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FULL COMMITTEE HEARING ON

CLOSING THE TAX GAP WITHOUT

CREATING BURDENS FOR SMALL BUSINESSES

COMMITTEE ON SMALL BUSINESS 

UNITED STATES HOUSE OF 

REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

APRIL 26, 2007

Serial Number 110-17

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 

WILLIAM JEFFERSON, Louisiana 

HEATH SHULER, North Carolina 

CHARLIE GONZA ́ LEZ, 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 

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 

DEAN HELLER, Nevada 

DAVID DAVIS, Tennessee 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

JIM JORDAN, Ohio 

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 

DEAN HELLER, Nevada, Ranking 

BILL SHUSTER, Pennsylvania 

STEVE KING, Iowa 

VERN BUCHANAN, Florida 

JIM JORDAN, Ohio

Subcommittee on Contracting and Technology

BRUCE BRALEY, IOWA, Chairman 

WILLIAM JEFFERSON, Louisiana 

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 GONZA ́ LEZ, Texas, Chairman 

WILLIAM JEFFERSON, Louisiana 

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 

JIM JORDAN, Ohio

Subcommittee on Urban and Rural 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 

DEAN HELLER, Nevada 

DAVID DAVIS, Tennessee

Subcommittee on Investigations and Oversight

JASON ALTMIRE, PENNSYLVANIA, Chairman 

CHARLIE GONZA ́ LEZ, Texas 

RAUL GRIJALVA, Arizona 

LOUIE GOHMERT, Texas, 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 

PANEL I 

Everson, Hon. Mark W., Commissioner of Internal Revenue, Internal Revenue 

Service ................................................................................................................... 4

PANEL II 

Hall, Keith, National Association for the Self-Employed ..................................... 23

Hense, Paul, National Small Business Association .............................................. 25

Brennan, James E., American Institute of Certified Public Accountants ........... 27

Alexander, Hon. Donald C., Former IRS Commissioner ...................................... 28

Samuel, Joe, First Data Corporation ..................................................................... 30

APPENDIX 

Prepared Statements: 

Vela ́zquez, Hon. Nydia M. ....................................................................................... 44

Chabot, Hon. Steve .................................................................................................. 46

Altmire, Hon. Jason ................................................................................................. 48

Everson, Hon. Mark W., Commissioner of Internal Revenue, Internal Revenue 

Service ................................................................................................................... 49

Hall, Keith, National Association for the Self-Employed ..................................... 68

Hense, Paul, National Small Business Association .............................................. 75

Brennan, James E., American Institute of Certified Public Accountants ........... 84

Alexander, Hon. Donald C., Former IRS Commissioner ...................................... 93

Samuel, Joe, First Data Corporation ..................................................................... 95

Statements for the Record: 

Porpilia, Paula D., TIN Compliance Consultants ................................................. 105

(V) 

(1)

FULL COMITTEE HEARING ON 

CLOSING THE TAX GAP WITHOUT 

CREATING BURDENS FOR SMALL 

BUSINESSES 

THURSDAY, APRIL 26, 2007

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

Washington, DC. 

The Committee met, pursuant to call, at 11:00 a.m., in Room 

2360 Rayburn House Office Building, Hon. Nydia Vela ́zquez 

[Chairwoman of the Committee] presiding. 

Present: Representatives Vela ́zquez, Jefferson, Shuler, Larsen, 

Cuellar, Braley, Clarke, Sestak, Chabot, Bartlett, Akin, Heller and 

Jordan. 

OPENING STATEMENT OF CHAIRWOMAN VELA ́ ZQUEZ 

ChairwomanVELA ́ ZQUEZ. Good morning. I call this hearing to 

order to address closing the tax gap without creating burdens for 

small businesses. 

One of the focuses of this Committee is to ensure small businesses are given every tool to comply with regulations as well as 

reduced paperwork burdens. No place is this more true than when 

it comes to the taxes. Right now, it is estimated that small businesses spend 6 billion hours complying at a cost of $260 billion. 

While the vast majority of taxpayers comply with their obligations, 

the Internal Revenue Service has estimated that a significant percentage of tax due are not paid. This problem, known as the tax 

gap, is the subject of today’s hearing. The IRS estimated the tax gap to be $345 billion for 2001 alone. 

It seems the Administration is seeking for new ways to make up 

for the current deficit. As made clear in the Fiscal Year 2008 revenue plan, they have wrongly determined that the best course of 

action is to escalate IRS enforcement efforts on small businesses. 

I believe there are several proposals in the plan that will impose 

severe hardships on the small business community, yet only narrow the tax gap by a fraction of 1 percent. 

Before imposing additional reporting requirements, the IRS 

needs to assess whether their internal procedures can achieve this 

without creating excessive burdens. Small businesses are facing a 

number of challenges which include an overly complex tax code. 

Now, they are being hit with a disproportionate share of IRS enforcement efforts. 

2

Of the $100 million enforcement initiatives in the FY 2008 budget, nearly 75 percent is directed toward small businesses. It is that 

fact that in our present system of taxation many of our most profitable, large corporations avoid paying taxes by shifting income to 

off-shore tax savings. In fact, the IRS web site cites one of 30 that 

the annual loss to off-shore tax shelters to be at least $70 billion. 

Yet, enforcement efforts remain on small businesses. 

I find it puzzling when the IRS projects it will generate 50 percent more revenue for each dollar spent in enforcement for large 

multi-nationals. It is also troubling to know that the figures estimating the tax gap do not include recent data on the compliance 

levels of large corporations. That information has not been updated 

since 1988. Before deciding on a course of action that may harm 

small businesses, it is necessary to have an accurate picture of the 

tax gap. 

Congress also needs to work together to make it easier for small 

businesses to comply and harder for bad actors to evade their obligations by simplifying the tax code. A good first step will be made 

with passage of a measure to expand and extend 179 expending. 

The Commissioner is right when he says that it is unfair for honest, small business taxpayers to have to compete against these tax 

cheats. 

My advice to the IRS in crafting a tax gap plan is to consider 

the private costs on burdens of your proposals and do not simply 

focus on the revenue figures. As this country celebrates Small Business Week, we need to ensure our government is not creating unnecessarily obstacles for the small business owners who are doing 

the right thing. 

Closing the tax gap is critical, but we must not simply replace 

one problem with another by burdening our small businesses. I 

look forward to today’s testimony and I thank the witnesses for 

their participation. 

I yield to Mr. Chabot for his opening statement. 

OPENING STATEMENT OF MR. CHABOT 

Mr.CHABOT. 

Thank you, Madam Chairwoman, and thank you for holding this 

hearing on closing the so-called tax gap. This term ‘‘tax gap’’ is the 

Internal Revenue Service’ estimate of the difference between taxes 

voluntarily paid and taxes that should have been collected. For example, a tax gap is created when individuals under-report income 

or improperly claim credits or deductions. 

The IRS estimates that the United States collects 83.7 percent of 

the total taxes due and let me state for the record that I believe 

taxes are far too high and should be reduced, but as obviously important that businesses and everyone comply with the law. 

After adjusting for delinquent taxes collected by existing compliance efforts, the IRS estimates that 86.3 percent of tax revenues 

are collected. The net tax gap is currently estimated by the IRS 

National Research Program, as the Chairman indicated, nearly 

$350 billion for the tax year 2001 which was the last year that data 

is available. 

Even Washington, D.C., where the words ‘‘million’’ and ‘‘billion’’ 

are tossed around liberally throughout the course of each day, $350 

3

billion is quite a significant amount of revenue that is not collected 

each year. Because of taxpayer non-compliance, the burden of funding our nation’s commitments falls more heavily on taxpayers who 

willingly and accurately pay their taxes and that’s not fair. 

And again, I want to make the point that the amount of taxes, 

the total amount of taxes that the Federal Government collects 

from the American public in my view is also not fair because I 

think taxes are just too high. 

The question becomes what do we do about it? Many small business groups have serious concerns regarding the IRS plan to address the tax gap. Already struggling under the weight of massive 

paperwork burdens and high taxes, many of the ideas put forth by 

the IRS would only make it more difficult for small businesses to 

keep their head above water. While a few of the ideas put forth by 

the IRS has merit, the stated overall goal of increasing enforcement 

efforts is not the way to go. 

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

address this problem is to simplify the tax code. The code has become a morass or incomprehensible rules and regulations that is 

growing increasingly complex. For small businesses that are just 

starting out, 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 is never easy for them as the 

cost of complying and the difficulty in following the tax code can 

be overwhelming. 

In 2001, the Small Business Administration’s Office of Advocacy 

released a report on the regulatory costs faced by small firms that 

contained an estimate of the pay for compliance costs. The report 

showed that small businesses with fewer than 20 employees spend 

over $1200 per employee to comply with tax paperwork, record 

keeping and reporting requirements. This is twice the compliance 

cost faced by larger firms. 

Another area that the IRS has not focused on enough is education and compliance assistance. The IRS itself estimates that 

roughly $148 billion of a gap comes from under-reported business 

and self-employment taxes. Expanding efforts to help businesses 

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

time would significantly reduce the gap without penalizing the honest people out there doing their best to comply. 

Make no mistake, I do believe that enforcement must be a factor 

in the equation. Just like any segment of the population, there are 

always going to be bad actors out there trying to skirt the system. 

Finding them is not easy. We must continue to look for and penalize those who deliberately evade paying their taxes, but it must not 

be done at the expense of those citizens doing their best to comply 

with their share of the tax burden. 

It’s going to take a balanced approach of simplification of the tax 

code and again I want to emphasize that, greater education and 

outreach efforts to individuals and businesses in enforcement in 

order to make any real headway on this problem. 

Madam Chairwoman, thank you again for holding this hearing. 

I look forward to hearing from our distinguished panels and to 

working with you and our colleagues in the House in a bipartisan 

4

fashion, hopefully, as we’ve done on the Committee on most occasions and the Administration to address this issue. 

And again I want to thank you for holding this hearing. I yield 

back my time. 

ChairwomanVELA ́ ZQUEZ. Thank you, Mr. Chabot. And now I welcome the Honorable Mark Everson, Commissioner of the Internal 

Revenue Service. 

Commissioner Everson was confirmed by the U.S. Senate on May 

1, 2003. Commissioner Everson is the forty-sixth Commissioner 

since the creation of the Agency in 1962. The American Red Cross 

last week announced that Commissioner Everson will be its President. We commend Commissioner Everson for his service at the 

IRS and wish him the best in this new position. 

Thank you for coming before our Committee today. 

STATEMENT OF THE HONORABLE MARK W. EVERSON, COMMISSIONER OF INTERNAL REVENUE SERVICE, U.S. DEPARTMENT OF THE TREASURY 

Mr.EVERSON. Thank you, ma’am. It’s a pleasure to be back here 

again, Chairman Vela ́zquez, Ranking Member Chabot, Members of 

the Committee. 

Before taking your questions, let me just say a few things about 

the filing season that we’re just completing. At the IRS, we recognized some time ago that this would be a challenging filing season 

for us. Two of the reasons were Congress’ late action on the extender legislation. It didn’t take place until December. And the fact 

that we did not actually have an operating budget until the middle 

of February, as you know. 

The one time refund of the telephone excise tax and initiation of 

the split refund were also of concern. Taken together, we anticipated the most difficult filing season in a number of years. Nevertheless, we have kept up with the work and the system is functioning well. The extenders were successfully implemented. Our 

software updates were taken care of by early February. 

Electronic return filing continues to grow to almost 9 percent 

from a year ago at this time and our service indicators are healthy. 

Along with the increase in the e-file rate, we have see a 16 percent 

gain in our volunteer prepared returns which is a cornerstone of 

our outreach program. 

As you may know, this effort helps eligible participants claim the 

earned income tax credit which lifts millions out of poverty every 

year. 

We have, however, seen a lower than expected claim rate for the 

telephone excise tax refund, some 30 percent of the people haven’t 

taken that and what I would characterize as quite minimal interest 

in the new split refund program. 

Concerning services for the small business community, our small 

business, self-employed division has a vigorous outreach in education program for small businesses, including some 500 personnel 

who work in this area. Our office has relationships with over 1500 

small business, industry and tax professional organizations. In Fiscal Year 2006 we concentrated or—pardon me, coordinated or participated in over 2000 events across the country with more than 

5

120,000 direct participants sharing education and outreach messages and information about IRS policies and procedures. 

We co-host small business fora along with the U.S. Chamber of 

Commerce, the NFIB, and the Small Business Legislative Council. 

In 2006, we began a new outreach to tax professionals through 

phone forums, eight national forums have been conducted by our 

offices across the country who have more than 1,000 participants 

each on various tax topics. 

Let me turn to enforcement. We again enjoyed significant increases in our enforcement results in Fiscal Year 2006. And I am 

pleased to report we’re making continued strides in Fiscal Year 

2007. One of the things that I’m proudest of is that the IRS has 

restored the credibility of its enforcement programs without generating a significant amount of noise or increased allegations of infringement of taxpayer rights, very essential that we do it this way. 

In addition, we have successfully launched the private debt collection initiative passed into law in 2004. With private companies, 

an estimated $1.4 billion of unpaid back taxes can be collected over 

10 years. The IRS lacks the manpower to collect this money by 

itself. We are holding the companies to the highest standard of professionalism and integrity. The Inspector General for Tax Administration recently reported that the IRS has effectively developed and 

implemented the private collection program. 

Concerning the President’s 2008 budget, I am pleased that the 

President’s request provides additional monies for IRS systems infrastructure and modernization as well as for enforcement and notably for increased research. There is also a modest increase for 

taxpayer services. This is the best budget that I have seen in my 

four years on the job. I ask the Members of the Committee to support the President’s budget and to help enact an appropriation before Fiscal Year 2008 actually starts. That’s really essential for a 

large operating agency like ours. 

These requested monies will help us generate continued progress 

in attacking the tax gap, but they are not the only things we need 

to do. The Administration has made 16 legislative proposals. I 

would direct your attention to four that I think are particularly important. First, reporting of credit card gross receipts; second, making willful failure to file a tax return a felony, rather than a misdemeanor; third, requiring basis reporting for sales of securities; 

and fourth, lowering the threshold for mandatory electronic filing 

for large corporations and partnerships. 

Thank you. I’d be happy to take your questions. 

[The prepared statement of Mr. Everson may be found in the Appendix on page 49.] 

ChairwomanVELA ́ ZQUEZ. I will recognize Mr. Chabot. 

