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LESS IS MORE: THE INCREASING BURDEN OF

TAXPAYER PAPERWORK

HEARING

BEFORE THE

SUBCOMMITTEE ON REGULATORY AFFAIRS

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

MAY 25, 2005

Serial No. 109–35

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpo.gov/congress/house

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

CHRISTOPHER SHAYS, Connecticut

DAN BURTON, Indiana

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

CANDICE S. MILLER, Michigan

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

GINNY BROWN-WAITE, Florida

JON C. PORTER, Nevada

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

CHARLES W. DENT, Pennsylvania

VIRGINIA FOXX, North Carolina

——— ———

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. DUTCH RUPPERSBERGER, Maryland

BRIAN HIGGINS, New York

ELEANOR HOLMES NORTON, District of

Columbia

———

BERNARD SANDERS, Vermont

(Independent)

MELISSA WOJCIAK, Staff Director

DAVID MARIN, Deputy Staff Director/Communications Director

ROB BORDEN, Parliamentarian

TERESA AUSTIN, Chief Clerk

PHIL BARNETT, Minority Chief of Staff/Chief Counsel

SUBCOMMITTEE ON REGULATORY AFFAIRS

CANDICE S. MILLER, Michigan, Chairman

GINNY BROWN-WAITE, Florida

CHRIS CANNON, Utah

MICHAEL R. TURNER, Ohio

LYNN A. WESTMORELAND, Georgia

STEPHEN F. LYNCH, Massachusetts

WM. LACY CLAY, Missouri

CHRIS VAN HOLLEN, Maryland

EX OFFICIO

TOM DAVIS, Virginia HENRY A. WAXMAN, California

ED SCHROCK, Staff Director

DENA KOZANAS, Counsel

LAUREN JACOBS, Clerk

KRISTA BOYD, Minority Counsel

(III)

C O N T E N T S

Page

Hearing held on May 25, 2005 ............................................................................... 1

Statement of:

Everson, Mark W., Commissioner, Internal Revenue Service; and John

D. Graham, Ph.D, Administrator, Office of Information and Regulatory

Affairs, Office of Management and Budget ................................................. 9

Everson, Mark W. ...................................................................................... 9

Graham, John D. ....................................................................................... 36

Steinberg, Leonard, the Steinberg Group; Keith Hall, Hall and Hughes,

PLLC; and Larry Gray, Alfermann, Gray and Co. ..................................... 58

Gray, Larry ................................................................................................ 77

Hall, Keith ................................................................................................. 68

Steinberg, Leonard .................................................................................... 58

Letters, statements, etc., submitted for the record by:

Everson, Mark W., Commissioner, Internal Revenue Service, prepared

statement of ................................................................................................... 12

Graham, John D., Ph.D, Administrator, Office of Information and Regulatory Affairs, Office of Management and Budget, prepared statement

of ..................................................................................................................... 38

Gray, Larry, Alfermann, Gray and Co., prepared statement of ................... 79

Hall, Keith, Hall and Hughes, PLLC, prepared statement of ...................... 70

Miller, Hon. Candice S., a Representative in Congress from the State

of Michigan, prepared statement of ............................................................. 3

Steinberg, Leonard, the Steinberg Group, prepared statement of ............... 60

(1)

LESS IS MORE: THE INCREASING BURDEN OF

TAXPAYER PAPERWORK

WEDNESDAY, MAY 25, 2005

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON REGULATORY AFFAIRS, COMMITTEE ON GOVERNMENT REFORM

Washington, DC.

The subcommittee met, pursuant to notice, at 2 p.m., in room

2154, Rayburn House Office Building, Hon. Candice Miller (chairwoman of the committee) presiding.

Present: Representatives Miller, Lynch, and Souder.

Staff present: Ed Schrock, staff director; Dena Kozanas, counsel;

Lauren Jacobs, clerk; Krista Boyd, minority counsel; Cecelia Morton, minority office manager.

Ms. MILLER. I would like to call the hearing to order. I welcome

you all today.

We are here today to discuss the ongoing oversight of the Internal Revenue Service in its taxpayer paperwork burden reduction efforts, particularly in relation to the provisions under the Paperwork Reduction Act. Like paying taxes, paperwork is an inevitable

part of an American adult’s responsibilities. Each year, Federal

agencies collect a variety of information from individuals. This information might be helpful for the agencies, but it can also be a

huge nuisance for individuals and businesses.

For many individuals, tax paperwork is confusing and very time

consuming. In 2001, the Joint Committee on Taxation released a

study that stated individual taxpayers filing Form 1040 could encounter 79 lines on their return, 144 pages of instructions, 19 separate worksheets, as well as the possibility of filing numerous other

forms.

For small businesses, the burden is equally troublesome. In 2001,

the Small Business Administration Office of Advocacy released a

report on the regulatory costs of tax paperwork compliance faced

by small firms. At that time, they found that a typical small business faced a burden of over $1,200 per employee, actually, to comply with tax paperwork, recordkeeping and reporting requirements.

Small businesses, of course, make up 99 percent of all U.S. business and employ over one-half of our American work force. Yet the

tax compliance burden for them is more than twice that which is

faced by large firms.

Paperwork burden is not a new problem. The desire to reduce it

has long been recognized by this Congress and others before it. In

fact, in 1980, the Congress enacted the Paperwork Reduction Act

and established the Office of Information and Regulatory Affairs

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within the Office of Management and Budget, whose primary responsibility is paperwork reduction. In 1986 and then again in

1995, Congress passed amendments to the PRA and set Government-wide paperwork reduction goals of 10 percent for fiscal years

1996 and 1997 and then a 5 percent reduction for each of the next

4 fiscal years, and annual paperwork goals thereafter that reduced

burden to ‘‘maximum practical opportunity.’’

Unfortunately, to this date, these goals have not been realized,

and we certainly hope that today’s hearing will help us understand

how the Congress can assist the agencies in achieving these goals.

By the end of fiscal year 2001, these reduction goals would have

placed the Government-wide burden at 4.5 billion hours. But these

burden levels were a significant contrast to the mandated 35 percent reduction goal of 7.6 billion hours.

And now the burden is about 8 billion hours. Interestingly

enough, one agency is accountable for 80 percent of this figure—

of course, the Internal Revenue Service.

Information collected as part of the tax system is a principal ingredient in a very overstuffed pot of paperwork burden imposed by

the Federal Government. Present estimates show that nearly 6.5

billion hours of paperwork burden is a result of the IRS. Even

though the IRS accounts for 80 percent of the burden, it does not

account for 80 percent of the information collections. In fact, the

current estimates show that out of nearly 8,000 information collections Government-wide, IRS collections only account for approximately 800, which is roughly 10 percent. Of those 800 forms, only

10 are culpable for producing about 80 percent of the burden. Of

course, the basic tax returns, Form 1040 and its associated schedules, measure at 1.6 billion hours or 24 percent of all IRS burden.

Certainly to be fair, much of the IRS challenge in reducing taxpayer burden is a complex Internal Revenue Code passed by Congress. However, the Code’s complexity also underscores the importance of creating tax forms and instructions that are as clear as

possible and as understandable as possible. Moreover, even though

a statute may require the IRS to take certain action, the agency

does have the discretion in the manner and the frequency with

which the information is collected, and even if it needs to be collected.

The IRS has taken its own initiatives to curb the rise in its paperwork burden. In 2002, the IRS created the Office of Taxpayer

Burden Reduction. And the IRS has also expanded the E-government projects that it has by creating an interactive customer service link on the Web site, and increasing efforts for e-filing. Although the IRS administrative and E-government initiatives are a

huge step in the right direction, it will certainly take much more

to tackle this 6.5 billion hour goliath. So we’re hoping that today’s

hearing will examine how Congress may need to make adjustments

to the PRA to make significant changes to the burden.

I certainly look forward to working with all of you today and

hearing the testimony of our witnesses. And at this time, I would

like to yield to the ranking member, Representative Lynch, for his

opening statement.

[The prepared statement of Hon. Candice S. Miller follows:]

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Mr. LYNCH. Thank you, Madam Chairwoman.

First of all, I want to begin by thanking you for your willingness

to look at this issue. I want to thank Dr. Graham and Commissioner Everson for your willingness to come before the committee

and help us out.

I do share in the spirit of this hearing in terms of the overarching goal of reducing the paperwork for U.S. taxpayers in this

process. I do understand that sometimes the actions that we take

as Members of Congress, we actually make that problem worse

rather than help it. So I do not see it as your responsibility alone,

I think it is a shared responsibility between we in the Congress

and yourselves. You have just been given a more specific role in

this, I think. I understand I’m not holding anyone here to blame

for what we have been unable to do in the Congress, which is to

sort of simplify the whole process on our end.

