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42–689 PDF 2008

FULL COMMITTEE HEARING ON

ELECTRONIC PAYMENTS TAX

REPORTING: ANOTHER TAX BURDEN

FOR SMALL BUSINESSES

COMMITTEE ON SMALL BUSINESS 

UNITED STATES HOUSE OF 

REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

June 12, 2008

Serial Number 110-99

Printed for the use of the Committee on Small Business

(

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

HOUSE COMMITTEE ON SMALL BUSINESS 

NYDIA M. VELA ́ ZQUEZ, New York, Chairwoman 

HEATH SHULER, North Carolina 

CHARLIE GONZALEZ, Texas 

RICK LARSEN, Washington 

RAUL GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

MELISSA BEAN, Illinois 

HENRY CUELLAR, Texas 

DAN LIPINSKI, Illinois 

GWEN MOORE, Wisconsin 

JASON ALTMIRE, Pennsylvania 

BRUCE BRALEY, Iowa 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JOE SESTAK, Pennsylvania 

BRIAN HIGGINS, New York 

MAZIE HIRONO, Hawaii 

STEVE CHABOT, Ohio, Ranking Member 

ROSCOE BARTLETT, Maryland 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

STEVE KING, Iowa 

JEFF FORTENBERRY, Nebraska 

LYNN WESTMORELAND, Georgia 

LOUIE GOHMERT, Texas 

DAVID DAVIS, Tennessee 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida

MICHAEL DAY, Majority Staff Director 

ADAM MINEHARDT, Deputy Staff Director 

TIM SLATTERY, Chief Counsel 

KEVIN FITZPATRICK, Minority Staff Director

STANDING SUBCOMMITTEES 

Subcommittee on Finance and Tax

MELISSA BEAN, Illinois, Chairwoman 

RAUL GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JOE SESTAK, Pennsylvania 

VERN BUCHANAN, Florida, Ranking 

BILL SHUSTER, Pennsylvania 

STEVE KING, Iowa

Subcommittee on Contracting and Technology

BRUCE BRALEY, IOWA, Chairman 

HENRY CUELLAR, Texas 

GWEN MOORE, Wisconsin 

YVETTE CLARKE, New York 

JOE SESTAK, Pennsylvania 

DAVID DAVIS, Tennessee, Ranking 

ROSCOE BARTLETT, Maryland 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

MARY FALLIN, Oklahoma

(II) 

Subcommittee on Regulations, Health Care and Trade

CHARLES GONZALEZ, Texas, Chairman 

RICK LARSEN, Washington 

DAN LIPINSKI, Illinois 

MELISSA BEAN, Illinois 

GWEN MOORE, Wisconsin 

JASON ALTMIRE, Pennsylvania 

JOE SESTAK, Pennsylvania 

LYNN WESTMORELAND, Georgia, Ranking 

BILL SHUSTER, Pennsylvania 

STEVE KING, Iowa 

MARILYN MUSGRAVE, Colorado 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida

Subcommittee on Rural and Urban Entrepreneurship

HEATH SHULER, North Carolina, Chairman 

RICK LARSEN, Washington 

MICHAEL MICHAUD, Maine 

GWEN MOORE, Wisconsin 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JEFF FORTENBERRY, Nebraska, Ranking 

ROSCOE BARTLETT, Maryland 

MARILYN MUSGRAVE, Colorado 

DAVID DAVIS, Tennessee

Subcommittee on Investigations and Oversight

JASON ALTMIRE, PENNSYLVANIA, Chairman 

CHARLIE GONZALEZ, Texas 

RAUL GRIJALVA, Arizona 

MARY FALLIN, Oklahoma, Ranking 

LYNN WESTMORELAND, Georgia

(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page

Vela ́zquez, Hon. Nydia M. ....................................................................................... 1

Chabot, Hon. Steve .................................................................................................. 2

WITNESSES

Stubna, Ms. Kim, Director of Public Policy, First Data Corporation, Greenwood Village, CO .................................................................................................. 4

Sohn, Mr. David, Staff Counsel, Center for Democracy and Technology ............ 6

McCracken, Mr. Todd, President, National Small Business Association ............ 7

Darien, Ms. Kristie, Executive Director, National Association for the SelfEmployed .............................................................................................................. 9

Boeding, Mr. Donald, General Manager of Merchant Services, Fifth Third 

Processing Solutions, Cincinnati, OH ................................................................. 12

APPENDIX 

Prepared Statements: 

Vela ́zquez, Hon. Nydia M. ....................................................................................... 25

Chabot, Hon. Steve .................................................................................................. 27

Stubna, Ms. Kim, Director of Public Policy, First Data Corporation, Greenwood Village, CO .................................................................................................. 28

Sohn, Mr. David, Staff Counsel, Center for Democracy and Technology ............ 34

McCracken, Mr. Todd, President, National Small Business Association ............ 43

Darien, Ms. Kristie, Executive Director, National Association for the SelfEmployed .............................................................................................................. 51

Boeding, Mr. Donald, General Manager of Merchant Services, Fifth Third 

Processing Solutions, Cincinnati, OH ................................................................. 56

(V) 

(1)

FULL COMMITTEE HEARING ON ELECTRONIC 

PAYMENTS TAX REPORTING: ANOTHER TAX 

BURDEN FOR SMALL BUSINESSES 

Thursday, June 12, 2008

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

Washington, DC. 

The Committee met, pursuant to call, at 10:02 a.m., inRoom 

1539, Longworth House Office Building, Hon. Nydia M. Vela ́zquez 

[Chair of the Committee] Presiding. 

Present: Representatives Vela ́zquez, Hirono, and Chabot. 

OPENING STATEMENT OF CHAIRWOMAN VELA ́ ZQUEZ 

Chairwoman VELA ́ ZQUEZ. Good morning. I call this hearing to 

order. 

Among its duties, this Committee is charged with evaluating the 

impact of legislative proposals on this Nation’s small businesses. 

That includes policy consequences ranging from health care and energy to transportation and taxation. 

The bulk of these proposals are crafted with the best of intentions, and this panel has supported many of them. On occasions, 

we also face policies that appear innocuous and may have laudable 

goals but have detrimental impact on small firms. Today we will 

examine one such proposal requiring small-business tax reporting 

on credit card receipts. 

A little more than a year ago this Congress, under Democratic 

leadership, wisely reinstated the budget rule known as PAYGO. It 

requires all new spending, including tax cuts, to be made revenueneutral. The restoring of PAYGO signals a firm commitment to fiscal responsibility and makes clear that any new spending must be 

paid for. These rules fundamentally change the way in which we 

discuss new proposals. Evaluating underlying policies remain key, 

but PAYGO implications must also be considered. 

Today’s hearing to examine requiring small-business tax reporting on electronic payments is just such a case. The proposal has 

been broached in various forms, and over the past year it was even 

suggested as a means of helping pay for the farm bill. Promises of 

valuable offsets are always tempting, but this proposal raises significant technical and financial challenges for banks and entrepreneurs alike. 

In today’s fast-paced marketplace, electronic payment systems 

are integral to the daily working of the U.S. economy. They link 

2

merchants, consumers and banks through secure means that are 

both efficient and convenient. 

As we will hear today, the administrative and financial burdens 

associated with the reporting requirements of this proposal are indeed significant. They might even be justified if the trade-off for 

small businesses was greater certainty, but the opposite is true. 

The proposal is built on an incorrect premise that electronic payments foreshadow profits. The reality is quite different for most 

small businesses. Electronic transactions bear little relation to actual income, especially when charge-backs, merchant discounts and 

other fees are accounted for. The result is that even careful compliance by entrepreneurs could lead to costly IRS audits. 

At a time when data security is being challenged constantly, the 

new reporting requirements also pose serious privacy risks for millions of citizens. For many small firms, the owner’s Social Security 

number is used by the IRS to track the revenue and tax compliance 

of their business. Under this proposal, banks will have to include 

that same information in their reports, which could leave important personal data exposed to identity thieves and other criminals. 