Mr.CHABOT. Thank you very much, Madam Chair, and thank you 

for appearing before us this morning, Commissioner Everson. 

Just a few questions. First of all, relative to the proposed reporting on payment cards from businesses, there’s currently no line on 

the Schedule C for merchants to report their annual payment card 

reimbursement, so clearly these annual information reports 

couldn’t presently be used for income matching purposes. 

How exactly does the IRS intend to utilize that information? 

6

Mr.EVERSON. Well, I think that we—what we’ve seen in our research, sir, is that the biggest portion of the tax gap is under reporting. A big piece of that is the income on Schedule Cs. What we 

believe is that if we get the information, let’s take a simple example. You have a dry cleaning business, let’s say. And we know that 

from our studies that typically half of the revenues in a business 

like that comes in cash and half comes in credit cards. I don’t know 

if that’s actually the case or not. But if the retailer were to be reporting to us a total receipts of $1 million, but we saw in the credit 

card information that would come in once a year, just once a year 

that the total revenues were $800,000 or $900,000 just on the credit card receipts, that would prompt us to perhaps make an inquiry. 

And maybe it would be a signal for audit. 

What we believe is though that as soon as this reporting took 

place, there would be more honest reporting on the part of some 

who are under reporting. Let me just give the Committee the classic example of this. In ’86, when the last time there was major tax 

reform issues, the Congress added in the ability for us to show the 

Social Security Numbers for dependents. Previously, that was not 

on the face of the form. And when that happened, the next year, 

5 million dependents vanished. And that was—even though the 

IRS had no capability at that time to do matching at that stage, 

because it took a couple of years to get it all programmed. But people will just be more honest, though some people who aren’t reporting honestly. 

Mr.CHABOT. Let me ask you another question somewhat related. 

Are you concerned or is there a possibility that the proposal on additional reporting on the cards, you may run the risk of small merchants not accepting credit cards, for example? 

Mr.EVERSON. I think that that—I guess, the Treasury Department has taken some comments to that effect. I think as commerce 

moves more and more into the credit card reporting, I don’t see 

that as a significant issue. I had dinner last night at a restaurant. 

I asked the proprietor, I asked, what is your percentage of credit 

card receipts? He said 98.5 percent. That’s his business. I think 

we’ll get an awful lot from this if we do it. 

Mr.CHABOT. Have you asked the GAO to evaluate the proposal 

from a cost-benefit perspective? 

Mr.EVERSON. We have not, sir. What happens in these is that 

the Treasury Department and then the Joint Committee, they do 

revenue estimates and take a look at the proposals and they come 

up with dollar figures that they think will be generated and then 

those are used for scoring purposes. Typically, if you add money to 

our budget to hire more auditors or people doing the collection 

work, that cost is scored by the Congress in the budget but not the 

extra revenues we’re going to get. 

If you do a legislative proposal like these, on the other hand, that 

is scored and you do put an effect into the budget. 

Mr.CHABOT. Madam Chair, if I have time I’ll ask one additional 

question? Thank you. 

I realize it might be more than a little difficult for IRS employees 

to do the education and outreach. But I think most Americans 

might be a little incredulous to having an IRS agent come to them 

and say I’m from the IRS and I want to help you. But what strateVerDate 0ct 09 2002 08:51 Dec 20, 2007 Jkt 033615 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\34829.TXT LEANN
7

gies are you implementing to get the word out and get better education and those types of things out? When one considers, I think, 

10 percent is going to the education effort and 90 percent going to 

the enforcement effort. So if you could respond? 

Mr.EVERSON. Yes. If you recall the reforms that were taken by 

Congress in 1998, it changed the way the Service was organized to 

have it be organized around tax payer sort of segments. So we have 

one for the larger businesses and we have one that’s for sort of individuals, one for tax-exempt entities. But the one that is of particular interest to this Committee is for small business and self-employed individuals. 

So that unit is charged with looking at both the enforcement side 

and the services side. It does have a large group of dedicated people who do a lot of outreach with trade organizations and others 

as I have indicated. It is a cornerstone of our program. I think 

we’ve done much better. The other thing we have is we have an 

Office of Burden Reduction that is constantly looking at what we 

can do administratively. 

I agree, sir, with everything you have said. Simplification is 

something that we have got to do, but that’s—I mean, that’s something that you have got to do. We’re trying to do whatever we can 

though, and we have done some things like make it for smaller taxpayers, do their employment tax reporting annually instead of 

quarterly and things like that. We try to do whatever we can. 

Mr.EVERSON. Madam Chair, I don’t have any additional questions. Let me just comment on what the Commissioner just said. 

I agree. It’s not the IRS’ fault that the code is so complicated. It 

is Congress’ and, whereas, in recent we have made some progress 

in reducing the level of taxes, whether it is capital gains or a number of other things, we’ve—I think Congress has failed miserably 

in simplifying the code, and I think that ought to be a major effort 

that hopefully could be worked on in a bipartisan fashion. Thank 

you, and I yield back. 

ChairwomanVELA ́ ZQUEZ. Mr. Cuellar? 

Mr.CUELLAR. Thank you, Madam Chair, and following up on 

what the Ranking Member said, Commissioner, I agree with him. 

I think certainly there is a responsibility that we need to do in 

Congress when we talk about simplifications. But if I can just follow up a little bit. You talk about some of the trade groups, and 

I’ve just talked to one of the small business trade groups just a couple of days ago. 

Their concern that IRS, and I appreciate the difficulty that you 

have to look at in your agency, but they are concerned that you’re 

looking at, when you look at closing up the tax gap that you’re 

looking more at the enforcement part instead of the assistance and 

the compliance and the customer service, and that type of assistance. 

How do I respond to them in that particular area? 

Mr.EVERSON. We’re not going to audit our way out of this tax 

gap. What we have to have is a balanced program, and it includes 

some additional of this third-party reporting, which I know generates a lot of controversy, and you’re certainly going to hear from 

the second panel on this. We have, as I’ve mentioned in my opening 

statement, asked for more monies our infrastructure. 

8

We’ve been under funding this for years. It is very important because better systems will help us get things more accurately as we 

correspond back and forth with taxpayers and respond to their concerns. I think that the other thing I would indicate is that we just 

issued now something called the Taxpayer Assistance Blueprint, 

the second phase of this which is a big study that is going to help 

us. It’s an outline, if you will, of a set of principles that will help 

us make decisions just in this area on service and on outreach. 

We’ve worked hard to do better here. It’s not so much—I mentioned 

in a statement that our volunteer program, on our assistance for 

the elderly—this program has increased the total returns filed by 

over 16 percent year-on-year. 

That’s a phenomenal increase. That is all about outreach. 

There are people who will deal with, be much more comfortable 

dealing with an association or dealing with a volunteer group to 

ask them a tax question. Not maybe as comfortable coming to the 

Service, particularly some of the immigrant communities and 

emerging areas. So we really work hard on that. 

Mr.CUELLAR. Commissioner, could you on that blueprint, because 

I know my office has worked with your folks on there on the outreach and the taxpayer assistance. Is there anything else that you 

have specifically that you can provide to us in the Committee that 

we as Members of Congress, we work on the simplification on 

something else, that you can provide so we can work with you to 

provide some of that assistance to the small business community? 

Mr.EVERSON. Yes, sir. Well, what I will do as the Chair has indicated, I’m not going to be in this job that much longer. But I will 

certainly make sure that our folks come see you and take you 

through the materials we have. One of the things we’d like, we’ve 

worked—Secretary Paulson was very strong on the EITC this filing 

season. And we reached out to all of your offices to try and do more 

outreach through your offices. I’d like to do whatever we can working with your office. 

Mr.CUELLAR. If we can do that. Just one more question, Madame 

Chair. 

As you know, when you look at the simplifications and how we 

can provide customer service, some of it is within the rule-making 

authority that you have. Could you give us an outline for the Small 

Business Committee following up what Mr. Chabot talked about? 

What is congressional—what needs congressional action and what 

is something that you can do within your rulemaking authority? I 

mean, you do have a little bit of flexibility, if I can say this. Could 

you give us some suggestions where we could improve customer 

service, improve compliance assistance for the small business and 

just say well, if we’re going to take this action it needs congressional or statutory change, but this is something within the rulemaking authority that you might have? 

Mr.EVERSON. I’m certainly happy to provide you a list of the 

things that we’re looking at in terms of administration burden reduction. It’s a changing list, obviously. But the problem is more on 

the other side where we feel we’re following what the Congress has 

said. 

Let me give you an example. People complained in this community about a very complicated, something like a 22 part test. 

9

There’s a manual this big about what’s an employee versus an 

independent contractor. The Congress wrote into law in I think it 

was 1977—1978, pardon me—saying that you can’t change this definition or issue any regs on it. That’s an example of an area where 

there is a lot of ambiguity. It’s very hard for people to comply. 

Mr.CUELLAR. Well, give us at least an attempt. I know it’s fluid, 

but at least so we can get a blueprint, to give us some suggestions. 

I still want to see what rulemaking authority you have because I 

know you have a little bit of flexibility on that, sir. If you could provide those two things, I would appreciate it. 

ChairwomanVELA ́ ZQUEZ. Time has expired. Thank you. I will recognize Mr. Bartlett, but let me just say that right after Mr. Bartlett we’re going to recess and go to the House vote. We will reconvene within the next half hour right after the vote. 

Mr.BARTLETT. Thank you very much. As a small business person 

in a former life, I’m particularly sensitive to the issues that we’re 

talking about here. Thank you, Madam Chairman, for your comments. And Ranking Member, thank you for your comments. 

I have a brief statement I would like to submit to the record if 

that is okay. The gist of the statement is—

ChairwomanVELA ́ ZQUEZ. No objection. 

Mr.BARTLETT. —Thank you—asking the question are we sure in 

this effort the juice is going to be worth the squeezing? 

[Laughter.] 

Mr.BARTLETT. I’m sure that there are some taxes out there that 

we haven’t collected. But maybe the harm that we do by trying to 

collect those taxes will not justify the effort. There are occasions 

when the treatment is worse than the disease. We have to be careful that this is not going to be one of those. 

And now to a specific question, if I might. According to the tax 

gap figures for tax year 2001 released in 2007, I would like to ask 

you to provide to this Committee for the record the methodology, 

you don’t have to do that today, but just provide us for the record 

the methodology used to arrive at these estimates. How did the IRS 

arrive at the conclusion that the 2001 voluntary compliance rate 

was 83.7 percent? Could it in fact have been 95 percent? What are 

the solid raw data and the methodologies including assumptions 

that produce the tax gap estimates? 

I understand that the initial research was done in 1988. I would 

like those raw data sources provided as well as any updated data 

that this most recent research has performed and on which the tax 

gap estimates are based. Can you do that for us? 

Mr.EVERSON. We can certainly provide details on how this was 

all compiled. It has been looked at by GAO and by our Inspector 

General and we have had outside consultants working with us. It 

is a very significant effort involving 46,000 individual audits. So 

yes, we can tell you about that. I don’t know how much we’ll be 

able to provide from 1988, but we certainly can tell you how the 

difference between the two approaches. 

Mr.BARTLETT. For all of us who fairly pay our taxes, it is unfair 

that others aren’t fairly paying their taxes. I think the desire for 

fair enforcement is everybody’s goal. Our small businesses now are 

enormously burdened by a cumbersome code. I just want to make 

sure that we aren’t going to make their life worse and that at the 

10

end of the day we’ll be happy that the results we get were worth 

the effort that we put into it. 

Thank you very much and thank you Madame Chairman. 

Mr.EVERSON. If I could just say one thing on that very important 

point. Both the Secretary and I have been very cognizant of this 

question. In fact, we have been criticized for not being more ambitious in some circles, Senator Baucus, Senator Conrad, in particular, saying you ought to be doing more, what you’re proposing 

really is too modest. Because we do recognize this trade-off about 

burden versus the ability to get the revenues, and we think we 

have a good set of proposals. We’re asking the Congress to work 

with us to enact those, but we’re sensitive to going further than 

this. So I understand what you’re saying, sir. 

Mr.BARTLETT. Thank you, sir. 

ChairwomanVELA ́ ZQUEZ. Okay, so we’re going to the House now 

and vote and come back in a half an hour. 

[Recess.] 

ChairwomanVELA ́ ZQUEZ. The Committee is called to order. 

Commissioner Everson, I just would like to again ask a question 

that was asked to you by Congressman Bartlett, but I don’t feel 

that I didn’t hear a complete answer to the question. Again, my 

concern is the impact that the new proposals are going to have on 

small businesses. I would like to ask you if either the IRS or Treasury Department conduct a cost-benefit analysis of tax cut proposals 

before they are offered in the Blue Book. And if so, what is the nature of this analysis? 

Mr.EVERSON. We look at and estimate all of the revenues and we 

try to look at what we think the burden impact will be. Now it is 

difficult in some instances to know exactly what you’re going to get, 

because after all a lot of this is directed at what is under reporting 

now. so you may not know how large the populations are. But we 

look at things like, I’ll give you an example. We would say right 

now one of the proposals that I’m sure you know is generating commenting, concern is about the 1099s for corporations. 

Right now, Madam Chair, we already get something like 82 million reports a year that are like that, the 1099 Miscellaneous for 

Independent Contractors. We anticipate that this would be another 

60 million perhaps reports that we would get because of that. We 

don’t necessarily put a cost figure on it, though, but we do estimate 

the revenue side. 

We could develop some options there. What we tried to do is we 

went through the basket of proposals, ma’am, was we tried wherever we could to limit this like in the credit card reporting, so that 

we had the least burden for the small businesses. There were other 

things, as you know, that we could do. Some have advocated withholding. We’re not suggesting that. Withholding gets you more 

compliance obviously, but is extra work. What we have tried to do 

is be as sensitive to the issue as possible. 

ChairwomanVELA ́ ZQUEZ. As I’ve mentioned in my opening statement, I am concerned by the fact that the data that the IRS is relying on in estimating the tax gap for C corporations is from the 

1970s and 1980s. In fact, and in July 2005, the General Accounting 

Office report cited IRS official as stating that the IRS has not sysVerDate 0ct 09 2002 08:51 Dec 20, 2007 Jkt 033615 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\34829.TXT LEANN
11

tematically measured large corporation tax compliance through statistically valid studies. 

This despite the fact that officials acknowledge such information 

will be useful. I suspect that if that information was updated, the 

proportion of the tax gap attributed to small businesses will be significantly lower. Do you agree with that? 

