States, tax preparers, and the software developers and
us, is exchange information in real time during the tax season,
which we have done this year, which allows us to spot
suspicious patterns of activity much earlier, but it also
allows us to develop more and more sophisticated filters and
authentication.
So this year I was told by one of the preparers, well, you,
the IRS, have to set standards. And I said, well, I am happy to
set the standards if you help design because I do not want to
tell you what to do. So this year everyone who used software or
everyone who went to a preparer had a higher level of
authentication than they had last year set by the industry. All
of the industry participants have agreed to a higher level of
security. Many of them were already at that level, so we would
have a standard level of security.
We have 40 states who are cooperating with us and so our
goal is, as I told them, the reason for creating that
partnership was because no one of us can solve this problem on
our own and it has been a great example of what happens if you
get a public-private partnership where it is a real partnership
of what you can accomplish.
And so I think the most significant step forward we are
going to be able to make is taking what we call the entire tax
ecosystem, from the time you actually use the software or use a
preparer until the time you file, and we are now working with
financial institutions, that the time the refund is deposited,
if we can have that entire circle sharing information, tracking
down criminals, it will allow us to, in fact, let legitimate
taxpayers through with more security.
A big step forward and, again, I appreciate the support
from Congress, is the requirement that goes into effect next
year that we get W-2s at the same time the employees do.
Historically, we have not gotten the W-2s until March or April,
well after the time refunds go out. It will allow us to detect
fraud, but also it allows us to detect legitimate taxpayers.
Last year we stopped over 4 million suspicious returns about--
of the 150 million. Well, a chunk of those, about a million and
a half, were clearly fraudulent and where about $8 billion of
refunds were stopped, but obviously a couple million were
legitimate taxpayers. Getting the W-2s earlier will allow us to
authenticate taxpayers so many of them will not be delayed very
much in their refunds at all, but it is sort of a complicated
picture, but I think we are making progress.
Mr. CURBELO. I thank you and I also want to commend you on
really trying to change the perception and perhaps the culture
of the agency making it more approachable so that people feel
comfortable knowing that the IRS is actually going to help them
file their taxes as opposed to somehow get them in trouble or
confuse them or discriminate against them.
So I certainly do commend you for that because, as you
know, many small business owners, many individual filers feel
like they have to hire someone just because they do not feel
the agency is approachable just because they are paranoid, they
are scared. So I certainly commend you on your work to change
that. Thank you, Mr. Chairman, I yield back.
Chairman CHABOT. Thank you, the gentleman yields back. The
gentlelady from North Carolina, Ms. Adams, who is the ranking
member of the Subcommittee on Investigations, Oversight and
Regulations, is recognized for 5 minutes.
Ms. ADAMS. Thank you, Mr. Chairman, and thank you, Ranking
Member Velazquez, and, Commissioner, thank you so much for your
testimony and for being here. I just have a couple of
questions. You talked a little bit about scams. How do you
educate companies about them and help them recover if they are
victimized by that?
Mr. KOSKINEN. As I said regularly putting out notices,
releases--one of the advantages of the partnership just talked
about is we now have direct access to all the tax preparers in
all the States, so we share all of those concerns. They then
publicize them.
We had a big meeting last September, talking about taxpayer
protection with the States and the private sector. I have been
struck by the phone scams' persistence because for the last 2
years, every press availability I have had, we have talked
about if you are surprised to be hearing from us, you are
probably not hearing from us. We have coverage locally,
nationally across the country. We have started to arrest
people, which gets some visibility, and I am still dismayed at
the number of people who actually fall for the scam.
It is a declining percentage, but the Inspector General
works with us and tracks it and each week we get reports of 15-
to 18,000 reporting that they have gotten one of these calls
and that is just obviously the tip of the iceberg. So I think
it is why we keep putting out the dirty dozen list, we keep
putting out warnings.
We have been putting out warnings this year. We learned
from one of our partners that one of the latest scams is what
appears to be an email from the CEO of an organization, goes to
the payroll department that says I need the information on our
employees, their Social Security numbers, and it turns out that
is not an email from the CEO, it is an email from a criminal.
Ms. ADAMS. Wow, I get calls occasionally that the IRS says
that we are having all these break-ins in my neighborhood,
trying to sell me security. But thank you for your comments. So
what procedures are you using to operate overall more
efficiently?
Mr. KOSKINEN. Well, what we have done, especially in light
of the fact that we have 10 million more taxpayers and a
billion dollars less in funds, so we have no choice but to try
and prioritize and become more effective and efficient. We are
responding to the taxpayers' request that we provide more
digital services, but obviously it is in our interest to do
that as well. It costs $40 to $60 for us to answer a phone call
or deal with someone in person. It costs well less than a
dollar to give them the same information online. So to the
extent that we can be more efficient and convenient for
taxpayers it actually makes us more efficient.
On the Get Transcript App that was accessed last filing
season, over 7 million taxpayers downloaded 23 million tax
returns online. Those people used to have to call. We have an
app called ``Where is My Refund'' that thus far this tax season
has 250 million hits on it. Now, we do not have 250 million
taxpayers, some of them just love to push the button and find
out how their refund is doing. But even if it is only 30 or 40
million taxpayers those people used to have to call to find out
the status of their refund. So to the extent that we can meet
taxpayers' expectations it also makes us more efficient.
Ms. ADAMS. So I do have until Monday to file my taxes?
Mr. KOSKINEN. You do have until Monday. It is Emancipation
Day in the District on Friday, so everybody gets until Monday.
Ms. ADAMS. Okay, I just wanted to verify that. Mr.
Chairman, I am going to yield back.
Chairman CHABOT. The gentleman from Missouri, Mr.