Equally troubling is the provision to withhold 28 percent of credit 

card payment reimbursements to enforce compliance. Banks will be 

required to withhold the amount from each entrepreneur whose 

personal information is not collected in time. That means if a bank 

sends out a mass mailing asking small-business owners for their 

Social Security numbers, those that do not receive the letter will 

see 28 percent of their credit card revenue withheld. For every 

$100,000 in credit card sales, their business will receive just 

$72,000. For many businesses whose profit margins are between 3 

and 5 percent, that can mean the difference between making payroll and having to permanently close their doors. 

In short, what at first sounds like a promising budget offset has 

very real costs for the Nation’s small-business economy. These unintended consequences are exactly what we must keep in mind during the consideration of such proposals. After all, even in a PAYGO 

environment, we cannot afford to focus blindly on revenue figures 

while creating unreasonable costs for the small firms that drive 

economic growth. 

I want to thank all the witnesses in advance for their testimony 

today. The Committee is looking forward to their insights on this 

issue, and we are very pleased that they could join us this morning. 

With that, I recognize the ranking member for his opening statement. 

OPENING STATEMENT OF MR. CHABOT 

Mr. CHABOT. Good morning. And thank you, Madam Chair, for 

holding this hearing on an important topic for small businesses, 

proposals to use electronic payments reporting as a way to increase 

tax compliance. 

I would like to extend a special thanks to each of our witnesses 

who have taken the time to provide this Committee with their testimony. I would especially like to welcome fellow Cincinnatian, 

Donald Boeding, who I will be introducing a little later. 

The IRS estimates that the United States collects 83.7 percent of 

the total taxes due. After adjusting for delinquent taxes collected 

3

by existing compliance efforts, the IRS estimates that 86.3 percent 

of tax revenues are collected. The net uncollected taxes are currently estimated by the IRS National Research Program at nearly 

$290 billion for the tax year 2001, the last year for which data is 

available. 

We all recognize that $290 billion is a significant amount. Because of noncompliance, the burden of funding our Nation’s commitments falls more heavily on responsible taxpayers who willingly 

and accurately pay their taxes. That is most unfair. 

However, many small-business groups and merchant banks have 

serious concerns regarding the proposal to address noncompliance 

through electronic payments reporting. With small firms already 

struggling under the weight of massive paperwork burdens, this 

initiative would add to that burden. Further, there is uncertainty 

over the benefit of this reporting requirement. 

I firmly believe that the first and best thing that we could do to 

address noncompliance is to simplify the tax code. The code has become a morass of complicated regulations and laws that grow increasingly complex. 

For small businesses that are just starting out especially, it can 

be exceptionally difficult to know exactly what to do and when to 

do it. Most small businesses pay their taxes in full and on time. 

However, doing so isn’t easy, as the cost of compliance and the time 

spent to understand and interpret the tax code can be overwhelming. 

According to a 2001 Small Business Administration Office of Advocacy report, small businesses with fewer than 20 employees 

spend over $1,200 per employee to comply with tax paperwork, 

record-keeping and reporting requirements. This is more than 

twice the compliance costs faced by larger firms. 

The IRS should also focus greater attention on education and 

compliance assistance. The IRS implied that roughly $148 billion 

of uncollected taxes comes from underreported business and selfemployment taxes. Expanding efforts to help small businesses and 

the self-employed to prepare their returns accurately and on time 

could improve compliance. 

Unfortunately, there will always be bad actors trying to skirt the 

system. Finding them isn’t easy, but we must continue to look for 

and penalize those who deliberately evade paying their taxes. 

We have an excellent panel of witnesses here today, as I mentioned before, and I look forward to hearing their thoughts. And I 

again want to thank you, Madam Chair, for holding this important 

hearing. And I yield back the balance of my time.

Chairwoman VELA ́ ZQUEZ. Thank you. 

I welcome all the witnesses. 

You will have 5 minutes, and you have the timer in front of you, 

with the green, and the red meaning that your time is up. 

Our first witness is Ms. Kim Stubna. Ms. Stubna is the director 

of Public policy for the First Data Corporation, a payment-processing company based in Greenwood Village, Colorado. First Data 

is the Nation’s leading provider of merchant transaction processing 

services including credit, debit, private label, gift, payroll and other 

4

payment solutions that power millions of small-business transactions each day. 

Welcome. 

STATEMENT OF MS. KIM STUBNA, DIRECTOR OF PUBLIC POLICY, FIRST DATA CORPORATION, GREENWOOD VILLAGE, 

COLORADO 

Ms. STUBNA. Thank you, Madam Chair, members of the Committee. Again, I am Kim Stubna, with First Data Corporation. 

I would actually like to focus, really, on three areas today: the 

impact, again, to our Nation’s small business, as you alluded in 

your opening statement; the administrative burden that others in 

the payment industry along with First Data would be facing; and, 

really, a solution that we think would be a lot more simple. 

But first let me just tell you a little bit more about First Data. 

So, as mentioned, we are a Denver-based payments processor. We 

are a Fortune 500 company. We employ about 29,000 employees 

globally. And by ′′payments processor,′′ what I mean is that we facilitate the ability of merchants to accept electronic payments of all 

sorts: credit cards, debit cards, stored value, loyalty cards. So when 

you swipe your credit or debit card, say, at a Safeway grocery store, 

we are the ones actually powering that transaction from the point 

of sale through Visa, Master Card, Amex, Discover to the bank and 

back. And we do that for over 4 million merchant locations in this 

country. 

So, again, as you mentioned in your opening statement, we are 

extremely concerned about the backup withholding requirement of 

this proposal. You know, when we actually sign up a merchant to 

do business, we actually ask for the name that they are going to 

be doing business as, their DBA, which a lot of times is different 

than the name that they may have filed with the IRS. So, for instance, Dr. Bob Jones, Incorporated may be on file with the IRS, 

but we have on file Jones Foot Clinic. So that is going to obviously 

result in a discrepancy that we would have to then institute 

backup withholding. 

If you figure, conservatively, there may be 10 percent of our merchant base that has this discrepancy, that is 400,000 merchant locations in the United States that we would withhold 28 percent of 

their income. And, as you mentioned, in this time of economic uncertainty, 28 percent could very well mean them having to go out 

of business. 

From an administrative standpoint, one of the difficulties is linking the TIN to transaction information. So, again, when First Data 

signs up a merchant for business, we may accept their SSN, we 

may accept their TIN, do some due diligence. But once we actually 

start transacting for them, they are put into a different system. 

And we actually assign them a unique First Data ID. And we do 

that because of locations. So take something like Hallmark Cards. 

They may have one TIN on file with the IRS, but they may have 

3,000 locations across the country that we are transacting for. So 

we assign a different ID based on each one of those locations so 

that we can track the transactions, look for fraud and things like 

that. 

5

On the other end of the spectrum, maybe you have a doctor’s office where we have one unique ID for that doctor’s office because 

of the transactions, but there may be five doctors within that office 

who each have TINs with the IRS. 

So even if we were able to link the two systems from the due diligence and the application process to the transaction, you still have 

the issue of reconciling all of those different locations, the different 

IDs, the TINs. So that is obviously an administrative burden that 

would be quite difficult if you look at 4 million merchant locations 

across the country. 

Also, there is an issue about inaccurate data reporting. So if you 

take an example, I go to Safeway, I buy $60 worth of groceries, but 

I decide to get $40 cash back at the point of the sale, from a transaction perspective, First Data would report to IRS $100. We don’t 

distinguish between the cash back. So that information then that 

we would report to the IRS would be biased against Safeway. So 

now we are put in an adversarial relationship with our customer, 

because we are reporting information that is inaccurate, and you 

expose risk of litigation, all those kinds of issues. So, again, from 

an administrative perspective, that is really problematic. 

What we think is actually that there is a much easier solution. 

Why not add a line on the Form 1099 and have merchants self-report their number of electronic transactions? 