Mr.EVERSON. Can we look at the tax gap map, Lenny? Let me 

just sort of say what we did. We started with the individuals and 

we did the work that was 46,000 individual audits. It’s very timeconsuming because you’re going through each line. As you say, we 

have no yet, the corporate piece here is sort of this train, maybe 

you can point to it, Lenny, right there, the under reporting. That 

is exactly what you said. It is using the old assumptions and updating it for certain changes. That is a relatively smaller portion. Let 

us go to the audit coverage now. 

What I have said, ma’am, is that the way we use the data is to 

make audit selections and update our own internal procedures. No, 

no, the coverage. Right, that front one. We already have very high 

coverages for the large corporations. As you can see here, the percentage coverage in 2006 is one out of every three of those companies is being audited. So we have ongoing, very high coverage in 

contrast down here with the Schedule Cs, which is a 3 percent coverage rate. 

What I have said we would not change our approach too much 

on the big companies based on more data in terms of total coverage. Nevertheless, we have in the budget asked for $41 million 

more for research. One of the things that we’re going to do is get 

at this. I’m particularly concerned about, someone mentioned international. The international transactions, very great complexity. 

They are a real challenge for us in the off-shore areas. So we want 

to do more in that area. I assure you. 

ChairwomanVELA ́ ZQUEZ. But let me ask you. Do you have any 

plans to update the tax gap data for C corporations? 

Mr.EVERSON. Yes, we do. We will start to work on that. We’re 

doing some sort of macro studies on it now. But this is a tricky 

thing to do because if you’re looking at individual you can go line 

by line and do it all, but a big corporation, like General Electric, 

are you going to audit every line? That’s not the approach you take 

as you can imagine given the size of some of these. 

ChairwomanVELA ́ ZQUEZ. When do you plan a better picture of 

the tax gap regarding C schedules? 

Mr.EVERSON. I would say it’s going to take place over the next 

four of five years. If we get the money that we need—this takes 

several years. If you do an audit, the entity or the corporation or 

the individual files the return, then it takes us a lot to figure out 

which ones we want to look at. Right now you might be familiar, 

we’re doing the 1120 Ss. We’ve already finished. We started that 

work a little over a year ago. We finished some of them, but those 

are the clearer ones. The more complex ones tend to take a little 

bit longer where there may be issues in sorting out. So it takes several years. 

What we want to do now though, to get at one of the issues you 

may inferring, we don’t want to just have a periodic study like in 

2001 or way going back to 1988. We want to put enough money in 

12

the base of the budget so that we can be constantly fine-tuning the 

research and updating it and looking across all of the different elements of the tax system. 

ChairwomanVELA ́ ZQUEZ. Let me ask you, shouldn’t you wait, the 

Administration wait until you have a complete picture of the tax 

gap? And you just said that yes, you intend to do a—to try to update the tax gap data for C corporations. So my question is 

shouldn’t the Administration have a complete picture of the tax gap 

before deciding on a plan, on a specific plan? 

Mr.EVERSON. Let’s go to the visibility chart. I think we know 

enough here that there are clear problems in terms of under reporting of income in the Schedule C area for the business income 

that—we can address that. We can address that through a combination of things. Outreach has been mentioned. Sure, that may 

have some impact, but the biggest issue here is just plain understatement of gross receipts. That’s not so much a question of education, we believe. 

What this chart does is it shows you that you have a one percent 

noncompliance rate on wages. That is our estimate. There are 146 

million wage earners in the country and employees. There, we are 

getting the third-party reporting. There’s actually withholding too. 

This says that when you get all the way out to the other end where 

there isn’t any third party reporting, as in this instance, this credit 

card proposal that we’re getting to, that there is a noncompliance 

rate of something like 50 percent. 

I think we know enough to make these proposals. The trick 

though is what we got to before. It’s this balance. How much do 

you do and how many proposals do you put in? That’s the trick, I 

would say. 

ChairwomanVELA ́ ZQUEZ. Mr. Everson, I think that also we know 

enough, or maybe you should know enough about corporations and 

accounting firms that are becoming aggressively, increasingly aggressive in seeking ways to shift their profits on paper into offshore tax havens in order to avoid tax obligation. In fact, the General Accounting Office has stated that abusive tax shelters are costing the federal government tens of billions of dollars in revenues 

and that the IRS faces challenges in addressing the abusive shelter 

workload. 

It seems to me that instead of skewing enforcement resources towards small businesses, you should be investing more to address 

the abusive shelter workload. Why isn’t this the case? 

Mr.EVERSON. Well, I think that if you look over what we have 

done over the last four years, we have made shelters in particular 

both for corporations and high-income individuals a centerpiece of 

our work. So we started there and we have increased audits generally, but we have not, I think, addressed that much additional 

focus I would say to you on small businesses in particular. We 

started with the high income individuals and the corporations. 

Now the other piece that you’re getting at which is so complicated is the international. Now a lot of the problem there, it’s 

not only—it’s not only things that we would consider in the tax 

gap. It would also be the manipulation through tax arbitrage and 

the establishment of sophisticated transactions which are actually, 

arguably legal but they’re taking advantage of one thing is debt in 

13

one country and treated as equity by another, and then you structure transactions to minimize taxes that way. 

There’s a lot of complexity here. It is the hardest thing for us to 

get after, but we devoted more resources to it. It is an area of focus. 

I have chaired something called the Forum on Tax Administration 

which works on it. 

ChairwomanVELA ́ ZQUEZ. What would you say is the biggest challenge in addressing the abusive shelter problem? 

Mr.EVERSON. Well, the biggest problem in the abusive shelter 

had been I would say the practitioners. What happened, you’ve got 

Don Alexander here. Not everybody is as scrupulously adherent to 

the standards of the law as Commissioner Alexander. Things got 

quite—they got quite wild a few years ago with attorneys and accountants trying to outdo each other, setting up transactions that 

in many instances were inappropriate. Now I think some of that 

through efforts of the Service and the Justice Department, stepping 

in strongly we’ve turned a corner on that. But there still is a lot 

of problems out there. 

ChairwomanVELA ́ ZQUEZ. Okay, my last question on this round 

before I turned to Mr. Chabot. You’re enforcement budget request, 

it doesn’t make a lot of sense to me, basically because nearly three 

times as much money is being requested for enforcement against 

small businesses than for large multi-nationals. Meanwhile, the 

IRS says it generates 50 percent more revenue for each dollar 

spent on large, multi-national businesses. Why is it that this enforcement budget request is not more balanced? 

Mr.EVERSON. Well, again I think that what we’re trying to do 

here is address where this very large portion of the tax gap is, 

which is in under reporting by individuals. We are adding $26 million to the large corporate piece, which is about what we can take. 

The work force is much larger on the small business area, because 

that’s a much bigger piece of the economy, as you would know so 

well. 

What we do is we are adding an enforcement personnel, pretty 

much what we can in each of these areas, frankly. 

ChairwomanVELA ́ ZQUEZ. Mr. Chabot? 

Mr.CHABOT. Thank you, Madam Chair. I just have a couple of 

questions and you’ve covered quite a bit in your questions, too, and 

I certainly won’t repeat that. But Mr. Commissioner, let me ask 

you this, if I can. On average, how long would it take, I know this 

is going to vary extraordinarily depending on the size of the business and the complexity of the return, but what is your range on 

the typical audit for a small business, how much time that it would 

take, and again, I know you can’t just say it’s eight hours or ten 

hours or whatever. 

Mr.EVERSON. I’d want to get back to you. It’s something that we 

could certainly tell you how, what the norms are and then what the 

ranges will be, but it all depends on whether issues can be settled 

out, or whether documentation can be brought—it can take some 

time, but those are obviously much simpler than you get into the 

big companies. The big companies takes years. It’s actually something I’ve been concerned about. It takes too long. 

Mr.CHABOT. Thank you. In previous hearings on this topic, several witnesses brought up the idea that the IRS could help address 

14

the issue by modernizing their systems to take advantage of the information that they already collect. Would you comment on this 

and are there any inefficiencies that you could address internally 

or need help from Congress to address internally? 

Mr.EVERSON. Yes, sir. As I indicated before, I really do think this 

is the best budget request that I’ve seen in my four years on this 

job. And one of the reasons that’s the case is because it provides 

adequate funding to improve our infrastructure. Your point is absolutely correct. Good infrastructure supports both the service side of 

the IRS and the enforcement side of the IRS, so we need to invest 

more on that. There are new monies in there that do that, both on 

terms of the core sort of infrastructure and also what we call modernization efforts within the IRS, so that is the good, the real good 

news on the budget. 

Going to your point, I would tell you that my personnel, my man- agers tell me if you said, Mark, I’m going to give you an extra $30 

million, you have to choose whether it’s in better systems or additional people. They would take it in the systems is where they are 

now. So that really is job one and that’s a good component of the 

new budget. 

Mr.CHABOT. Thank you. Before I yield back, the charts you had 

there before, there was just one of the lines—

Mr.EVERSON. Percentage coverage? 

Mr.CHABOT. Not that one. It had the list of—

Mr.EVERSON. Yes, sir. 

Mr.CHABOT. That’s it. The very bottom line, ‘‘employment tax returns’’, then it was .13 percent. What is that exactly? 

Mr.EVERSON. That is an audit of whether the tax return that a 

business will be filing on what it’s withholding for Social Security 

or Medicare, the employment taxes. Most of our work in that area 

is in the collections side where what happens is we get into problems where a business and it can often—it’s typically a small business, the business will get a little behind, getting squeezed and 

then they don’t make the current payments. They’ve been withholding the taxes for you as an employee, but then they get behind 

on making the quarterly payments. We try to step in very quickly 

there because what happens is it just compounds itself and they 

get in deeper and deeper. It’s a lot of well-meaning folks who are 

trying to stay in business and we work with them. If they’re a couple of quarters behind and they can demonstrate to us that they 

can get current for that quarter, and then start to work out the 

other piece, then we’ll work with them, but otherwise, if they’re 

just going to keep shorting the government and not sending on the 

money they have withheld from the employee, then we’ll really step 

in. 

We don’t do that many audits there. We don’t find that the employer has really—we don’t see that as a problem area. 

Mr.CHABOT. Thank you. One other thing, I apologize, one other 

thing comes to mind. I’d just like to maybe emphasize and reiterate 

what our colleague Roscoe Bartlett said much better than I am 

going to be able to repeat it now, but he said something about 

squeezing the orange and getting the juice out of something like 

that. 

Mr.EVERSON. He said is the juice worth the squeeze. 

15

Mr.CHABOT. That was it. Yes. And I have to say I agree with him 

and want to make sure that we kind of keep our eye on the ball 

here. We definitely, if you have businesses or individuals that are 

intentionally or even accidentally but are either evading or not paying their fair share, they certainly because it does put the burden 

on the rest of the folks that are doing what they’re supposed to be 

doing, both individuals and small businesses especially. But we 

don’t want to have one additional burden on the small business 

community where we’re trying to squeeze out every last dollar and 

creating kind of a paperwork monster on these folks who are already struggling in a very competitive environment already. 

I would just urge to the extent that you’re able to commit to us 

to going after those tax dollars that are owed, but not making it 

any more burdensome on the small business community than necessary. 

Mr.EVERSON. I think that’s good counsel and both the Secretary 

and I really feel quite strongly that you’ve got to be careful about 

how far you do go and as I indicated before, we’ve both been criticized by a number of people in the Congress for not having more 

robust proposals going after the tax gap, but I think it reflects our 

appreciation of just this tricky question you’re getting at. 

Mr.CHABOT. Thank you very much. 

ChairwomanVELA ́ ZQUEZ. Mr. Sestak? 

Mr.SESTAK. Thank you, ma’am. Sir, just a couple of specific questions just for my edification. One of the proposals in the Blue Book 

was to expeditiously verify TINs. 

Mr.EVERSON. Yes. 

Mr.SESTAK. If that were to come about, what would have to be 

done for IRS to be able to verify it expeditiously which has got to 

be one of the major challenges. 

Mr.EVERSON. Yes, sir. This proposal gets at this question of 

whether there’s some misrepresentations, someone saying you don’t 

have to give me a 1099 under the existing standard because I’m 

not an independent contractor. I’m a corporation. 

My understanding is we do have already enough automation to 

be able to handle this comfortably. It’s not one of the proposals. 

Some of the proposals require additional investment. We provided 

for those monies in the budget. I don’t believe that this is one of 

the cases where we feel we would have difficulty on it. 

Mr.SESTAK. I’ve heard you speak about PCAs. 

Mr.EVERSON. Yes. 

Mr.SESTAK. But also the comment has been made that we’re getting what we expected from them. What does that mean? What are 

the figures for it, the return on it? 

Mr.EVERSON. Thus far, over the life of the program through the 

middle of April, we’ve received almost $20 million that has come 

in through the program and then you have to back off of that $3 

or $3.5 million from the commissions that they earn. So for this fiscal year, it’s about at a break even point considering the investments we’ve made. 

We expect the program—

Mr.SESTAK. Break even after how many years, is it three? 

Mr.EVERSON. No, no, not even. It was put into law in October of 

2005, but after we had to develop it and go through the procureVerDate 0ct 09 2002 08:51 Dec 20, 2007 Jkt 033615 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\34829.TXT LEANN
16

ments, we did not start it until September of this past year. So it 

is really still a very new program. 

We expect to recoup the whole investment, the systems that we 

put in and everything else, by about a year from now. And then 

the comment, I freely acknowledge that we could do this work as 

well or better. We’ve got great employees who are trained. The constraint we have though, sir, is that right now as with many other 

agencies in the government, we have a lot of attrition. There’s a lot 

of churning in the workforce, okay. Our churning is running at 

something like 8 or 10 percent, so then when you build on top of 

that the enforcement initiatives that we’re talking about here 

today, with the $230, $240 million we’re asking for, that adds more 

people. There’s only so many people you can add in a given period 

without losing control of your training and everything else. 

What I have said to the appropriators, your colleague, Congressman Serrano, particularly, we got into this at a hearing a few 

weeks ago, is that we would not be able to do this work for a number of years. You have to be giving us these increases of the magnitude that we’ve asked for several years before we’d be in a position to get after this money. 

Mr.SESTAK. The third is you said in your testimony that you’ve 

increased the audit of those who earn over $1 million by 78 percent. What’s the number change? How many to how many? 

Mr.EVERSON. I’d have to get you that, but what we have now is 

about a—it’s over—I think it’s like 6.3 percent for the—over $1 million. If you take a look again, that’s what it is. 

Mr.SESTAK. The number of individuals? 

