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20–699 2017

AUDITS AND ATTITUDES: IS THE IRS HELPING 

OR HURTING SMALL BUSINESSES? 

HEARING 

BEFORE THE

SUBCOMMITTEE ON ECONOMIC GROWTH, TAX AND 

CAPITAL ACCESS 

OF THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

SECOND SESSION 

HEARING HELD 

JUNE 22, 2016 

Small Business Committee Document Number 114–065 

Available via the GPO Website: www.fdsys.gov 

SBREP-219A with DISTILLER


Congress.#13
(II) 

HOUSE COMMITTEE ON SMALL BUSINESS 

STEVE CHABOT, Ohio, Chairman 

STEVE KING, Iowa 

BLAINE LUETKEMEYER, Missouri 

RICHARD HANNA, New York 

TIM HUELSKAMP, Kansas 

CHRIS GIBSON, New York 

DAVE BRAT, Virginia 

AUMUA AMATA COLEMAN RADEWAGEN, American Samoa 

STEVE KNIGHT, California 

CARLOS CURBELO, Florida 

CRESENT HARDY, Nevada 

NYDIA VELA ́ ZQUEZ, New York, Ranking Member 

YVETTE CLARK, New York 

JUDY CHU, California 

JANICE HAHN, California 

DONALD PAYNE, JR., New Jersey 

GRACE MENG, New York 

BRENDA LAWRENCE, Michigan 

ALMA ADAMS, North Carolina 

SETH MOULTON, Massachusetts 

MARK TAKAI, Hawaii 

KEVIN FITZPATRICK, Staff Director 

JAN OLIVER, Chief Counsel 

MICHAEL DAY, Minority Staff Director 

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(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Hon. Tim Huelskamp .............................................................................................. 1 

Hon. Judy Chu ......................................................................................................... 1 

WITNESSES 

Mr. Pete Sepp, President, National Taxpayers Union, Washington, DC ............ 3 

Mr. Lee Davenport, Member, Electronic Tax Administration Advisory Committee (ETAAC), Washington, DC ...................................................................... 4 

Mr. Roger Harris, President & COO, Padgett Business Services, Athens, 

GA .......................................................................................................................... 6 

Ms. Emily Peterson-Cassin, Project Coordinator, Bright Lines, Washington, 

DC, testifying on behalf of Public Citizen .......................................................... 8 

APPENDIX 

Prepared Statements: 

Mr. Pete Sepp, President, National Taxpayers Union, Washington, DC ..... 18 

Mr. Lee Davenport, Member, Electronic Tax Administration Advisory 

Committee (ETAAC), Washington, DC ....................................................... 38 

Mr. Roger Harris, President & COO, Padgett Business Services, Athens, 

GA .................................................................................................................. 41 

Ms. Emily Peterson-Cassin, Project Coordinator, Bright Lines, Washington, DC, testifying on behalf of Public Citizen ...................................... 47 

Questions for the Record: 

None. 

Answers for the Record: 

None. 

Additional Material for the Record: 

None. 

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SBREP-219A with DISTILLER

(1) 

AUDITS AND ATTITUDES: IS THE IRS 

HELPING OR HURTING SMALL BUSINESSES? 

WEDNESDAY, JUNE 22, 2016 

HOUSE OF REPRESENTATIVES, COMMITTEE ON SMALL BUSINESS, SUBCOMMITTEE ON ECONOMIC GROWTH, TAX AND CAPITAL ACCESS, Washington, DC. 

The Subcommittee met, pursuant to call, at 10:00 a.m., in Room 

2360, Rayburn House Office Building, Hon. Tim Huelskamp [chairman of the Subcommittee] presiding. 

Present: Representatives Huelskamp, Chabot, Radewagen, and 

Chu. 

Chairman HUELSKAMP. Good morning. Thank you all for being 

with us today. I call this hearing to order. 

Whether we want to or not, each and every one of us has a relationship with the IRS. Benjamin Franklin famously said, ‘‘In this 

world, nothing can be said to be certain except death and taxes.’’ 

In the administration of the tax code, the IRS has dual roles, collection and enforcement. Small businesses have a right to be treated fairly on both counts. Unfortunately, that is not always the case. 

Many can appreciate that the IRS is a tough job to do; however, 

the best outcomes will result from the IRS and taxpayers working 

together to improve voluntary compliance and efficiently allocate 

resources. 

The Small Business Committee has heard from a number of 

small businesses that have been harmed in one way or another by 

the IRS. In at least two cases, aggressive audits have resulted in 

these companies actually closing their doors. 

Today’s hearing will focus on some of the ways the IRS can 

proactively work with small business taxpayers to improve communication and compliance, as well as on some things the IRS needs 

to do differently. 

I would like to thank our witnesses for coming today. I look forward to your testimony. 

I now yield to the ranking member for her opening remarks. 

Ms. CHU. Thank you, Mr. Chairman. 

One of the focuses of this Subcommittee is to ensure that small 

businesses are given the tools to comply with regulations without 

increasing their costs. This is particularly true when it comes to 

taxes and interacting with the Internal Revenue Service. 

In the past, when small businesses have testified before the 

Committee, they have told us that complexity and uncertainty create difficulty when filing tax returns. Many business owners worry 

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2 

that one simple mistake can lead to a costly and timely audit, and 

at a time when many businesses are striving to expand and hire 

additional employees, every hour and dollar counts. 

As a result of IRS procedures and administrative challenges, 

small firms must devote greater resources towards accounts and 

lawyers to properly report income and pay taxes. Over a quarter 

of small businesses in the 2015 National Small Business Association’s Taxation Survey stated that they spent over $10,000 on tax 

compliance, and another 8 percent stated that they employ an outside tax expert to handle tax issues. 

Unlike larger, multinational corporations, the time spent by 

small businesses in complying with tax laws is much more costly, 

impacting business expansion, job growth, economic prosperity, and 

growth of small businesses. They should not also have to face intense scrutiny from the IRS through business audits and inadequate IRS compliance with the Regulatory Flexibility Act. Nevertheless, small firms cite filing hardships, aggressive auditing, and 

collection procedures as confusing as to how a new regulation will 

affect their business. 

Seeing as our nation’s fiscal constraints are an ongoing priority, I understand that closing the $450 billion tax gap is critical to our 

long-term prosperity, but so are small businesses. Any effort to increase tax compliance must be done in a way that is responsible, 

fair, and not disproportionately burdensome to small firms. 

Today’s hearing will give us a better grasp of the scope and collection techniques regarding small business audits. This hearing 

also allows us to examine what is being done to minimize IRS regulatory procedural burdens for small entities. I believe that this information is even more important right now as the agency seeks 

to be more efficient due to financial realities. The fact of the matter 

remains that the IRS cannot review and modify the procedures impacting small businesses if Congress continues to cut their budget 

every year. These actions have weakened the IRS’s ability to enforce the nation’s tax laws while also providing sufficient customer 

service for our small businesses. With the proper tools, America’s 

small firms can sustain the economic growth currently underway 

by investing in their operations without fear of an audit and confusing regulations. 

With that, I would like to thank the witnesses for being here 

today. I yield back. 

Chairman HUELSKAMP. Thank you for that opening statement. 

A quick summary again on timing. First, if Committee members 

have an opening statement prepared, I ask that it be submitted for 

the record. 

