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99–834 2016

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 

Small Business Committee Document Number 114–055 

Available via the GPO Website: www.fdsys.gov 

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Congress.#13
(II) 

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 VELA ́ ZQUEZ, 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 

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(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Hon. Steve Chabot ................................................................................................... 1 

Hon. Nydia Vela ́zquez ............................................................................................. 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. 

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SBREP-219A with DISTILLER

(1) 

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, Vela ́zquez, 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 

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2 

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. Vela ́zquez for her opening statement. 

Ms. VELA ́ ZQUEZ. 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 onethird 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 

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3 

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 Vela ́zquez, 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 polSBREP-219A with DISTILLER

4 

icy 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. 

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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 

Vela ́zquez, 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 outof-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 outof-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 

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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 

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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. 

Vela ́zquez, is recognized for 5 minutes. 

Ms. VELA ́ ZQUEZ. 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. VELA ́ ZQUEZ. 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. VELA ́ ZQUEZ. 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? 

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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. VELA ́ ZQUEZ. 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. VELA ́ ZQUEZ. 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 

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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 

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hind 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 

Vela ́zquez, 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. 

SBREP-219A with DISTILLER

11 

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. 

SBREP-219A with DISTILLER

12 

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 

SBREP-219A with DISTILLER

13 

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. 

SBREP-219A with DISTILLER

14 

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 

SBREP-219A with DISTILLER

15 

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 

SBREP-219A with DISTILLER

16 

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 Vela ́zquez, 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. 

SBREP-219A with DISTILLER

17 

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? 

SBREP-219A with DISTILLER

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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 simSBREP-219A with DISTILLER

19 

pler 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, 

SBREP-219A with DISTILLER

20 

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 

SBREP-219A with DISTILLER

21 

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 

SBREP-219A with DISTILLER

22 

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.] 

SBREP-219A with DISTILLER

23 

A P P E N D I X 

INTRODUCTION 

Chairman Chabot, Ranking Member Vela ́zquez 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 proceSBREP-219A with DISTILLER

24 

dure 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 individSBREP-219A with DISTILLER

25 

uals 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. 

SBREP-219A with DISTILLER

26 

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 

SBREP-219A with DISTILLER

27 

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 inflationadjusted 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 

SBREP-219A with DISTILLER

28 

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 phaseout 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. 

SBREP-219A with DISTILLER

29 

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 

SBREP-219A with DISTILLER

30 

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 

Æ 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 

Æ Provides a direct link from practitioner or small business organization websites to IRS.gov information that is 

designed for their members’ specific needs 

Æ Provides easy access to numerous resources 

• Online Learning 

Æ 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 

SBREP-219A with DISTILLER

31 

Æ 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 

Æ Online Tools and Educational Products 

Æ Small Business Events—ongoing IRS small business 

workshops and events 

• Penalties at a Glance webpage 

Æ Provides information about penalty relief options, eligibility and instructions 

• Recordkeeping Guidance 

Æ Provides detailed information, including a YouTube 

video, to assist small business owners in understanding 

recordkeeping requirements 

• Free Information Webinars 

Æ 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 

Æ Links due dates and events to help small business 

owners meet tax deadlines 

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

Æ 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 

Æ 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. 

SBREP-219A with DISTILLER

32 

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: 

Æ 114 in-person outreach events directly reaching over 

3,499 direct participants 

Æ 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 

SBREP-219A with DISTILLER

33 

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 

SBREP-219A with DISTILLER

34 

to allow for the issuance of emails to business owners when 

their PSP makes or cancels tax payments. 

• We made changes to our offer-in-compromise (OIC) program to make it easier for a business defrauded by a PSP to 

obtain an OIC. Revised document requirements for such offers 

allow our OIC specialists to process offers submitted by these 

taxpayers more expeditiously than they otherwise would be. 

Also, beginning July 1, 2016, the IRS will begin accepting application materials under the new certified professional employer organization (CPEO) program. The Tax Increase Prevention Act of 

2014, enacted Dec. 19, 2014, required the IRS to establish a voluntary certification program for professional employer organizations (PEOs). PEOs handle various payroll administration and tax 

reporting responsibilities for their business clients and are typically 

paid a fee based on payroll costs. Unlike PSPs, PEOs report and 

pay payroll taxes under their EINs, rather than the clients’ EINs, 

and often hold themselves out as employers or ‘‘co-employers,’’ even 

though the latter is not recognized for federal tax purposes. To become and remain certified under the new program, CPEOs must 

meet tax status, background, experience, business location, financial reporting, bonding and other requirements described in the 

statute and regulations. As required by law, the IRS will publish 

lists (to be updated quarterly) of PEOs that have been certified 

under the program and of those whose certification has been revoked or suspended, which may help businesses locate reputable 

service providers. 

In the written testimony at http://smallbusiness.house.gov/ 

koskinen testimony, we also highlighted the following recent actions the IRS has taken to reduce burden on small businesses to 

help them comply with the tax laws, and some important legislative proposals in the President’s FY 2017 Budget for small business: 

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

• Increased Expensing Thresholds 

• Home Office Deduction 

Several important legislative proposals in the President’s FY 

2017 Budget for small business, including: 

• Increased Expensing Limitation 

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

• Increased Deduction for Start-Up Expenses 

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SBREP-219A with DISTILLER