Mr.EVERSON. Yes, the individuals with income over $1 million, 

we audit 6.3 percent last year. That was up from around 5. 

Mr.SESTAK. I see. 

Mr.EVERSON. If we go to that one you’ve got right there, individuals, it sort of gets me to another point I would like to make. The 

centerpiece of what I’ve tried to do over the last four years has 

been to do more for high income individuals and corporations. And 

if you see here this starts in ’01 which was a transition year. Clinton-Bush, first part of that year was under President Clinton, the 

second part of that is under this President. 

You can see the growth. The EITC is the green line. We have 

brought those up but then I took a decision in ’05 to flat-line those 

because we were getting a lot more efficiency, but we rediverted. 

We diverted our resources into that blue line which is audits of individuals under $100,000. And the real growth, you can see, has 

been over $100,000. So we really have worked on this. A lot of it 

gets back into the shelter question and this has been very successful for us because a lot of the money is up there. 

Mr.SESTAK. Last two. In your comment, when you say that you’re 

going to put like $73 million in to get $144 million in more revenues from small businesses, does that include what you always talk 

about, that 3 percent of indirect revenue where people are deterred? 

Mr.EVERSON. No, sir. 

Mr.SESTAK. That’s just what you expect from actually the enforcement? Is that correct? 

17

Mr.EVERSON. That’s right. What we have said in this, all the proposals that we’ve made in the legislative side, they would get about 

$3 billion in direct. 

In the budget side, the money that we’re asking for in the budg- et, we’ve said that would get I think it’s $700 million of direct. We 

have conservatively and we think this is conservative, stated it 3 

to 1 indirect. 

Mr.SESTAK. I’ve got it. Last question is I honestly believe from 

my background you kind of expect what you inspect. And my take 

on it is some of your proposals that you have on the merchant payment card reimbursements or the verification of TIM or the payments to corporations, my question is even though the study says 

that a large proportion comes through small businesses and this 

may have already been asked, do you see a greater return for every 

dollar for enforcement on small businesses, X amount of dollars out 

for revenue enhancement, as compared to big business, even 

though the study says there’s a smaller pool of revenue to be garnered? And if so, even though there’s a bigger pool in the small 

businesses, if the return is better for bigger business, shouldn’t 

more enhancement enforcement be there? 

Mr.EVERSON. We are increasing what we’re doing on bigger businesses. First of all—

Mr.SESTAK. $23 million compared to $73 million for small businesses. 

Mr.EVERSON. The small businesses are a bigger piece. 

Mr.SESTAK. But is there a better return? 

Mr.EVERSON. The returns vary. Going after the complicated bigger businesses can take many, many years. The best returns we 

have—

Mr.SESTAK. The only reason I ask is your testimony shows that 

$73 million into small businesses will you give a 2 to 1 return, 

$144. 

Mr.EVERSON. Right. 

Mr.SESTAK. The other one, the 23, it’s a 3 to 1 return. 

Mr.EVERSON. Right. 

Mr.SESTAK. When you add up all your seven proposals that you 

have, the last two you don’t show what the returns are on the 

criminal investigation and—

Mr.EVERSON. We don’t calculate it. 

Mr.SESTAK. But if you did look at that, that’s a 4 to 1 return. 

Is it right to go after the 2 to 1 return, if you’re getting 4 to 1 in 

other areas or 3 to 1 in other areas? I’m not saying you shouldn’t. 

I honestly think you should make sure you’re fair across the board. 

But are you putting the marginal dollar in the best enforcement 

pot to get the best return, if you are a business? 

Mr.EVERSON. We don’t approach it that way. We try to run a balanced program. 

Mr.SESTAK. Should we approach it that way? Because this is all 

about getting more dollars back. 

Mr.EVERSON. I don’t believe we should in terms of the easiest, 

the returns that you would do the most on, earned income tax credit. You’ve got a very high return on that. And in the middle class, 

some of the work you do in the middle class, you get a very easy 

return or some of the collection work you get a better return. We 

18

don’t get any return of significance in the short term on the work 

we do on charities, as an example, because there’s a tax exemption 

there. 

Mr.SESTAK. You show in your testimony you get about a $15 million return on charities by looking at them. So you do get a return. 

Mr.EVERSON. I’m not sure which piece of that proposal you’re 

talking about, but generally speaking, what I’m saying is a general 

rule, we have several thousand people working on what are tax-exempt areas. 

Mr.SESTAK. Your $50 million to create tax-exempt entities compliance? 

Mr.EVERSON. That’s a budget increase that we’re making, but I 

don’t think we have anything revenue-associated with that. Over 

the long term, sir, if we don’t draw the line between what is taxexempt and what is not, you’ll have an erosion of the revenue base. 

So we have to run a balanced program. This does represent our 

view of what is good, strong steps to take now. 

Mr.SESTAK. I understand. And then just it seems though when you look, you have gone up $15 billion. You’re now at $50 billion 

approximately a year now, at $45 billion gap which was studied 

five years ago, so what is it today? That’s still just a 1 in 7 return. 

It just seems as though getting the dollar back in with close to $9 

trillion deficit maybe—shouldn’t we look at it a little bit more? 

Having a return across all the various channels, but isn’t it almost 

becoming a business proposition now if we can get your best return? 

Mr.EVERSON. I don’t like to view it that way. I view it as trying 

to trying to run a balanced program across all of the responsibilities that the IRS has and I think what we’ve done is we’ve added 

to each of those areas and in my tenure, again, we’ve given great 

emphasis in the area of tax-exempt and governmental entities and 

they aren’t viewed as generating that kind of return. 

Mr.SESTAK. Thank you, sir. 

ChairwomanVELA ́ ZQUEZ. Mr. Jefferson. 

Mr.JEFFERSON. Thank you, Madam Chair. Good afternoon, Mr. 

Everson. 

Mr.EVERSON. Good afternoon, sir. 

Mr.JEFFERSON. In your written testimony here, you say that in 

more than one place we cannot determine how much of the gap is 

attributable to willful noncompliance and how much is a result of 

a lack of understanding by the taxpayer, his or her full tax obligation. Why is that the case? 

Mr.EVERSON. Well, I think that as you go through and you do 

these audits, you have penalties that would be associated with willful noncompliance that could be more onerous. And the individual 

would not obviously admit that they were willfully being non compliant is one factor that I would suggest to you. So you have to exercise a fair amount of judgment as the auditor as to whether 

you’re going to assess that penalty or not. 

Mr.JEFFERSON. There has to be a long history with the IRS collection system. 

Mr.EVERSON. That’s right. And part of it is research on service, 

if I can get to the other piece of this, has been lacking. One of the 

things we’re asking for more money in here to try and get a little 

19

bit of a better understanding on just what, if you provide better 

service and education, what will that do. 

Mr.JEFFERSON. It just seems to me that if you don’t know which 

it is, and you make decisions where you apply more resources to 

enforcement over compliance, but you don’t know which is worse, 

I don’t know how you come to a decision. Here’s almost 3 to 1 on 

enforcement, I guess because you just—it seems to me you’ve got 

to find some way to figure which is a greater problem, so you can 

apply the resources accordingly. 

Mr.EVERSON. Right. 

Mr.JEFFERSON. And without that, then you simply seem to just 

opted for the enforcement angle as opposed to the compliance 

angle. 

Now small businesses, you admit in here that complexity is a big 

issue and it obscures the understanding of the code. I would suspect that the complexity issues go more to the smaller concerns, it 

seems to me more difficult to understand it and have the advice 

you need from accountants and lawyers who clears these things up 

for people. 

And so doesn’t it seem to follow that we ought to do as much as 

we can to make sure that before we get to the issue of enforcement 

and audits and so on, this complexity issue is really, really addressed properly by your Agency and that you take all the time you 

need to invest, all the resources you need, and ask us for as much 

as you need to make that determination clearly so that we don’t 

overburden small business people because of the complexity issues 

and lack of compliance as opposed to intentional under-reporting. 

Mr.EVERSON. I would say to you, sir, it comes back to the earlier 

conversation. The complexity starts with the nature of the law 

itself and simplification of the code will do a lot for compliance. 

Mr.JEFFERSON. We can’t do that. We hear about that all the 

time, so that’s not going to work. 

Mr.EVERSON. You can do that, I can’t do that. 

Mr.JEFFERSON. It hasn’t happened here. So we’re talking about 

stuff that isn’t going to happen on the complexity side. We’ve 

tried—everybody has a simplification proposal, but it never works. 

The world that we live in is one of a complex tax code. That being 

the case, we ought to deal with the issue of compliance, given the 

complexity that’s obviously there and we aren’t in any quick way 

get rid of. I know we have it within our power theoretically, but 

as a practical matter, just never happens. 

Now—I’m sorry. 

Mr.EVERSON. No. That’s a direct response. I won’t—I’m not going 

to agree totally with that. 

(Laughter.) 

Get myself in trouble with others. We are, as I indicated earlier, 

we have this taxpayer assistance blueprint where we’re looking at 

all these issues about how we better educate and how we serve the 

taxpayer, but I do have to say on this one area which is so large, 

the understatement of receipts, I don’t think that’s a question of 

education. That’s why this credit card proposal we think is such a 

good one. We think we’ll get better reporting on that. 

Mr.JEFFERSON. You have a lot of elements of the under reporting 

over here. Let’s see if I can find it. Well, I don’t seem to see it here. 

20

All the way from having deduction exemption reported incorrectly 

to simply failing to report—overstated reductions of income, under 

reporting of nonbusiness income, all that sort of business. 

Mr.EVERSON. Yes. 

Mr.JEFFERSON. Some of these require determinations as to how 

it ought to be categorized and how you—what you essentially have 

to make of it and some of them, of course, you know, it’s a lot less 

complicated. 

But in any event, my point is that we ought to really, given that 

we’re dealing with this issue complexity, we’ve spent a lot of time 

on the issue of compliance through education. Now the last little 

thing I want to say here, you talk about high-risk tax returns. 

What do you mean when you refer to that? Under the funding or 

increased audits of high-risk tax returns. What does that mean? 

Mr.EVERSON. Well, we see high-income individuals where they’re 

working at a level of complexity, they might have lots of K-1s or 

different investments and things that we have seen historically 

some problems with. You can get into this international area that 

we were talking about a little bit before. There are certain categories which would fall into the higher risk. The Schedule C 

where we would see certain relationships. What we’ve done with 

our research is we’ve updated our audit selection models and we 

go through and we look at each return and we see how it relates 

to other comparable returns. And if we see a problem, it’s outside 

the norm, that would make it higher risk. 

Mr.JEFFERSON. Does it have anything to do with the kind of how 

small the concern is or where the concern is located, the part of 

town it’s from, any of those things have anything to do with higher 

risk? 

Mr.EVERSON. I wouldn’t say that they generally would. I mean 

you’re looking—again, we have to have a balance. We try to do 

across a range of size of organizations and both individuals and incorporated businesses. 

Mr.JEFFERSON. This really is the last thing, Madam Chair. The 

EITC, these are really small people here. These are people who are 

working poor folks who don’t make enough to meet the poverty 

wage that are working and therefore we give them a refundable tax 

credit. 

This has to be an area in many cases where people just don’t understand what’s going on with this whole area of taxation. This 

cries out for some sort of assistance to taxpayers to make this work 

right. In your experience, how much assistance are we giving to 

folks in the EITC area and before we condemn them as not meeting 

their responsibilities of the system? 

Mr.EVERSON. One of the things we’ve really worked on over the 

last several years is increasing the outreach in this area. I mentioned earlier the fact that this year there’s been a 16 percent increase in volunteer-prepared returns. We work—there are 12,000 

sites around the country that are mostly community-based where 

organizations work with individuals. And it’s all based on—it’s 

typically based on income and a large part of it is geared towards 

EITC. I’ve done events with Congressman Lewis, Congressman 

Emmanuel and others to try to champion just these sorts of coalitions because they’re highly effective because in many instances 

21

people in that population, they’ll feel more comfortable coming in 

and working with a community-based organization than they will 

coming directly to the IRS. 

The EITC is terribly important, both the Secretary and I believe 

it needs to be increased. As you may know, something like our calculation is about 75 or 80 percent of eligible claimants take the 

credit. That means there are still millions more who could and are 

not. 

ChairwomanVELA ́ ZQUEZ. I will ask if the gentleman doesn’t have 

any more questions, a last question, Commissioner. It has been 

widely reported in the media that IRS auditors are being forced to 

close larger corporate cases prematurely, allowing billions in tax 

dollars to go unpaid. Agents have said that unless they were free 

to pursue what their instincts told them, their focus will end up 

being only on non-abuses. New tax shelters crated by the tax advice industry will go undetected. 

What are your comments on that? 

Mr.EVERSON. Yes. I’m happy to address that. It’s come up almost 

every year. Like with the audits of individuals, the audits of corporations, large corporations, we’re talking about over $10 million, 

they had decreased. Do they have this chart? I think you have this 

chart in your packet. 

And you can see the number of returns audited—it was going 

down from before this, but this is starting 2001. We brought that 

back up significantly from 2003 where it bottomed out. And what 

we wanted to do is get more coverage in this area between $10 and 

$250 million of assets because those are growing businesses that 

are going to become bigger. We were doing very little there. Now 

we’ve started adding back there. 

In terms of the dollars that we’ve set up, if you look at this line of dollars recommended, you can see it went from $13 billion all 

the way up to $32 and then $27 billion in the last two years. So 

it’s gone up very much. Now I have pushed to try and reduce the 

length of time it takes to do these audits. I think it’s unconscionable that it takes 7, 8, 10 years to do these audits because we don’t 

get after problems. The IRS missed the tax shelter eruption in the 

year like 2000, 2001 because we were looking at audits from 1992 

and 1993. So I do think it’s important to do our work more quickly 

to help to resolve that uncertainty. 

Now an individual auditor though who has a problem with a decision that’s being taken should take it up line, but the complaints 

I’m hearing is there may be more in those individual returns. That 

conceivably is true, but I’m not hearing complaints that we’re taking them off line and sending them home to watch TV or get 

trained. They’re going off to do other work as indicated there and 

to touch more corporations. 

I think that’s a better answer. 

One final point on this, do you have the chart on the growth? 

Yes. This shows the growth in the last several years of corporate 

tax receipts as the green line is the growth in just overall dollars 

and they’ve come up sharply in the last several years and also as 

a percentage of GDP. 