I would like to take a moment to explain the timing lights for 

you. You will each have 5 minutes to deliver your testimony. The 

light will start at green. When you have 1 minute remaining, the 

light will turn yellow. Finally, at the end of 5 minutes it will turn 

red. I ask that you kindly adhere to that time limit. 

Our first witness this morning is Mr. Pete Sepp, president of the 

National Taxpayers Union here in Washington, D.C. Mr. Sepp first 

started with the NTU in 1988. Currently, he supervises their government affairs, public relations, and development activities. Mr. 

Sepp has testified before Congress on a wide range of tax-related 

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3 

issues and has also been a guest on several nationally broadcast 

radio and television programs. 

Mr. Sepp, you have 5 minutes, and you may begin. 

STATEMENTS OF PETE SEPP, PRESIDENT, NATIONAL TAXPAYERS UNION; LEE DAVENPORT, MEMBER, ELECTRONIC 

TAX ADMINISTRATION ADVISORY COMMITTEE; ROGER HARRIS, PRESIDENT AND COO, PADGETT BUSINESS SERVICES; 

EMILY PETERSON-CASSIN, PROJECT COORDINATOR, 

BRIGHT LINES 

STATEMENT OF PETE SEPP 

Mr. SEPP. Mr. Chairman, Madam Ranking Member, I am honored to be here to discuss a central feature of our tax system, the 

examination process. Back in 1988, my organization, National Taxpayers Union, led a transpartisan coalition, which included American Civil Liberties Union and National Council of La Raza, business organizations, taxpayer groups, all on behalf of a taxpayer bill 

of rights. There have been subsequent coalitions, subsequent pieces 

of legislation, but one interesting facet of this process has been a 

lack of focus on improving examinations. They tended to focus instead on making reforms to the collection process. There is a wide 

range of problems that have been identified in the small business 

community that still need to be addressed, particularly pertaining 

to examinations. 

I call them ‘‘fear factors.’’ One major fear factor has to do with 

the complexity of the tax system itself and the uncertainty that 

brings. The Ranking Member of the Full Committee, Congresswoman Vela ́zquez, said this very eloquently in 2013. I quote, 

‘‘Many business owners worry that one simple mistake can lead to 

a costly and timely audit and at a time when many businesses are 

striving to expand, every dollar and hour counts.’’ Quite true. 

I also think we have to worry about intimidation tactics used 

against small businesses. We are witnessing right now a counter 

and paradoxical trend of speed up audits where businesses are getting audit notices and being asked to respond almost immediately 

to whether they want to even appeal. They do not even have time 

to consider the central issues of the audit itself. On the other hand, 

there are ‘‘slow-down’’ audits where the procedure drags on and on. 

Interest keeps accruing through no fault of the taxpayer and abatement of that interest is a very difficult matter to resolve indeed. 

We also have the question of opportunity costs. When you look 

at very small businesses, under $100,000 in receipts, they tend to 

have a tax liability after examination, an additional tax of less 

than $10,000. They could easily rack up that much in legal and 

audit representation costs. Many if not most of them decide, in my 

opinion, not to fight it. That is why the audit appeal rate is so low. 

It hovers between 5 and 7 percent annually. 

When they have these problems, the remedies in court remain 

pitifully small. The cap on attorney fees that they can recover if 

they prevail in court nowhere near matches the amount that they 

actually need to spend to prove their position. 

There are other problems on the horizon. We are part of a coalition called the Coalition for Effective and Efficient Tax AdministraSBREP-219A with DISTILLER

4 

tion involving more than a dozen associations representing thousands of businesses. We are identifying problems in the large business and international division with issuing designated summonses 

and designating cases for litigation, tactics which are normally supposed to be reserved for a very small number of uncooperative taxpayers or broad ranging, and they are being applied in consistently 

greater fashion and with more force, and the threat is being wielded to compel taxpayers into accepting the IRS’s position. That is 

going to be a major problem for smaller businesses down the road. 

Taxpayer experts and litigation representatives, like Daniel Pilla, 

who has been before Congress in the past, has said he fully expects 

those kinds of tactics to migrate into the small business area and 

the self-employed area sooner or later. 

There is the issue that is being discussed in Committee markup 

for the Financial Services and General Government Bill. One of 

your colleagues, Congressman Katko, is offering an amendment to 

block the IRS from hiring private outside counsel to participate 

deeply in the examination process. Essentially, farming out audits. 

Now, this is currently applying to large business, the IRS hiring 

thousand-dollar-an-hour attorneys. You could easily see $300, $400 

an hour attorneys working on small business liabilities. It happens 

because the IRS may consider the hazard of litigation in an appeal 

situation. They do not have to consider the cost of that litigation 

versus the tax due. So we have a volatile situation here. 

We need to enact reforms ranging from S. 2809 by Senator 

Portman, which would address some of the CEETA Coalition’s concerns, and the Small Business Taxpayer Bill of Rights, H.R. 1828, 

to reviewing the taxpayer advocates’ most serious problems affecting small businesses, and coming together in a bipartisan fashion 

to address the factors of lack of trust, lack of certainty, and lack 

of remedies for small businesses in the audit process. We did it in 

1988 and 1998. We can do it again. Thank you. 

Chairman HUELSKAMP. Thank you, Mr. Sepp. We appreciate 

your testimony. 

Our next witness is Mr. Lee Davenport, member of the Electronic 

Tax Administration Advisory Committee here in Washington, D.C. 

Mr. Davenport is in his third year as a member of the Advisory 

Committee, which serves as a public forum to discuss electronic tax 

administration issues. He is principal of Davenport Consulting, 

which provides business consulting and private financing services. 

He was also the architect of Myfreetaxes.com, which assists those 

who earn less than $62,000 per year to file their state and federal 

taxes for free. 

Mr. Davenport, thank you for being here today. You may begin. 

STATEMENT OF LEE DAVENPORT 

Mr. DAVENPORT. Thank you. Chairman, I thank you for holding today’s hearing on how the IRS could help small businesses. 

Twenty-eight million small businesses in America are a cornerstone to our economy. Small businesses account for over half of all 

U.S. sales and 55 percent of all jobs, and they pay significant 

amounts of income, employment, and excise taxes into the U.S. 

Treasury. 

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5 

Helping small businesses easily file and pay their taxes is a critical mission of the IRS Electronic Tax Administration Advisory 

Committee, ETAAC. ETAAC was formed by law in 1998 to make 

strategic recommendations to Congress on how to improve tax administration and better serve taxpayers, including small business 

taxpayers through electronic means. In short, we are objective, digital, strategy consultants to the IRS. 

The Committee believes that modernizing the IRS taxpayer service communication platform is an urgent and strategic priority for 

the IRS. In the 2015 tax season, the IRS was in its fourth consecutive year of budget reductions and IRS service levels plummeted. 

IRS answered only 38 percent of its calls from taxpayers. IRS has 

been unable to modernize its tax service platform to move away 

from traditional paper and phone interactions. A current phone and 

paper taxpayer service platform is also not the preferred choice of 

the IRS or the many taxpayers who expect secure online services. 

Along with this issue is a lack of transparency with the IRS. For 

most taxpayers, the information the IRS has about them is a complete mystery. It is not easy for taxpayers to access and understand 

their tax information on file with the IRS, their previous tax-related interactions, or their tax compliance obligations. 