Luetkemeyer, who is vice chairman of the Full Committee, is
recognized for 5 minutes.
Mr. LUETKEMEYER. Thank you, Mr. Chairman. Welcome,
Commissioner. I have a couple of quick questions for you. With
regard to the GAO study that was done recently, my
understanding is there were 211 recommendations that are
currently open with 11 being designated as the highest
priority. Can you elaborate on that a little bit in where we
are and find some solutions to those problems?
Mr. KOSKINEN. As the chairman gave my background, I spent 3
years chairing the intergovernmental agency for Inspectors
General and in the private sector I thought internal auditors
were your best friends. So I am a very strong supporter----
Mr. LUETKEMEYER. As somebody who is a former bank examiner
and lived on the other side of the fence for 30 years, I am not
sure I go along with that, sir, but that is okay, I know where
you are coming from.
Mr. KOSKINEN. So we take very seriously their
recommendations, both the IG and GAO. In fact, we have counted
up, we have had over 2,000 recommendations in the last 3 or 4
years from the 2 agencies----
Mr. LUETKEMEYER. Okay, so what are we doing with them?
Mr. KOSKINEN. So what we are doing with them is we have
implemented about 80 percent of those 2,000. GAO has done us a
great service over the year by prioritizing them as which ones
they think are the most important for us to address. Our goal
is to address them all. We track them and since I have been
there we have consolidated the monitoring of those because I
think it is important for us to implement them.
Mr. LUETKEMEYER. Can you give an example of the top two or
two of the five?
Mr. KOSKINEN. They have been working with us and, in fact,
we are now--one of the things is the ability to monitor our
systems in real time to monitor for----
Mr. LUETKEMEYER. How are you fixing the problem?
Mr. KOSKINEN. One of the things we have done is we have
used part of the $290 million we got this year from the
Congress to acquire state-of-the-art software that allows us to
increase our ability to monitor the systems in real time.
Mr. LUETKEMEYER. What is another one?
Mr. KOSKINEN. Another one is we have moved--we have
identity cards that now instead of worrying about changing
passwords every 90 days, one of the IG recommendations is to
make sure we did that, you cannot run my computer without not
only my number, but without putting this into the computer. One
of the things we have been recommended to do by GAO and IG is
to worry not only about our computer operations, but about our
servers and access to our servers. And again, if we get some of
the additional funding in the 2017 budget, we want to move to
PIV cards to access to any piece of IRS IT equipment. So you
could not use a piece of IT server or otherwise without having
what is called a PIV card as well as a number.
Mr. LUETKEMEYER. Do you have a system in place by which you
are monitoring and addressing all of these with timelines on
your expectation of trying to solve these problems?
Mr. KOSKINEN. Yes.
Mr. LUETKEMEYER. What is the longest timeline you have and
what is the shortest you have?
Mr. KOSKINEN. I would have to take another look at it for
you but the longest timeline is probably in to next year and
that is a resource-related thing. The shortest timelines----
Mr. LUETKEMEYER. So if we had you back a year and a half
from now all these 200, including the high priority ones, you
would hope to have them all done.
Mr. KOSKINEN. Yes. My goal is to--again, we get as you move
down the list of priorities we run into resource constraints.
Mr. LUETKEMEYER. IRS has got a perception problem with the
American people with regards to how you do your job. In my
district there is a city named Jefferson City. It is the
capital city of Missouri, and there is not another office
within 120 miles that is staffed by an IRS person. The
Jefferson City office only has one person in it. And during the
time period from January 25 to February 12 nobody was in the
office. The notice on the window said that they were going off
for training. That is wonderful, the staff has to be trained,
but you train them in the middle of the season and then not
leave the office occupied by somebody that can help. And we
wrote to you about this and you sent back a letter, which is
fine and you explained that you can go online and get some of
the questions answered, but by your own admission over 50
percent of the calls do not get through.
Mr. KOSKINEN. Now we are up to 70 percent getting through,
but we are doing better. You are right we should not train
people in the middle of filing season.
Mr. LUETKEMEYER. It certainly has a perception problem for
you. There is a lot of discussion with regards to the flat tax.
I realize that is a policy decision, but from the standpoint of
the IRS and being able to implement a flat tax, how much would
it save you from people being hired and the money being
expended because of the simplification of that would you
estimate that it would help your budget problem here?
Mr. KOSKINEN. I do not think I have a number for you but
clearly if you had a two-page form or a one-page form where you
got rid of all the deductions and everything else, people just
paid in effect either a flat tax or a graduated flat tax, it
would be simpler for taxpayers and it would be much simpler for
us. Somebody would have to make sure that the numbers are right
and we have to follow up with people, we have to answer
questions, but there would be far fewer questions.
Mr. LUETKEMEYER. What is the total budget that you have for
the IRS?
Mr. KOSKINEN. The total budget this year is $11.2 billion.
Mr. LUETKEMEYER. Can you give me a percentage of what you
would anticipate saving of the 11.2 if you went to a flat tax?
Mr. KOSKINEN. I have not looked at the numbers but we would
save a lot.
Mr. LUETKEMEYER. Thank you, Mr. Commissioner.
Chairman CHABOT. Thank you, the gentleman's time has
expired. The gentleman from Kansas, Mr. Huelskamp, who is the
chairman of the Economic Growth Tax and Capital Access, who
held the hearing this morning that the Commissioner testified
before the Committee, and he is recognized for 5 minutes.
Mr. HUELSKAMP. Thank you, Mr. Chairman. I appreciate the
opportunity to ask the Commissioner some questions. We had a
great Subcommittee hearing this morning talking about tax
simplification and how I think all of our four witnesses agreed
the Tax Code was biased against small businesses and was
obviously not helpful and they spent a lot more per employee
per business for tax compliance then otherwise.