That, kind of, follows the same rationale that the IRS has done 

in the past. In meetings that we had with them, one of the IRS personnel used the example that when they started requiring SSNs to 

be listed for each dependent that was listed, the number of people 

claiming dependents, or at least the number of dependents people 

were claiming, went down. 

So why not at least try self-reporting and see it if it meets—you 

know, we think it would increase some of the compliance and at 

least be much less costly than the current proposal. 

So, really, the bottom line is, again, administrative nightmare, 4 

million merchant locations for First Data, others within the payments industry. And, ultimately, I think that it would increase the 

cost of accepting electronic payments. We can’t bear all of the costs 

of this proposal on our own. So we would pass a portion off to merchants, who would likely pass a portion of their costs to consumers. 

So you are looking at increased costs of electronic transactions. 

And, again, we can’t ignore the backup withholding issue and the 

fact that it would drive any number of merchants in this country 

to go out of business. 

Thank you. 

[The prepared statement of Ms. Stubna may be found in the Appendix on page 25.]

Chairwoman VELA ́ ZQUEZ. Thank you, Ms. Stubna. 

Our next witness, Mr. David Sohn, the staff counsel for the Center for Democracy and Technology, a Washington, D.C.-based organization with expertise in law, technology and policy that seeks 

practical solutions to enhance free expression on privacy and global 

communications technologies. 

Welcome. 

6

STATEMENT OF MR. DAVID SOHN, STAFF COUNSEL, CENTER 

FOR DEMOCRACY AND TECHNOLOGY 

Mr. SOHN. Thank you, Chairwoman Vela ́zquez, Ranking Member 

Chabot. First let me say thanks for inviting me to participate here, 

on behalf of the Center for Democracy and Technology. 

CDT is a nonprofit public interest group dedicated to preserving 

privacy, civil liberties and other democratic values in the digital 

age. And we have been a leader on privacy and closely related data 

security and data retention issues. So we are very happy to be able 

to offer our views on the privacy and security questions raised by 

the proposal that is the subject of today’s hearing. 

CDT believes that the proposal could have serious consequences 

for data privacy and data security, particularly in the case of small 

businesses. First, there is the issue concerning Social Security 

numbers of sole proprietors and other individuals engaged in smallscale business activity. 

The proposal would require banks and other payment processors 

to keep track of merchants’ taxpayer identification numbers, or 

TINs. And for sole proprietors and other individual business people, the TIN will often be the individual’s Social Security number, 

as Chairwoman Vela ́zquez noted in her opening statement. So for 

these individuals, the proposal will mean that their Social Security 

numbers will be stored and linked to further personal information 

about them in corporate databases that today don’t keep that information. 

The reason that is significant is that, in the words of the President’s Identity Theft Task Force, which issued a report last year, 

the Social Security number is ′′the most valuable commodity for an 

identity thief.′′ And the more parties and the more databases where 

that commodity is held, the greater the risk that it could fall into 

the wrong hands. 

In recent years, we have seen virtually a constant stream of 

high-profile data breaches at institutions of all kinds—corporations, 

educational institutions and government agencies. And that is why 

the Federal Government has established a clear policy of trying to 

move away from and reduce the use and storage of Social Security 

numbers. 

Now, to their credit, the merchant banks seem to recognize this 

risk. The standard practice today for banks issuing merchant accounts is to discard the merchant’s TIN as soon as the account is 

approved. And this is consistent with the widely accepted privacy 

principle called ′′data minimization.′′ The principle is really pretty 

simple. It just means: Only collect the data you really need, and 

only keep it for as long as you need it. Banks are following that 

principle today regarding TINs and Social Security numbers of sole 

proprietors. And CDT does not believe that Congress should force 

them to abandon that kind of sound privacy practice, as this proposal would force them to do. 

Second, the proposal may well entail other types of expanded 

data collection from small-business owners. Sometimes reporting 

the aggregate amount of credit card receipts from a particular merchant account can paint an incomplete or misleading picture. And 

when that happens, it is easy to predict what is going to happen 

next. There will be pressure to provide more detailed information. 

7

For example, you could have small businesses that share a merchant account. Think about flea market sellers who are neighbors 

at the flea market. In these kinds of cases, the aggregate amount 

reported will say little about what the actual revenues or profits 

of those businesses are. So it is likely to lead to pressure for the 

IRS to ask for a more detailed breakdown of that information, 

which would mean significantly more tracking by the banks of 

their merchants’ activities than occurs today. 

Anyway, the point on this is simply that, before Congress adopts 

any new proposal here on this topic, it really should carefully explore the additional types of data collection that would likely be demanded as part of any new reporting system. 

The final concern I want to mention is that the proposal would 

set a dangerous precedent. CDT is actually very concerned that if 

this proposal is enacted it could encourage additional government 

efforts to enlist private-sector intermediaries in tracking the behavior of their customers. 

For example, if the Federal Government goes this direction, it is 

easy to imagine that State governments might try to follow suit 

and impose tax-reporting obligations of their own. Other types of 

data-retention requirements that have been proposed in the past 

and that could get an unwarranted boost here would be proposals 

to have Internet service providers, for example, track the browsing 

behavior of their entire customer base simply because something 

might someday prove of interest to law enforcement. 

CDT objects to those proposals and would hate to see them get 

encouragement from congressional action on this subject. 

So, for all these reasons, CDT believes that this Committee and 

Congress should pay careful attention to the data privacy and security concerns that this proposal raises and, in light of those concerns, really should put a heavy burden of proof on the proponents 

of the proposal to show that it is effective, that it is necessary and 

that it is better than possible alternatives. 

Thanks again for the opportunity to testify. 

[The prepared statement of Mr. Sohn may be found in the Appendix on page 27.]

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Sohn. 

Our next witness is Mr. Todd McCracken. Mr. McCracken is the 

president of the National Small Business Association, a national, 

nonprofit organization representing more than 150,000 of America’s 

small-business companies and entrepreneurs. The NSBA is the 

first and oldest national small-business advocacy organization in 

the United States. 

It is always a pleasure to welcome you. 

STATEMENT OF MR. TODD McCRACKEN, PRESIDENT, 

NATIONAL SMALL BUSINESS ASSOCIATION 

Mr. MCCRACKEN. Thank you, Madam Chairwoman. It is good to 

be here. And I appreciate the Committee inviting us to testify 

today. This is quite a crucial issue. 

I would like to ask that my written statement be submitted to 

the record, because I am going to try to narrow my oral remarks 

a little bit. You have a lot of expertise up here—

8

Chairwoman VELA ́ ZQUEZ. Without objection. 

Mr. MCCRACKEN. —on some of the more technical questions of 

how the information gets processed and how the money gets transferred. So I would like to focus my remarks on some of the more 

practical objections that small businesses have, but also the question of whether this, even in a perfect world, would really be a solution to the tax gap, you know, as the IRS perceives it. 

The bulk of the tax gap, as the IRS has reported, it comes from 

the underreporting of income. And so this clearly is an attempt by 

them to figure out a way to get more of that income reported. 

There are a few problems, I think, with that analysis. And one of 

them is that there is not a lot of evidence to suggest that most of 

the underreporting of income comes from credit card transactions. 

Some evidence suggests that there is underreporting of cash transactions and some other things like that; not so much on the credit 

card side of things. 

So you begin to at least have to question, well, why is this seen 

to be so important? And we think that one of the reasons it is important is for a couple of—actually, there are a couple reasons we 

think it is important for them. 

One is because they think it will enable the agency to do some 

modeling. And that is to say, if your credit card transactions are 

outside the norm for your industry, it will send up a flag that 

maybe there is something funny going on in your business and we 

should come look at what you are doing. 