For small business taxpayers, this issue is even more critical because small businesses are more likely to complete multiple yearround transactions with the IRS. In many cases, when there is a 

compliance issue, small business taxpayers find out through a surprising IRS notice after they file, or even more stressful, an audit 

that can take months or years to resolve. For all types of taxpayers, accessing and using their information to proactively comply 

is almost entirely out of the question in our current system. 

The Committee believes that a key solution to these problems is 

a more digitally-enabled, modernized IRS that better equips taxpayers with information on how they can proactively comply, rather than solely focusing on detecting and enforcing compliance. 

In the past 3 years, ETAAC has provided recommendations 

based on a simple vision of how the IRS could serve taxpayers. The 

vision allows taxpayers to fully understand their tax obligations, to 

have transparent access to their tax information status with the 

IRS, and effectively and securely interact with their tax administrator on the way they want to be served, in the way they want 

to be served. 

The end state is a tax system that is less burdensome. It is a tax 

system that relies less on reactive measures, such as audits, and 

more on preventative and educational measures for taxpayers to remain proactively compliant. There are two challenges the IRS faces 

in achieving this vision. 

First, the current tax system is designed to be reactive. It does 

not leverage tax information to help taxpayers meet their obligations. 

Second, the IRS cannot quickly develop and implement its digital 

roadmap, including online accounts to address the needs of preferences of taxpayers. Our last two reports to Congress explain this 

dilemma and provide recommendations to overcome these challenges. In our 2015 report to Congress, we recommended that the 

IRS accelerate its digital taxpayer service strategy; that is, develop 

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6 

and implement secure online accounts for all business and individual taxpayers. We know that businesses are much more likely 

to use a tax professional for tax filing compliance needs. Online accounts for these tax professionals should be a priority. ETAAC advocates for the IRS to commit to quickly developing online accounts 

for business taxpayers and the tax professionals who serve them, 

and we encourage the Committee to do the same. 

In our most recent 2016 report, which actually comes out today, 

ETAAC addresses the lookback tax system that centers on post-filing programs that detect current noncompliance. We challenge 

Congress and the IRS to move to a system that verifies taxpayer 

identities and tax return information before accepting the return. 

A system that uses information statements, such as forms 1099 

and W-2 to verify taxpayer tax return information is essential to 

fighting fraud and reducing the taxpayer burden. The IRS should 

support taxpayers in filing accurate returns, giving them full electronic access to their tax account information at the time of filing. 

This proactive system would verify accuracy upfront and reduce audits, particularly those on small businesses. 

ETAAC is pleased with the IRS’s first steps in its digital service 

plans. IRS released an initial draft of the Future State Initiative 

in January of this year that specifically incorporated ETAAC recommendations from the past 3 years. The initiative specifically contemplates small business taxpayers and their needs. ETAAC endorses this digital service component of the Future State plans, and 

we clearly identified the urgent need for small businesses. The IRS 

needs to accelerate online accounts for businesses and tax professionals. 

On behalf of the entire ETAAC, I thank you for inviting us to 

testify on this important topic. 

Chairman HUELSKAMP. Thank you, Mr. Davenport. We appreciate your testimony and your service on the Advisory Committee. 

Our third witness this morning is Mr. Roger Harris, President 

and COO of Padgett Business Services in Athens, Georgia. Mr. 

Harris has served twice as Chairman of the Internal Revenue Advisory Council, and has previously testified before this Committee, as 

well as before the Senate Small Business Committee. He has been 

named one of Accounting Today’s Top 100 People. Mr. Harris, you 

have 5 minutes. 

STATEMENT OF ROGER HARRIS 

Mr. HARRIS. Thank you, Mr. Chairman, and Ranking Member 

Chu. It is a pleasure to be here today. 

To give you a little background, Padgett Business Services provides accounting, tax, and payroll services to small businesses. We 

are currently celebrating our 50th year and have over 200 offices 

throughout the United States. 

We define a small business as someone with less than 20 employees. Now, a lot of people consider that to be a ‘‘mom-and-pop’’ type 

business, but I would remind those people that almost 90 percent 

of people who have employees would fit that definition, so it is a 

very powerful part of our economy. 

Our history and our relationship with our clients gives us a good 

perspective to comment on the interactions that small businesses 

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7 

have with the IRS and, in our case, their representative. Specifically as it relates to audits, no taxpayer, be it an individual or 

small business, ever wants to receive a notice that they are being 

audited. But in a voluntary tax system like we have, there is an 

element of enforcement that must be present. So, if you are successful and stay in business long enough, there is a good possibility 

you are going to interact with the IRS in some form of audit or 

some sort of correspondence. 

Currently, the IRS really executes two different types of audits 

on small business. The one that seems to be most prevalent and 

continues to increase over the years is the correspondence audit. 

Now, the idea behind a correspondence audit is that some computer or some person somewhere in the bureaucracy selects what 

appears to be some simpler issues and the small business owner 

is notified by mail, as the name indicates, and they are to respond 

to that notice about the specific issues in question. In theory, this 

is a very good system and I think it is partly the reason that we 

are seeing more and more of these is for the better use of IRS resources. It eliminates face to face, which is intended, again, I think, 

to minimize the cost and burden that a small business owner or 

their representative might face. 

Unfortunately, it does not work always as intended. First and 

foremost, sometimes the tax code is a little more complicated than 

it might seem, and what looks like a simple issue that can be very 

easily dealt with through correspondence really has more complicated pieces in it than may be on the surface. Sometimes that 

lack of face-to-face is a disadvantage, not an advantage, because 

the small business owner or their representative may feels like 

they are just talking to the bureaucracy and they do not really 

know where their information is and what is being done with it, 

and if there is something that needs to be questioned explained, 

there is not a real convenient process to do that. 

The thing that we probably hear the most as a criticism of correspondence audit through our company and our experiences, is 

that there is an inconsistency in the quality of this unknown person responding from the IRS. In many instances it is almost as if 

they do not know the issue as well as the representative or the taxpayer does. Eventually, you really do need to move to a face-to-face 

environment to get the issue resolved. So, in many instances, what 

starts as a correspondence audit can only be resolved if it moves 

to some sort of face-to-face contact. 

We understand that correspondence audits are probably going to 

continue to be the preferred method of auditing small businesses, 

but if that is the case, I think there are three areas that the IRS 

needs to focus on and address. 

First of all, they need to do a better job of selecting the issues 

that work in this type of environment, so if it is going to be done 

through correspondence, it is an issue that can be resolved through 

corespondence. Secondly, they need to have more consistency and 

better training of their employees. And finally, I think something 

that is very important is they need to develop a tracking system. 

It is interesting to us that FedEx or UPS can track packages all 

the way through the delivery process, but the IRS cannot allow a 

taxpayer or a representative to track the status of their informaSBREP-219A with DISTILLER

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tion in their audit. There needs to be better tracking of the information as it is submitted and as it is going through the process. 

The audits that I think we all associate with the IRS are field 

audits where people come out and spend time either at the small 

business owner’s place of business or the representative’s place of 

business. The good news for that is you tend to get a more trained 

and better qualified IRS representative. The bad news is those audits can last days, weeks, months, and sometimes years, and the 

cost of those are almost exclusively the burden of the small business owner. Again, they are necessary evils because they can be 

very costly and very expensive. 