I am concerned, however, that while we go at this goal, and it

is a laudable goal and we should stay at it, of reducing the paperwork and the time burdens on Americans who just want to file

their tax returns and pay their tax obligations, while we’re in this

process, it seems that the progress is slow. Again, that is not your

fault, it is our shared responsibility.

However, I do see across the country in various IRS offices, and

because 80 percent of this, of the paperwork instituted by Government activity is the responsibility of the IRS or in their jurisdiction, that seems to be where we can realize the greatest gains, I

guess, in our mission. I see that across the country we are reducing

staff would who otherwise be available to help taxpayers either in

call centers or in walk-in centers to help them with the process,

which remains fairly complicated for the average taxpayer.

Until we can reduce this to a level where hopefully people can

handle it on their own without professional help, I would like to express my concern about sort of a premature reduction in work force

for those who would help taxpayers within the IRS grapple with

the forms and with the whole process.

But I do appreciate both of you coming before us and working on

this problem. I think this is a bipartisan effort. That is the way we

approach it here in terms of a mutual goal, shared by both Republicans and Democrats here in the Congress.

Thank you, Madam Chairwoman.

Ms. MILLER. Thank you. If I could just remind the witnesses, in

the interest of time here, we try to keep your oral comments to

about 5 minutes. In fact, you’ve got these little boxes in front of

you, when you see the yellow light it shows you have 1 minute remaining, then the red light of course, says that 5 minutes is up.

If you are still speaking at that time, just try to wrap it up if you

could.

It’s the process of our committee here that we swear in all of our

witnesses, so if you could rise, please, and raise your right hands.

[Witnesses sworn.]

Ms. MILLER. Thank you very much.

Our first panelist today is Commissioner Mark W. Everson. He

is the Commissioner for the Internal Revenue Service, of course.

Commissioner Everson was actually confirmed in May 2003. Prior

to coming to the IRS, Commissioner Everson served as the Deputy

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Director of Management for the Office of Management and Budget.

He is the 46th Commissioner of the IRS.

Commissioner Everson, we want to thank you very much for attending the hearing today. We look forward to your comments, sir.

STATEMENTS OF MARK W. EVERSON, COMMISSIONER, INTERNAL REVENUE SERVICE; AND JOHN D. GRAHAM, PH.D, ADMINISTRATOR, OFFICE OF INFORMATION AND REGULATORY

AFFAIRS, OFFICE OF MANAGEMENT AND BUDGET

STATEMENT OF MARK W. EVERSON

Mr. EVERSON. Madam Chairwoman, Mr. Lynch and members of

the subcommittee. Thank you for the opportunity to testify on the

Internal Revenue Service’s continuing efforts to reduce unnecessary

paperwork burdens on the taxpayer.

As this committee well knows, individuals and businesses spend

more than 6 billion hours a year on tax paperwork and other tax

challenges. Together, the Internal Revenue Code and regulations

run for millions of words. In terms of pages, that is twice as many

pages as 20 years ago.

Burden is a direct result of the complexity of the Code. Not only

does complexity cause economic burden, it also obscures understanding. Complexity in the Tax Code compromises both our service and enforcement missions. Taxpayers who seek to comply but

cannot understand their tax obligations may make inadvertent errors or may ultimately throw up their hands and say, why bother?

In the enforcement context, complexity facilitates behaviors at

variance with those intended by Congress. Our goal is to impose

the least amount of burden necessary for taxpayers to meet their

tax responsibilities.

A certain amount of paperwork, of course, is essential to tax collection. Taxpayers must report what they make to the IRS. Their

incomes and businesses can be complex. Their deductions and credits can be complex. So the paperwork can be complex. That having

been said, we seek to reduce unnecessary paperwork and make the

filing process as simple and convenient as possible.

The Office of Taxpayer Burden Reduction at the IRS has aggressively pursued burden reduction initiatives. Since the Office was

launched in January 2002, we have reduced taxpayer burden by

over 200 million hours. One area of our initiatives involves filing

thresholds. We recently increased the Federal unemployment tax

deposit threshold from $100 to $500, reducing burden for over 2.6

million employers.

We also increased the threshold for filing Form 1040EZ and

Form 1040A from $50,000 to $100,000, decreasing taxpayer burden

by more than 5 million hours. And for small businesses, we increased the threshold for business expenses reported on Form

1040CEZ from $2,500 to $5,000. This enabled about 500,000 more

taxpayers to file this simpler form.

We are also working to reduce burden through other means. For

example, we are simplifying forms and instructions. We simplified

the Schedules K–1 for partnerships and S Corporations, reducing

burden by an estimated 95 million hours for the 20 million taxpayers who file these forms. In addition, we are actively considerVerDate 11-MAY-2000 09:29 Aug 16, 2005 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 D:\DOCS\22202.TXT HGOVREF1 PsN: HGOVREF1
10

ing allowing very small employers to file their employment taxes

returns annually instead of quarterly. We estimate that this action

alone could reduce burden on approximately 1 million businesses

by some 50 million hours.

The revolution in electronic filing also helps to reduce the paperwork burden. Electronic filing of taxes requires less paper and is

more accurate. Computers catch mistakes that would have been

made on paper and required more time to correct. This year for the

first time more than half of all individual taxpayers have filed electronically. Starting next year, we have mandated that all larger

corporations file electronically. This will reduce significant amounts

of paperwork and speed up audits.

Congress has a key role to play in reducing the paperwork burden. Dealing with complexity and paperwork is easier if the Tax

Code is stable. But tax laws change quite frequently. I’m sure you

saw this last week, but take for example the Jobs Act that you

passed last year. It brings important benefits to the economy and

does much to strengthen the Government’s hand in combating abusive shelters. But it also adds complexity to the Code. The Jobs Act

has 193 provisions, 178 of these require IRS actions like the

issuance of guidance, and the creation of new forms.

Before I close, let me briefly discuss tax reform, the real opportunity for significant simplification and burden reduction. Earlier

this year, the President created a bipartisan panel to examine ways

to ‘‘simplify Federal tax laws to reduce the costs and administrative

burdens of compliance with such laws.’’ In March, I appeared before the panel and made five suggestions concerning tax reform.

First, our economy is constantly evolving with change seemingly

ever-accelerating. Examples of change include transformation of

the work force to more self-employed individuals, businesses contracting out activities they had previously done themselves, the relatively greater portion of economic growth generated through

smaller, non-manufacturing businesses and increasing

globalization. It is vital to construct a tax system that recognizes

this dynamic and is built for the 21st century, not the 1960’s.

Second, policy options should be carefully assessed for their potential impact on attitudes toward compliance. Fairness and a perception of fairness are essential, as the President has recognized in

his charge that the reform proposals be ‘‘appropriately progressive.’’

Third, administerability is also an important consideration. Bolting on new programs to the Tax Code without significantly simplifying or eliminating existing elements may in fact make it more

difficult to collect the $2 trillion we need to fund the Government.

Fourth, there needs to be an apples to apples comparison. We

should not compare a sub-optimized existing system to a perfect

theoretical system. I can assure you from my conversations with

counterpart tax administrators that there are administrative and

compliance issues in all systems.

Finally, we must recognize the transitions issues associated with

migration to a new system or systems merit close attention. If the

transition is not properly planned and managed, the new system

will get off to a rocky start. After such a start, it may take decades

to recover.

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I wish to emphasize that these points are not offered to suggest

inaction. That would be perhaps the worst option. I strongly support the President’s call for simplification. Simplification is essential to burden reduction. Thank you.

[The prepared statement of Mr. Everson follows:]

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Ms. MILLER. Thank you very much.

Our next witness is Dr. John Graham. He is the Administrator

of OMB’s Office of Information and Regulatory Affairs. Born and

raised in Pittsburgh, Dr. Graham found and led the Harvard Center for Risk Analysis from 1990 to 2001. He was confirmed in July

2001. He is on leave from the faculty at Harvard School of Public

Health, where he taught graduate students the method of risk

analysis and cost-benefit analysis.

Dr. Graham, we certainly appreciate your coming today as well,

and look forward to your testimony, sir.

STATEMENT OF JOHN D. GRAHAM

Mr. GRAHAM. Good afternoon, Chairwoman Miller and Congressman Lynch. I am pleased to be here this afternoon to summarize

for you our recent report to Congress on the paperwork burden of

the Federal Government on the American people. This report we

have shared with you has some good news and it has some bad

news. And I will summarize a little bit of both of that.

On the good news side, in fiscal year 2004, we saw Federal agencies take steps to slash paperwork burden by 96.8 million hours.

While that roughly 100 million hour reduction is small compared

to the billions of hours of total burden, for those people who have

less burden that they have experienced as a result of these actions,

we owe them, the agencies, applause and an encouragement to do

more.

The bad news I must share with you is that new statutory requirements passed by Congress, and I’m sure some of them were

supported by the administration, caused an increase in the burden

of 119 million burden hours. The result of these two program

changes, reductions in discretionary paperwork, increase in congressionally mandated paperwork, is that the net change in paperwork burden has been up in fiscal year 2004.