The one question I had for then that I direct to you,
Commissioner, first of all, is what in the IRS what reassurance
can we have? What process is at the IRS and here is how we look
out for small businesses rather than the large corporations,
who certainly have a Tax Code that they are able to understand
and use, but not our smallest businesses across America?
Mr. KOSKINEN. Well, as I have noted, we have gone out of
our way to develop what has been viewed as a very positive
website with as much instruction in understandable language for
small businesses about how to start a business, what the
obligations are, how you file your return, how you are
answering as many questions, and giving them as much advice in
advance as to how to actually work their way through it. We put
up frequently asked questions and answers. We have tax forms
for preparers. We get about 10,000 preparers every summer in
which we spend--and most of their clients are individuals and
small businesses and we spend time with in sessions. There are
three or four sessions a day. We do five of them across the
country and we take their feedback as to what it is we should
be providing to give them better information so they can better
provide advice to their clients.
The vast majority of small businesses use preparers, so
that is one way we can actually provide service. We continue to
get feedback from business organizations and others as to where
there are difficulties with forms, where there are areas where
we could make improvements because they are a significant part
of the population and we take their concerns seriously.
Mr. HUELSKAMP. I appreciate that. We heard testimony today
and it has gone out that academic research as well has a
significantly higher tax compliance cause for small businesses.
How do we bring that down? When the tax compliance costs us
three, four, five, six, seven, eight times I mean, there are
certain tax credits, certain things they are not going to do,
not going to take that the largest corporations with a whole
assembly of tax lawyers and accountants to take care of it. How
do we make certain they get a fair shake in that system? I
understand taking input, but at the end of the day it is still
not working for them.
Mr. KOSKINEN. No. I think as we discussed a little earlier,
but briefly, and let me just elaborate, I think from the
standpoint of the Tax Code and tax laws when we pass those we
need to pay more attention to the impact on small businesses.
One of the things we have done wherever we have the regulatory
authority is to increase the safe harbors so that we, in fact,
allow you to take deductions or not capitalize expenses without
having to do a lot of complicated calculations, even change
your accounting systems in a straightforward way.
We have made some proposals for instance to try to
standardize the definition of small businesses because you go
through the Tax Code and you are eligible and some places you
are not eligible and other places it would make a helpful tax
simplification there if everybody knew whatever the Code
provision is, I am a small business or I am not a small
business. I think if we could have more recognition of whenever
a piece of legislation or a regulation even is passed, it is
one thing for a large corporation like the General Motors of
the world, it is another for somebody with 12 employees. If we
could bear that in mind, I think we could build more cushion
into the system for small organizations.
Mr. HUELSKAMP. I would encourage you to continue to develop
those and simplify those for small businesses because they
believe the system is loaded against them and I think they are
right. A couple things, privately we visited about--Mr.
Commissioner, I think about a month ago, we talked about the
political activity definition which Congress has done more work
on that. What do you anticipate, if we do not adopt a language
that restricts your activity on that and proceeding ahead with
that redefinition, what could we expect as Congress come
October 1?
Mr. KOSKINEN. Well, as I have said and talked to you, we
would not do anything that would surprise anyone. So we would
continue to keep everybody advised. The Inspector General said
that part of the problem is or focus was that the facts and
circumstances in all of the examples in the regs are just too
complicated. So one of the things we have made clear in our
discussions with members on the Hill is that the goal is not to
change the rules of the game, the goal is to try to make them
clearer.
So basically it would try to make it easier for an
organization to be comfortable when they apply for a
determination, but, more importantly, when they are operating
that they have a pretty good rule of the road and rules have
been made as clear as they can and they do not have to worry
about somebody looking over their shoulder after the fact,
disagreeing with them because they have a different view of the
facts. So the goal there would be to simplify, not make more
complicated, the rules but not to change the basic fundamental
way that the system has been operating since the 1950's.
Mr. HUELSKAMP. And I appreciate that. We have heard
testimony from conservative groups they thought the definition
was pretty clear until about 2012, but all of the sudden it
looked like they were targeted and I think there is plenty of
evidence of that. One thing we did talk about that I have not
got from you yet, you had identified to me and claimed IRS had
fired over 1,000 individuals in the last year and I wonder if
you could provide that listing on behalf of the Committee?
Mr. KOSKINEN. We will get you that answer in the next few
days because we did commit we would do that for you.
Mr. HUELSKAMP. I appreciate that. Thank you, Mr. Chairman,
I yield back.
Chairman CHABOT. Thank you, the gentleman yields back. I
just had one final concluding question here. We had talked in
my office about people getting those calls saying that you have
not paid your taxes, you are going to jail unless you send this
money, et cetera, and how common that was. You have already
addressed that I think quite well.
The other scam that I do not think we have brought up here
this afternoon is how common is it that people file their taxes
and then find out that some scam artist or criminal has already
filed a bogus tax return and gotten their refund and then Mr.
or Mrs. Taxpayer has to go through the process to prove who
they are and that they did not get it and it was some criminal
that got it rather than them. Does that happen frequently?
Mr. KOSKINEN. Thus far, cumulatively, we have sent about
2.7 million IP PINs which are identity protection PINs we give
to people who have been victims of identity theft. It is 5- to
600,000 taxpayers a year which, on the one hand, is small
percentage of 150 million, but our sense is it is far too many
in the sense that there is nothing more angst producing.
Chairman CHABOT. So you are saying a half-million it
happens to each year?
Mr. KOSKINEN. Right.