I agree almost completely with some of the comments of Mr. 

Davenport as we move forward with online accounts. The IRS is 

setting up individual accounts, which I commend them for. However, there is a vast need for business accounts and practitioner accounts. Currently, about 70 percent of small business owners have 

some sort of relationship with a practitioner, and, therefore, you 

need to give access to accounts to the people who would be most 

likely to use them. Unless you operate as a Schedule C, if you are 

a partnership or a corporation, there are no accounts right now, 

but I think we need those accounts as well. 

Finally, even on the individual accounts, which I think are a step 

in the right direction, and I certainly understand the challenges of 

identity theft that the service is facing, but right now the service 

says that the way to authenticate those accounts today, by their 

own admission, are only successful 30 percent of the time. If we are 

going to have individual accounts, they need to be something that 

the average person can actually access when needed. 

So with that, I see my time is up, again, thank you for allowing 

me to being here, and I look forward to your questions. 

Chairman HUELSKAMP. Thank you, Mr. Harris, we appreciate 

your testimony. 

I now yield to our Ranking Member for the introduction of the 

final witness. 

Ms. CHU. It is my pleasure to introduce Ms. Emily PetersonCassin. Ms. Cassin is the Coordinator of Public Citizen’s Bright 

Lines Project. The Bright Lines Project was founded in 2008 and 

worked to change the big test that currently defines political activity for nonprofits. Before joining Public Citizen, she worked as an 

attorney in ERISA litigation and in indigent representation. She 

received her juris doctorate from Georgetown University Law 

School. 

Welcome, Ms. Peterson-Cassin. 

Chairman HUELSKAMP. I thank the Ranking Member for that 

introduction. 

Ms. Peterson-Cassin, you may begin. 

STATEMENT OF EMILY PETERSON-CASSIN 

Ms. PETERSON-CASSIN. Thank you. Mr. Chairman, Madam 

Ranking Member, thank you for the opportunity to testify today. 

My name is Emily Peterson-Cassin. I am the Bright Lines 

Project coordinator at Public Citizen Congress Watch. Public Citizen is a national, nonprofit, public interest organization, with 

more than 400,000 members and supporters. 

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9 

For 45 years, we have successfully advocated for stronger health 

safety, consumer protection, and other rules, as well as for a robust 

regulatory system that curtails corporate wrongdoing and advances 

the public interest. My own work at Public Citizen is to coordinate 

the Bright Lines Project, an expert team of attorneys and nonprofit 

partners working for an improved definition of political activity for 

all nonprofits. 

I do not need to tell this Committee how important small business is to our economy and our society. Congress can, and should, 

protect small business by ensuring a clear, predictable framework 

of tax rules and regulations. Rules that are easy to follow and enforce allow small businesses to thrive, while minimizing opportunities to abuse the tax system. 

The IRS should be doing more to ensure that small businesses 

can easily comply with the regulations already in existence, and 

work to improve its ability to provide accurate and timely guidance. 

The Bright Lines project focuses on nonprofits, advocating for a 

definition of political activity that increases civic participation and 

creates objective standards for the IRS to follow when enforcing the 

law. Clear rules are just as important for a small business. Indeed, 

nonprofits can be likened to small businesses with a social mission. 

At the same time, it is important to recognize the benefits to small 

business and our society of having a safe and healthy workforce 

made possible by sensible government regulation. 

Regulation is also essential for opening up new markets for small 

businesses and helps incentivize innovation in safer and cleaner 

technologies. Regulations make our country stronger, safer, cleaner, healthier, and more fair to small business. 

The regulatory system must not operate to give large corporations an unfair advantage by delaying important regulations or 

muddying the rulemaking process. Making the rulemaking process 

too complicated for commonsense regulations harms small businesses rather than helps them. The analysis required under 

SBREFA, for example, can delay the already laborious rulemaking 

process for months. A recent GAO report, which investigated the 

slow process of rulemaking at OSHA, found that it takes 8 extra 

months of work for OSHA to prepare for the SBREFA panel. In addition, small business analysis should be narrowly targeted to benefit small business. 

Though the advisory panel component of SBREFA legislation 

often results in unnecessary delays to needed regulations, other aspects of the law do help small businesses comply with regulations 

and could be expended to be even more helpful. Supporting and expanding the Small Business Ombudsman and Compliance Assistance programs is a sensible way to give direct, tangible help to 

small business. 

The information the IRS provides to business taxpayers is essential to increasing compliance and decreasing hassle for small business. However, funding cuts to the IRS in the past few years has 

made that assistance more difficult to provide. Since fiscal year 

2010, the IRS’s funding has been drastically cut again and again. 

Consequences of those cuts have led to reductions in staff available 

to assist taxpayers and in the training available to that staff. An 

IRS staff that is adequately knowledgeable and available to small 

SBREP-219A with DISTILLER

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business taxpayers makes filing taxes easier and prevents compliance problems from compounding. Yet, over and over, the IRS is 

unfairly attacked and prevented from fulfilling its mission. Therefore, it is essential that the IRS is fully funded. 

It is in our nation’s interest that small businesses are able to 

grow and thrive in a society that protects health and safety and ensures that the market operates fairly to businesses of all sizes. 

Small changes to SBREFA, fully funding the IRS, and ensuring a 

predictable rulemaking process will ensure that the playing field is 

level for small business. 

Again, it is an honor to come before you today, and I look forward to your questions. 

Chairman HUELSKAMP. Thank you, Ms. Peterson-Cassin. I appreciate your testimony. We will begin with questions. 

I would first like to direct a question to Mr. Harris. I appreciate 

your experience as a practitioner. Looking at this and after a correspondence audit, what do we really know how the IRS determines who is going to be audited? The New York Times article contends they have a secret algorithm. What is your experience or 

your best guess in what is occurring over there? 

Mr. HARRIS. They have what they call a DIF score. Tax returns 

are scored and compared to some norms of other returns and their 

prior returns, which, I guess, is the most common way. They also 

at times target specific issues where they see problems either in a 

tax part of a law or taxpayer behavior. Sometimes they are just 

random. They do some audits that are for research purposes, and 

those are done randomly and are done in great depth and detail. 

Quite honestly, sometimes you just do not know why you are selected. You see some returns that you think, wow, I do not know 

why that one is not getting an audit and one that looks fairly simple gets one, so, I think there are a lot of different reasons. I am 

not sure anybody knows them all. 

Chairman HUELSKAMP. Another question for Mr. Sepp about 

the auditors. How are they currently held accountable when they 

make errors that might cause a catastrophic result for taxpayers 

and/or small businesses? 

Mr. SEPP. There are some methods by which taxpayers can see 

redress if the IRS either loses documentation or if, perhaps, a math 

error on an examiner’s part is discovered. That was something 

brought up to me in an interview I conducted with a tax professional. Interestingly, the IRS issues millions of math correction 

error notices on its own. Sometimes the IRS’s own staff make mistakes in the calculation of a tax. The problem is, beyond going to 

appeals, and assuming the taxpayer even understands his or her 

appeal rights, getting into tax court or district court is a very expensive proposition. One of the elements of H.R. 1828, the Small 

Business Taxpayer Bill of Rights, would begin a pilot program for 

alternative dispute resolution in small business tax cases. That 

was an idea that had been developed by an IRS Reform Commission some 30 years ago, or 20 years ago I should say, and it is a 

good idea now. I think we should move forward with it. 