That is enormously concerning to us because of, again, for a couple of reasons. One is because there is a great diversity in the 

small-business community. And just because, you know, an average 

of 60 percent of transactions in a given industry are on credit cards 

and another business seems to have, you know, 80 or 90 percent 

of their transactions on credit cards doesn’t necessarily mean anything is going on that is unusual. It has a lot to do with the demographics of the customer base of that business, perhaps, a lot to do 

with the way that person has chosen to run their business. It 

doesn’t necessarily mean anything funny is going on. But those 

kinds of businesses, we think, are going to become subject to greatly increased audits and administrative burdens that come with 

those audits for no real good reason. 

Secondly, the IRS tells us that they want to find non-audit-based 

ways of collecting revenue. That doesn’t seem to fall in that category. 

And then there is a whole raft of concerns that we have about 

what small businesses would have to do to, sort of, reconcile their 

books with the reporting that they get. And we have already heard 

a few of them, but the list goes on. There is lots of sharing of credit 

card processing services amongst small businesses. It could be the 

flea market. It could be the doctor’s office you have already heard 

about. But there is a lot more that goes on in the economy as well, 

and that is going to have to get sorted out. And it may ultimately 

mean a lot less use of credit cards in the small-business community, which provides whole other layers of burden for those small 

companies. 

But there is also the question of reconciling, you know, cash 

versus accrual systems. A business may send out an invoice in DeVerDate 0ct 09 2002 15:16 Jul 17, 2008 Jkt 033615 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 G:\CLERK SB-LD\HEARINGS\TRANSCRIPTS\42689.TXT LEANN
9

cember for a printing job, for instance, to a customer, and it goes 

on their books as, you know, a receivable that year. Well, they may 

not get paid, and get paid on a credit card the next year, and it 

will get reported as income the next year. They have to figure out 

a way to reconcile those kinds of things. 

Lots of businesses take deposits. Well, that is not income until 

you actually take delivery. That deposit could be refundable. You 

don’t count that as taxable income until you actually purchase it. 

Yet, a lot of deposits, whether it is for a new kitchen or a boat or 

whatever, are paid on credit cards. 

And so there is just a huge stream of money that flows to businesses on credit card transactions that simply isn’t taxable income. 

And that is going to have to be sorted out, not just by the IRS, but 

by the business owners themselves. 

So, again, even if all of these technical questions can be addressed—and we don’t think they can be—but even if they could 

be and the credit card processors could find an easy, seamless, lawsuit-free way of providing good data, there are still huge obstacles 

for how this data would actually get used by the IRS in any meaningful way to actually increase the revenue in a way that makes 

sense for small companies. 

So we appreciate your having this hearing. And we would strongly urge you to do everything you can to convince your friends at 

the Ways and Means Committee and over in the Senate in the Finance Committee that this is a particularly bad idea. 

[The prepared statement of Mr. McCracken may be found in the 

Appendix on page 43.]

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. McCracken. 

Our next witness is Ms. Kristie Darien. Ms. Darien is the executive director for the National Association for the Self-Employed, the 

Nation’s leading resource for the self-employed micro businesses, 

providing a broad range of benefits and support to help the smallest businesses succeed. 

Welcome. 

STATEMENT OF MS. KRISTIE DARIEN, EXECUTIVE DIRECTOR, 

NATIONAL ASSOCIATION FOR THE SELF-EMPLOYED 

Ms. DARIEN. Thank you. I am really happy to be here on behalf 

of our 250,000 member businesses. 

NASE’s members are micro-businesses, 10 or less employees, and 

the self-employed that are the segment of the business population 

that repeatedly struggles with complying with our complex and 

ever-changing tax code. And they do so without the benefit of professional assistance. 

We feel that any recommendation relating to tax compliance 

must be reasonable and effective. And, unfortunately, we believe 

this recommendation is neither. 

This proposal is likely to have significant unintended consequences. The lack of clear details regarding its implementation 

must be addressed to accurately gauge its effect on both the microbusiness community and our economy. 

Todd mentioned quite a bit about the use of data, which is one 

of our top concerns, so I will second all of his comments in regards 

10

to that, particularly our concern of the use of industry profiles to 

make estimations on other types of items on the tax return, like 

cash payments. We think that will be riddled with inaccuracies and 

cause a lot of significant difficulties for small business. 

Another area that is ripe for mishandling in regards to this proposal is the taxpayer identification number verification and the 

backup withholding process that would be required of credit and 

debit card issuers under this plan. These companies would be required to verify the TIN of a business, and if that is inaccurate, 

they would have to backup withhold 28 percent of the gross transactions for that business. 

Obviously, no specifics have been released to date as to how to 

IRS plans to effectively implement these components. There are 

likely to be inadvertent reporting errors through this process, yet 

there is confusion regarding where a small-business owner would 

go to rectify any problems. 

Many sole proprietors, the majority of NASE’s membership use 

their Social Security number as their identifier. Therefore, we are 

concerned about privacy and protection of personal data under this 

plan. 

In addition, withholding on gross transactions will create a substantial cash-flow problem for the self-employed. In 2007, the median gross revenue of an NASE member’s business was only 

$62,500, and overwhelmingly their business was the main source 

of household income. Thus, backup withholding could also place a 

severe financial strain on their families. 

Cost is another factor that we must consider. Overall implementation of this proposal will require financial and human capital resources by both the IRS and the credit and debit card companies. 

We think it is prudent that Congress require IRS to prepare a costbenefit analysis of this plan to determine potential costs of administration as it compares to projected revenue. 

Moreover, our bigger concern is the credit and debit card companies who are more than likely to pass the cost of compliance onto 

their microbusiness merchants in the form of higher user fees. 

NASE member Keith Kaufman own a business in Arizona. He receives about 60 percent of his transactions through credit and debit 

cards, and he is significantly worried about the additional financial 

burden on his business in the form of higher credit card fees. Because he cannot charge more for credit card transactions, he would 

essentially have to eat those fees, and it would affect his bottom 

line. 

So we strongly encourage Congress to reach out to these pertinent companies to determine the ultimate impact on consumers before they even think of moving forward on this proposal. 

In conclusion, I think there are two key questions that we need 

to ask: Will this proposal increase tax compliance? And will Government recoup funds with the implementation of this plan? 

The majority of NASE members feel that this recommendation 

will not increase tax compliance. They are quick to point out that 

this proposal will be collecting information that is well-documented, 

already likely reported, and would be revealed easily upon review. 

Therefore, the taxpayer who willingly underreports would not 

11

knowingly choose to exclude credit card receipts, since those items 

show up on bank statements and have a paper trail. 

In regards to recovering revenue, the NASE believes that it is 

highly unlikely that this plan will identify any additional taxable 

income. In fact, we think that the majority of the revenue collected 

would be from inaccuracies or mistakes that would trigger backup 

withholding. 

The NASE does not support this recommendation, and we urge 

Congress to look to alternative solutions. In our opinion, legislators’ 

true interest in this proposal lies with its possible use as an offset 

for various congressional spending priorities. We understand the 

fiscal climate our government is facing. However, you are asking 

the segment of the economy that is affected most by the current 

high health-care costs, by high energy costs, facing difficulties due 

to our current credit crunch to foot the bill for other proposals, 

many of which they would receive no benefit from. 

Congress should focus on ensuring passage of effective policy at 

a reasonable cost for all citizens before they rush to put the financial squeeze on the self-employed and micro-business. 

Thank you. 

[The prepared statement of Ms. Darien may be found in the Appendix on page 51.]

Chairwoman VELA ́ ZQUEZ. Thank you, Ms. Darien. 

And now I recognize Mr. Chabot for the purpose of introducing 

our next witness.

Mr. CHABOT. Thank you, Madam Chair. 

I would like to welcome a fellow Cincinnatian, Donald Boeding. 

He is the senior vice president and general manager of merchant 

services for the Fifth Third Bank Processing Solutions. Fifth Third 

is one of the more significant employers in the city of Cincinnati, 

and we are very pleased that they are there. 

He has direct responsibility for the day-to-day operations of the 

merchant processing business alliance. Mr. Boeding has been with 

the Fifth Third Bank since September 2004 and has been involved 

with merchant services for most of his career. 

He holds a BS in finance from the University of Iowa. 