Chairman CHABOT. Now, in the scheme of things that might be
1 out of 300 or so?
Mr. KOSKINEN. Yes, but, again, our view is not to minimize
it for any individual taxpayer. There is nothing more anxiety
producing then filing and discovering somebody has got your
Social Security number and has filed in advance of you. So we
continue to try, as I say, to protect taxpayers from having
that happen. We have also gotten much better about streamlining
our process of dealing with taxpayers.
In fact, increasingly, we are able to stop those returns
before they get posted so that we can work the taxpayer through
the legitimate filing of their return in a matter of a few
weeks rather than several months, which was the system before.
Chairman CHABOT. And how successful have you been in
actually then criminally prosecuting those individuals that
have put the taxpayer into that unnecessary situation?
Mr. KOSKINEN. We have put about 2,000 people in jail thus
far. We have about 1,700 investigations underway now. Part of
our problem is it started out with a lot of individuals. There
are still some of those in the United States and that is a lot
of people put in jail. Increasingly, as I said, we are now
dealing with organized crime syndicates around the world and
finding them and prosecuting them is obviously much more
difficult.
So our goal there is to simply stop them to the extent we
can or at least make it so difficult and complicated that it
limits their ability to have an adverse impact on individual
taxpayers. But I would stress our concern is if we had it down
to 10, it would be 10 too many because it is a terrible thing
for a taxpayer to have that happen to them.
Chairman CHABOT. If you want any advice from the chair of
this Committee, throw the book at them.
Mr. KOSKINEN. Yes, we do. The courts have been good. The
average sentence is about 3-1/2 years in jail.
Chairman CHABOT. Because I do think that the person who has
been violated in that manner, it is probably a huge deal to
them, and understandably so, so they need to be protected and
we are in a position to do everything we can to try to protect
them, so we appreciate your cooperation in going after those
folks. We appreciate your testimony here this afternoon.
The Committee on Small Business remains dedicated to
helping small businesses and their hard-working employees by
reducing any unnecessary complexity in the Tax Code, and there
is certainly more than ample evidence that there is that
complexity. And it is our responsibility, ``our'' being the
members and elected representatives of the American people,
because we are the ones that enact the Tax Code.
It is not your fault. You enforce it, so we need to get our
act together and it is our duty to identify these problems,
call attention to them, and pursue appropriate solutions. And,
Commissioner, we look forward to working with you in that
endeavor as we move forward, so thank you for your testimony
here this afternoon.
I would ask you now to consent that members have
legislative days to submit statements and supporting materials
for the record. Without objection, so ordered.
And if there is no further business to come before the
Committee, we are adjourned.
[Whereupon, at 3:46 p.m., the Committee was adjourned.]
A P P E N D I X
INTRODUCTION
Chairman Chabot, Ranking Member Velazquez and Members of
the Committee, thank you for the opportunity to discuss the
IRS's ongoing efforts in the area of tax simplification.
Because tax law simplification requires changes in tax
policy, which is the domain of Congress, the White House, and
the Treasury Department, the IRS as tax administrator does not
have a direct role in simplifying tax laws. We do, however,
have a responsibility to make it as easy as possible for
taxpayers to fulfill their tax obligations, and in that way, we
can contribute to tax simplification.
Against that backdrop, the IRS recognizes the critical role
played by small businesses and self-employed taxpayers in our
country as engines of economic growth, and we understand the
need for the IRS to do its part to ensure these businesses can
flourish. While the complexity of the tax code and the limits
of our constrained resources create challenges for us in this
area, I can assure this Committee that the IRS is committed to
doing everything possible to help small businesses and self-
employed taxpayers fulfill their tax obligations.
SIMPLIFYING TAX COMPLIANCE FOR SMALL BUSINESSES
Small businesses, from sole proprietors who file Form 1040
with a Schedule C to small corporations and partnerships, must
not only familiarize themselves with complex aspects of the tax
code but also keep up with tax code changes, creating
challenges for them in complying with the tax laws. As a
result, the IRS is continually seeking ways to help these
business owners in their efforts.
The compliance assistance the IRS provides to small
businesses takes many forms, and includes: simplifying tax
forms and notices; streamlining policies and procedures;
providing regulatory relief, easing recordkeeping requirements;
and voluntary compliance programs aimed at small business. We
rely on feedback from a variety of sources in the tax industry
and small business community to help us determine what actions
we can take that would be most helpful.
Following are just a few examples of recent actions the IRS
has taken to reduce burden on small businesses and help them
comply with the tax laws:
Tangible Property Regulations. In February 2015, the IRS
announced a simplified procedure for businesses to use to make
it easier for them to apply regulations issued in 2013
governing tangible property. The regulations clarify when
expenses for tangible property are deductible repairs or
capital improvements. The new procedure, requested by
businesses owners and tax professionals, allows small
businesses to change a method of accounting under the
regulations on a prospective basis. The new simplified
procedure is generally available to small businesses, including
sole proprietors, with assets totaling less than $10 million or
average annual gross receipts totaling $10 million or less.
Increased Expensing Thresholds. In issuing the tangible
property regulations described above, the IRS requested comment
on the $500 safe harbor threshold on amounts spent to acquire,
produce or improve tangible property that would normally
qualify as a capital item. The threshold can be used by
businesses without an applicable financial statement, and
allows them to take an immediate deduction on such expenditures
rather than depreciating them over many years. Small businesses
told the IRS that the $500 threshold was too low to have its
intended effect of reducing paperwork and recordkeeping
requirements. In response, the IRS in November 2015 increased
the threshold to $2,500.