However, lurking behind these numbers, and we focus on the

agency of concern here, the Internal Revenue Service, is some more

good news. That is, much of the Government-wide reduction in paperwork burden due to agency actions is attributable to the agency

that Commissioner Everson runs. Program changes at IRS reduced

burden by 137 million hours, a significant fraction of that from a

simplified individual income tax return. In this particular area of

IRS paperwork, there were adverse trends from statutory changes

from Congress which increased burden by 101 million hours.

But notice, for IRS the success of Commissioner Everson’s people

in reducing paperwork burden has overwhelmed the increases

passed in the Tax Code. This net accomplishment is 36 million

fewer hours of paperwork burden for the American taxpayer.

Now, I don’t mean to criticize necessarily these statutory changes

passed by Congress and supported by the administration. But I

want to explain to you how well-intentioned legislation may increase paperwork burden. An example is the recent tax benefit provided to school teachers. The Tax Code now allows teachers to subtract up to $250 from their taxable income for the purchase of

classroom supplies. To implement this tax benefit, IRS had to provide a new explanation on the 1040 about their eligibility. That is

additional paperwork.

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They also had to provide a separate worksheet which is needed

to be provided so school teachers seeking to claim this benefit can

document their eligibility and their need. This separate worksheet

increases paperwork burden.

So the illustration I’m giving you is just one concrete example

why, if we go provision by provision in the Tax Code and try to reduce burden, we’re going to have a long haul ahead of us. That is

of course why the President is deeply interested in a substantially

simplified Tax Code.

Our role at OMB in this area is an oversight one. Our desk officers at OIRA review over 3,200 information collections from Federal agencies each year. As you can imagine, with a couple dozen

staff, we focus our energies on some key areas. We look at new information collections or revised information collections with particular priority.

During my tenure, we have devoted a specific attention and priority to slashing agency violations of the Paperwork Reduction Act.

A typical agency violation is when they impose on citizens or taxpayers a requirement to fill out paperwork when they don’t have

approval from OMB to engage in that activity. We have adopted,

in this administration, a zero tolerance policy toward these paperwork violations. I am proud to say that since 1998, the number of

these violations has gone from 325 to zero in 2004, our most recent

report to this subcommittee.

Of course, we have a lot of work ahead of us. We now need to

work with agencies to prevent these violations from occurring in

the first place rather than fixing them after the fact, and much

work remains to be done in this subject.

So in conclusion, we’re making progress. But at the same time,

we are creating more paperwork burden with the laws we pass,

sometimes well-intentioned and constructive laws. It is a complex

problem and does not lend itself to easy solution.

Thank you very much.

[The prepared statement of Mr. Graham follows:]

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Ms. MILLER. Thank you both, very, very much.

Commissioner Everson, every time you hold that book up, I want

to dive under the desk, since I did vote yes for the ETI.

Mr. EVERSON. I can tell you, I have not read it all myself.

Ms. MILLER. A little evening reading there. [Laughter.]

I think certainly a way that, in part your testimony articulated

this, how we are ever going to get away from some of this paperwork burden is by using newer technologies. So I certainly applaud

you with the e-filing and some of these kinds of things. In fact, actually before I got this job, I was the Michigan secretary of state

where we have all the DMV there. We had gone in a couple of

years period actually from having almost a 2-hour average wait

time in our branch offices to about 5 minutes after we started initiating registration renewal by using technologies, fax, phone, Internet, etc. It’s somewhat of an analogy to what you are trying to do

there with e-technology, or e-filing.

Maybe you could flesh this out a little bit, some of the different

efforts. You did talk about that a bit, but some of the efforts your

agency has made to encourage that and how you can educate, I

think particularly various demographics of our society. I sometimes

say perhaps senior citizens are a little hesitant, although some of

these studies say they are more on the Internet than anybody.

Mr. EVERSON. Yes.

Ms. MILLER. I think people who perhaps have a language barrier

or some of these kinds of things might be hesitant to use the Internet or e-filing. How can we assist them?

Mr. EVERSON. I would make a couple of points here. Last year,

a little shy of 62 million individuals filed returns electronically.

That was something like 47 percent. This year, the filing season is

not quite finished, we get something like 8 or 9 million returns that

come in after the 15th for extensions. But we are well over 50 percent, we expect as time goes on we will still be over 50 percent, I

think it’s 66 or 67 million returns already filed electronically.

There are a couple of pieces of that. There are the pieces that

come in, the portion that comes in from paid preparers. The fastest

growth is the portions coming in from software where people are

doing the returns themselves. They buy a product and bring it

home and do it. The other thing that is grown very rapidly is something called the Free File Alliance. This is an initiative that John

and I both worked on from OMB earlier, when the President’s

management agenda was launched to work on electronic government. Over 5 million returns have been sent in through a consortium of some 20 companies that provide free access to the Internet.

You go to IRS.gov and then you pick a product and you can actually file your Federal return for free.

So that was set up to help middle income and disadvantaged

folks and it’s grown like a weed this is the third and final year of

the initial launch on it. We are now going to renegotiate with these

companies and I hope that it will stick around and continue to

grow.

I have been surprised at the growth of the electronic filing. I

thought it might peter out. It’s just the opposite. It’s become the

way of doing business. There are beta sites, we have 14,000 beta

sites around the country, they are using it. Lots of different playVerDate 11-MAY-2000 09:29 Aug 16, 2005 Jkt 000000 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 D:\DOCS\22202.TXT HGOVREF1 PsN: HGOVREF1
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ers, all interact with communities. So we are not going to get everybody over time, but we are doing more and more this way. It

is good. The refunds come in half the time. It cuts down on the

need for these RALs, the refund anticipation loans that are a predatory practice by the preparers and others. This is all good for taxpayers.

Ms. MILLER. Just following up on that, you mentioned, I think,

that there was a decrease in 5 million hours, I wrote that down,

a reduction when you went from a threshold of $50,000 to

$100,000. How do you determine even $100,000, a sort of arbitrary

number? Why not a million? How do you get to that number?

Mr. EVERSON. I think that what our folks do is they analyze, we

have some pretty good data from our research people about who

qualifies for what kinds of deductions or what is typical of a taxpayer that has $100,000 of income or $200,000 of income. Then you

make a straight-out comparison as to who is more likely to qualify

or not. And it’s professional judgment that goes into that kind of

a decision.

Ms. MILLER. Let me just ask you one more question here. Also,

you were mentioning that you were looking at a pilot program or

initiative where you would allow small businesses to file annually

rather than quarterly. In one of my former lives, I also did the

books in a family marina business. It was always such a pain to

be doing that on a quarterly basis. We always said, well, the Government wants us to do this so they can get the float on our money

rather than us having it.

So I really like the idea of going to an annual filing for some of

the small businesses. In fact, you could even make an argument,

I think, it’s a tax cut for small businesses, besides the paperwork

reduction burden and all these kinds of things. Where are you in

the process with that?

Mr. EVERSON. I think it’s 2 years away. Next year, pardon me,

I’m corrected. We expect to get it in by next year. It’s exactly the

kind of thing that we like to do. And again, let me make the argument, for whatever we had with the new system, stability really

helps you in an instance like this. Because the same people who

have to design new forms are the ones who come up with the best

ideas about simplifying things. If our teams of people are working

on implementing the 173 provisions from this, they can only worry

to a certain degree about where else they might simplify things.

So if we can get some stability in the system, maybe we can mine

some more ideas like that. I know you have another panel, we get

a lot of good ideas from small business groups and others about

where to head with these. We’re very receptive to that. We work

with OMB, they provide a good frame of reference and hold us accountable as we do these efforts, as do you.

But give us a little breathing room here and I think we can do

better.

Ms. MILLER. Great.

I’d like to recognize the ranking member, Representative Lynch,

for his questions.

Mr. LYNCH. Thank you, Madam Chairwoman.

Commissioner, I realize that the electronic filing is on the increase. Are there certain areas where we have made it less likely

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that people would file electronically? Are there certain types of returns that don’t lend themselves to the way we have things set up

right now, such as amended returns? Are those all non-electronic,

and are we doing anything to increase the simplicity for people who

have maybe there in that outlier group that is not currently coming

into the electronic filing process?

Mr. EVERSON. I would say that the tear line is not within the

family of individual returns. It is more importantly, the issue of

corporations and non-individual filers. We are, as I indicated in my

statement, we have mandated for corporations to file electronically

next year, the larger corporations and the larger tax-exempts. Taxexempts are a different animal, because there is total transparency

there, as you know. Their annual returns are actually public. That

is not the truth for corporations or individuals.