And Fifth Third Bank Processing Solutions is one of the five 

principal activities of Fifth Third Bank Corp, a diversified financial 

services company headquartered, as I mentioned, in Cincinnati, 

Ohio. 

In addition to the Fifth Third Processing Solutions, Fifth Third 

is involved in commercial banking, retail banking, consumer lending and investment advising. Fifth Third Processing Solutions provides electronic funds transfer; debit, credit and merchant transaction processing; operates an ATM network; and provides dataprocessing services to affiliated and unaffiliated customers. 

Fifth Third processes $175 billion in card sales annually. According to the March 2008 Nielsen report, Fifth Third is the fourthlargest Visa, Master Card acquirer in the country. 

Mr. Boeding, we look forward to your testimony. Thank you. 

12

STATEMENT OF MR. DONALD BOEDING, GENERAL MANAGER 

OF MERCHANT SERVICES, FIFTH THIRD PROCESSING SOLUTIONS, CINCINNATI, OHIO 

Mr. BOEDING. Good morning, Chairwoman Vela ́zquez, Ranking 

Member Chabot and distinguished members of the Committee. 

As Mr. Chabot said, my name is Donald Boeding, and I am the 

general manager for the Merchant Services Division of Fifth Third. 

I appreciate the opportunity to appear today and offer you some industry perspective on the proposal to require institutions that 

make payments to merchants for payment card transactions to file 

those annual information reports with the IRS. 

First, I would like to give you some general thoughts on the increased information reporting and then dive a little deeper on some 

of the aspects that maybe some of the other panel members haven’t 

touched on. 

To begin, in short, I think we can draw a few initial conclusions 

about this potentially sweeping proposal, notwithstanding the limited availability of detail as to its specific requirements and implementation parameters. 

First, the enactment of such an increased information reporting 

measure would come at a very difficult time in the economy, particularly for financial institutions and small-business sectors. New 

and increased reporting requirements will translate into significant 

IT investment expense and allocation of employee talent by processors like myself to ensure compliance during both the ramp-up 

period and on a go-forward basis. 

Second, the potential application of backup withholding presents 

tremendous risks for both processors and merchants. At 28 percent, 

backup withholding will have deep impacts on merchants and, in 

some cases, represent the difference between success and failure. 

Third, the merchant processing industry as developed does not 

operate in a way to comply with the known parameters of this proposal. 

Fourth, the proposal will strain the relationship between payment processors and merchant customers, in some cases driving 

merchants to avoid the convenience and security of electronic payment systems. 

Finally, given the vague nature of the proposals offered to date, 

the full impact on all parties will not be known until implementation and compliance have been audited. It is likely that interested 

parties are not fully aware of the operational impacts that this will 

have. 

First, focusing on the costs of compliance. System modification 

and contract renegotiations and the time associated with both will 

place significant expense on payment processors. Further, processors will need to store and secure the data provided to the IRS. 

The expected hard costs associated with ramping up and maintaining a program to facilitate compliant reporting are only part of the 

cost that should be expected to arise out of this proposal. 

It should be expected that the number of hours a processor will 

ultimately have to devote to trouble-shooting alleged errors in the 

reporting would be significant. For instance, if the IRS reporting 

from a processor does not reconcile with other reporting received by 

a particular merchant, it will likely result in significant hours 

13

spent by myself and my team trying to help that merchant reconcile through that process. This will add a level of complexity to 

all new product initiatives, additional analysis, and possible extra 

development will be required each time a new payment product is 

developed and/or rolled out. 

Specific to backup withholding, as noted, the merchant reporting 

proposal includes a proposal to withhold 28 percent of payments 

made to merchants on whom we do not have a valid TIN. Processors would be required to immediately withhold on any payment 

on which a TIN is missing or is obviously an incorrect number. 

The impact of this new withholding on merchants, particularly 

smaller merchants, would be substantial, presenting great complication and burden on their cash-management procedures, as has 

been already noted by the panel. The reduction of cash-flow based 

upon transactions that may have no income tax consequence would 

be a tremendous burden to our merchant clients. 

At a minimum, should back-up withholding remain a part of any 

increased merchant reporting proposal, a period of significant 

phase-in, perhaps 2 to 3 years, should be provided before withhold 

is required. This will allow payers time to obtain the necessary information. And, additionally, any new compliance regime in this 

area should include appropriate safe harbors from penalties where 

100 percent compliance is not achieved. 

Focusing on the impact of the merchant reporting entity relationship, it is certainly possible that the reporting could create tensions 

between acquirers and processors and their merchant customers, 

who don’t understand how the information is going to be used and/

or disagree with the methodology by which the processors have created the reporting. This will result in a tremendous amount of concern and confusion among our merchant customers. Additionally, 

fear of audit can make merchants less likely to accept electronic 

payments. 

On a final note, it should be expected that the noncompliant taxpayers this proposal targets will ultimately find and develop 

schemes to avoid recognition through this type of reporting. Some 

may simply stop accepting cards all together, thereby making it 

less likely that the IRS will be able to track taxable income. Others 

may simply work to find loopholes in the reporting mechanisms 

that are ultimately established. 

The benefits expected to arise from this initiative may ultimately 

result in increased cost to the compliant payment card participants—consumers, acquirers, processors, issuers and merchants—

with no real benefit to these same participants. 

Thank you for your time, and I look forward to answering any 

questions that you may have. 

[The prepared statement of Mr. Boeding may be found in the Appendix on page 56.]

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Boeding. 

I would like to address my first question to Ms. Stubna. 

Ms. STUBNA. Yes. 

Chairwoman VELA ́ ZQUEZ. It has been suggested that only banks 

providing services to businesses would be affected by these new reVerDate 0ct 09 2002 15:16 Jul 17, 2008 Jkt 033615 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 G:\CLERK SB-LD\HEARINGS\TRANSCRIPTS\42689.TXT LEANN
14

porting requirements. Is that an accurate assessment of who would 

be required to file information reports? 

Ms. STUBNA. Madam Chairwoman, we don’t actually believe it 

would just fall on banks. In fact—and First Data’s role to accept—

when a merchant wants to accept a credit or debit card, a bank 

must actually sponsor the merchant into the system. That is what 

Visa and Master Card, at least, require for their particular cards. 

And First Data is then usually a party to that contract. So, in our 

role as a service provider to a bank, we would assume that the 

bank would ask First Data, because we are actually part of the 

processing arrangement, to actually report the information. So, no, 

we feel like it would fall on banks, processors, merchant acquirers. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. McCracken or Ms. Darien, Ms. Stubna suggested self-reporting electronic payments as an alternative to bank reporting. Could 

you comment on that proposal? 

Ms. DARIEN. Yeah, one of the less burdensome recommendations 

that we have made is that we think that there are very easy things 

that can be done with the current tax forms to help facilitate reporting. 

One of the things we recommended was modifying the Form 1040 

Schedule C, which is the form that sole proprietors use, which is 

who the IRS seems to think is the segment of the population that 

are underreporting. Where, in part one of the form, we could simply separate the line item for gross receipts and sales into two and 

ask them to distinguish between cash payments and also credit and 

debit card transactions. It is an easy way to self-report, and it is 

also an easy way to remind the businesses that they have to track 

their cash payments equally as well as their electronic transactions. 

So, yes, we agree that would be a great way to begin the process 

of increasing compliance. 

Mr. MCCRACKEN. It is not something we have specifically dealt 

with yet, but I would agree that it would be a better alternative 

than what we have on the table now. I am not in a position to endorse it yet, but it is something that I think bears some looking at. 

Chairwoman VELA ́ ZQUEZ. Okay. Mr. McCracken, many businesses, particularly small businesses, make agreements to sell 

their card payment income to other entities, often with franchise 

or separate station agreements. 

Do the proposed reporting requirements account for this type of 

arrangement, where the merchant never receives the full value of 

their card payment income? Can you comment on that? 