Voluntary Compliance Program for Certain Retirement Plan
Sponsors. Since 2014, the IRS has been offering certain small
business owners with unfiled retirement plan returns the
opportunity to come into compliance and reduce potential
penalties. The voluntary compliance program, which began as a
pilot and was made permanent in 2015, is designed to help small
businesses that may have been unaware of reporting requirements
that apply to their plans. Businesses that fail to file
required annual retirement plan returns can face stiff
penalties--up to $15,000 per return. But under this program an
eligible small business that voluntarily comes into compliance
pays only $500 for each delinquent return filed, up to a
maximum of $1,500 per plan for multiple delinquent returns. The
voluntary compliance program is generally open to small
businesses with plans covering a 100-percent owner or the
partners in a business partnership, and the owner's or
partner's spouse (but no other participants), and certain
foreign plans.
Streamlined Application Process for Tax-Exempt Status. The
IRS created Form 1023-EZ, Streamlined Application for
Recognition of Exemption Under Section 501(c)(3) of the
Internal Revenue Code, in 2014 to give small organizations a
less-cumbersome option for qualifying for tax-exempt status.
Most organizations with annual revenue of $50,000 or less and
assets of $250,000 or less are eligible to use the 1023-EZ,
which is three pages long, compared with the standard 26-page
Form 1023. Prior to introduction of the 1023-EZ, all
organizations seeking tax-exempt status went through the same
lengthy application process, regardless of size, creating
delays for applicants. It now takes organizations using the
1023-EZ an average of less than two weeks to receive a
determination on their application, compared to several months
before the form was introduced. Use of the 1023-EZ has also
helped contribute to a decline in the inventory of pending
applications for tax-exempt status. Open inventory at the end
of Fiscal Year (FY) 2015 was 11,616, compared with 65,719 at
the end of FY 2013, a reduction of approximately 82 percent.
Home Office Deduction. In 2013, the IRS began offering
taxpayers the option of using a simplified method to calculate
the home office deduction, a tax break that is widely used by
individuals who operate home-based businesses. Normally,
taxpayers claiming the deduction are required to fill out a 43-
line form, Form 8829, Expenses for Business Use of Your Home,
which often involves complex calculations of allocated
expenses, depreciation and carryovers of unused deductions.
Instead, taxpayers choosing the simplified method need only
complete a short worksheet in the tax instructions and enter
the result on their income tax return. This simplified method
has substantially reduced the paperwork and recordkeeping
burden for small businesses.
ENFORCING THE TAX LAWS AND ENSURING FAIR TREATMENT
Even as we seek to provide top-quality service to small
business taxpayers, the IRS also must carry out a robust
enforcement program. While the IRS has an obligation to make
sure all individuals and businesses pay the taxes they owe, it
is especially critical in the small business community, in
order to maintain a level playing field for all business
owners.
The enforcement activities we conduct help ensure that
those small bu8siness owners who are fulfilling their tax
obligations are not disadvantaged by others who may be cutting
corners, whether that involves income taxes, employment taxes,
or the classification of workers as employees or independent
contractors.
In many cases, actions taken to improve enforcement can
also help taxpayers and increase voluntary compliance. An
excellent example is our new Employment Tax Early Interaction
Initiative, which was launched last December.
Under this initiative, the IRS seeks to identify employers
who appear to be falling behind on their interim employment tax
payments before they file their annual employment tax returns.
We offer helpful information and guidance through contacts such
as letters and automated phone messages. In the past, the first
attempt by the IRS to contact an employer having payment
difficulties often did not occur until much later in the
process, after unpaid tax obligations were already beginning to
mount. This initiative is designed to help employers stay in
compliance and avoid interest and penalty charges. This
initiative can be seen as a more efficient enforcement activity
or a form of improved taxpayer service, but we believe it is
both.
Within the employment tax area, another important component
of our efforts to ensure small businesses meet their
obligations involves helping businesses that outsource some or
all of their payroll and related tax duties to third-party
payroll service providers (PSPs). While most PSPs do a good job
of helping small businesses meet filing deadlines and deposit
requirements, businesses sometimes can fall prey to
unscrupulous PSPs that defraud clients and abscond with their
payroll tax deposits, leaving the employer liable for amounts
they thought had been remitted to the IRS but were not.
We have taken many steps to help protect employers from
becoming victims of unscrupulous PSPs, and to provide
assistance when fraud does occur, including the following:
Unscrupulous PSPs sometimes change the
address of their clients (without their clients'
consent) to that of the PSP, so that the client never
sees tax delinquency notices sent by the IRS. In 2015,
the IRS began sending identical notices to both the old
and new addresses on file for an employer after an
address change is received.
In 2014, we created the Inquiry Personal
Identification Number (PIN), which is used by business
owners who use PSPs. They can use their Inquiry PIN to
access the Electronic Federal Tax Payment System
(EFTPS) to check whether tax payment submissions were
made timely on their behalf by their PSP. Additionally,
we are working to modify the EFTPS to allow for the
issuance of emails to business owners when their PSP
makes or cancels tax payments.
We made changes to our offer-in-compromise
(OIC) program to make it easier for a business
defrauded by a PSP to obtain an OIC. Revised document
requirements for such offers allow our OIC specialists
to process offers submitted by these taxpayers more
expeditiously than they otherwise would be.
In conducting our enforcement program, the IRS strives to
ensure all taxpayers, including small businesses, receive fair
treatment in their dealings with us. One important aspect of
ensuring fair treatment involves raising taxpayers' awareness
of their rights when interacting with the IRS, especially when
tax disputes arise. In 2014 the IRS adopted a Taxpayer Bill of
Rights that we believe is a cornerstone document that will help
taxpayers, including small business owners, understand their
rights in the tax process.