Chairman HUELSKAMP. With a tax appeal rate of 5 to 7 percent, is this because businesses are a function of being scared as 

well as not knowing, or not worth the price of entry? There is a 

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lot of discussion about large corporations that will draw audits for 

years. For a small business with 20 folks or less a couple days is 

a major crippling factor on their business if they are shut down or 

have to spend all their time with an auditor on an appeal. 

Mr. SEPP. Yes, absolutely. Some professionals have reported to 

me, just the basic misunderstanding, that when taxpayers receive 

the so-called 30-day letter with an RAR, the report of the examiner, 

as to the issues and the position of the IRS, they think it is a bill. 

They think they have to pay it. 

Chairman HUELSKAMP. Who would they call? 

Mr. SEPP. It is very difficult sometimes. That is a problem the 

Taxpayer Advocate has pointed out, that there needs to be a single 

point-of-contact with a phone number that a citizen under examination can get in touch with. The IRS has interpreted that mandate in a very fluid fashion, and that is not very helpful. 

Chairman HUELSKAMP. Mr. Davenport, what is your sense of 

volume of audit activity? Could that be diminished, and more targeted, and more efficient? You filed recommendations for the council you are on. Can you describe that a little bit more, how we could 

actually make it more efficient and better allocate the resources? 

Thoughts on that? 

Mr. DAVENPORT. I do not know if I can speak to the volume 

of the audits and their current status. I think that they would be 

increased. You would have more efficiency in the system if you allowed the small businesses to transparently see information that is 

on file. If the IRS presented to you an electronic account or a format, that they could say this is what we have for you. These are 

the kinds of things we are going to be talking about. 

As was previously mentioned, they could track the audit process, 

the paperwork through the entire cycle of the audit. Their interactions are, as I mentioned, largely unaccountable for, so you can 

change hands of the audit process several times. You can speak 

with people on one issue or event in the IRS and then speak with 

another person in another department. They do not have a way to 

be able to speak knowledgeably about all the information held in 

one place at one time, and I think it would improve dramatically. 

Chairman HUELSKAMP. They have, certainly, some type of internal processes, but are taxpayers not privy to those? Or if they 

ask who is looking at it next or who looked at it, where it is, what 

do they tell a small business man or woman that is appealing? 

Where is the appeal? Will they even answer that question? 

Mr. DAVENPORT. I think it would require several lengthy responses back and forth. I think putting all the information we have 

into the same place and having an important and dynamic conversation about the information that we have at the same time 

would be fair and transparent for both the filer and the service. 

Chairman HUELSKAMP. Well, thank you. I appreciate that. 

Next, I would like to recognize the ranking member for her 5 

minutes of questions. 

Ms. CHU. Thank you, Mr. Chair. 

Ms. Peterson-Cassin, the Regulatory Flexibility Act, or RegFlex, 

was passed by Congress and mandates that Federal agencies consider the potential economic impact of Federal regulations on small 

entities. In fact, it was this Committee that created the RegFlex 

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Act over 25 years ago. How can the lack of RegFlex compliance 

from the IRS impact the ability of small businesses to adjust according to a new regulation? 

Ms. PETERSON-CASSIN. Well, clarity and predictability are essential to a good regulatory system to any regulation that comes 

out. It makes compliance easier and it makes enforcement easier. 

Small businesses want to comply with regulations, and when they 

do not know when the regulations are coming out, what the regulations will be, whether the regulations are going to affect them, it 

is impossible to comply. Furthermore, compliance problems, once 

they start, have a tendency to compound, which leads to a lot of 

the problems with difficult audits that we have been discussing 

previously. 

Ms. CHU. Well, this Regulatory Flexibility Act, RegFlex, and the 

Small Business Regulatory Enforcement Fairness Act, were designed with small business compliance in mind. What are the most 

advantageous aspects of these laws and could these tools be extended to further assist small firms? 

Ms. PETERSON-CASSIN. Absolutely. The best thing these laws 

do is to provide direct tangible assistance to small businesses, including creating small business ombudsmen. Most agencies already 

have one, including Treasury. Those ombudsmen are there to answer questions, provide guides, and help small businesses comply 

with existing procedures. But the program should be expanded to 

include more outreach, make sure that small businesses know that 

those resources are available and can be found easily. There should 

also be best practices guidelines on how to do that outreach. More 

compliance assistance and making that assistance meaningful will 

have enormous benefits, and remove burdens also to small businesses. 

Ms. CHU. Absolutely. Now I would like to ask you about the significant budget cuts at the IRS. The IRS has had significant budget 

cuts and it has resulted in limited resources. Is it realistic to think 

that the IRS can appropriately and efficiently perform all the duties it has been tasked to do while also reviewing the modified 

problem areas, like the price of audit on taxpayer accounts? How 

can increasing the IRS budget, and therefore increasing personnel, 

address many of the problems we are hearing about today? 

Ms. PETERSON-CASSIN. An answer to your first question, unfortunately, I do not think it is realistic at all to expect the IRS 

to carry out its vast mission of enforcing the tax code with the cuts 

that have been in place. Since 2010, as Mr. Davenport mentioned, 

the IRS has lost about 17,000 full-time employees, including 5,000 

from enforcement. As we have been hearing, audits are an imperfect tool. Increasing compliance assistance and guidance, before the 

problems compound, makes those audits easier, and increasing the 

training available to staff through adequate funding would decrease the problems that those audits cause as well. 

Ms. CHU. How about increasing personnel and increasing the 

budget? What could that do to address these problems that we are 

hearing about? 

Ms. PETERSON-CASSIN. That is exactly right. I mean, the most 

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tistic that the IRS has a 38 percent service level on their phones. 

That is obviously unacceptable. When they do get more funding, as 

they did, they got a little bit of funding in 2015 to address that 

problem, the service level goes up. In fact, when that extra funding 

came up, they were able to hire 1,000 temporary workers and increase the phone level service to about 70 percent. Now, that is not 

even talking about the first thing I do when I have a problem or 

I have a question, which is go to the internet. The IRS needs that 

extra funding in order to create easy-to-find compliance guides so 

that small businesses do not have to wonder what they are supposed to be doing. They should be able to find those answers right 

away. More funding will make sure that happens. 

Ms. CHU. Thank you. I yield back. 

Chairman HUELSKAMP. Thank you. Next, I would like to recognize Mrs. Radewagen for her 5 minutes of questions. 

Mrs. RADEWAGEN. Thank you, Mr. Chairman. I, too, would like 

to welcome the panel. Thank you for appearing today. 

Mr. Davenport, you talk about a system that verifies taxpayer 

identities and tax return information before the IRS accepts a return. How would this work in practice? 

Mr. DAVENPORT. In my mind there are a few things that would 

have to change. There are some regulations in place now to bring 

in information returns in earlier, much earlier. Information now 

from the 1099s and the W-2 passes through Social Security and 

then gets to the IRS sometime around the summer or late summer. 

If information was to arrive earlier and it would be usable by the 

IRS, searchable and cross-matched, we could better identify information that was included on those information statements, like W2s and 1099s, and use it to verify, authenticate the individual. 

I think there is some movement in the spending bill this year, 

the IRS will start issuing refundable credits on February 17th this 

year. This has some negative impacts for the system, but if you 

move back the date the refunds come out and you move up the date 

information comes in, you have a better chance of matching that 

information, and then knowing who the individual is and if they 

are getting the right number. 