Mr. MCCRACKEN. I am probably not the best person up here to 

comment on that, but it does strike me that that would be a significant problem. I mean, I think that gets at the heart of, I think, the 

whole issue, is you can’t begin to catalog all of the situations where 

the money that moves through the credit card processing system is 

not reflective of real income. 

Chairwoman VELA ́ ZQUEZ. Any other member of the panel would 

like to comment on that? Yes, Mr. Boeding? 

Mr. BOEDING. I think I can specifically address that where the 

merchant effectively sells their receivables and they instruct me to 

credit their daily receipts to the entity that has fronted them the 

15

money. And that would present tremendous difficulties of determining who is responsible for the tax burden. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Ms. Stubna, when this new reporting requirement was first proposed for 2007, it was estimated that it could generate approximately $225 million over 10 years. Only 1 year later, that figure 

jumped to $10.8 billion over 10 years. 

What accounts for this large discrepancy in those estimates? 

Ms. STUBNA. You know, actually, we asked the same question. 

We posed that question to Treasury in the meetings that we had 

with them. And nobody ever really actually gave us an answer as 

to what accounted for the jump. And, I mean, it has been, obviously, significant. 

One of the things that Treasury said was that the large number 

accounted for all of the different tax gap proposals together, and it 

wasn’t just the credit card reporting ones. So, I am sorry I don’t 

have a better answer, but—

Chairwoman VELA ́ ZQUEZ. Does anyone on the panel have any 

comment? 

Mr. MCCRACKEN. Well, we don’t know either where the number 

came from. And there are so many different ways that you hear 

that this could raise revenue, that increased reporting increases 

revenue, that being able to track this and get more—audits raises 

revenue. But we are not really sure which of these they think are 

the primary ways that the revenue will come in. 

Chairwoman VELA ́ ZQUEZ. Sure. 

Ms. Darien? 

Ms. DARIEN. Again, we agree, we don’t know where their numbers are coming from. And a big concern is that I don’t think there 

has been any account for how many businesses would go under because of this and how many entrepreneurs would be deterred, because if they want to go into a business which happens to be an 

electronic-payment-card-heavy business, like retail, for example, 

high fees are a great way to push people out of entering entrepreneurship. And I am certain that that has not been accounted for 

in their numbers. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. Sohn, in your opinion, how should consumers and merchants 

be made aware of the privacy risks if a card payment reporting requirement were enacted? 

Mr. SOHN. Right, well, I think the initial thing is to make sure 

we have a full public debate on it now, before the proposal is put 

into effect, and that it is fully considered, that Congress looks into 

all the different ways that this might end up expanding information reporting requirements and that that be fully part of the public debate. 

You know, I think to some extent if a proposal like this is actually enacted, it is to a large extent too late. If people are aware of 

the privacy consequences and concerned about it, their real option 

will be to not use credit cards as a means of payment. And that 

strikes us as an unfortunate consequence. 

Chairwoman VELA ́ ZQUEZ. Are there ways that entrepreneurs 

could protect themselves from the privacy risks associated with the 

16

reporting regime if they currently use their Social Security number 

as their taxpayer ID number? 

Mr. SOHN. Yes. I mean, they certainly could. Individuals could 

register as a business and get a taxpayer identification number 

that is different from their Social Security number. I think, again, 

when you are talking about individuals doing relatively small-scale 

sales, that, too, puts a significant burden on them to take that 

extra step. But it might well be, if this proposal were to go into effect, that that is something they would want to do to try to protect 

their Social Security numbers. 

Chairwoman VELA ́ ZQUEZ. Ms. Darien, if backup withholding, 

which will require 28 percent of a business card reimbursement directly be sent to the IRS, were made part of the reporting requirements, what would be the effect on small businesses? 

Ms. DARIEN. It would be a massively detrimental effect, particularly on our members. Again, the majority of our businesses are 10 

or less. Our average member is a two-person business. It is typically a family business. And as mentioned, when you are looking 

at a median gross revenue of a little over $62,000 and you are 

going to withhold 28 percent of gross transactions and that money 

directly flows through to their household income, you are going to 

put a severe strain on millions of American families that are counting on the self-employed bread-winner in their family. So it will 

have widespread damaging effects on the self-employed community. 

Chairwoman VELA ́ ZQUEZ. Todd, I suspect you are having discussion with the IRS in terms of the implications, economic implications, that this will represent for small businesses. And have you 

posed a question to them if they have done any economic analysis 

as to the effect of 28-percent withholding on credit card reimbursements? 

Mr. MCCRACKEN. I don’t know that we specifically asked the IRS 

if they looked at that. We certainly have asked them for more information on how they arrived at revenue estimates of it. But, 

clearly, the economic implications are potentially enormous. 

I mean, they clearly have not looked at all of the ways that, even 

aside from clerical errors, that the TIN just isn’t going to correspond with the businesses being reported about. And so there is 

going to be not an inconsequential amount of backup withholding 

if this proposal goes forward, which is going to be just—and just 

think about a business—I mentioned deposits before. 

I mean, you may be running an inn. You may require a night or 

two stay deposit, and someone pays on a credit card. They cancel. 

You may issue them a refund via check; doesn’t necessarily go back 

on their credit card. Well, you are getting backup withholding on 

revenue you are not going to have for another year until you file 

your taxes. And for those folks, every dollar counts. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. Chabot? 

Mr. CHABOT. Thank you, Madam Chair. 

Mr. Boeding, I will begin with you. Why is the withholding aspect of the proposal such a significant issue to both small businesses and merchant banks? And can you ID a better approach to 

improve the compliance than we currently have? 

17

Mr. BOEDING. Well, let me start with the small business, as I 

have spoken with some of my customers about this particular initiative and the impact that it may have upon them. 

You know, concepts of the way that we paid in the 1970s and 

1980s are coming back. The desire to offer discounts for cash to be 

able to avoid—you know, wanting to accept checks as a preferred 

form of payment are the words that we are hearing from our clients. And, as you might imagine, in the business that I run, that 

is not a particularly good thing. And I also don’t think it is a good 

thing for, you know, for our economy in general. 

Impacts to me and our business from a backup withholding perspective, we don’t know. You know, the merchant processing business, you know, has been around for, you know, well over 30 years, 

and this is not anything that we have ever contemplated in executing our business model. So there are so many intricacies that 

we have to work through to try to determine how we will do it and 

how we will communicate, how we will report and, most definitely, 

how we will work with our clients to try to help explain to them 

the numbers that we have submitted, especially if we are reporting 

on gross. Some of the other panel members have mentioned that. 

You know, charge-backs, refunds, you know, the prepaymenttype aspects all go into some very serious things that have to be 

considered. You know, many merchants, especially in, like, in the 

card-not-present space, they have, you know, 15 to 20 percent return rates on some of the goods that they sell. So, you know, 28 

percent for those types of clients, it would be a much higher effective rate against their net proceeds. 

We would prefer that no backup withholding be a part of this, 

that this simply be an information reporting at most. 

Mr. CHABOT. Okay. Thank you very much. 

Ms. Darien, right at the end of your closing statement, you said 

something that I really agreed with strongly, and I thought I would 

just read it again. You said, ′′It is in our opinion that legislators′′—

that means us or Congress or the Ways and Means Committee or 

whoever the bad guys are in this—′′their true interest in this proposal and others relating to the tax gap lies with its possible use 

as an offset for various congressional spending programs. Congress 

should focus on ensuring passage of effective policy at a reasonable 

cost to all our citizens before they rush to put the financial squeeze 

on the self-employed and microbusinesses, which remain the foundation of both America’s economy and communities.′′

And, as we all know, small businesses are responsible for creating about 70 percent of the jobs, and they would be hit particularly hard in these various reporting requirements. 

And the term ′′tax gap,′′ you didn’t hear that years ago. It is a 

term that crept up recently, in recent years. And I think it is exactly what you said in your statement. It is a way for Congress to 

think there is this money that is sitting there, that all we have to 

do is get it and then we can continue to spend in the free spending 

style Congress has for years, both under Republican control and 

Democratic control; we have seen it under both. And, of course, my 

colleague here would indicate that it has been much more responsible recently—

18

Chairwoman VELA ́ ZQUEZ. Bigger, bigger under a Republican administration, by the way. 