The Taxpayer Bill of Rights contains 10 fundamental rights
that every taxpayer should be aware of, such as the right to
receive quality service from the IRS, the right to pay no more
than the correct amount of tax, and the right to retain
representation when a taxpayer has a disagreement with the
Service. Each one of these 10 rights is in our tax code, but
the length and complexity of the code make it difficult to
understand these rights or even find where they are in the
code. Our employees believe in these rights and are doing their
best to advise taxpayers about them and to support them in
their day-to-day activities. To further strengthen these
efforts, the IRS is working expeditiously to implement the
provisions passed in the Protecting Americans from Tax Hikes
Act of 2015, which adds to the Commissioner's duties the
requirement to ensure that employees of the IRS are familiar
with and act in accordance with taxpayer rights as afforded by
other provisions of the Internal Revenue Code.
NEED FOR ADEQUATE RESOURCES AND LEGISLATIVE SOLUTIONS
It is important to note that continuing initiatives like
the ones that I have described in my testimony depends on the
IRS receiving adequate resources to fund them. Our efforts to
assist small business taxpayers are challenged by the difficult
budget environment we are in. The IRS's funding was cut
significantly for the five years from 2011 to 2015, and those
reductions have taken a toll on both taxpayer service and
enforcement programs.
Congress did approve $290 million in additional funding for
the IRS for FY 2016, which we appreciate. The additional funds
were directed to be used to improve service to taxpayers,
strengthen cybersecurity and expand our ability to address
identity theft. This was a major step in the right direction.
But even with this additional funding, we are still under
significant financial constraints, as the IRS appropriation
remains $900 million below the FY 2010 enacted level, and the
reductions are more significant in inflation-adjusted terms.
As a result, we will need to continue the exception-only
hiring policy that began in FY 2011, leaving us unable to
replace most employees we lose this year through attrition. In
fact, we expect the IRS workforce to continue to shrink by
another 2,000 to 3,00 full-time employees during FY 2016,
equaling a loss of over 17,000 full-time employees since FY
2010.
Therefore, I continue to urge Congress to approve the
President's FY 2017 Budget for the IRS, which requests a base
increase of $530 million over the FY 2016 enacted level. This
would support improvements to a wide range of taxpayer service
activities and investments to help prevent identity theft and
refund fraud and to reduce improper payments. The Budget also
proposes a multi-year program integrity cap adjustment to
restore and improve tax enforcement activities, including a
$515 million investment in FY 2017 to reduce the deficit and
narrow the tax gap. If approved, the cap adjustment would yield
an estimated net taxpayer savings of $46 billion over the next
10 years.
As important as adequate funding is to improving our
efforts to help small businesses, Congress also has an
important role to play by passing legislative proposals that
would simplify tax administration. In that regard, let me
highlight several important legislative proposals in the
President's FY 2017 Budget in the area of small business:
Simplified Accounting Methods. Although
current law contains various provisions granting relief
to small businesses from complex tax accounting rules,
the eligibility requirements for these forms of relief
are not uniform. They rely on varying forms of gross
receipts tests, with widely different exception
thresholds, and different rules depending on the
classification of a taxpayer's business activities.
Therefore, a uniform definition of a small business for
determining applicable accounting rules would simplify
tax administration and taxpayer compliance. The
Administration's proposal would create a uniform
business threshold, set at $25 million in average
annual gross receipts and indexed for inflation, for
qualifying for exceptions from certain accounting
rules.
Increased Expensing Limitation. Section 179
of the Internal Revenue Code allows taxpayers to elect
to deduct up to $500,000 of the cost of qualifying
depreciable property placed in service during a taxable
year, rather than depreciating the asset. The
Administration's proposal would increase the $500,000
limit to $1 million. This would not only reduce the
after-tax costs of tangible depreciable assets, but
also provide accounting simplification for many small
businesses, by allowing them to avoid the complexity of
tracking depreciation. As with the current limit, the
proposal $1 million cap would be adjusted for
inflation.
Increased Deduction for Start-Up Expenses.
Current law allows new business owners to deduct $5,000
of start-up costs for the first year they are in
business. Businesses organized as corporations or
partnerships may also deduct $5,000 in organizational
costs in their first year. To support new business
formation and job creation, the Administration's
proposal would allow up to $20,000 of new business
expenditures, including organizational costs, to be
deductible in the first year. As under current law,
businesses would be allowed to amortize, over 15 years,
start-up costs that exceed the deductible limit. The
proposal would also consolidate various Code provisions
related to new business expenditures, reducing burden
on new business owners.
Improving the Small Business Health Care Tax
Credit. The Affordable Care Act permits small employers
to take a tax credit for a portion of the cost of
providing health coverage for their employees. To be
eligible, employers must have no more than 25 full-time
equivalent employees and pay at least half of the
employees' health premiums. Also, the employees'
average annual wages must not exceed a specified level,
indexed for inflation. That amount for 2016 is $51,800.
The credit is phased out on a sliding scale between 10
and 25 full-time employees, as well as between an
average annual wage of $25,900 and $51,800 in 2016. The
administration's proposal would raise the 25-employee
limit to 50 and begin the phase-out at 20 employees,
rather than 10. The proposal would also change the way
the phase-out rules are coordinated to provide a more
gradual, combined phase-out.
Chairman Chabot, Ranking Member Velazquez, and members of
the Committee, this concludes my statement, and I would be
happy to answer your questions.
House Small Business Committee Hearing on ``Keep It Simple:
Small Business Tax Simplification and Reform, the Commissioner
Responds'' QFRs
Chairman Steve Chabot
You state in your testimony, ``We do not have a direct role
in tax law simplification since tax policy is the domain of the
Congress, White House, and Treasury Department . . .'' However,
at least count, statutes passed by Congress accounted for fewer
than 3,000 pages as compared to 9,000 pages of regulations.