This is not to stop me stealing his information at a coffee shop; 

this is to stop the 500,000 returns and refunds that are issued improperly to people who do not exist. They are phantom corporations 

that have filed for millions of people. 

Mrs. RADEWAGEN. Given the IRS cybersecurity challenges, as 

well as those of taxpayer identity theft and refund fraud, how do 

we ensure that the taxpayer online portals you recommend are secure? 

Mr. DAVENPORT. Security is an evolving thing. Even 3, 4 years 

ago, we thought security questions were lightyears ahead of where 

we are. Now you can find that stuff on Ancestry.com and this is 

a pretty common thing that we think the status of evolving authentication, for me knowing who an individual is, the computer must 

be smarter than we are and those are powered by people and people have to make the decisions, and cybersecurity is a big deal. 

Right? So if we can improve that, if we can know who they are and 

if we can master information, we will have a better chance of making those payments correctly. 

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The thing is now I can choose to interact with the IRS on the 

schedule I want. I can come in and out of the system at any point. 

I can file and not file next year and no one will know the better. 

We will know later, years later, but if we were to create an online 

system that I could match my information the employer sent me. 

I am a small business owner, if I got 1099s in the mail, as did the 

IRS, and if I could actually see what was there, what they had, 

what I had, in a prefiling season I could know my compliance was 

going to be right and I was going to file the right return. I could 

submit my return through an online account. They would send me 

a note, we received your return today. Thank you very much. We 

are going to drop your refund in your account today. Is that okay? 

Well, if it was not me or that was not my return I would say no 

and we would stop immediately. 

I think there are some security concerns around how to do it, but 

does it need to be done? It absolutely has to be done. 

Mrs. RADEWAGEN. Okay. I am running out of time here. 

I wanted to ask Mr. Sepp, the current audit process seems to be 

a bit of a mess based on a number of issues you identified: lack of 

centralized management, lack of transparency, flawed IDR process, 

et cetera. But it appears that many of these issues could be resolved administratively within IRS. What recommendations would 

you make to the agency to make the process work as intended? 

Mr. SEPP. Some of these recommendations are being made by 

the Coalition for Effective and Efficient Tax Administration, but I 

think they apply not only to the large business and international 

division but small business and self-employed. There needs to be 

more centralized case management and points of contact. There 

needs to be much more consultation between the auditors and the 

audited about deadlines for information document requests, about 

timelines for completion of the audit, and about issues identified in 

the audit. I would echo the testimony of those here who say we 

need better training of IRS staff to focus more intently on the 

issues and to refrain from tactics such as designated summons or 

threatening to designate cases for litigation or hiring outside firms. 

Those kinds of issues, again, are eventually going to migrate into 

the small business community in some form or another. We need 

to address those now. 

Mrs. RADEWAGEN. Thank you, Mr. Chairman. I yield back. 

Chairman HUELSKAMP. I have a feeling we may have some 

members streaming in from other committees, and I have a couple 

of additional questions and the members will have another round 

of questions. 

Mr. Sepp, you did mention the option of farming out audits, 

which is a new concept to me. I understand the current system 

where we actually do in most States, if not all, participate in assisting the IRS in tax administration. But the current system, 

farming out audits to hire private companies are perhaps conflicts 

of interest? Describe why that should be allowed or your opinion 

on the IRS doing that. Apparently, it is doing it on a number of 

cases. 

Mr. SEPP. Well, certainly, National Taxpayers Union has in the 

past supported allowing the private sector to deliver services more 

efficiently and effective than government, but you have to draw a 

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line. This is an inherently governmental function involving sensitive information and very sensitive issues. When a business is involved, of course, anything that gets made public can affect the reputation of the business, its ability to attract capital and the like. 

This issue was first raised when the Internal Revenue Service retained Quinn Emanuel in an investigation, an audit of a very large 

firm, and this has led to concerns on the Senate Finance Committee side of all kinds of things. We have privacy issues, we have 

whether this is worth the expense. We also have the issue of 

whether this is something that reinforces the intimidation factor 

when you have attorneys at over $1,000 per hour participating in 

the examinations. We are not talking about appearing as expert 

witnesses about issues that the examiners within the IRS might 

need help with, but rather, deposing witnesses. That could be very 

troubling. 

Chairman HUELSKAMP. Is this a new route for the IRS? Or 

have they been doing this for a long time? 

Mr. SEPP. No. It is very recent. Very recent. We are essentially 

ahead of the curve here in our ability to curtail this practice before 

it becomes commonplace. As I mentioned, one of your colleagues, 

Congressman Katko, is already offering an amendment regarding 

this. Senator Portman’s legislation has a somewhat different approach to curtailing the practice, but we need to get on this as 

quickly as possible. 

Chairman HUELSKAMP. It seems very shocking to me and I 

was actually in a different type of regulatory setting of environmental regulations with the idea we would bring in a competing 

firm to help enforce or decide what permits their competitive firm 

gets and it is just beyond unbelievable the IRS would do this as 

well. 

Ms. Peterson-Cassin, you said you had experience in the nonprofit world as well, and there have been a lot of discussions in the 

last few years in trying to figure out who gets targeted for audits 

or selection of special scrutiny, which has come under a lot of discussion lately. Can you provide an insight? Should the IRS be 

using special words they target, or how do they pick these out in 

the nonprofit world for this tax-exempt status, which of course 

raised plenty of concerns, I think, by many folks. Can you describe 

what they should have done, what you think they did? 

Ms. PETERSON-CASSIN. Absolutely. What happened in that 

case is that the laws governing what political activity is for nonprofits are so vague that they are not only hard for nonprofits of 

all stripes to comply with, but they are also very, very difficult to 

enforce. This is exactly the discussion we have been having. Compliance and enforcement are two sides of the same coin. 

So I liken it to a speed limit sign that says do not go too fast. 

When the rule is that vague, there are going to be plenty of people 

who do go too fast for whatever reason. Then there are going to be 

even more people, in fact, the most common thing we hear from 

nonprofits is they just do not engage. They restrict themselves from 

things that they could be doing, could be participating in, could be 

furthering their mission, and they say we are too afraid. We are 

too afraid and we are not going to do it. The Bright Lines project 

exists to make that clear so that everyone can be on the same page. 

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Chairman HUELSKAMP. In my conversations with the Commissioner, there are things that he told me they could do that no one 

in their right mind in the nonprofit world would even try to do because they know they are going to be hit on the wrist or even 

worse. How do you know what you know? How do you find out? 

Now we are in the middle of just trying to figure out what exactly 

they were doing in Cincinnati, which is the subject of other hearings of other committees, so I appreciate that insight. 

Ms. Chu, did you have any additional questions? 

Ms. CHU. Yes. Mr. Davenport, I was intrigued by the recommendations of the Electronic Tax Administration Advisory Committee. Electronic signatures is just such a basic common sense 

idea and would allow small business owners to save time and 

money when filing their taxes electronically. How could such a simple administrative change create efficiency for small businesses and 

the IRS? 