There is a tremendous savings in time, particularly for us, and

the help of processing everything as you go that way. With individuals, what’s happening now is as I indicated, practitioners more

and more, they get on this bandwagon, you have somebody who

prepares 50 or 100 returns, if they haven’t done it, once they do

it they never go back. I talk to practitioners, and the whole office

goes electronic, they don’t have as much paper any more in their

offices.

But there are still some individuals who prefer to file by paper.

I get letters, you mentioned the elderly, I get several letters a week

from the elderly that share with me about some question and

someone’s been doing his or her return for decades and they still

do it by hand. Usually it’s a simple return. The more complex you

get, the more complicated sources of income or rental income, the

harder it is for people to do it by hand now of course.

Mr. LYNCH. I’m just wondering, the other part of this, and the

Chair has already mentioned small businesses.

Mr. EVERSON. Yes.

Mr. LYNCH. And the burden, No. 1, on small businesses right

now is significant.

Mr. EVERSON. Yes.

Mr. LYNCH. What have we done, it was already suggested about

the time period for filing, but what are we doing now to help small

businesses deal with their burden in filing?

Mr. EVERSON. This is a part of our—as you indicate, this is the

bulk of the burden issue, if you will. We are constantly looking at

things. We simplified the mileage deduction in the past year, where

people could just take a standard rate for a higher number of vehicles than was the case before. We are always looking for opportunities here to increase the thresholds, if we have the latitude. Sometimes we don’t. Or I would say we take ideas from the various

groups, NFIB and others who represent small businesses.

What the IRS did 7 years ago, in 1998, was it reorganized under

the new statute so that it is organized around four taxpayer

groupings. One is small business and self-employed individuals. So

we have a group within that organization that is constantly interacting with them and working to get these ideas and to make

changes where we can. So it is an active part of the program that

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ports directly to the Commissioner of the Small Business unit so

it gets his personal attention, as it does mine from time to time.

Mr. LYNCH. OK. Thank you, Commissioner. Thank you, Madam

Chairwoman.

Mr. EVERSON. If I could respond to one point that the ranking

member made in your opening statement, we are committed to

service. We believe strongly that we have a balanced program on

services. We are doing some belt tightening here in line with the

President’s budget request.

But we believe particularly with the much higher level of services that we have on the phones that has been recovered over the

years in terms of both access to our people and also an improvement in tax law accuracy, answering questions about the code, the

complexities of the code, that we are getting a better result here.

I think you are referring to the closing of some of our walk-in

centers. Those are the highest cost facilities that we have. You are

also less likely to get the best answer there, because when you call

on the phone, sir, you get routed to someone who knows about

home office deductions or charitable contributions or whatever the

issue may be. The subject matter expert, as opposed to when you

walk into an office, you’re dealing with an individual who then has

to use more general knowledge and go to certain scripts as well.

But that is why we are doing this. GAO in fact has suggested

that if you have to take cuts and balance your services, that the

walk-in centers are a place to look, and that is what we have done.

Mr. LYNCH. Just in response to your statement, how was that determination made in terms of what offices get cut? I have heard

them all over the country. So I know it is fairly widespread.

Mr. EVERSON. Yes.

Mr. LYNCH. I just want to know what the criteria were.

Mr. EVERSON. We expect to make this announcement, in fact,

later this week. We used five broad categories, a couple were costs,

employee costs, facilities costs. One was demographics, one was geography and workload was another. So we weigh things like how

many EITC returns are there in the region serviced by the TAC,

how close is the TAC to a beta center. As I mentioned, we have

14,000 beta centers around the country.

It is a whole variety of factors weighted more heavily toward taxpayer issues, if you will, in terms of volumes of the services, are

there forms being asked for or is it tax law questions. It is actually

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Mr. LYNCH. Madam Chairwoman, if I may, are we outsourcing

any of this prep work? Is the IRS off-shoring it?

Mr. EVERSON. No. None of our work is off-shore. If you mean to

other countries. That issue comes, it has been raised by Representative Markey. There are some preparers of returns that have had

some of their work done overseas. That is not something we regulate directly. But we have said that we think in terms of transparency, anybody who is buying that service ought to understand,

ought to know that is being done. But none of the work being done

by the IRS under law can be done overseas. That is all done here.

Mr. LYNCH. Thank you.

Ms. MILLER. Closing these offices is your version of the BRAC,

I suppose? Not looking for a comment there.

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Mr. EVERSON. We would be lucky to get an up or down vote, a

yes or no vote on this, I think. [Laughter.]

Ms. MILLER. Representative Souder.

Mr. SOUDER. Certainly Thomas Freedman’s new book is going to

raise this outsourcing outside the country question. Many of us

strongly favor the ability to go to the private sector for collection

and other types of things. But as it goes overseas, it becomes a little more complicated on privacy questions and legal questions.

I want to address, I brought a question. First off, and then narrow it in, as a case in my district, that you can get back to me on.

Mr. EVERSON. Yes, sir.

Mr. SOUDER. First off, I think there has been tremendous

progress since I came in in 1994. I can tell over the last few years

our case work, which many of our offices do, if it is not immigration, many of the others are either Social Security or IRS.

Mr. EVERSON. Right.

Mr. SOUDER. The ability to get back more rapidly on more cases

and in a satisfactory way has been a pleasing change. In the first

couple of years, it was hard. We have seen it more frequently. It

does not mean everybody is always happy with it. But we have

seen that improvement.

I use e-filing myself now. But it illustrates several of the problems, I know a witness on our next panel is going to talk about the

home office. In many cases, like mine, my sisters and I have a partnership, so that is running through our personal returns, so we

have to have that. My wife has a job at the house, so we go through

this difficulty of how much of the desk can be deducted and how

much of this section, how much of the energy bill, because she only

works part-time at this job and it is only in one room of the house.

Clearly, one of the challenges that you face as is even pointed out

in these regs, and yesterday in meeting with CPA people as they

were up on the Hill, that complexity versus vagueness, the more

complex the Code, the less vague it is, the more simple the Code

is, the more vague it is and the more regulations you have to have

to enforce it. That is part of our dilemma here. If we micro-manage

and make huge, complex codes, then theoretically it is less vague.

But in the case that I have been dealing with for a couple of

years, and it is important to my district, Napanee Ford, if you

could have your staff look at the materials we gave you, because

it illustrates a number of problems. It is clear on trucks, it is clear

on trailers. I have the No. 1 RV manufacturing district in the

United States, close to three-quarters of them are made there.

There are vehicles that are used to pull smaller trailers. In fact,

if you think in terms of elephant ears at fairs or people selling you

lemonade at a fair or a hot dog, if you think in terms of gardeners

who have these little white things that they pull behind them when

they work on a lawn, the top 17 manufacturers of those are in my

district, in addition to the RVs.

Many of the dealers around the country sell kind of in between

not a Kenworth truck and not a pickup that haul these types of

equipment around. I have one dealer in my district that is being

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essarily clear in the law, and that different IRS agents interpret

this differently, which gives a competitive advantage to one dealer

over another, not to mention I do not think, and if there is a clear

change in policy, where all of a sudden this law is enforced at a

given point, how we in Congress can then look at that as to whether we intended this to be addressed in that fashion.

Mr. EVERSON. You have covered a fair amount of ground there.

First, I agree with what you said in terms of the general situation

on the Code. It is a delicate balance between setting general principles or bright lines, bright lines are always helpful, but the more

bright lines you set actually gives greater opportunity for the attorneys and accountants to find the little tear lines. It is a complicated question.

Returning to excise taxes, and I was briefed on this a little bit

this morning, if you look at excise taxes generally they account for

something like 31⁄2 percent of the total revenue stream of the Government that it is the $2.52 trillion we expect to take in this year,

some $70 odd billion. The excise taxes associated with trucks, I

gather, are just a little over $2 billion.

We did issue a new ruling that we felt clarified the standard

here. It really relates to some of the vehicles that are now being

used, as you say, to tow other vehicles. I guess this grew out of

changes in recreational vehicles where they got larger and larger

and then you had to basically have, I am told it is called a fifth

wheel. I said what was that, and they gave me a picture of it.

So this is a change to a vehicle. The question is, is this a tractor

or not. We have said that yes, this is.

Now, we issued those rulings, I gather this is a fairly new one

last year, 2004, I think it is, in terms of enforcement, which is the

second piece of your question. We select our audits based on either

a generalized criteria, what we see on returns, or we do get leads.

If your people in your district feel that somebody is getting away

with something they should not get away with, please tell us that.

We respond to leads like that.

The one part of your statement that I found distressing was the

assertion that two different revenue agents would be interpreting

the same set of facts differently. I am very concerned to hear that.

We have trained people working on excise taxes. It is a relatively

small group of people and I would imagine within Indiana it would

be the same person or persons who are calling around here.

So I will raise that when I go back. We will followup on the cases

you have raised. We do try to be consistent.

Mr. SOUDER. We will followup on how in effect a small vehicle

got turned into a truck. But the second thing is, these vehicles are

sold all over the United States.