1. Is it your contention that regulations do not in any way
affect tax policy?
IRS response: Tax policy direction originates with
laws enacted by Congress. Treasury regulations
implement the law enacted by Congress and reflect tax
policy and tax administration decisions made by the
Treasury Department and the Internal Revenue Service.
Responsibility for tax policy decisions within the
Department of Treasury rests with the Assistant
Secretary for Tax Policy, and attorneys from the IRS
Office of Chief Counsel participate with Treasury
attorneys in the Office of Tax Policy in drafting
regulations that reflect these tax policy decisions.
Limiting the burden on taxpayers in ways that promote
sound tax administration is an important consideration
in that effort.
2. Doesn't the IRS have at least some control over how
lengthy or cumbersome to make these regulations?
IRS response: The IRS recognizes regulations are
often lengthy and complex. There are several reasons
for that. The Internal Revenue Code is itself very
complex. When Congress enacts tax legislation it often
gives only a statutory framework, and then gives the
Secretary authority to provide more specific rules in
regulations. This often requires the Secretary to
address a myriad of types of specific transactions and
taxpayers to whom the statute applies, and to do so in
a manner that builds on that statutory framework to
carry out Congressional intent. The Office of Tax
Policy and IRS Chief Counsel attorneys consult with
those in the IRS who have responsibility for
administering the relevant Code sections during the
drafting process to ensure the regulations are
effective and administrable. The public is also given
the opportunity to comment on the length, complexity,
and burden of the regulations in accordance with
various statutory requirements, such as the Paperwork
Reduction Act. So although some tax regulations are
lengthy and complex, the IRS Office of Chief Counsel
and the IRS strive, in our coordination with Treasury's
Office of Tax Policy, to make them no longer or more
complex than necessary.
It is important to note that in many instances it is
taxpayers and tax practitioners who ask for more
detailed regulations. In commenting on proposed tax
regulations, for instance, tax practitioners often
request more detailed guidance to provide taxpayers
with more certainty in complying with the very complex
statutory rules. Finally, even after regulations are
published, more detailed amendments to regulations are
sometimes necessary when, in the course of preparing or
auditing returns, gaps, ambiguities, or abuses are
discovered.
Congressman Cresent Hardy
According to a recent Office of Advocacy report, the United
States has over 28 million small businesses.
1. What are you and your agency doing to alleviate the
ongoing tax concerns of these 28 million small businesses?
IRS response: The IRS has a wide range of products, tools
and initiatives designated to assist small business owners in
understanding and meeting their federal tax responsibilities.
Products and tools on IRS-gov include:
Small Business Tax Center at https://
www.irs.gov/Businesses/Small-Businesses-&-Self-Employed
Provides resources for taxpayers who file
Form 1040, Schedules C, E, F, or Form 2106, as
well as small businesses with assets under $10
million, including information on:
Employer ID Numbers (EINs)
Forms and Publications
Self-Employment Taxes
e-File Employment Taxes
Provides a direct link from practitioner or
small business organization websites to IRS.gov
information that is designed for their members'
specific needs
Provides easy access to numerous resources
Online Learning
Small Business Taxes: The Virtual Workshop
Explains how small
businesses can meet federal tax
obligations in nine easy-to-understand
lessons, including:
What you need to
know about federal taxes
How to file and pay
your taxes electronically, and
How to manage
payroll so you withhold the
correct amount
IRS Video Portal--users can watch helpful
videos and webinars, including:
Navigating the Small
Business and Self-Employed Tax Center
Business Taxes for the Self
Employed
Avoiding the Biggest Tax
Mistakes, and
Small Business Owners: Get
All the Tax Benefits You Deserve
Online Tools and Educational Products
Small Business Events--ongoing IRS small
business workshops and events
Penalties at a Glance webpage
Provides information about penalty relief
options, eligibility and instructions
Recordkeeping Guidance
Provides detailed information, including a
YouTube video, to assist small business owners
in understanding recordkeeping requirements
Free Information Webinars
For Small Business Week, May 1-7, 2016, the
IRS hosted four informational webinars for
small business owners:
May 2 - Tax Tips for your
New Business
May 3 - Staying Afloat:
Planning for Emergencies Before they
Happen
May 4 - Worker
Classification: Employee or Independent
Contractor? - (in Spanish)
May 5 - Tip Reporting and
Tips v. Service Charges
Online Small Business Tax Calendar
Links due dates and events to help small
business owners meet tax deadlines
Includes an IRS Calendar Connector tool,
which allows access to calendar events from a
desktop
Allows users to have Calendar reminders
sent to their email inbox via RSS Feeds one or
two weeks in advance of when a form or payment
is due
North and South Carolina have partnered
with the IRS to create joint fed/state
calendars which are available on their
respective websites
The IRS also provides e-News for Small Businesses. This
electronic mail service provides tax information to over
309,000 subscribers. E-News is used to increase awareness of
the tools and products available. Taxpayers can sign up on
IRS.gov.