Mr. CHABOT. We could debate that, too. 

But, in any event, I think you are right, that it is this new thing, 

that that is going to solve the fact that Congress doesn’t balance 

its budget every year, even though families have to do that, but we 

don’t. And that is just wrong. But I completely agree with you on 

that statement. 

Any comment? 

Ms. DARIEN. Yes, I mean, we understand—of course we want to 

increase tax compliance, help people to meet their responsibilities 

better. But, as a Nation, we have consistently had a tax gap since 

we have had a tax code. I don’t think you find any industrial nation that has 100 percent tax compliance; I don’t think you ever 

will. 

And I think the focus should really be on our government tightening their purse strings, learning how to be responsible with our 

money, just like a small business does. And I agree that, all of a 

sudden, it seemed like this pot of money was an exciting pot of 

money to go after as we are looking to pay for different proposals. 

And, again, many of these proposals that they are looking to attach these recommendations to will actually have no benefit to a 

small-business owner. So you are asking these people, this foundation of our economy, who have $62,000 a year, to squeeze out a little more to help our government, and they are already struggling. 

So I think we need to be mindful of who we want to help and who 

we are going to hurt in that process. 

Mr. CHABOT. Thank you. 

Mr. McCracken, you mentioned that one of your principal concerns or worries was the additional audits that small businesses 

could be subjected to. And, obviously, other than the psychological 

trauma that the small-business owner and their employees, because their jobs could literally be at risk depending on how the 

audit comes out, could you tell us why that is particularly burdensome to a small business, that they have to go through an audit? 

Mr. MCCRACKEN. Oh, sure. I mean, an audit can be an extraordinarily time-consuming activity. A lot of small companies don’t 

have a full-time CPA on staff or even on retainer for their company. So it is an issue they are often in the position of dealing with 

personally. And it can go on for quite some time and really sap a 

lot of time and energy out of a company, even if, at the end of the 

day, there is no additional tax revenue that is required to be paid. 

So, I mean, an audit is no small thing. And to the extent the 

IRS—I mean, we think it is a good idea for the IRS to figure out 

ways to target audits appropriately. And they have said they want 

to do that. And we think, to the extent they are going to audit people, they ought to figure out who are the best targets. Our concern 

is that the credit card information is going to provide a great deal 

of misleading information about who those targets really ought to 

be and that they are going to be auditing folks that aren’t appropriate targets. 

Mr. CHABOT. Okay. Thank you. 

19

Mr. Sohn, you had mentioned that—and, of course, you have privacy concerns as one of your big concerns. And I have been very 

active in that area over the years and very interested in it as well. 

And you mentioned that one of the concerns was the Social Security numbers being more susceptible to thieves getting a hold of 

these things. And could you explain the significance of that, what 

it is that the thieves do with these things and why that is such a 

risk to both the small business and anybody that may be listed on 

there? 

Mr. SOHN. Sure. It has been a finding of everyone who has 

looked into identity theft that, really, the most important piece of 

information an identity thief would like to get is a Social Security 

number. For purposes of trying to open fake bank accounts in 

someone else’s name and so forth, that is an extraordinarily valuable piece of information and is really the gateway to identity theft 

and a variety of scams. 

So the general principle—and this is the precise policy the Government has adopted—is, we need to stop relying on Social Security numbers so much, we need to stop collecting and using them 

as much as we do, because when they are out there and when they 

are stored in lots of different databases all over the place, it just 

creates more opportunities that, through data breaches, they could 

fall into the wrong hands. 

So really trying to minimize Social Security number use is a core 

piece of the strategy of combating identity theft, and this proposal 

goes the opposite direction. 

Mr. CHABOT. Thank you very much. 

And, finally, Ms. Stubna, you mentioned that—well, I think the 

panel here and I think both the chairwoman and myself agree that 

this electronic payments reporting is greatly suspect and that there 

ought to be other ways found. 

Could you again point out what alternatives are out there, what 

should be done instead of this if—and, again, I don’t use the term 

′′tax gap,′′ but the noncompliance or underreporting or the fact that 

some people historically have gotten away with not paying their 

fair share to the detriment of everybody else. But what would you 

do as an alternative that might work, compared to this, which we 

all agree would be too burdensome? 

Ms. STUBNA. Well, we are actually still trying to come up with—

we have been having quite a few meetings internally with operations to find maybe some other alternatives, whether it is, you 

know, looking at the monthly transaction statements that we supply to merchants. You know, we are trying to figure out if we could 

do that on an annual basis. 

But I really do think that, first and foremost, the self-reporting 

would at least be a good start. You know, if it doesn’t meet the 

compliance that the IRS is hoping to achieve, then maybe look at 

other alternatives. But, you know, we weren’t set up to be an extension of the IRS. We were set up to move money efficiently, 

quickly, securely, not to report information to the IRS. And so we 

would love to be not placed in that spotlight. 

And I will just point out too, you know, the whole thing seems 

to be predicated on this 90 percent compliance rate for reporting. 

But, you know, in the meetings that we have had, the issues about 

20

inaccurate data, the problems with our systems, it doesn’t seem 

like they care. They are just looking at this magic 90 percent compliance number. 

And I think it would be more appropriate to look into some of 

the concerns that we have raised before moving forward with it. 

Mr. CHABOT. Okay. 

Thank you, Madam Chair. 

And I just would conclude by commenting that your statement 

just then about not being an extension of the IRS, I think unfortunately the Government looks at all of us as an extension of the 

IRS. 

I yield back. 

Chairwoman VELA ́ ZQUEZ. Ms. Hirono? 

Ms. HIRONO. Thank you, Madam Chair. 

I conclude from the testimony from all of you that this is, while 

well-intentioned as a way to make sure that everybody pays the 

taxes they owe, it is very broad and burdensome. So I am glad, Ms. 

Darien, that you offered an alternative way for people to comply 

with the IRS’s needs. 

I am not sure whether anybody talked about how much it would 

cost the businesses to comply with this. Is there a ballpark figure? 

You all, I think, testified that this is going to be very costly to comply, but is there a figure that you can come up with? 

Mr. BOEDING. I think we are having a difficult time, being a 

processor, coming up with what that will be. Certainly, the number 

for us, in just our business, ranges well into the millions to establish the ability. 

What is most concerning to us and really an unknown is the ongoing costs associated with compliance and servicing and dealing 

with our customers and the ongoing explanation. We think that is 

going to be, over the long term, the most significant portion of the 

expense.

Ms. HIRONO. When you are having your discussions with the various committees, including the IRS, do you kind of go as a group, 

or are you individually doing that? Because I notice we have testimony from the ABA. That is a large interest group out there. Are 

you coordinating or collaborating in any way? 

Ms. DARIEN. Of the small-business groups, there is a Coalition 

for Fairness in Tax Compliance, which is a large coalition of smallbusiness organizations that are addressing some of the tax gap recommendations, including this. So we have begun to work together 

on these particular issues. 

But in terms of your cost, I think that one of the big issues is 

this proposal has been misrepresented as being not burdensome to 

small business, because actually the onus on compliance is on the 

credit and debit card companies. But what they doesn’t take into 

consideration, again, are the consequences of the proposal, the time 

costs for small business in having to address any inaccuracies, the 

time costs in dealing with backup withholding and, more specifically, the cost they are going to face with higher user fees on their 

credit cards, which is almost a guarantee should this go through. 

And that would be a substantial cost on small business. 

Ms. HIRONO. I just think that that cost that is ultimately going 

to be borne by the merchants, that should be a pretty basic kind 

21

of an understanding. And including the 28 percent backup withholding, I think that is very burdensome. 

My question is, since this seems to be an idea that—has the 

train left the station already? Do you think that we can do some 

things that will cause us to pause on this? 