Mr. EVERSON. Yes.

Mr. SOUDER. And the competition is all over the United States,

and this particular dealer is right in the heart of the center, and

may have been picked as an example to test the enforcement. What

I believe is there ought to not be selective enforcement. It ought to

be universal. We also need to know when there is a significant policy change that can affect a whole industry. Because this changes

the nature of the cost of the vehicles that people purchase, to know

there are going to be sudden excise taxes on hauling something

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home that they did not believe was covered by the law previously.

That is pretty much a policy change, to just having it be a simple

reg change.

Mr. EVERSON. I think you could go back and forth as to whether

it is a policy change or it is something that is reflecting a change

in the industry where Detroit or your people who fabricate changes

here make a very real change, because they are dragging along

these much bigger recreational trailers and needed to redesign the

vehicles. I am told here the question gets down to, do you disadvantage trucks ultimately of a certain size who may be paying

the tax, and then if you exempt others, if you view the two operating together.

There is a lot of complexity here. I will check on the circumstances here. You are entirely right, if we are doing something

that is specialized, we need to communicate it. People need to understand why we are doing it. I agree with that point as well.

Mr. SOUDER. It illustrates the danger in paperwork here, because

I think it was 80 percent of the cases wind up, even as you reduce

the paperwork, into these few cases that then drag on for years.

In this case, yes, they have altered it, but we are talking 17,000

pounds versus 34,000 pounds on a Kenworth. It is more of a pickup

on steroids, so to speak, although we are going to ban steroids.

[Laughter.]

But an oversized pickup, and yes, there may be a few up here,

and it is how do you distinguish between pulling a trailer for lemonade and elephant ears and a gardener from a huge almost fullsize RV. That is what we are trying to work through.

I thank you for your indulgence with this. I thank the Chairwoman. It is a dilemma, clearly, in how you get tons of paperwork,

because this has been generating a pile. This dealer is going

around saying, I have all this paperwork with IRS. What happens

is, when there is this type of change and how it is implemented is

exactly how we get into these situations.

Mr. EVERSON. Sure. I appreciate your raising it. I have already

told you more than I know. I will take it up when I get back to

the office.

Ms. MILLER. Before we excuse you both, I have one question for

Dr. Graham, I think, but perhaps both of you could answer it. I

have been trying to understand the methodology that the IRS used,

I think you used something called the A.D. Little. I am not quite

sure if that is the right term, but the methodology that you use.

Dr. Graham, in your written statement, you were saying that

there would be a one-time shift in estimated burden to the taxpayers when the IRS goes to a different kind of methodology. Perhaps you could enlighten me a little bit about what your thoughts

are on that. One-time shift, which direction is the burden going to

be going in, and hopefully in a positive trend line then, and then

what is the timeframe for implementing that kind of analysis with

the new methodology utilization?

Mr. GRAHAM. Thank you very much for that question.

We have been meeting quarterly with IRS on the development of

their new model for estimating paperwork burden. I do not really

know the answer to your question about what the overall direction

of the effect will be. But one of the things that is very valuable

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about the new modeling effort that they have put together is they

will be able to look at paperwork burden and estimate by subgroups within both individuals and the business sector, so you can

estimate changes due to regulation or policy on different segments

of the tax-paying public.

This modeling investment they have made over several years is

going to bring the measurement of paperwork burden at IRS in

terms of quality considerably beyond what we have in all the other

Federal agencies. I think that makes sense, given the 80 percent

figure that you noted at the beginning of the hearing, 80 percent

of this burden is at Treasury, mostly IRS.

Mr. EVERSON. I will just add one or two points on this. The old

model, it really, I do not think it held water, because what it did,

it just counted up the number of words and lines on a form. The

new methodology, what it does is it looks at that, but then it also

looks at the various attributes, is this going to result in more recordkeeping, is it going to result in calculations, it has something

like 21 different attributes that are collected so that you make an

overall calculation.

We have done that, it does show a spike up, a one-time adjustment. I think the piece for individuals went from 2.5 billion hours

to 3 billion hours or something of that magnitude. So it is not insignificant. But it will really help us, as Dr. Graham has indicated,

going forward, to have a much better calibration of impacts. It will

take a while as we work. We have not used this on a form yet. As

we go to work with OMB, there is some sort of indication that each

form takes a certain amount of time. We have to now go through

that process of updating those forms. So while we have an overall

estimate, we will roll it through at greater levels of detail over the

next, I think, 1 to 2 years.

Ms. MILLER. I will ask the ranking member if he has any additional questions.

Mr. LYNCH. Just one last one, it might be a loaded question. You

mentioned earlier, Commissioner, about the real elephant in the

room, so to speak, is the issue of tax reform. We continue in this

exercise, and we are doing our best here, but at the end, ultimately

maybe a better approach would be toward fundamental tax reform.

Excluding the whole issue of equity and all that, from a paperwork and efficiency standpoint, what in general terms would be the

best approach to tax reform in terms of just addressing the narrow

issue that we are talking about here today in terms of paperwork

reduction and the simplicity of filing? Is it more of a consumption

type arrangement or what are your thoughts on that?

Mr. EVERSON. That is a great question. One of the President’s

charges to the tax panel is to make sure that they look not just at

the VAT or sales taxes, but that they look at the existing income

tax scheme and reach a proposal there, along the lines of addressing just what you suggested.

When I testified before the tax panel in March, I mentioned a

couple of things. There are numerous credits now. There is something like seven different educational credits. Really tough for

somebody to figure out where they qualify for or where they do not

qualify for. That is a reduction in complexity and burden.

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There is the AMT that has received a lot of discussion. I think

that is a burden. Somebody goes through a whole calculation, you

get down to the bottom and we go, aha, we’ve got you. That is not

your real tax, it is actually $2,200 more. That is a form of complexity that breeds confusion, and I would suggest ultimately erodes respect for the law. Those are two areas.

I look particularly at corporate income tax. I do not think that

is something that you worry about per se. I think you are thinking

more of small businesses, the majority of which are organized, they

are not incorporated, they are not C-corps. I am thinking about

that in terms of the large corporations where complexity is now in

this increasingly global world, it works against compliance for the

IRS, people hide behind it.

I would like to see us reconcile this dynamic, this tension between the desire to increase book earnings, which drives shareholder valuations and decreased taxable earnings, because you get

some incongruities there that are a function of complexity, which

hurt compliance. Those are three areas I would mention.

Mr. LYNCH. Dr. Graham.

Mr. GRAHAM. Your question runs to the heart of one of the

charges of the President’s tax panel. It is going to be fascinating

to see when they rank those various systems how they stack up,

just as you say, in this narrow area but then weighing that against

the other requirements.

Just to give a feel for the complexity of that, as I mentioned the

tax benefit for school teachers in my oral statement, some simplified versions of the tax system will not have that benefit. So simplification may reduce paperwork, but it is going to draw some attention when those proposals come out.

Mr. LYNCH. Thank you. Thank you, Madam Chairwoman.

Ms. MILLER. I certainly want to thank both the witnesses today.

We appreciate your time and consideration and your very thoughtful testimony as well. We will excuse our first panel and take a few

minutes recess while our second panel gets themselves situated

there. Thank you both very much.

[Recess.]

Ms. MILLER. We will call the hearing back to order. Next, the

subcommittee will hear from Leonard Steinberg. Mr. Steinberg is

the president of the Steinberg Group, which is a consulting practice

that concentrates in the area of accounting, financial and administrative operations and taxpayer representation. He is also a member of the Small Business and Entrepreneurship Council. Mr.

Steinberg is a former member of the Taxpayer Advocacy Panel,

which is an organization created by the IRS that provides a forum

for citizens to make suggestions regarding IRS decisionmaking.

Mr. Steinberg, we appreciate your coming today. We look forward

to your testimony, sir.

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STATEMENTS OF LEONARD STEINBERG, THE STEINBERG

GROUP; KEITH HALL, HALL AND HUGHES, PLLC; AND LARRY

GRAY, ALFERMANN, GRAY AND CO.

STATEMENT OF LEONARD STEINBERG

Mr. STEINBERG. Thank you, Madam Chairwoman, Mr. Lynch and

I am sorry the other members of the subcommittee are not here.

I thank you for the invitation to participate in today’s hearing.

My testimony is based on my work with the Taxpayer Advocacy

Panel and also my work, my professional work in my consulting

and tax practices. Basically taxpayer burden really begins with enactment. Congressman Lynch, you had stated this very early in

your remarks.

In my previous testimony to the Small Business Committee,

chaired by Congressman Don Manzullo, I discussed the implications of tax law complexity and its associated disproportionate burden on small business. I look at this opportunity as to expand upon

that testimony.