When I got on this job, I was getting a lot of tough questions 

about how come they’re so low? You’ve got to get in there. I would 

22

be concerned about what I’m hearing from a macro point of view 

if this wasn’t recovering or we weren’t setting up more dollars, but 

it’s a tough issue. I know it’s tough, particularly if you think you 

can do more on an individual case, but we’re just saying we want 

you to go work somewhere else and get some money there. 

ChairwomanVELA ́ ZQUEZ. Okay. I have one final question as this 

will be the last time you come before this Committee. When are 

you leaving for your vacation? And where are you going? 

Mr.EVERSON. Soon, soon. We lived in France for three years and 

we had a joy in 1996 of going on a boat, you know where you rent 

a boat, our family, and you cruise down a river for a few hours and 

you stop and wander around a village. My wife and I are going to 

do that and we’re in the Cognac region and hopefully we’ll get good 

weather. We’re taking a bit of a chance here. We’ve got an 18-yearold, a 20-year-old and they’re in school, so they’re going to be home 

alone. 

(Laughter.) 

As my mother said, this is a vote of confidence in them and we 

think it’s going to go well, but we’ll see. 

ChairwomanVELA ́ ZQUEZ. I guess it’s going to be a vacation for 

you and for them. 

Mr.EVERSON. That’s it. That’s it. 

ChairwomanVELA ́ ZQUEZ. Well deserved. Thank you for your service, sir, and I just would like to ask you, we are going to have a 

second panel and for you to identify the person, your staff person 

that will remain here? 

Mr.EVERSON. Yes, okay, in case there are follow-up questions. I 

think that would be Cathy. Kathy Petronchak is here and also 

Beth Tucker and Mark Mazer is the head of our research group if 

you want Mark to stay. He can certainly stay as well, because this 

gets into the question of the tax gap methodology. 

ChairwomanVELA ́ ZQUEZ. Thank you and you’re excused. 

Mr.EVERSON. Thank you, and I just want to say it’s always a 

pleasure to be here with Don Alexander. He’s a real sort of icon of 

the tax community. 

ChairwomanVELA ́ ZQUEZ. I would ask the second panel to take 

their seats. We have to put some chairs there. Thank you very 

much. 

Well, I want to welcome all the witnesses, and I want to thank 

you for your participation in this important hearing. You will be 

given five minutes to make your presentation, and your complete 

testimony could be entered into the record. 

So we are going to start with Mr. Keith Hall. He is the primary 

consultant available to the self-employed and micro business owners through the National Association of the Self-Employed Tax 

Talk Service. He has been involved in providing consulting and tax 

services to small businesses for the last 10 years through the accounting firm of Hall and Hughes in Dallas/Fort Worth. He is testifying on behalf of NASE. 

Welcome. 

23

STATEMENT OF MR. KEITH HALL, NATIONAL TAX ADVISOR, 

NATIONAL ASSOCIATION FOR THE SELF-EMPLOYED 

Mr.HALL. Thank you. Madam Chair, members of the Committee, 

thank you so much for the opportunity to be here today representing micro business owners. From a professional standpoint, 

I am first and foremost a small business owner. I have a small tax 

and accounting practice in Dallas, Texas. We have an administrative person, three staff accountants, and me. That is it—pretty 

small, but we have created five jobs where none existed before. To 

me, that is what small business is all about. 

Outside of my kids, I am more proud of those five jobs than anything else I can think of. There are over 20 million men and women 

just like me out there creating jobs every day one job at a time. 

Through the National Association for the Self-Employed, I get a 

chance to visit with thousands of those small business owners 

every year. Most don’t ask a lot from the IRS, maybe because they 

don’t have time, but mostly they just want a fair shake. The problems that you face every day are more complicated than those that 

we face, and certainly the decisions that you make affect a lot more 

people. But today we share the same problem in the form of the 

tax gap. 

There is no doubt that the tax gap is a significant issue. There 

is no doubt that something needs to be done, and there is no doubt 

that you are the ones that can do something about it. But after 

that, I have some doubts. 

The proposals that the administration and Congress are considering include increased reporting on credit card transactions, requiring ID number verification, TIN verification, implementing voluntary withholding on independent contractors, and several others 

affecting micro business owners. There is more detail in my written 

testimony, including some new ideas on how to increase compliance 

with minimum burden on small business, but I didn’t want to put 

everybody to sleep this close to lunch. 

In general, each of those ideas will provide more data, more information, which always seems like a good idea, but at what cost? 

One issue is that we can’t tell what any of these ideas will really 

cost. All of the ideas expand current reporting systems or create 

new regulations, which will require additional manpower, technology, and infrastructure, both for the IRS and for small business 

owners trying to comply with those new rules. 

The only thing we know for sure about the cost is who is going 

to pay for it, and that is us. Worse, we don’t know the true benefit, 

and we don’t know for sure how any of the new information will 

be used. There is a reasonable chance that none of the ideas will 

help the problem at all. 

About two months ago my sister noticed a burning smell inside 

her new car. After several trips to the shop, several different diagnostic tests, nothing worked. They checked heating coils, oil gaskets, and even the seat warmers. But it turned out to be a plastic 

bag stuck to the muffler underneath her car. 

That is not a great example, but the point is, no matter what 

they are going to do to the heating coil, it is not going to affect the 

smell of that burning plastic bag. I am afraid that credit card reVerDate 0ct 09 2002 08:51 Dec 20, 2007 Jkt 033615 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\34829.TXT LEANN
24

porting, TIN verification, 1099 withholding, are all heating coil 

tests that have no chance of fixing the problem. 

The plastic bag here that is causing things to smell funny is the 

complexity of the Tax Code itself, as we have heard before. Most 

small business owners are scared to death of the IRS. Most are 

scared to death of their own tax return. They just want to do what 

they are supposed to do when they are supposed to do it. 

But let me be more specific. Several weeks ago, Commissioner 

Everson and Assistant Treasury Secretary Solomon held a roundtable discussion about the tax gap. After opening comments from 

everyone, Secretary Solomon proposed a question before a group for 

conversation. His first scenario was let us assume a small business 

guy who provides services and gets paid in cash but doesn’t report 

that on their tax return. What do we do? That was his emphasis 

for the discussion. 

I think it is interesting that he chose that example, because that 

is what most—most people think the tax gap is caused by. The 

question I have is, I mean, obviously that guy is contributing to the 

tax gap, but which of the proposals that we are talking about is 

going to catch that guy? And I think the answer is none of them, 

and that is my real fear. 

I hope it doesn’t sound like I am against any and everything, because I want that guy caught also. Every dollar that he doesn’t pay 

is a dollar that I have to pay. But adding more reporting, more paperwork, and more costs to taxpayers, as outlined in the current 

proposals, won’t target those who are underreporting, and will only 

make it more difficult for those who are currently complying to continue to comply. 

I am afraid that we are shooting a bunch of arrows that really 

have no chance of hitting the target. My request of this Committee, 

as a micro business owner, is that no matter which arrows we 

choose to shoot, please make sure that they have a reasonable 

chance of hitting the target. And, more critical, please make sure 

that compliant taxpayers don’t pay for the arrow with less support 

and less education. 

The Commissioner has often stated that enforcement plus education equals compliance. So please don’t—please keep both of 

those components important. Don’t sacrifice education for the sake 

of enforcement. Current assistance from the IRS helps compliance 

and reduced the tax gap through education. Again, my belief is 

that most people want to do the right thing, so please don’t take 

away support from the people who are trying to do the right thing 

solely because of those who aren’t doing the right thing. 

And, again, I appreciate the opportunity to be here. Thank you 

very much. 

[The prepared statement of Mr. Hall may be found in the Appendix on page 68.] 

ChairwomanVELA ́ ZQUEZ. Thank you, Mr. Hall. 

Our next witness is Mr. Paul Hense. He owns his private accounting practice in Grand Rapids, Michigan, which focuses on 

small business, personal tax, and financial advising. He is on the 

Board of Trustees for the National Small Business Association. He 

is speaking on behalf of the National Small Business Association. 

Welcome. 

25

STATEMENT OF MR. PAUL HENSE, CPA, PAUL HENSE, CPA, 

P.C., OWNER, ON BEHALF OF THE NATIONAL SMALL BUSINESS ASSOCIATION 

Mr.HENSE. Thank you, Chairman Vela ́zquez, and Ranking Member Chabot. I want to thank Todd McCracken from MSB for inviting me here, because I am a CPA from a small midwestern town. 

And to have an opportunity to come here and speak for my clients 

in the small business community is a real honor. 

I do want to mention, if I am a little grouchy, I just finished tax 

season. My suit is tight, because I haven’t lost my tax season fat 

yet, so I am—may be a little temperamental. 

It is kind of interesting when this—when this came up, I ought 

to have mixed feelings. It is a little bit—I guess in pictures—put 

pictures in people’s mind. I look at the additional paperwork. I am 

a little bit like an undertaker taking—being told there is a plague 

coming. Your first reaction is, oh, those poor people. But inside you 

are thinking, think of the money I am going to make. 

If you add another level of complexity to the tax law, as a CPA, 

with a—I guess it is a small practice, there is three CPAs and five 

or six staff people, depending on the time of the year. But that is 

how we make our business. 

I bought a new boat a year ago, and I think I was here testifying 

in another committee, and I made the comment that I was going 

to name the boat the Alternative Minimum Tax, because that is 

what paid for it. Whenever things get more complicated, as 

though—even though us accountants come here and complain, we 

make more money, but the problem is that is short-sighted on our 

part, because if we kill the source of our income in the long run 

we are going to suffer. So in the short run, over the next two or 

three or four or five years, I might make more money with these 

proposals, because I will set up the services to prepare these forums. 

On the other hand, I believe that these types of proposals are the 

type of thing I am—part of my reputation in Grand Rapids has to 

do with startup. We are good at getting people off the ground. It 

is getting harder and harder to get businesses off the ground, because there is more and more paperwork. 

And I guess a lot of older people—I am 64, a lot of people my 

age have always said this, ‘‘The people coming up don’t know what 

we knew when we were their age.’’ On the other hand, I don’t think 

that the more complexity we add to the tax law and to running a 

small business, the more we close the door. 

The expansion of information reporting is—I can see where the 

Treasury, the IRS would think that was a good idea. On the other 

hand, I am not sure the small business community can handle the 

burden. 

One comment—and I am not real good with names, but the Commissioner mentioned—I am always afraid I am going to mispronounce it or—but the Commissioner mentioned the credit card 

issue. That they looked at dry cleaners, that this would give them 

an idea—and this is the difference where I am a hands-on, up-tomy-elbows-in-it accountant working with small businesses all day 

every day. That is what I do. 

26

I don’t deal a lot in statistics, but I do know this. If you checked 

a cleaners in—East Grand Rapids is our trendy, upper class part 

of town—you are probably going to see a lot of credit cards. Go 

downtown, you are probably going to see a lot of cash. 

So you have got to be real careful how you use statistics, because 

if you are in the guts of this thing, and you are working with it 

every day, and you work with the real people in the real situations, 

you sometimes see that statistics—figures don’t lie, but liars figure. 

Well, it is not a lie, it is just that the thing doesn’t really tell you 

what you think it told you. 

Another question that came up in my mind was this idea of providing the ID numbers for people you do business with. It seems 

that you are asking the small business community to do your work 

for you. We are going to collect more numbers, do more paperwork, 

ask people for more information. It just becomes overwhelming. 

So now not only do we have to keep track of how much we paid 

them, and their address, we now have to get their federal ID number. I see some problems with that. 

Blaming small business for the tax gap—I am going to tell you 

a couple of things—human nature. You can pass all these laws, 

and you can tighten the screws, and you can go all the way back 

to the Revolutionary times to see that the tighter you turn the 

screws, the smarter the real crooks get. 

As you do this and put all of this paper—this squeezing juice 

idea was a nice idea, because you go to everybody and make this 

push, but the real cheaters will figure out a way to get around the 

paperwork. That is just the nature of the way things go. 

One of the things that disturbs me in this is there is more burden going to be placed on small business, whereas the tax law is 

also inordinately unfair to us. We don’t get the pension plans, we 

don’t get the health care benefits, we don’t get a lot of the tax 

breaks that normal everyday employees and government and big 

business get, yet when there is a problem you turn on us. 

You know, I can’t go have my 401(k) plan double just because, 

well, I have got a little extra money. I have to go—because I am 

the owner, I have to go through a lot of paperwork to get that benefit. The simplification is a big issue. It leads to some problems 

with some small businesses feeling set upon. 

Improved services—I think the IRS is doing a good job—am I out 

of time? 

ChairwomanVELA ́ ZQUEZ. Your time is expired. 

Mr.HENSE. I am done. Thank you. 

ChairwomanVELA ́ ZQUEZ. But you could wrap up if you want. 

Mr.HENSE. I am very concerned that this is like throwing we 

blanket on a hot fire. Small business, the engine that drives the 

economy, we don’t want to put that fire out. 

Thank you. 

[The prepared statement of Mr. Hense may be found in the Appendix on page 75.] 

ChairwomanVELA ́ ZQUEZ. Thank you, Mr. Hense. 

Our next witness is Mr. James Brennan. He is a partner with 

Ernst & Young in New York City, practicing in their tax controversy and risk management services group. Prior to joining 

Ernst & Young in 1983, he was with the IRS Appeals Division. Jim 

27

is testifying on behalf of the American Institute of Certified Public 

Accountants. 

Welcome. 

STATEMENT OF MR. JAMES E. BRENNAN, CPA, ERNST & 

YOUNG, LLP, ON BEHALF OF AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS 

Mr.BRENNAN. Thank you. Myself and the AICPA want to thank 

the House Small Business Committee for this opportunity, for this 

hearing on the tax gap, the impact on small business, where small 

business, you know, plays in this whole tax gap debate. And I find 

this a very wonderful debate, and not very simple, by the way. 

We support the Congress’ efforts and the administration to identify ways to close the gap. We have heard a lot about enhanced information reporting, increased IRS audit activity, and we think 

there is a spot in the tax administration for those measures, but 

the overriding feature is to minimize burden. And we have heard 

that from everyone today. 

Make sure that—again, the juices work the squeeze. Cost-benefit 

analyses, and looking at the data—the research data is so important, and one of your colleagues, or maybe it was yourself, talking 

about getting the data from the large business. It is not there. 

I am sure there are assumptions made from the data that is 15 

years old, but I can—we can see that the data that is more current, 

which impacts individuals and small business, if there are problems there, they should be addressed. But keep the burden reasonable, practical, and don’t hurt the honest person unduly. 