The IRS also develops and implements compliance assistance
programs to assist under-served business start-ups and improve
their knowledge of the tax code. Current efforts include:
Providing the Small Business Tax Center
information and other available resources to users when
they apply for a new EIN via the EIN application page
on IRS.gov
Leveraging IRS partnerships to deliver small
business tax information
Providing small business tax workshop
training materials to our partners for use in
presenting these workshops. In calendar year 2015,
there were more than 916 English language Small
Business Workshops held by IRS partners and more than
73 Spanish language workshops
Identifying small business issues for review
by federal advisory groups and implementing approved
recommendations
Encouraging partners/stakeholders to market
Low Income Tax Clinics (LITCs) to small business owners
who can't pay for return preparation and tax
controversy resolution
Partnering with LITCs to provide small
business owners with easy access to tax information,
online payment agreements and tools to combat business
ID theft
Partnering with agencies that interact with
start-up businesses (e.g., SBA, Postal Service) to
prominently place the IRS Small Business Tax Centers on
their websites
Increasing internal marketing of outreach
products for sharing with taxpayers
Providing our outreach materials within the
IRS operating divisions
Delivering business identity theft
prevention messages to startup businesses
The IRS continues to support new entrepreneur outreach
efforts by establishing relationships with entrepreneurial
organizations so they can include IRS information in their
curriculum and publications, and partnering with associations
that assist new entrepreneurs. To date, FY16 activities
include:
Customized materials and coordinated message
delivery at:
114 in-person outreach events directly
reaching over 3,499 direct participants
52 virtual events with 1,971 participants
including many new business owners
Materials distributed via 344 small business
email distribution lists, which reach thousands of
small business organizations
As noted in the written testimony, even as we seek to
provide top-quality service to small business taxpayers, the
IRS also must carry out a robust enforcement program. While the
IRS has an obligation to make sure all individuals and
businesses pay the taxes they owe, it is especially critical in
the small business community, in order to maintain a level
playing field for all business owners.
The enforcement activities we conduct help ensure that
those small business owners who are fulfilling their tax
obligations are not disadvantaged by others who may be cutting
corners, whether that involves income taxes, employment taxes,
or the classification of workers as employees or independent
contractors.
In many cases, actions taken to improve enforcement can
also help taxpayers and increase voluntary compliance. An
excellent example is our new Employment Tax Early Interaction
Initiative, which was launched last December.
Under this initiative, the IRS seeks to identify employers
who appear to be falling behind on their interim employment tax
payments before they file their annual employment tax returns
and are so far behind that payment of the entire tax due at one
time can be difficult. We offer helpful information and
guidance through contacts such as letters and automated phone
messages. In the past, the first attempt by the IRS to contact
an employer having payment difficulties often did not occur
until much later in the process, after unpaid tax obligations
were already beginning to mount. This initiative is designed to
help employers stay current and in compliance to avoid large
tax bills and interest and penalty charges. This initiative can
be seen as a more efficient enforcement activity or a form of
improved taxpayer service, but we believe it is both.
Within the employment tax area, another important component
of our efforts to make it easier for small businesses to meet
their obligations involves helping businesses that outsource
some or all of their payroll and related tax duties to third-
party payroll service providers (PSPs). While most PSPs do a
good job of helping small businesses meet filing deadlines and
deposit requirements, businesses sometimes can fall prey to
unscrupulous PSPs that defraud clients and abscond with their
payroll tax deposits, leaving the employer liable for amounts
they thought had been remitted to the IRS but were not.
We have taken many steps to help protect employers from
becoming victims of unscrupulous PSPs, and to provide
assistance when fraud does occur, including the following:
Unscrupulous PSPs sometimes change the
address of their clients (without their clients'
consent) to that of the PSP, so that the client never
sees tax delinquency notices sent by the IRS. In 2015,
the IRS began sending identical notices to both the old
and new addresses on file for an employer after an
address change is received.
In 2014, we created the Inquiry Personal
Identification Number (PIN), which is used by business
owners who use PSPs. They can use their Inquiry PIN to
access the Electronic Federal Tax Payment System
(EFTPS) to check weather tax payment submissions were
made timely on their behalf by their PSP. Additionally,
we are working to modify the EFTPS to allow for the
issuance of emails to business owners when their PSP
makes or cancels tax payments.
We made changes to our offer-in-compromise
(OIC) program to make it easier for a business
defrauded by a PSP to obtain an OIC. Revised document
requirements for such offers allow our OIC specialists
to process offers submitted by these taxpayers more
expeditiously than they otherwise would be.
Also, beginning July 1, 2016, the IRS will begin accepting
application materials under the new certified professional
employer organization (CPEO) program. The Tax Increase
Prevention Act of 2014, enacted Dec. 19, 2014, required the IRS
to establish a voluntary certification program for professional
employer organizations (PEOs). PEOs handle various payroll
administration and tax reporting responsibilities for their
business clients and are typically paid a fee based on payroll
costs. Unlike PSPs, PEOs report and pay payroll taxes under
their EINs, rather than the clients' EINs, and often hold
themselves out as employers or ``co-employers,'' even though
the latter is not recognized for federal tax purposes. To
become and remain certified under the new program, CPEOs must
meet tax status, background, experience, business location,
financial reporting, bonding and other requirements described
in the statute and regulations. As required by law, the IRS
will publish lists (to be updated quarterly) of PEOs that have
been certified under the program and of those whose
certification has been revoked or suspended, which may help
businesses locate reputable service providers.
In the written testimony at http://smallbusiness.house.gov/
koskinen testimony, we also highlighted the following recent
actions the IRS has taken to reduce burden on small businesses
to help them comply with the tax laws, and some important
legislative proposals in the President's FY 2017 Budget for
small business:
Recent examples of IRS actions to reduce burden on small
businesses.
Increased Expensing Thresholds
Home Office Deduction
Several important legislative proposals in the President's
FY 2017 Budget for small business, including:
Increased Expensing Limitation
Expanding Simplified Accounting for Small
Businesses and Uniform Definition of Small Business for
Accounting Methods
Increased Deduction for Start-Up Expenses
[all]