As an example, the revised W–4 form, which was put out for

2005, the information regarding the Paperwork Reduction Act is

printed in extremely small print on page 2 of the form. The form

states that the time needed to complete this form will vary depending upon individual circumstances. The estimated average time is

recordkeeping, 45 minutes, learning about the law, 12 minutes,

preparing the form, 58 minutes. For 2004, the estimated times for

all of these were only about a minute longer for 2005, and yet all

of this information is printed on the form for a minute more.

The total time for this form is 115 minutes, almost 2 hours. This

form is a prime example of how burden is not reduced. From experience, both as a tax professional and someone who does consulting

to small businesses, I know that learning about the tax laws associated with this form takes a great deal longer than the estimated

12 minutes.

In addition, there are many employees who require multiple W–

4 forms due to changes in their personal circumstances and more

often, when they work at second or even third jobs. The Government does not employ a measurement tool to determine the cost to

small business employers in lost productivity. This lost productivity

can only be made up by additional hours spent by the employer or

passing the costs on to the consumer. This additional time affects

the employer’s quality of life and associated family issues as well,

especially for the small business entrepreneur.

The Paperwork Reduction Act language on these forms states an

average amount of time to correctly complete the forms. But these

times are arbitrary, in my opinion, and based on the ability of the

preparer. Once again, many small businesses must rely on paid

professionals and their assistance in order to comply with the tax

laws.

Now you have the issue of errors. When errors occur, the IRS

must spend the resources to notify the small business that a correction is necessary. These additional communications add significant

burdens to small business owners, since the letters sent by the IRS

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quired to pay for professional assistance in order to comply with

the notices.

In measuring burden, the Congressional Joint Committee on

Taxation scores tax law changes only for dollars and not for complexity on burden. This is a critical issue that Members of Congress

must understand.

One issue that neither the Commissioner nor Dr. Graham mentioned which is in my written testimony is the burden the tax code

puts on individuals in their State compliance. There is no

connectivity or communication, satisfactory communication, between the IRS forms and the States. Therefore every State has developed its own system of taxation, whether it is for income tax or

Federal unemployment. This only increases the burden on the

small business taxpayer.

In my testimony I have given many additional examples of where

the Taxpayer Advocacy Panel worked on issues directly related to

paperwork reduction, and Michael Chessman is here from the office

from which our committee worked on, and I am very appreciative

of the work and support that Michael and his office gave us. But

we analyzed issues of the payroll deposit penalties, the revised K–

1, the Schedule D, the 940, and I listed in my written testimony

approximately another 10 issues for which we were involved in.

In conclusion, I would like to say that the issue of burden on

small business falls squarely with the domain of Congress. The IRS

can only implement the will of Congress. The Paperwork Reduction

Act, if it is not going to be done away with, it really should be

modified to ease the burden on small businesses tax compliance.

Remember, good intentions do not always lead to the expected outcomes. Thus we have the reality of unintended consequences. That

is what the small business community is experiencing—the unintended consequences of the burden of all of this additional work

that has to do in order to maintain compliance.

Thank you.

[The prepared statement of Mr. Steinberg follows:]

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Ms. MILLER. Thank you very much. The subcommittee is going

to hear now from Mr. Keith Hall. Mr. Hall is a member of Hall and

Hughes. He is a CPA and also a member of the National Association for the Self-Employed, which is the Nation’s leading resources

for the self-employed and micro-businesses. Mr. Hall also participates in the NASE Tax Talk Service, where he answers specific

personal questions for thousands of small business owners every

year.

Mr. Hall, we appreciate your attendance at today’s hearing and

look forward to your testimony, sir.

STATEMENT OF KEITH HALL

Mr. HALL. Thank you very much, Chairwoman Miller, Ranking

Member Lynch. I appreciate the opportunity to be here today, both

as a small business owner and as a member of the National Association for the Self-Employed.

As such, I represent the over 250,000 NASE members and more

broadly, the 18 million micro-business owners which are those that

employ less than 10 people. In 1980, lawmakers much like yourselves recognized the increasing burden of Government regulations

and paperwork on all businesses and passed the Paperwork Reduction Act of 1980. This act, and its expansion in 1995, have had a

positive impact on what we are discussing here today. But I don’t

think the job is finished, especially for small business owners.

Even after the efforts of the last 25 years, the Small Business

Administration estimates that a small business owner incurs about

$7,000 per employee per year just to keep up with taxes, paperwork, reporting requirements. For many, this is like paying for another employee that never shows up for work.

Further, the IRS estimates that taxpayers will spend about 19

hours completing their 2004 tax return. For a small business owner

with a Schedule C, they will spend more time than that.

There are certainly a lot of numbers that we can throw around.

But the key point is that regulatory compliance and excess paperwork is still an issue for small business owners like me. Now, I

know we’re here to talk about paperwork reduction and not paperwork elimination, so hopefully there is a medium somewhere that

we can find. In fact, during the last 5 years, the IRS has made a

tremendous effort and had success in helping small business owners like me in managing the nightmare that is called the Internal

Revenue Code.

Their education and outreach efforts and their work within their

Office of Burden Reduction has been very good. Their commitment

to their Web site and availability of forms and information online

has been exceptional. The changes that Mr. Everson mentioned on

threshold requirements, of the ability to file a 1040A up to

$100,000, those things are a tremendous help to small business.

And I wanted to make it clear to the IRS that small business does

appreciate their efforts, especially since I haven’t gotten my refund

yet. [Laughter.]

Really, they have done a great job. But again, I don’t think the

work is done. It is very easy to generalize about the problem and

then kind of sit back and hope somebody else can fix it. So please

allow me to be specific, both to issue and to solution.

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Many small business owners operate out of their home and most

likely qualify for home office deduction. But many lose that deduction just because they can’t handle the form. They have to know

the difference between indirect expenses and direct expenses, what

type of mortgage interest they have, there are two different lines

for casualty losses, and as I mentioned in my written testimony, on

the one-page form, the words ‘‘see instructions’’ appear 16 times,

just on the form.

A solution would be to provide a standard deduction for the use

of a home office. The form could be two yes or no questions and

then pick a number from a chart. The net deduction would be

about the same, the net tax impact would be about the same, but

the taxpayer would save 2 hours and probably two Advil.

Another example is the current confusion related to worker classification. The small business owner knows they use an individual

to help in the business, but they don’t know if it is an employee

or an independent contractor. The IRS has a 20 point checklist to

help, but many of those items are subjective, and it is difficult to

get to a yes or no answer.

The solution is to simplify the process for identifying who is an

employee and who is not an employee. Developing a clear set of

rules will help all employers make the right decision on who is an

employee and who is not.

There are a lot of other examples to talk about, but again, the

common thread is the overall complexity of both the Internal Revenue Code and the paperwork required to maintain compliance with

that Code. The sheer volume of the forms and related calculations

can be overwhelming. This is particularly true for the small business owner, since they do not typically have the same access to accountants, attorneys and other professionals that big businesses do.

I believe that the most immediate solution is to continue to

strengthen the Paperwork Reduction Act and the Office of Information and Regulatory Affairs. Expanding OIRA with more funding

and more staff would make sure that the efforts continue. Expanding the oversight authority of OIRA is also critical. Currently the

IRS is not subject to the review process of OIRA, so that the biggest paper eater of all does not have the same rules that other

agencies do.

Additionally, the IRS Office of Burden Reduction should have

more funding and staff as well. This office has done a very good

job, as I mentioned, in helping redesign and simplify many tax

forms, but the job is bigger than they are.

On behalf of the NASE and for me personally, it is my request

that this subcommittee continue in the spirit of the Paperwork Reduction Act and in promoting the efforts of OIRA to reduce the burdens of regulatory compliance on small business. Every hour that

is not spent filling out a form can be spent creating a new job. And

I believe that’s what small business is all about.

Thank you very much.

[The prepared statement of Mr. Hall follows:]

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Ms. MILLER. Thank you very much.

Our next panelist this afternoon is Larry Gray. Mr. Gray is the

managing partner for Alfermann, Gray and Co. He served on the

IRS Commissioner’s Advisory Group from 1992 to 1994 and various

subcommittees as well, including compliance and small business.

Mr. Gray is also a member of the National Association of Tax Preparers.

Mr. Gray, we appreciate your coming to Washington. We certainly look forward to your testimony as well, sir.

STATEMENT OF LARRY GRAY

Mr. GRAY. Thank you, Madam Chairwoman, and Ranking Member Lynch.

As I go into my remarks, my remarks are based on being a practitioner in the field. But also currently, I am on the Electronic Tax

Administration Advisory Council. Then on a monthly basis, as the

Commissioner referred to earlier, we are one of the groups that

meets in Washington with the Small Business, Self-Employed, National Public Liaison. So my views today, as my two predecessors,

they spoke more on specifics and looking at paper. What I would

like to do is do a little different twist. I do get the opportunity to

look at the burden reduction through Michael Chessman’s office,

and I believe that’s doing a very good job.