Mr. DAVENPORT. You hit on a multiyear problem and I think 

this has come out of ERSAC before as well, but it is the way the 

form line 40-ES, the employment form for small businesses, it is 

a form that is filed quarterly and their employment taxes paid. It 

is administratively much easier to go to the form, print the form 

itself, sign it, and then scan it back than it is to create an electronic account to do this. It is a simple fix, but, you know, if we 

talk about the 80 percent goal to get electronic filing above 80 percent, which is going to charter ETAAC in 1998, we are close in 

most categories: individual filings, 87 percent of individual taxpayers; businesses are below 80 percent, just below 80 percent, because the 94X series, which there are 20-something million of these 

forms that come in every year, only about 37 percent of them come 

in electronically. It is something that the IRS has formed a working group on, they did that when I was in my first year in ETAAC. 

They formed a working group in e-services. They will make recommendations, and they expect to implement those recommendations in fiscal year 2018. And so you can see the arc for change is 

not as agile as you would expect in the private sector, but I do 

think that we are going to see some changes in that soon because 

it is honestly just an easier thing to do than not to do. 

Ms. CHU. What makes implementing these changes so difficult 

for the IRS? Why is it taking so long? Also, are there any downfalls 

to allowing electronic signature, such as fraud or ID theft? 

Mr. DAVENPORT. I think one of the things they are dealing 

with is that an individual must authenticate for a business, on behalf of a business, and as a Schedule C filer. There are millions of 

Schedule C filers, it is no problem for me to authenticate myself 

with my own social, but to do so on behalf of a business, you have 

to share your own personal identity on behalf of a business as a 

business owner, and sometimes as businesses grow, that information then has to pass to internal accounting services or external 

folks. 

Again, it may just be an administrative thing that can change, 

that we can fix the system and make it easier, but I think they 

have to think about authentication as a whole strategy. That is just 

kind of wound up in it. I would probably defer to Mr. Harris, he 

may have strategies. 

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Mr. HARRIS. No, I think your comments are true. We need to 

move to more electronic filing capabilities, and I think the service, 

if I was going to be critical, it is the old saying, ‘‘The enemy of good 

is perfect.’’ At some point we need to begin to allow businesses— 

there is always a reason not to do something. We need to start trying to find a reason to do something. 

Ms. CHU. Mr. Harris, collecting tax debt is possible through 

flexible collection tools and can be an efficient way of helping these 

individuals, yet these tools are rarely utilized by the IRS and instead tax liens, levies, and seizures are used. What makes liens 

and levies, which are much harsher points of collection, the preferred method for IRS agents? 

Mr. HARRIS. I really have no idea why it would be the preferred 

method because it is the most cumbersome method. It creates the 

most difficulties. I guess if you have exhausted every other tool. As 

you said, there are plenty of opportunities through any collection 

process through the use of installment agreements or offers in compromise or just paying the tab, it should be in all cases the place 

of last resort. If it moves up anywhere beyond that, then something 

in the system has not gone as intended because, again, that should 

be the last thing anyone gets to because that has the most severe 

impact of all on a small business owner. 

Ms. CHU. I yield back since I think votes have been called. 

Chairman HUELSKAMP. Are there votes this early? I did not 

know that, so I appreciate that. We got sidelined with another 

Committee, so I would like to thank all of you witnesses for participating today. You have raised a number of issues and potential solutions—I like hearing solutions—that require some serious attention at the IRS. It seems we have a lot more work to do in this 

area but this hearing is a good start. 

I know the Full Committee and this Subcommittee will follow up 

with the IRS and other stakeholders on the issues raised today. 

You have not heard the last from us. It is important that these 

issues and other related concerns are identified, addressed, and 

corrected. 

I ask unanimous consent that members have 5 legislative days 

to submit statements and supporting materials for the record. 

Without objection, so ordered. 

This hearing is now adjourned. 

[Whereupon, at 11:28 a.m., the Subcommittee was adjourned.] 

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A P P E N D I X 

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Prepared remarked from the 

IRS Electronic Tax Administration Advisory Committee 

Chairman, thank you for holding today’s hearing on how the IRS 

can help small businesses. The 28 million small businesses in 

America are a cornerstone to our economy. According to the Small 

Business Administration and the IRS, small businesses account for 

over half of all US sales and 55% of all jobs. They pay significant 

amounts of income, employment, and excise taxes to the US Treasury. 

Helping small businesses easily file and pay their taxes is a critical mission of the IRS Electronic Tax Administration Advisory 

Committee, or ETAAC. ETAAC was formed by law in 1998 to make 

strategic recommendations to Congress on how to improve tax administration and better serve taxpayers—including small business 

taxpayers—through electronic means. In short, we are objective 

digital strategy consultants to the IRS. Recently, the committee has 

sharpened its focus on how the IRS could make the tax system less 

reactive and intrusive by providing taxpayers with digital access to 

their tax information and a better understanding of their compliance requirements. 

The committee believes that modernizing the IRS taxpayer service platform is an urgent, strategic priority for the IRS. In the 2015 

tax season, the IRS was in its fourth consecutive year of budget reductions, and IRS service levels plummeted. The IRS answered 

only 38% of its calls from taxpayers. The IRS has been unable to 

modernize its taxpayer-service platform to move away from traditional paper and phone interactions. The current phone and paper 

taxpayer-service platform is also not the preferred choice of the IRS 

or the many taxpayers who expect secure online services. 

Aligned with this issue is a lack of transparency with the IRS. 

For most taxpayers, the information the IRS has about them is a 

mystery. It’s not easy for taxpayers to access and understand their 

tax information on file with the IRS, their previous tax-related 

interactions or their tax compliance obligations. For small-business 

taxpayers, this issue is even more critical, because small businesses are more likely to complete multiple year-round transactions with the IRS. In many cases, when there is a compliance 

issue, small-business taxpayers find out with a surprising IRS notice after they file, or—even more stressful—an audit that can take 

months or years to resolve. For all types of taxpayers, accessing 

and using their tax information to proactively comply is almost entirely out of the question in the current system. 

The committee believes that a key solution these problems is a 

more digitally enabled, modernized IRS that better equips taxpayers with information on how they can proactively comply, rather than solely focusing on detecting and enforcing compliance. 

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In the past three years, ETAAC has provided recommendations 

based on a single vision of how the IRS should serve taxpayers. 

This vision allows taxpayers to: 

• Fully understand their tax obligations, 

• Have transparent access to their tax information and status with the IRS, and 

• Effectively and securely interact with their tax administrator in the way that they want to be served 

The end state is a tax system that is less burdensome. It is a tax 

system that relies less on reactive measures, such as audits, and 

more on preventative and educational measures for taxpayers to remain proactively compliant. 

• First, the current tax system is designed to be reactive, 

and does not leverage tax information to help taxpayers meet 

their tax obligations, and 

• Second, the IRS cannot quickly develop and implement its 

digital roadmap, including online accounts, to address the 

needs and preferences of taxpayers. 

Our last two reports to Congress explain this dilemma and provide recommendations to overcome these challenges. 

In ETAAC’s 2015 report to Congress, we recommended that the 

IRS accelerate its digital taxpayer-service strategy—that is, develop secure online accounts for all business and individual taxpayers. Taxpayers should have secure digital access to their tax information, and they should be equipped with comprehensive tools 

to interact effectively with the IRS online. 

In the report, we directly addressed key problems in the IRS 

strategy that affect small businesses, and we advocated for an expedited release of online accounts and tools for businesses—still not 

a stated IRS priority. 