Customer service is vital. Recently, the IRS has just issued 

Phase II of its tax assistance blueprint. The AICPA looks forward 

to working with the IRS as they implement the various facets of 

this blueprint. There should be a greater emphasis on research, 

continual research. 

We reiterate our call to the IRS to maintain a high level of outreach and dialogue with its stakeholders, and for the Service to 

continuously refine its tax gap data, including further analysis of 

the components of the tax gap, before any hasty legislation is enacted. I wonder if anyone would be surprised if two years from now 

we look at the tax gap, and we guess that it is double what we say 

it is today, and that maybe it is from an area that is not the areas 

that have been identified heretofore. 

We would also like to commend Chairperson Vela ́zquez for including the small business—including in the Small Business Tax 

Flexibility Act, which could give certain S corporations and certain 

partnerships that are starting up the flexibility to adopt a tax yearend that makes sense for that business, rather than a mandated 

year-end. Another area that has been tossed around recently in the 

press are increased tax penalties and how that might put a dent 

into the tax gap. 

We are concerned that many of the civil penalty proposals are 

being raised by the Congress in a narrow rifle-shot perspective. 

You might use the word ‘‘haphazard.’’ Instead, we, as an organization, believe greater levels of tax compliance could be achieved if 

Congress established a broad legislative oversight process similar 

to that which was used in the drafting of the Improved Penalty AdVerDate 0ct 09 2002 08:51 Dec 20, 2007 Jkt 033615 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\34829.TXT LEANN
28

ministration and Compliance Tax Act of 1989. We believe that by 

using a broad process not only would you have higher levels of tax 

compliance, but there would be a much better view of fairness in 

the system. 

Lastly, a comment on some recent proposals that came out of the 

Joint Committee on trying to neutralize—trying to eliminate selfemployment tax or FICA—Social Security tax—as being a determinant in picking the choice of an entity, be it an S corp or a partnership. 

Currently, the way self-employment tax or FICA is paid by the 

owners of those different entities—S corp and partnership—are distinct. They are quite different. And one could pick the choice of an 

S corporation if they wanted to minimize somehow payment of that 

tax. 

But from our research and from the studies that we have done, 

we believe that the choice of entity, while one factor might be the 

payment of self-employment tax, we do not believe it is a driving 

factor. So to conclude, what we—as the AICPA believes, it is premature to enact either of the Joint Committee tax proposals that 

deal with this without first identifying whether a self-employment 

tax avoidance problem truly exists, and, if a problem exists, the 

IRS should first utilize its existing enforcement capabilities. 

Thank you. 

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

Appendix on page 84.] 

ChairwomanVELA ́ ZQUEZ. Thank you, Mr. Brennan. 

And I will recognize Mr. Chabot for the introduction of our next 

witness. 

Mr.CHABOT. Thank you, Madam Chair, for permitting me to 

make this introduction. It is a great honor to introduce our next 

witness. Although we have had a very distinguished panel, I want 

to recognize this particular gentleman, The Honorable Donald C. 

Alexander, who was the IRS Commissioner from 1973 to 1977. 

His expertise includes corporate taxation, the taxation of partnerships, insurance companies and their products, and employee 

benefits matters. He is now a partner at Akin Gump, and I just 

want to say that he literally is an institution in this town. We have 

had an opportunity to talk with him many times over the years 

about a whole range of issues. 

And he is—not only that, you know, there is a group of people 

that has been called the greatest generation, Don Alexander was 

also one of our World War II veterans. We are losing them at about 

the rate of 1,000 a day in this country, and he fought for his country and was in combat. And it is just—I can’t say enough about 

this gentleman who is our next witness. 

Mr. Alexander? 

STATEMENT OF THE HONORABLE DONALD C. ALEXANDER, 

FORMER IRS COMMISSIONER, PARTNER, AKIN GUM 

STRAUSS HAUER & FELD LLP 

Mr.ALEXANDER. Thank you very much, Mr. Ranking Member, 

Congressman Chabot, whom I have known—had the privilege of 

knowing for many years, and the equal privilege of living in Cincinnati, which you have represented extremely well all those years. 

29

Thank you, Madam Chairwoman, for having this hearing on this 

very important subject. By the way, thank you for your earlier 

hearing, on March 22 I think it was, where you discussed what we 

are discussing today, where you saw a proposal which would have 

an enormous squeeze yielding little juice, and that was withholding 

on government contract revenues. 

Now, the Treasury has proposed certain measures—and others 

have, too—to try to deal with the tax gap, to try to be able to assure the honest taxpayer that those who would cheat their fellow 

taxpayers are going to be called to account more than they have 

been in the past, more than they are in the present. 

All of us have a duty, unfortunate as it is, to pay our taxes, and 

most of us—and that includes small business of course—meet that 

duty well. The duty is a very difficult one to meet, because our tax 

law, as has been pointed out by the members of this Committee, 

is so unbelievably complicated. However, when one says, ‘‘Hey, simplify the law and that will solve the problem,’’ great. When is the 

law going to be simplified, if ever? 

We call on the Internal Revenue Service to try to administer at 

least half our discretionary expenditures in our entire budget. Internal Revenue has to try to determine, for example—taking a new 

one—whether a car is environmentally friendly enough to deserve 

a subsidy. Why on earth doesn’t the Department of Transportation 

do its job and make that determination? 

Well, there are some very good reasons. There are some very 

good reasons that turn not so much on policy as on the necessity 

of having a Congress continue to be concerned about national 

issues. And to be concerned about national issues and do something 

about it, you have to be reelected. And being reelected is tough if 

you were to undertake a genuine deep-seated simplification of the 

Code as we tried to do in 1987. 

So we have a tax gap. We have got an enormously complex code. 

You have an excellent Commissioner of Internal Revenue in office 

right now. I wish he were going to stay 10 more years, but he is 

not, and he needs support. We need to recognize that there is a 

gap. We need to recognize that we do need to have some more juice 

in the reduction of a gap measured at $345 billion gross. I think 

it is probably closer to $500 billion for the reasons stated very 

briefly in the statement that you are willing to put in the record. 

Should we do something about it, or forget about it? I don’t think 

we can forget about it. I don’t think that’s unfair to the many people who cope with their tax responsibilities. But having in mind, 

again, the need to get the maximum amount of juice from the minimum amount of squeeze what you need to do is to avoid withholding as a remedy. Withholding deprives small business of the 

essential working capital that they must have to survive. 

You need, then, to turn to the least obtrusive, the least expensive, the least difficult remedies. A selection out of some of those 

in the Treasury’s proposals and other proposals would be useful, 

and joint staff is reviewing, I understand, the burden, and indeed 

the burden is something of great interest to all of us, including 

even former tax collectors. 

Thank you. 

30

[The prepared statement of Commissioner Alexander may be 

found in the Appendix on page 93.] 

ChairwomanVELA ́ ZQUEZ. Thank you very much. 

Our next witness is Mr. Joe Samuel. He is Senior Vice President 

of Public Policy of First Data Corporation, where he leads the company’s federal and state government advocacy initiatives, as well as 

their community outreach program. 

In addition, Mr. Samuel serves as Chairman of the board of the 

First Data Foundation, which is First Data Corporation’s philanthropic organization. 

Welcome, sir. 

STATEMENT OF MR. JOE SAMUEL, SENIOR VICE PRESIDENT, 

PUBLIC POLICY, FIRST DATA CORPORATION 

Mr.SAMUEL. Thank you. Good afternoon, Chairwoman Vela ́zquez, 

Ranking Member Chabot, members of the Committee. I am pleased 

to be here today to talk about First Data’s role in the payments industry and, frankly—and talk about merchant processing and really the costly impact that the IRS’s proposed credit card plan would 

have on small businesses and payment processors such as First 

Data. Frankly, we believe that the consequence of this proposal will 

have an extremely highly negative impact on small businesses as 

well as payment processors such as First Data. 

Now, not long ago, the Committee heard from the IRS Commissioner about many of their tax gap proposals, and there was some 

talk about—high-level talk about this credit card plan. And while 

I think the plan has been portrayed as being very simple and very 

easy to implement, I am here to tell you in fact that it is a very 

difficult plan. 

At best, it is flawed and challenging, and, at worst, it is flawed 

and unworkable. And here is why, frankly. And there is a lot of detail in my written testimony, so I am just going to take a few minutes just really to highly summarize some of the question marks 

that we think should be raised about this particular IRS proposal. 

First, again, the data as we see it would be highly inaccurate. 

Second, it is going to be very costly. And unless the government is 

willing to help pay for the considerable resources and costs that 

would be expanded to pay for this, I think it is fairly unworkable. 

Third, we believe that this proposal could encourage merchants, 

particularly smaller merchants, to steer customers away from certain payment methods and to steer them more into particularly 

cash payments, because of the costs. And, fourth, I think a good 

question the Committee should pose to the IRS is, you know, does 

the Treasury and the IRS—do they have the tools necessary to 

read this kind of information that they are talking about? 

Essentially, it is akin to me to opening up the spigot on a fire 

hydrant and putting your face in front of it. Do they have the tools 

necessary to read this information and understand it? Even if they 

did, this accurate—this data would be inaccurate. 

So I am going to take just a minute to talk about—to give you 

some examples of why this information is going to be inaccurate. 

First and foremost, there was some talk earlier about how a merchant here in Washington, D.C., a restauranteur took 95 percent 

of his or her payments by credit card transactions. 

31

Well, I am here to tell you that data varies. It varies by merchant, it varies by location, it varies in a number of different methodologies, and I think Mr. Hense talked about this just a few minutes ago. I can tell you that a merchant who is a plumber, an electrician, a carpenter, does not have to take 95 percent of their transactions via credit cards. 

So to extrapolate the data that was initially talked about earlier 

to all small business merchants, frankly, is doing a disservice to 

them, and it is going to be very costly for them. 

Second of all, I think it is important to note—I have got a quick 

example of another reason why this would be inaccurate, why the 

data would be inaccurate. Many of you—many of us here in this 

room use our debit cards every day to make purchases, and we 

have a feature on our debit cards called a PIN. Use your personal 

identification number to sign electronically for a transaction. So, for example, I may go to Safeway, and I decide to buy $60 

worth of groceries for the week. And then, I said, ah, you know 

what, I forgot that I need to get some cash. I need some cash; I 

am going somewhere. So I decided to get $40 in cash, and using 

my PIN with my debit card allows me to get cash back. It is called 

cash back at the point of sale. Well, I do that. That is a $100 transaction. That is what the IRS 

wants payment processors like First Data to present to them to 

show, okay, this business had $100 in transactions. Well, I can tell 

you right now that is incorrect. $60 of that transaction was actual 

business transaction, it was, you know, me buying something from 

the store, from the little bodega down the street. $40 of it was cash 

back. 

So, in other words, what I am saying is we would be over reporting numbers on small businesses to the IRS. That puts them at a 

significant disadvantage, because then they are going to be facing—they are in the burden—now they have the burden of proving 

themselves innocent when they didn’t do anything wrong. 

And I think that is a significant issue that we wanted to bring 

up to you. There are a lot of other issues, but in the interest of 

time why don’t I stop there. 

But ultimately what I would like to say is this. We urge—we 

strongly urge, I think all of us on this panel do, members of this 

Committee and members of this Congress to slow down this particular IRS process. No one here is against encouraging and going 

after those who don’t pay their taxes, but it is how the IRS goes 

after—this plan that they have in place, how they go after and 

solve this tax gap issue, frankly, is a real issue. 

So, again, we urge you to slow this process down, because the 

last thing I think would be helpful is to put significant burdens on 

either the payments industry or financial or small businesses 

where you are hurting this backbone of our nation’s economy. 

So with that, I will conclude my statement. Thank you. 

[The prepared statement of Mr. Samuel may be found in the Appendix on page 95.] 

ChairwomanVELA ́ ZQUEZ. Yes, Mr. Chabot. 

Mr.CHABOT. Thank you very much, Chairwoman. And before I 

ask questions, just one comment that I would make, and I think 

this—personally, it has been very helpful having this hearing, and 

32

I want to, again, commend you for holding the hearing on this tax 

gap issue. 

I want to just make this comment, that I think that we need to 

be careful that we don’t let kind of this concept of this sort of pot 

of gold at the end of the rainbow, that there is this $350 billion a 

year, maybe as much as Mr. Alexander indicated, maybe $500 billion a year that is there, and all we have to do is find a way to 

collect it. And it allows—because it pretty much matches up fairly 

closely with what the deficit has been on an annual year, and perhaps Congress doesn’t need to be restrained in its spending. We 

just need to get those resources that are out there. 

And so I think it is incumbent upon Congress not to have that 

attitude, that it is just a matter of collecting it, and we can continue to spend with reckless abandon, as I am concerned that Congress has done under Republican control, and, unfortunately, may 

well do in the future. I hope not, but that is just a point that I 

wanted to get out there. 

Secondly, Mr. Hall, if I could go to you first. Relative to the 

groups that you represent, and it is self-employed people, you are 

a tax advisor to them, is that—

Mr.HALL. That is correct. 

Mr.CHABOT. Have you seen an increase as more and more people, 

for example, are falling into the AMT now that weren’t involved in 

it perhaps over the years, and since it wasn’t indexed and more 

people find that they have to figure it out—are fewer people perhaps figuring out their own taxes and going to an advisor now because they—it is too complicated for them to figure it out? Is that 

an issue with some of your people at this point or—

Mr.HALL. I think it is an issue. I think over the years technologically always is going to pull more people from a manual method 

to an automated method, whether there is some software package 

that they actually use, whether they use an online filing option. I 

think there are more people moving towards that. 

But that may be one key difference between small business in 

general and micro business owners is access to resources, whether 

that is a 30-person company who has one of those people allocated 

to maintaining compliance with these issues versus the micro business owner which may only have two people, and so one of those 

individuals now is having to stop one of their other jobs because 

they all wear multiple hats. 

So the cost to that micro business owner, even if they do have 

that automated software package, it is still taking them away from 

managing their business. I think they had talked about the average 

cost for keeping up with just employee reporting was $1,200 per 

employee. 

Well, I would contend for the micro business owner it is even 

more exaggerated than that, because the owner is not making a 

sales call, or he is not providing services because he is having to 

take away from the growth side of his business to meet the needs 

of compliance with the Tax Code. 

So I think automated process still is an assistance point there, 

but a big piece of micro business owners still fill out the return 

forms at their kitchen table on April 14. 

Mr.CHABOT. Okay. Thank you. 