But I want to put a flavor on more of the technology, where we

need to move to. With that, my first comment is on the Paperwork

Reduction Act. I believe it has failed its purpose. In my written report, I cite some of the same numbers that you started out today

with, Madam Chairwoman. So in order to not take time there, I

want to move on and look at some of the failures.

The first one I would like to look at is that the failure of the Paperwork Reduction Act can be attributed in large part to the law

changes in the recent years and because of the additional forms, instructions, administrative pronouncements, rulings that are required to implement that new law. Also if you look in my written

report, you can see that the implementation of the last two major

law changes in 2001 and 2003 resulted in additional burden hours

of 330 million and 113 million respectively.

Now, I would like to describe areas that need reform. I am going

to look specifically at e-file, form management, documentation requirement, IRS communications and record retention. The e-filing

allows taxpayers to file taxes electronically instead of by paper. The

system not only saves paper but is more efficient for both the taxpayer and the IRS. It is estimated that if the e-filing system accommodated all taxpayers, the paperwork caused by tax preparation

would be slashed by a third.

But the current e-filing system has flaws that decrease its usage.

For example, a taxpayer with an amended tax return, a taxpayer

with more than one form 2106 to report unreimbursed employee

expenses, cannot e-file. Moving all return types to one platform,

XML platform, would resolve many of the e-file issues. Along with

that, the continued development of e-pay, e-services, would move us

more to a transparent e-system.

Another area that needs improvement is form management. The

sheer volume of forms is startling. The National Taxpayer Union

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policy paper 110 states that the IRS now prints over 1,100 publications, forms and instructions that total over 16,300 pages in length.

Taxpayers and tax professionals are hindered by the vast amount

of time required for forms, spending considerable amounts of time

reading instructions and publications to determine the proper way

to complete the required form.

Form management could be accomplished by eliminating forms

that are not necessary for the effective administrative of the tax

laws. An example includes the forms that require taxpayers who

wish to get an automatic extension of time to file their tax return.

Currently, form 7004 is required for corporations, the 4868 for individuals and form 8736 for partnerships and trusts. Why are these

forms required when these extensions are automatic and require no

IRS approval?

Another area for improvement would be the reduction in documentation required to be filed when the IRS already has the information that is being submitted. To illustrate, when an amended

tax return is filed, the taxpayer submits not only form 1040X, but

a copy of the original, which is wasteful.

The IRS communications with taxpayers need to be changed.

Taxpayers receive notices that are triggered automatically and result in a taxpayer receiving a notice just after they have responded

to a notice sent earlier. The automatically triggered notice requires

a taxpayer to respond again, and results in more paper and time

wasted for the taxpayer.

Taxpayers who participate in offering compromises are often

asked to submit the same information multiple times. IRS communication could be vastly improved if a two-way system of communications via e-mail were implemented as a communication channel. And I really stress the two-way. If you have it electronically,

then don’t put it back to paper. E-file would facilitate faster responses to the taxpayer inquiries and would be an effective method

for the taxpayers to contact the IRS.

Another area of change is in the area of record retention. Currently, taxpayers are advised to keep copies of original tax returns

for 6 years. Practitioners are required to keep them for 3 years.

And then when we go and look at audits in order to support documentation there, it can be many years. A more practical approach

would be to place the burden of storage on the IRS, since they already retain the information anyway.

Paper burden has also been a cause for the sheer complexity of

the Tax Code. While the hope is that the Presidential tax force will

make proposals for simplification, there is much to be done in the

interim.

While the time I have to speak is limited, there is much more

that could be communicated on this topic. I have only been able to

speak to a few of the more pressing issues. I thank you for the time

and consideration of my comments, Chairwoman Miller and Ranking Member Lynch. I look forward to our dialog and to your questions on this issue. Thank you.

[The prepared statement of Mr. Gray follows:]

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Ms. MILLER. Thank you very much. I appreciate that. I actually

was going to ask you all whether or not you thought the PRA was

actually working, and in your comments you said it had failed its

purpose. So I assume, Mr. Gray, you do not think it is working

well. I would ask you to talk about that a little bit more, and to

the other two panelists as well, what is your thought about the

practical reality.

Mr. STEINBERG. As a practitioner, the PRA is not working at all.

When people come in to have their taxes done, they have no idea

really what the tax law is. I know that the Commissioner spoke

about the increase in electronic filing. I will tell you that as someone who does electronic filing for my clients, the issue is not electronic filing. The issue is understanding the tax law.

I had three cases this past tax season where people were using

off-the-shelf software to try to do their own taxes. And because of

the complexity of the tax law, they were not able to complete their

taxes using this off-the-shelf software and therefore, they came to

my office and asked for help.

So here again, even though they went to the literature, such as

in the cases involved, the incentive stock options that were cashed

in, which is a major problem, because of the taxability of the incentive stock options, the tax law was so confusing to them, they did

not know how to correctly place it on the form. What happened was

that they wound up, or they thought they were going to wind up

paying a great deal of tax. While in understanding the tax law as

I do, they wound up not paying any tax, because tax had already

been taken out of their compensation for the incentive stock options.

There was another one where an individual did not understand

the laws regarding depreciating or amortizing a franchise fee. So

he wanted to deduct the entire franchise fee, and all of a sudden

he was getting back this huge refund. He came to me and said, no,

this can’t be right. I said, you’re correct, you have to amortize the

franchise fee. And here again, this is something where the complexity of the tax law, even though there is off-the-shelf software, that’s

not the panacea. That is only a tool. It is the understanding of the

tax law that actually helps the taxpayer. From my perspective,

every time Congress passes a new tax law, it’s called the Tax Preparer Full Employment Act. [Laughter.]

Only for the simple reason that the complexity gets greater and

greater. And the Commissioner had the volume of the new Jobs Act

for 2004, one of the major problems that happened with that was

that the law was passed in October. Tax season begins, for all intents and purposes, not in January, but February 1st, and we have

until April 15th, unless we file extensions, to get all the information in.

In many cases, the IRS was incapable of answering some of the

questions that we had. They said, well, we’ll deal with it later, because of the amount of time between the passage of the tax law to

get the new forms ready as of January 1st. A very inconsiderate

move, in my opinion, by Congress to force the IRS into this untenable situation.

So the Paperwork Reduction Act, Madam Chairwoman, to answer your question specifically, is not working.

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Ms. MILLER. Mr. Hall, do you have any better news than that?

Mr. HALL. Thank you. Well, I think I do. We will see. I believe

the PRA has had a beneficial impact. I think back originally, the

goal set by the OMB for the act was a 5 percent to 10 percent reduction in the burden on taxpayers. I think from a scorekeeping

standpoint, if that is the standard, you have to conclude that the

act has failed. I do not think that level of reduction has occurred.

But I think a lot of times, we like to talk in terms of reducing

the rate of increase. I think looking backward, which is also easy

to do, where we would be today without the Paperwork Reduction

Act might be a very scary thing. I think one of the issues is that

perhaps the IRS in its ability to forego some of the review requirements of OIRA, such as OSHA and EPA has, and that the OIRA

reviews draft legislation, draft changes to make sure it meets cost

benefit analysis, make sure it meets Paperwork Reduction Act,

those things kind of help keep those in check. The IRS is not subject to those rules.

So in evaluating just the impact on the IRS of PRA, it is probably more devastating of a failure or of a lack to reach that original

goal than looking at the act as a whole. Because in some of the

other agencies, again, such as OSHA and EPA, I think there has

been a tremendous benefit.

A few changes, perhaps even if possible having the IRS come

under that advance review process. Five years from now we might

have a different answer as to the success of that act. But I do believe the act has had a positive impact over the last 25 years.

Ms. MILLER. Thank you. Mr. Gray.

Mr. GRAY. Actually, I will go back and try to divide into two

areas. I think to show how the act is not working, first is in the

paper side. For example, I actually work with Michael Chessman’s

office for burden reduction on the K–1s that the Commissioner

mentioned. That was effective, but that was in one area.

But when you go global and look at all the laws and all the

changes, it is not just Congress, not just the IRS, but it is also our

court system. Because I go across the country teaching, and I have

to watch because in one circuit the case is one way and it’s different in another.

Well, if you go to prepare the return it has to be prepared differently. So we really have to look at the big rule.

But the other thing I would like to talk about on burden reduction I think could be very effective, dollars spent. Mr. Lynch, your

questions on the closing of the walk-ins and so on, sometimes you

have to do what you have to do in a budget. But I think there is

a real opportunity with the IRS working with outreach groups. I

am not talking about offshoring, I am talking about practitioner

groups. For example, in our area, I have a staff person that has

worked with VIDA locally.

So I think what you have to do is look at people-wise. You look

at these outside groups to say, how can we partner. But it has to

be a coordinated effort from the national, so we can be communicating the same information.