Because let’s face it, we are looking for all kinds of ways to comply with our PAYGO requirements. And I think, as business people, you would agree that Government should make sure that we 

have money for the programs that we are supporting. 

So what is your sense of where we are? 

Ms. DARIEN. I think we are all here asking, maybe, you for help. 

Obviously, Senate Finance had a public comment period on this 

particular proposal. And they, the Chair and ranking member of 

that Committee, are extremely interested in using the tax gap proposals to finance various priorities. So that is a big concern for us. 

So, you know, we seek your assistance, being the voice for small 

business in Congress, to get our message across about this particular proposal and others, and get people understanding what 

they are about to do to this important sector of our economy. 

Ms. STUBNA. And I think the problem is, too, you have this enormous number that has been tagged to this proposal, you know, $12 

billion, $18 billion, whatever it is now—it keeps changing, but—

Ms. HIRONO. It doesn’t seem real, right? 

Ms. STUBNA. It doesn’t. And as long as that is associated with 

it, unfortunately I think it is just an easy target. 

Ms. HIRONO. An easy target, yes. Well, that is the purpose of this 

hearing, so I thank the chairwoman for convening all of us. Thank 

you. 

Chairwoman VELA ́ ZQUEZ. I have two or three more questions. 

Mr. Boeding, how much time would be required for the payment 

processing industry to change its system to effectively implement 

new reporting requirements? 

Mr. BOEDING. We have held several meetings with that, and our 

ranges are very extreme. The amount of time for us to do this will 

be significant. To put a specific number to it, Madam Chairwoman, 

it is difficult for us to do. 

The thing that is absolutely certain to us is that it will come at 

the cost of other product innovation and offering better, more efficient services for consumers and merchants to get consumers to 

pay. And that is, you know, a reality for us, is that we will have 

to stop much of the innovation in the industry in order to seek 

compliance. 

Chairwoman VELA ́ ZQUEZ. Ms. Stubna, do you have any comments 

on that? 

Ms. STUBNA. Yes. We were looking—when this originally came 

out in 2006, we talked to some of our IT folks. And we have about 

10 platforms throughout the country that we process from. And 

they were estimating that just to link the 10 to the First Data ID, 

like I mentioned earlier, that it would take about 3,000 man-hours 

for each system. That is, again, not even taking into account the 

errors and all of that once it is implemented. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. McCracken, what should be done to ensure that businesses 

with a high volume of small-dollar transactions do not face excesVerDate 0ct 09 2002 15:16 Jul 17, 2008 Jkt 033615 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 G:\CLERK SB-LD\HEARINGS\TRANSCRIPTS\42689.TXT LEANN
22

sive administrative burdens to reconcile their information reports 

with their books and records? 

Mr. MCCRACKEN. I am not sure there is an easy solution aside 

from not doing this. I think that is the very real danger that you 

have in moving this forward, are, if you have—especially people 

who do a lot of small transactions who are bent on being tax cheats 

and they don’t want to report their income, and you decide to do 

this, I mean, all you are doing is creating incentives for them to 

move to cash. 

And either set an amount, like a lot of merchants already do, of a minimum of $15, $20, $25 to accept credit cards or not to accept 

credit cards at all, and you have moved those businesses from at 

least having some credit card data collection, which if there is an 

audit the IRS can go get that data and prove that those transactions occurred—instead you have moved those businesses to an 

entirely cash basis, in many cases. 

So if there is—and there is a very small minority of companies 

that don’t want to report all their income, but they do exist—by 

doing this, you have created yet less of an ability to track what 

they are really doing and what income actually going to their business. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Ms. Darien, like always happens, do you think it is reasonable 

to assume that the additional costs associated with these new reporting requirements will be passed along from banks and processors to merchants? 

Ms. DARIEN. Oh, yes, definitely. I mean, I have no doubt that 

that will be the case. I mean, they are a business as well, and you 

are going to see that a lot of these fees or costs of compliance will 

be passed on to small businesses. And what will likely happen is 

either they will, as Todd had mentioned, no longer take credit 

cards and move specifically to a cash economy, or either raise their 

prices for their customers, which will just hurt them in the end. 

Again, I think you will see a huge deterrence from people going 

into businesses, like, such as retail, where you almost have to take 

credit cards in order in order to stay in business. So, yes, I definitely think the cost will be passed on to small business. 

Chairwoman VELA ́ ZQUEZ. Okay. Thank you. 

And again to Ms. Darien, officials from the IRS concede that extraneous economic data will be necessary to make information reported on business card reimbursement useful. Does the IRS already have this type of information, or will it be necessary to acquire this data from another source? 

Ms. DARIEN. I am not quite sure what data they are seeking. You 

know, we take the position that information can be a good thing; 

it is the way you go about doing it. As mentioned, there are simple 

ways that we can use the system we have in place, the forms we 

have in place, to acquire additional data that might help them take 

a look or just get a better accurate figure on the quote/unquote ′′tax 

gap.′′

I don’t know if they will seek again—and this is the perfect proposal—going to other companies that have a whole host of data on 

merchants in hopes of getting additional data. I am not quite sure 

if they will go in that direction. 

23

Chairwoman VELA ́ ZQUEZ. Mr. Chabot, do you have any additional 

questions? 

Mr. CHABOT. Thank you, Madam Chair. Just kind of a final comment, at least wrap it up from our point of view, not necessarily 

a question. 

But this electronic payment tax reporting that we are dealing 

with here, which I think we all sort of agree is not a good idea, 

is part of the whole tax gap. It is a way for the Government to find 

more money to, kind of, mask what we are not doing right, which 

is being restrained in our spending up here. So we are trying to 

pick that number out of the air and say, ′′We have this money, it 

is a tax gap, so we can continue to spend because it is there.′′ And 

then we put the burden on you, that is how we are going to collect 

the money. We all agree it is not going to work and it will just be 

more burdensome on small-business folks. 

But the tax gap reminds me of a couple of these things. We used 

to do this, Congress did, by—we were going to sell the spectrum. 

And we had all this money out there. Every year, that would be 

part of the budget, the selling of the spectrum, that there would 

be billions of dollars that we would get. 

There was the infamous peace dividend. And the Cold War 

ended, so we had all this extra money we were going to spend for 

universal health care or you name it. It was there. But we all know 

that there are always things which are faced and additional costs. 

And so, arguably, that wasn’t there either. 

And the chairwoman kidded me before about when was I going 

to bring up ANWR again, well, I just figured out a way to get it 

in. 

Chairwoman VELA ́ ZQUEZ. Oh my. 

Mr. CHABOT. Ethanol was going to be the solution to all our problems. We didn’t need to drill in ANWR. We didn’t need to drill in 

the Outer Continental Shelf. Ethanol was going to take care of 

things. And, as we found out, it has driven up the costs, because 

we are diverting our food stock into now ethanol, and we are still 

seeing the prices go up. And now we are seeing food prices go up 

also. 

So I got ethanol in there. 

Chairwoman VELA ́ ZQUEZ. I see that. Okay. 

Mr. CHABOT. All right. But anyway, thank you very much. I 

thought the panel was excellent. 

Chairwoman VELA ́ ZQUEZ. Let me thank all of you for being here 

today. 

And, clearly, this proposal really represents a problem for the 

members of this Committee. We are going to continue to monitor 

what is happening and what will take place in Ways and Means. 

But I intend to send a letter to the Ways and Means chairman and 

ranking member with a copy of the transcript and comments of this 

hearing. 

I probably will be asking the Government Accountability Office 

to do an evaluation on those numbers that came out from the 

Treasury Department, to take a look at those numbers. And I will 

invite the ranking member to join me on those letters and requests. 

24

So, with that, I ask unanimous consent that members will have 

5 days to submit a statement and supporting materials for the 

record. 

Without objection, so ordered. 

This hearing is now adjourned. Thank you. 

[Whereupon, at 11:15 a.m., the Committee was adjourned.]

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