33

Mr. Hense, if I could go to you next. I think it was Mr. Hall that 

mentioned that small business folks, and individuals for that matter, are, you know, currently scared to death of the IRS. And not 

to offend any of the IRS folks here, but I think that is just kind 

of a fact, that most individuals are, no matter who they are. I am 

sure the President probably is as well, quite frankly. 

But do you think that the additional things that we have heard 

discussed here relative to tying to go after this so-called tax gap 

there—let me put it this way. Are there any realistic things that 

you think we ought to be looking at that would make it—people 

more compliant without just attempting to frighten them more, for 

example? 

Mr.HENSE. Well, I don’t think there is anything wrong with 

frightening the real cheaters. Just scare them. I mean, I don’t 

think anybody here—I don’t and the National Small Business Association doesn’t—I don’t think anybody here wants to defend people 

who are truly cheating on their taxes. And if you catch them, in 

normal, if you do the crime, you will do the time. Well, if you do 

the cheating, you are going to pay the penalties, the interest, and 

maybe worse than that. 

The fear in an audit sometimes doesn’t come from the fear of getting caught cheating, it is the fear of being asked a lot of questions 

about a lot of technical things that may or may not be correct—

dealing with Section 125 plans, dealing with simple plans, dealing 

with accounting’s contractors, with inventory issues, dealing with 

cash versus accrual. 

I asked an auditor one time, ‘‘What is your favorite situation to 

walk into?’’ He said, ‘‘QuickBooks and non-licensed accountant.’’ He 

said they are just—you have an accounting system that anybody 

can pick up and put any amount of numbers in they want, and 

they may print an accrual, they may print a cash, and then you 

have a lot of tax practitioners out there now. 

My office spends a lot of money on training, and we—but there’s 

a lot of people out there who aren’t spending money on training. 

They are just doing this work, no training, no background. They 

just QuickBooks, they get a tax program, and they are a professional. 

So the fear in the audit isn’t so much, God, they are going to find 

out I hid $100,00; it is that they are going to find out my Section 

125 program is flawed, I didn’t do something right on my pension 

plan, they are going to take that away from me. 

I don’t have any problem with scaring cheaters, and I don’t have 

any problem with prosecuting cheaters. But my concern is the fear 

of the IRS isn’t in that area of really cheating, I don’t think. A lot 

of it is just, oh, my God, what little thing are they going to find? 

Payroll—people on the payroll versus subcontract labor. Some 

companies use a lot of subcontract labor legitimately and under the 

right rules and doing it right. They are still scared to death they 

will get a zealot auditor who will come in and say, ‘‘Those people 

are employees; they are not subcontract.’’ And you can destroy a 

small business with that. 

So scare them—scare the bad ones, yes, and go get them. But the 

good people, treat them right and let them be. 

34

Mr.CHABOT. Thank you. I am going to—I have questions for each 

one. I am going to—try to keep the answers, if you could, relatively 

brief. 

Mr.HENSE. I am sorry, yes. 

Mr.CHABOT. Just so we—that is okay. So we can get it done. 

Mr. Brennan, is there—could you discuss briefly how much time 

folks in your profession have to devote to retraining or continuing 

to keep up with the laws as Congress is changing them, or whatever the IRS interprets them, so that you are able to continue to 

provide service to the folks that you represent? 

Mr.BRENNAN. It is actually a very significant amount of time. 

Various states mandate, you know, various numbers of hours. I am 

with a large firm. I probably spend 150 hours a year on education. 

That is not mandated by the state, but that is what our firm requires. And then, there is always incidental absorption of education. 

Mr.CHABOT. Okay. Thank you. 

Mr. Alexander—and, again, it is a real honor to have you here 

today. And you had mentioned that we have sort of been throwing 

out the figure that we think that the tax gap could be, say, $345-

, $350 billion a year. And in your testimony you thought that it 

could be up to $500 billion a year perhaps. Is there any particular 

reason that you think that might be the case, or anything you 

would like to add to that comment that you made, which I thought 

was kind of interesting? 

Mr.ALEXANDER. A good question, and there are several reasons. 

The first reason is that the tax gap does not measure all of the 

non-compliance with all of the taxes that we impose. We impose excise taxes. The biggest excise tax is, of course, the gasoline tax. The 

tax gap of $345- assumes 100 percent compliance with all excise 

taxes. 

It also ignores the illegal sector, because it is very hard to measure the illegal sector. If you can measure it, that means you have 

found it. If you have found it, you ought to do something about it. 

So the tax gap is—$345- is I think clearly lower than what the 

number is. I don’t know what the number is. 

I would like to add one tiny comment to my distinguished colleague’s mention of scare the bad guys. One of the problems the 

IRS has is that it doesn’t know who the bad guys are. It knows 

that there is some cheating out there. Let us face it, there is some. 

But if it is going to scare only the bad guys, it has got to figure 

out who the bad guys are, like figuring out what the illegal sector 

is. 

So, regrettably, it scares some people that shouldn’t be scared. 

But if didn’t scare anybody at all, it would fail to scare some people 

that I think all of us at this table believe should be scared. 

Mr.CHABOT. Thank you very much. 

And, finally, Mr. Samuel, you were in your discussion talking 

about the increased burdens that there might be on businesses if 

you had to report various transactions that aren’t necessarily reported now. Are there any ways that you think it might make more 

sense than what they are talking about doing that? Or, a different 

question, if you—how burdensome would that be to some of these 

small businesses that might have this imposed on them? 

35

Mr.SAMUEL. Considerable. I mean, I am going to be very honest 

here. I mean, just for us, First Data is the largest payment processor in the world. It is a U.S.-based company here in Denver, Colorado. And so for us, we are talking millions of dollars, not even 

knowing the full scope of what the IRS wants to do. 

Those costs—we don’t just absorb those costs, whether it is us or 

anybody else who is in this industry. We don’t just absorb those 

costs, so it is going to flow down. Someone has got to pay for this. 

And if the government is not going to pay for this, who is left? 

And, frankly, it is going to hit the small business folks the hardest, and ultimately consumers, right? You and I are going to pay 

higher costs, right, for goods and services. But, frankly, it is the 

small businesses, the micro businesses, those who can least afford 

to pay these costs. And I think that is one of our biggest issues. 

And also, even at that, even if we could do this, because the payments infrastructure, how you make a payment—credit cards, debit 

cards, electronic checks, stored value cards—that infrastructure is 

completely different than a tax reporting infrastructure. 

And the IRS would make you believe that you can just flip a 

switch and, you know, combine these two. That is absolutely not 

the case. We don’t have the same information, and so the concern 

is, again, the compliance costs of trying to match these two issues 

to provide the IRS what they are looking for. Those costs, building 

these systems, would be exorbitant, passing those on to businesses, 

particularly small businesses, and then, at the same time, Congressman, the data is still inaccurate. You are still going to get inaccurate data. 

Mr.CHABOT. Thank you very much, Mr. Samuel. 

I yield back. 

ChairwomanVELA ́ ZQUEZ. Mr. Sestak. 

Mr.SESTAK. Thank you. I just have one question to ask, if I 

might, I think of Mr. Paul Hense and Mr. Hall. And my question 

really does come from a concern for small businesses, since my district has lost 607 in the past three years. But at the end of the 

day—you know, I am trying to study this issue a bit. You know, 

at the end of the day, as much as I love the image of the juice, policy has to be made on facts. 

And the Commissioner stated that—and it appears as though, 

you know, out of the NRP study—and I know there is questions 

about that, but one fact that he brought forward is that it appears 

as though misreporting or, you know, compliance, that if you have 

a group that has to do reporting and withholding there is a noncompliance of 1 percent. And then, he walks through the facts that 

if it is just reporting it is 4 percent. And as partial reporting, it is 

12 or 16 percent. But if it is neither, it is 64 percent non-compliance. 

If you accept that as somewhere in the ball of possibility—understand every study is off—what does that say to us about, as I also 

struggle on another committee, No Child Left Behind, where the 

challenge of gathering the data, which I think is correct—I think 

President Bush is right—has permitted people to then use that 

data in a certain way, what are these facts that I just said between 

withholding and reporting 1 percent—99 percent compliance to 

36

only 36 percent compliance if you don’t have to report anything? 

And there is stuff in between. Sir? 

Mr.HALL. I think it is a good point, and I think at the bottom 

of the entire discussion is the validity of that data. And from a 

standpoint of micro business owners, I think the Commissioner had 

talked about his little formula. And I don’t want to give anybody 

flashbacks to algebra, so don’t have any nightmares, but he talks 

about compliance plus education—or, I am sorry, enforcement plus 

education equals compliance. 

There is only two variables in that formula that equals compliance. He indicated that a lot of that non-reporting, whether it is 

any of those percentages that you mentioned, were not a matter of 

education. His indication was people are not reporting by choice. It 

is not a matter of education. 

Well, consider the example of the guy who is—the plumber or the guy mowing the yard who gets $300 in cash for the services he provides. There is a requirement out there that 1099 reporting, if that 

was provided to a business, is not required because it is under 

$600. Does that guy who is actually mowing the yards for that 

company know that the $300 is still taxable income for him, or 

does he think it is not taxable income because it is not reportable 

on the 1099? 

At the end of the year, does he just add up all of the 1099s he 

gets and that is his income, or does he have to add up all the cash? 

Clearly, he has to add up all of the cash. That is the requirement. 

But does he know that or not? 

Mr.SESTAK. They always ask me in cash, not check. 

Mr.HALL. Well, the thing about the check, at least with the 

check—

Mr.SESTAK. They seem pretty educated out there. 

Mr.HALL. At least with the check he has to take that check somewhere to cash it. With the cash, he just puts it in his pocket and 

goes and spends that at Safeway for his groceries. That is never 

going to be traceable. 

The point I am making is I believe that the biggest impact in 

that algebra formula is on education, whether it is women’s business centers or small business development centers. 

Mr.SESTAK. Do you have any facts to show that? I mean, I have 

heard a lot of stories, very compelling stories—again, another man 

mowing a lawn—but I am searching for facts of what it is. For instance, the Commissioner—and, again, you know, I quizzed him on 

the other side why he was here, but he mentions the motor fuel 

excise tax example where there was the businessman who came 

forward and said, ‘‘Look, we really do want more compliance. It 

makes our competition more fair.’’

And then, he also gave the example—and I don’t remember it—

of the five million dependents that all of a sudden were erased 

when something—with more compliance there. And so what I 

would be interested in is, in addition to the very compelling stories, 

is—and, you know, the examples of the lemon and all of that, what 

are the facts on this? Because this is a hard one. It is hard to believe, again, with such a deficit, but I do believe it is half a billion 

dollars, just based on inflation alone since 2001, you know, half a 

trillion dollars out there. 

37

And if we have a U.S. Government where people have claimed 

that we are accountable for our national treasure, and we are only 

getting $1 out of every $10 back, you know, in compliance or education, it seems we have to go another step. And the facts attendant to which is the best method—obviously, we have to redo the 

NRP study and all and go back and get the big business one, which 

hasn’t been done since ’98, but I would be interested on—if there 

were facts to show, you know, this. And I think that is what we 

probably lack here of making the story—I mean, making a wise decision. 

Mr.HALL. I will make a quick comment and then pass to Paul. 

But I think that is one of the issues we have is that we don’t have 

the underlying facts. We are working on tax gap data from several 

years ago. The Commissioner even mentioned on several occasions, 

well, it will be several years before we know how that plays out. 

From the time somebody audits a return, it is two years after they 

file that return, and maybe another year by the time it is resolved. 

So I am not sure that those facts exist, but from my chair I have 

overwhelming fact, and that is every day I get questions from small 

business people who don’t know what they are supposed to do with 

that $300. Now, that doesn’t show up in the IRS statistics, but to 

me that is a fact that is undeniable. And I think that is where education always outweighs the opportunities for enforcement. 

Mr.HENSE. I am a very strong backer of small business, and I believe in integrity, on and on and on and on, but I am not stupid. 

I know if somebody gets cash and there is no way to track it that 

there is a fairly good chance it is not going to get reported. 

The thing I am wrestling with, you are asking for statistics, we 

are not those kind of people. I mean, I am a businessman. I don’t 

have access to that, couldn’t generate it, don’t have all that much 

interest in it. I am in the—I do things more on here it is in front 

of me as opposed to looking at a national statistic. 

Sometimes the cure is worse than the disease. If you had a cancer on your finger, would you cut off the finger, hand, arm? You 

can cure it, but how much are you going to take to do it? We have 

a problem, and none of us at this table know there is not a problem. If anybody here says there is not a problem, then they are not 

just not in touch with reality. I understand the problem. What we 

are talking about is methodology. 

If you say, ‘‘There is this cheating going on, and here is what we 

are going to do. We are going to lay this whole thing on you where 

you are all going to file these forms. The government is going to 

take withholding, and you are going to be responsible for getting 

the ID number for that person. You make me responsible for his 

taxes.’’ I have got enough problems. I don’t need to be responsible 

for his taxes. 

So I absolutely understand that if the fear of punishment is not 

there we will have this problem. I believe the solution is smarter 

auditors, better trained auditors, more experienced auditors, who 

instead of over fooling around on the Section 125 plan looking for 

some little mistake where they can snatch $4,000 from the owner 

or $2,000 from the owner, you go in, you look at the whole thing, 

get a feel for it, and if you are experienced and you have been 

38

trained right, you can get in and out pretty quick and know whether you have got a decent operation. 

If you have got somebody showing $25,000 a year in income, and 

they are living in a $400,000 house, then something is wrong. I 

mean, there is—I believe that rather than burden everybody with 

a greater problem, increased auditing—obviously, I am not going to 

be particularly happy with that. But if you are going to increase 

the auditing, be smarter in the audits. 

And I may be getting off the subject. If I am, just tell me that 

I am going the wrong direction. 1120-S corporations, where the 

owner is showing dividends and wages and they are not paying Social Security on the dividends, and they are paying Social Security 

on the wages, how hard is it to look at the front page of an 1120-

S and go—we have got to say a dentist making $400,000 a year, 

and that is an exaggeration by the way, and he has got $400,000 

in dividends or distributions and nothing in wages, well, that is—

probably you have got some non-compliance there. 

If he has got—if you pick up an 1120-S and they have got 

$80,000 in wages and $10,000 in distributions, they are probably 

doing it right. Some of this stuff is so simple and plain to find that 

I think that would be your first—the first thing to do would be 

smarter, better, more targeted audits, looking for underpayment—

I am sorry, underreporting of income. And the second was take the 

information you have already got and use it better. 