The other thing you have to look at is when we get over in technology. We are in a new world. I mentioned it briefly in my talk,

but to really have an impact, I believe, it is one thing to criticize,

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but a critique has, I believe, some good comments, maybe ideas

that work. I think what we have to look at is once an item or an

event goes electronic, then if we are going to say, let’s e-file, and

we e-file everything we can in our office, if we are going to e-file

that, then to reduce burden, it should be to the point where we

have an electronic option communication back. It’s not for all taxpayers, but you have to start somewhere. Cell phones at one point

in time nobody had, and it is amazing how if it is easy and transparent, it becomes just another tool you do not think about.

So I think it is really important to have a business plan or a

business model to look at the e-systems, the e-world, whatever you

want to call it. But it is a two-way street. I think that is how we

can reduce it greatly.

Ms. MILLER. Thank you, gentlemen. I will recognize the Ranking

Member, Representative Lynch.

Mr. LYNCH. Thank you.

Just a couple of things. It is sort of counter-intuitive, but I heard

the American Jobs Creation Act of 2004 referred to here, and I believe the Commissioner mentioned it in the earlier panel. Ironically, that was a bill that was supported very strongly and initiated by President Bush, who is, I think, probably the high priest

of paper reduction in terms of trying to reduce the burden on taxpayers. He is really out there in front.

So here is the President, and the impetus for a lot of the Job Creation Act support was within the business community, quite frankly. That is who I heard from in my district. So we have people who

are on the one hand complaining about the increases in complexity

and the additions of, in this one act, 174 revisions or additions to

tax products by the time that act is fully implemented. So they are

asking for the changes and then complaining about the changes.

So it is counter-intuitive that not everything is just being selfgenerated by Congress. We are responding to the small business

community and the larger business community as well, and this is

something that we are working with, with the Republicans and

Democrats together. But the bottom line is to create those exceptions and to create that relief, it requires additions to the Tax

Code.

I am just wondering if, as I said to the other panelists, is it the

model itself that we need to move away from? Can we realistically

accomplish what we are trying to do here, notwithstanding the

great improvements that have come in terms of technology? Do we

have to look at a more simplified, although perhaps more blunt, instrument of taxation, the whole model? I would like to hear from

all three, please.

Mr. HALL. Well, I think that as has been heard several times

today, I think there is a magic bullet out there which is overall

simplification of the Tax Code. I think that will answer a lot of the

questions. Obviously there are a bunch of levels of compromise involved in that.

I think the thing from a small business standpoint that is very

encouraging for me is to see the IRS making changes such as those

Mr. Everson mentioned today, changing the threshold for 941 payroll tax limits, changing the reporting requirement from quarterly

reporting requirement to annual reporting, simplification of the K–

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1 form. Those are all steps that do not require an act of Congress

to change the Tax Code, but have a tremendous impact on small

business.

At some point, though, you get to the point to where each time

you do a simplification, then you do have a period of time where

small business taxpayers have to get up to speed on the change.

So in the first year of change, it can even be more cumbersome for

them because it is something that they are not used to. So they

have to go back to instruction forms, go back to literature, go back

to an online research vehicle to figure out how to use this new tax

break or this new reporting form.

But over time, I think those changes have a tremendous positive

impact. I think that goes back to my comments about the positive

impact of the PRA in general. If you look at a specific point in time,

do we have a system now that is manageable, that is not difficult,

that is not cumbersome, I think the answer is no. But without the

efforts that have been expended, would it be much worse today? I

think the answer to that is yes.

I certainly am in favor of a more simplified and less complex Tax

Code. But again, that is very easy to stand up and say, let’s just

simplify things. There are many steps involved in that.

Mr. STEINBERG. I would like to just add to what Mr. Hall has

stated. Tax simplification is really the answer. If you want compliance, which is the goal of the Internal Revenue Service, to bring

in revenue, by simplifying the Tax Code structure, you will reduce

the burden. Since small business, Madam Chairwoman, as you

stated in your opening remarks, shares disproportionately in the

burden of compliance and since small business makes up 90 percent or more of all the businesses in this country, you will have

economic growth the likes of which this country has not seen, because the resources can be reallocated to job growth and entrepreneurship. What better way to grow the economy, which the intended effect would be greater income to the Government?

So why not go for simplification where the intended consequence

will be a fairer tax system, greater compliance and everyone paying

their proper amount to the Government to help run the $2 trillion

economy?

Mr. LYNCH. The question was not whether or not we should have

simplification, just whether this process, where the business community comes and asks us to make revisions and then there is an

increase, as you saw, in that one bill, one bill alone, 174 revisions

and additions.

Mr. STEINBERG. Congressman Lynch, any time there is a dialog

between the public and Congress, it is only beneficial. Because you

hear from us that are actually out there with the taxpayers, with

the small business people, actually doing the work day to day.

Therefore, as I stated, any communication which you receive from

us, whether it be written or whether it be oral or whether it be just

coming into your office as a member of a particular group. It is important that Members of Congress understand the depth and

breadth of the issue of this and therefore the more communication,

the better it is.

Mr. LYNCH. OK. All I’m saying is that act, the Job Creation Act

of 2004 was us listening and us responding to the business commuVerDate 11-MAY-2000 09:29 Aug 16, 2005 Jkt 000000 PO 00000 Frm 00091 Fmt 6633 Sfmt 6633 D:\DOCS\22202.TXT HGOVREF1 PsN: HGOVREF1
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nity. Now, because we responded in the way that we did, we are

hearing complaints from the same business community that the tax

laws have become more complex, which they requested several

months ago. That’s all I’m saying, it’s a conundrum.

Mr. STEINBERG. Right. But Congressman Lynch, in 1986, when

President Reagan had signed the Tax Reform Bill at that point in

time, that drastically reduced burden and it simplified the Tax

Code structure. From 1986 through 2004, it has grown disproportionately burdensome——

Mr. LYNCH. I agree.

Mr. STEINBERG [continuing]. Both to the individual and to small

business.

Mr. LYNCH. I agree.

Mr. GRAY. I think that simplification itself, as we all know, is the

Achilles heel to the complication. I think that when small business

comes and says, we need this and this, maybe you step back and

look and say, well, instead of throwing the whole thing out the window, why don’t we take an activity like passive activities, which

again 20 years ago was very critical, it stopped what was a big

problem, but now it’s filtered over into middle class America, people making under $100,000. AMT started out to say, these corporations are going to pay something. And now it gets to a person making into $100,000 with a family can end up in AMT.

So maybe you step back and say, yes, it is OK for us to come forward, small business, here are the ideas. But maybe there are

some areas of law, credits is another one, it is called, maybe there

needs to be a step-back and say, let’s just take this whole area,

yank it and put something else back in. Because if you change everything, then what happens, my theory a minute ago about the

cell phone, everybody using them now, if you changed the technology and they had to do something different, what happens is the

learning curve goes extremely high, non-compliance goes right with

it.

So I think in the best interests of the tax system, maybe instead

of fine tuning, you need to do some retuning. Throw some of those

keys out and say we need something different. This was good for

a time, but it has outgrown its need.

Mr. LYNCH. Thank you. Thank you, Madam Chairwoman.

Ms. MILLER. Thank you very much. I think we are all anxiously

awaiting, the entire Nation anxiously awaiting the end of July

when the President’s tax simplification committee, we use that

term, we cannot use the term reform, if we talk about tax reform

we are going to get another one of those 5 pound books. But tax

simplification, when they actually do make the recommendations,

I think there will be a great amount of interest in that, particularly

when you contemplate the fact that people estimate, guesstimate,

whatever benchmark they are using, that the cost of compliance

annually for taxpayers in our Nation, just to fill their forms out,

is about $225 billion. It really is rather staggering.

But I think sometimes in Government, things really never

change. I often think, I was thinking about this actually when we

were putting this hearing together, about paperwork reduction. My

dad is an aeronautical engineer. He is in his 80’s now, but he

worked down at Redstone with Werner von Braun, which he said

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were very exciting times, they used to set off the rockets. He said

once the Government got involved, they never would let them set

up a rocket until the weight of the paperwork equaled the weight

of the rocket. [Laughter.]

So there has been, as they say, some things never change.

I certainly appreciate all of you attending today. You have given

us some extremely specific recommendations about the kinds of

changes that we need to look at here and I am certain that the

committee staff has taken very good notes about many of these

things. We certainly will be working with the Internal Revenue

Service and some of the other agencies as well, but particularly

with the Internal Revenue Service, with your recommendations to

see about legislative changes, if that is necessary. Certainly I think

we could promulgate some rules and the kinds of tools we need to

give them to help our entire Nation comply with the existing Code

as we look forward.

We appreciate all of your time and your traveling to Washington

for our committee hearing. It has been very, very interesting.

Thank you so much.

[Whereupon, at 3:30, the subcommittee was adjourned.]

[Additional information submitted for the hearing record follows:

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