Mr.SESTAK. No, I appreciate—my time—I would just make one 

final comment, if I might, to you, sir. I honestly think your—some 

of your comments are spot on. I step back here, and even after 

looking at the three major proposals that have been mentioned, you 

know, the information reporting, payments to corporations, the 

merchant payment cards, and the certified TIN, even with those 

three that is only $1.6 billion a year against a half a trillion dollars 

of non-compliance. 

It comes back, obviously, to the Tax Code, as you say. Congress 

isn’t going to address that. So somehow it has to be better at compliance than $1.6 billion out of half a trillion. That is peanuts. 

And I hear about education, but I doubt it is going to do much 

more. There has got—and it comes back to what you say, I mean, 

we are really dancing around a little bit of money here with all this 

effort. 

Yes, sir, I am sorry. 

Mr.ALEXANDER. It is frustrating, because if you take all of the 

Treasury proposals, they add up to a very little bite in the tax gap 

that, as you point out, may well be understated for a whole host 

of reasons, one of which is simply time value of money. But it beats 

nothing. 

It would be wonderful to have smarter agents. It would save IRS, 

as well as taxpayers, a heavy burden that not infrequently results 

in a no change audit. No change audits are pleasant things at the 

end of the audit for the taxpayer, but it is a waste of the taxpayer’s 

time and a waste of the agent’s time, and sometimes the agents 

maybe miss things. The agents are going to continue to miss 

things, even under the direction of somebody as able as Commissioner Everson, who was with you earlier. 

39

Would that it were possible to simplify the law, a sensible law—

and the last time we tried was in 1986, make the law more sensible than it had been the prior year, and we were halfway successful, only halfway because we left the alternative minimum tax in 

there unindexed to grow into the monster that it is today. 

And we did lose not just five million dependents, but actually 

seven million dependents by requiring—by imposing a burden on 

the taxpayer. The burden on the taxpayer—well, gee, you have got 

to get a taxpayer identification number for your dependent. Is the 

world going to come to an end if the taxpayer is required to do 

that? Some would so suggest, I believe, the world didn’t come to an 

end. The seven million dependents that never existed came to an 

end, because they weren’t claimed in following years on tax returns. 

Mr.SESTAK. Thank you, ma’am. 

ChairwomanVELA ́ ZQUEZ. Mr. Alexander, you made reference to 

the 3 percent withholding for payment for government contracts. 

And in your testimony you said that it could have adverse impact 

on small businesses. As a former IRS Commissioner, I would like 

to ask you, can you speak to why this enforcement measure goes 

too far, and if you believe that this provision should be repealed? 

Mr.ALEXANDER. Taking the last question first, I certainly believe 

that it should be repealed and should be replaced by information 

returns, not by nothing but by information return reporting. Information return reporting does, according to GAO, produce 96 percent of the revenue that should be reported, and withholding produces only an additional 3 percent. 

That is hardly worth it when you are depriving, by this provision—you didn’t do it, but it was—Congress did it, and the President signed the law—when the taxpayers are being deprived by 

this provision of 3 percent of those gross revenues. Now, that is 

working capital, and that is really meaningful. That is not the burden of filing—of making an additional filing. That I think may be 

a little overstated here. 

But that is meaningful. That is highly adverse, and that does 

have or will have, in 2011, a very serious adverse impact upon 

small business that has any dealing, any contractual dealing with 

the government of the United States or the government of a state 

for that matter. 

ChairwomanVELA ́ ZQUEZ. Mr. Hall, I suspect that if these new 

withholding requirements are implemented that the self-employed, 

particularly your members, will be impacted. Can you talk to us 

about the burden and costs of this requirement? 

Mr.HALL. Sure. Twofold—first, the cost is strictly cash flow. 

Withholding money up front, number one, treats all businesses, all 

taxpayers, the same. If there is a 3 percent requirement, or a 5 percent requirement, two small businesses could be totally different 

but their withholding requirement is going to be the same. 

And that particularly is cumbersome for a small business owner 

who is trying to grow, so they may have a number of employees 

out there doing the paint jobs for them—this is a painter. So their 

margin on a particular job may be low, because they are paying 

other independent contractors and/or other employees to do some 

of the work. 

40

And if their margins are low in that particular job, a 3 percent 

withholding may be their entire margin. It could be half their margin. So if you talk about their personal cash flow, if they have got 

a 6 percent margin, just for an example, that is half of their personal money withheld up front. 

Compare that with an individual who does all the painting themselves, which I think may be the profile that initiated the plan to 

begin with, 3 percent may not be that much, because virtually all 

of the money is his personal money other than his supplies. But 

the big inequity there is that those two profiles of a business are 

treated exactly the same under that withholding concept. 

The second piece, of course, is they have to keep up with the activity. I think the National Association for the Self-Employed has 

done surveys of its membership, and it still has about a fourth—

about 24 percent of all its members still maintain some type of 

manual ledger, still keep track of their stuff with pencil and a piece 

of paper. And so now if they have got withholding on their contracts, that is going to be an additional burden for them to keep 

track of what exactly is their total revenue. 

And, again, that is just another hurdle and another allocation of 

resources they are going to have to keep up with. 

ChairwomanVELA ́ ZQUEZ. Thank you. 

Mr. Alexander, having served as the Commissioner of the IRS in 

the mid-’70s, do you believe that abusive tax shelters are a bigger 

problem today than it was back then? 

Mr.ALEXANDER. No, they are a smaller problem today than they 

were back then. They were a bigger problem a few years ago before 

Commissioner Everson’s activities brought an end, I believe, to the 

really abusive tax shelters and to the enormous leakage that we 

had from tax payments by the wealthiest individuals and by our 

largest corporations. 

We had tax shelters back when I was around IRS in those antediluvian days. They were simple shelters, dealing largely with fictitious cattle, like the 7,000 dependents that never existed but were 

being marketed heavily to people who were more interested in 

keeping their funds to themselves than they were in sharing their 

income with the country. 

ChairwomanVELA ́ ZQUEZ. Mr. Brennan, included in H.R. 46, a bill 

I introduced on the first day of Congress, is language giving most 

S corporations and partnership startups the flexibility to adopt any 

fiscal year end, from April through November. Do you believe this 

measure can in some way help to narrow the tax gap? 

Mr.BRENNAN. Well, we believe that having that flexibility—having that flexibility would enable small businesses, such as S corps 

and partnerships, to get better service from their outside service 

providers. I think the small businesses work hand in hand with 

your accountants, and this is as much of a benefit for the accountants as it is for the small businesses. 

I think in an obscure sense, when you have more time and the 

better time to work on something, you will get a better byproduct 

or a better result, and I think that would indirectly impact the tax 

gap. 

ChairwomanVELA ́ ZQUEZ. Mr. Hense, as I mentioned in my opening statement when the Commissioner was here, I am concerned 

41

that the administration proposal to require information reporting 

on payments to corporations, that it will have—impose a tremendous new paperwork burden on small businesses, while it is projected to narrow the tax gap by only a fraction of 1 percent. 

Could you please describe how this proposal will burden NSBA 

members? 

Mr.HENSE. There is two parts to this. One, I am not sure I have 

totally got my arms around it. I understood originally that there 

would be a requirement for 1099s to be issued for services and for 

product. I am not sure now on that. I was told just before we got 

together here that it does not include a 1099 for product. 

If it is for products and services, it is overwhelming. It is a youcan’t-do-it kind of thing. So if it is just for services, that eliminates 

probably 80 percent of the filing. It is still a burden—one burden 

for products and services, it is overwhelming, and I don’t believe 

it can be done. The other is if the requirement for issuing 1099s 

to corporations, when you keep the withholding issue out of it, that 

is a big thing to me. The withholding creates a whole other thing 

like payroll. 

We will have whole new companies blooming just to do or starting just to do the processing services for the withholding and the 

payment to the government. I am not happy with 1099s for corporations, but it wouldn’t be as bad if it is just for services. More 

additional paperwork, more of a burden. I don’t like it, but it 

wouldn’t be the killer that the product would be. 

ChairwomanVELA ́ ZQUEZ. Thank you. Mr. Brennan, in a report 

issued last March, the General Accounting Office stated that the 

current IRS modernization effort, the business system modernization, did not have adequate policies and procedures in place to be 

consistent with proper management practices. 

In fact, as I understand it, the IRS still uses the master file system, which was designed during the Kennedy administration. You 

mentioned that modernization is a positive avenue for easing taxpayer burdens. What is your assessment of how the IRS modernization effort is going? And I would invite Mr. Alexander to 

make any comments, if he has any knowledge as to how the modernization process is going at the IRS. 

Mr.BRENNAN. Yes. I can’t personally speak to how the modernization system is progressing. But I can attest to the fact that 

when a practitioner approaches the IRS, or a taxpayer approaches 

the IRS to get data, sometimes one might have to wait a month to 

get the data. You may make a payment to the IRS, and you want 

to see how it was posted to the IRS system, and if you made that 

deposit to your bank you could go on the next day and see that it 

is proper and it has been recorded. 

To do that with the IRS, you could be told by IRS, because of 

their system being so outdated, that they do things batch, they 

don’t do it real-time, and you have to wait three weeks. So things 

of that nature need to be corrected, but I can’t talk to how, you 

know, the progress is being made. 

Mr.ALEXANDER. Nor can I, really, because I have been out of the 

tax collecting business now for 20 years. But I am sure that distinguished folks from IRS who are here will give you a response to 

that question shortly. Is that right? 

42

ChairwomanVELA ́ ZQUEZ. If there is anyone from the IRS? Would 

you identify yourself, ma’am? 

Ms.PETRONCHEK. I am Kathy Petronchek. I am the Commissioner of Small Business Self-Employed. In terms of our modernization, we have had some stops and starts, but things are improving. 

I am a little bothered that it takes a month to get data, because 

we do have batch processing that is normally done each week. So 

there should be updates. 

And that was part of our modernization—to ensure that we could 

get information more timely, and that it was available to all of our 

employees across the country, because the old systems, they 

couldn’t get information wherever they were located. 

So we have—I think the Commissioner has talked in some of his 

other venues about CADE, and that has come up, and how we processed more returns this year, not as many as we would have liked, 

but we are making improvements. So I think there are improvements, and we realize we have other things that we need to be 

doing as well. 

ChairwomanVELA ́ ZQUEZ. Thank you. Mr. Samuel, a report recently released by the Inspector General of the IRS raised concerns 

about the security of taxpayers’ data at the agency. Could you 

please discuss First Data’s concern with sharing this information 

with the government? 

Mr.SAMUEL. Yes, absolutely, Madam Chairwoman. What the 

IRS—as we see it, the IRS plan is really vague. But as we see it, 

the IRS plan would have us match taxpayer identification number, 

or, if you are small business you may not have a taxpayer identification number. If you are a sole proprietor, you may use your Social Security Number. 

Match that information with transaction data, and we think, you 

know, that could just be ripe for bad things to happen. So in order 

to help protect privacy, you know, on the one hand, for example, 

here in Congress, in this House of Congress, there will be a committee that will work here pretty soon to pass legislation restricting the use and access to Social Security Numbers. 

On the other hand, we have got a government agency that is saying, ‘‘No, we want you to use more, take more.’’ That is a concern 

to us, because what happens if there is a breach? Who is liable? 

This is not something that we do normally, but the IRS is asking 

us to do something like this. And so, you know, who would take 

on that liability and those responsibilities? I think that is a major 

concern, Madam Chairwoman. 

ChairwomanVELA ́ ZQUEZ. Thank you. Mr. Chabot, do you have 

any other questions? 

Mr.CHABOT. Thank you, Madam Chair. Just let me conclude by 

saying I think this has been a very informative, very helpful hearing. I think we have had an excellent panel here today, and I just 

want to again reiterate things that I have said during the course 

of this and in the questioning. 

That I think what Congress can do, number one, is to simplify 

the Tax Code. I think we heard Mr. Jefferson indicate before that 

that’s just not going to happen. I am not as pessimistic as perhaps 

Mr. Jefferson is about that. I think we should never give up on 

43

that effort, although thus far I haven’t seen realistic evidence that 

it is going to happen in the near term. But I certainly—

ChairwomanVELA ́ ZQUEZ. Maybe it will happen now under a 

Democratic-controlled Congress. 

[Laughter.] 

Mr.CHABOT. Well, I hope so. If you can, I may switch parties and 

become a Democrat. 

[Laughter.] 

Not much chance of that happening, by the way. 

[Laughter.] 

ChairwomanVELA ́ ZQUEZ. Trying to convince yourself. 

[Laughter.] 

Mr.CHABOT. We get along, but not that well. And I also would 

just encourage us not to use this quest for the so-called tax gap as 

a—you know, it is almost like going after the Holy Grail or this pot 

of gold at the end of the rainbow—we not use that as an excuse 

for the fiscal discipline that Congress should show under either Republican control or Democratic control. And, unfortunately, it too 

often fails to exercise that fiscal discipline, whichever party is in 

the majority. 

And, finally, I would just again reiterate that we not do what Mr. 

Bartlett had talked about before, and that is, you know, squeezing 

and squeezing and squeezing to try to get that juice. And, unfortunately, the people squeezed oftentimes is the small business folks 

who can least afford to be squeezed, because they are already burdened with and live in a very competitive environment. 

But, again, this has been an excellent hearing, and I commend 

you for holding it, and yield back the balance of my time. 

ChairwomanVELA ́ ZQUEZ. Thank you. I want to take this opportunity to thank all the witnesses. As Mr. Chabot expressed, it has 

been an excellent, excellent panel. It really helped us a lot. 

And let me just say that before, in previous Congresses, the 

Small Business Committee was limited in terms of jurisdiction. But 

since under the new Democratic leadership, our Committee’s jurisdiction has been expanded, and it was included in the rules package that we passed. We intend to use this jurisdiction to make sure 

that we watch what Ways and Means and other committees are 

doing or will continue to do in terms of legislation that will have 

impact on small businesses. 

And I am proud to the fact that in my first day during this Congress I introduced legislation to simplify the Tax Code. So we are 

serious, and we want to make sure that we provide the tools for 

small businesses to continue to do what you do best, and that is 

creating meaningful jobs for our economy. So thank you all. 

And I ask unanimous consent that members have five legislative 

days to enter statements into the record. Without objection, so ordered. 

And this hearing is adjourned. Thank you. 

[Whereupon, at 2:33 p.m., the Committee was adjourned.]

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