Additionally, we know that businesses are much more likely to 

use a tax professional for tax filing and compliance needs. Online 

accounts for these tax professionals should be a priority. In the current IRS digital plan, online accounts for business taxpayers and 

their tax professionals arrive much later. ETAAC advocates for the 

IRS to commit to quickly developing online accounts for business 

taxpayers and the tax professionals who serve them, and we encourage this committee to do the same. 

In our most recent 2016 report, ETAAC addresses the ‘‘lookback’’ tax system that centers on post-filing programs that detect 

and correct noncompliance. We challenge Congress and the IRS to 

move to a system that verifies taxpayer identities and tax return 

information before accepting a return. 

A system that uses information statements, such as Forms 1099 

and W-2, to verify taxpayers and their tax return information is essential to fighting fraud and reducing taxpayer burden. The IRS 

should support taxpayers in filing accurate returns by giving them 

full electronic access to their tax account information at the time 

of filing. This proactive system would verify accuracy upfront and 

reduce audits, particularly those on small-business taxpayers. 

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ETAAC has been pleased with the IRS’ first steps in its digital 

service plans. The IRS released an initial draft of its Future State 

Initiative in January of this year. The initiative specifically contemplates small-business taxpayers and their needs. However, the 

delivery date of these digital capabilities is unknown. 

Many of the ETAAC’s recommendations from the past three 

years are incorporated into the IRS Future State Initiative’s digital 

plans. ETAAC endorse4s the digital-service components of the IRS’ 

Future State plan, and we have advocated to Congress that the 

IRS should accelerate these plans. Our recommendations clearly 

identify the urgent needs of small businesses. The IRS needs to accelerate online accounts for businesses and tax professionals. 

On behalf of the entire ETAAC, thank you for inviting us to testify on this important topic. 

For more information on ETAAC’s recommendations to the IRS, 

and those impacting small businesses, please see the committee’s 

recent reports at https://www.irs.gov/uac/electronic-tax-administration-advisory-committee-etaac-annual-reports. 

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Good morning, I am Roger Harris, President and Chief Operating 

Officer of Padgett Business Services. I have been a tax practitioner 

for over 40 years and have served on the Internal Revenue Service 

Advisory Council for four years and was its Chair for two of those 

years. I believe this experience gives me a balanced approach to 

small business taxation—I have had the opportunity to see what 

works and what doesn’t work in the real world. 

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For nearly fifty years, Padgett Business Services has been providing accounting, income tax planning and preparation, payroll 

and payroll tax services to thousands of small business owners 

through our network of over 200 offices across the United States. 

Our clients generally have 20 or fewer employees and are what 

some people would consider ‘‘mom & pop’’ businesses; however, 

based on recent studies almost 90% of all firms that have employees operate in our target market. 

Internal Revenue Service Audits of Small Businesses 

Padgett’s business model brings us in contact with our clients 

throughout the year, not just during filing season. We assist our 

clients in establishing good accounting, recordkeeping and tax processing. This ongoing communication allows us to understand these 

small business owners well beyond just knowing their numbers. 

Our strong belief is the best way to survive an audit is to do everything within your means to never have one. Enforcement being a 

prerequisite for our tax system to work, there is a real possibility 

for all small business owners to one-day experience the pleasure of 

an IRS audit. Because of that possibility the second best way to get 

through the process is to have a clear, traceable record of financial 

transactions and of course to keep and organize receipts and invoices. A disciplined approach throughout the year generally results in less trouble with the tax man—local, state and federal. 

In those occasions where audits do arise, either for established 

clients or individuals new to the small business world, it’s important to have a broad overview of the process. 

In general, there are two kinds of audits: Correspondence and 

Field. According to IRS data for 2014, the IRS conducted just over 

291,000 Field Audits and over 950,000 Correspondence Audits. 

Both of these numbers have dropped considerably since their peak 

in 2010 of 391,000 and 1.173 million, respectively. Because Correspondence Audits tend to focus on more moderate income tax returns, and more basic issues that should not require a face to face 

meeting, mom-and-pop small businesses are much more likely to 

experience these than actually sitting across from an IRS auditor. 

Correspondence Audits, known within the IRS as Campus examinations, are the most basic type of audit and are conducted—as the 

name implies—by mail. They are usually triggered by software that 

compares returns against common trends and selects those that 

might be considered outliers. 

Field Audits typically occur when the IRS suspects major violations or they are part of an IRS research program. IRS auditors 

may ask that taxpayers come to their offices, but they typically 

visit the place of business at least once during the process. 

The vast majority of small business audits are Correspondence 

Audits. While they are intended to cover only simple issues, because of the IRS’s focus on efficiency, they can be frightening to 

small business taxpayers, as well as being time consuming and expensive. In some circumstances when things go wrong, they can be 

devastating to a business. 

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For a Correspondence Audit, the IRS will mail small business 

taxpayers either a Letter 566 or a CP 2000 notice. 566 letters advise taxpayers that their returns have been selected for examination and will list documents such as receipts needed to verify positions on returns. The CP 2000 notice will contain adjustments 

based on third-party documents associated with the return. A taxpayer typically must respond within 30 days. 

If taxpayers agree with a notice, they simply sign the letter and 

return it with a check made out to the US Treasury; the problem 

arise usually when there is a dispute. 

When responses from taxpayers arrive at the Examination center, they sit in a queue at the IRS processing center for weeks or 

even months depending on the backlog—causing great anxiety on 

the part of taxpayers. Eventually, files are assigned to auditors. If 

all goes well, taxpayers will receive letters thanking them for their 

responses and telling them nothing more is needed. Sometimes, for 

whatever reasons, taxpayers do not receive these acknowledgements, forcing them or their representatives to hunt down their 

case files or to keep resending them. 

As expected a good number of these responses are denied by 

auditors due either to the quality of the records or because of a dispute over a matter of law. While many people believe tax law is 

black and white the reality is most areas are gray. This graying requires the law to be applied to the facts and circumstances that 

exist and are specific to that small business. Sometimes it is difficult to understand all of the facts and circumstances when the 

discussion is by correspondence. 

Unfortunately, it is not uncommon for a small business taxpayer 

to fail to respond to the original correspondence from the IRS in 

a timely manner. If taxpayers do not respond, the IRS issues a second notice, and if there still is no response, it will issue statutory 

notices of deficiency, known as a ‘‘90-day letter.’’ At the end of that 

time, the IRS ‘‘assesses’’ the tax, including penalties and interest. 

Assessment establishes that taxpayers legally owe the amounts in 

question and then the cases are move over to collections. 

The problems associated with the audit process for small businesses can range from the mundane to the Kafkaesque. First, even 

the simplest correspondence audits consume time and focus for 

business owners to find, gather and mail the requested records to 

the auditor. The IRS often states ‘‘but, it is up to taxpayers to keep 

proper records.’’ This is correct but it doesn’t make it any less burdensome. Even for the most organized among us, it takes time to 

locate and organize the correct documents. In addition to time requirements, the small business owner is usually under a great deal 

of stress. For many taxpayers this is their first dealing with the 

IRS in this way. Their minds wander to the horror stories they 

have all heard and they wonder how bad will this be and can I do 

this without help? 

Second, over 70 percent of small business owners rely on enrolled 

agents, CPAs or attorneys when they are contacted by the IRS. Because of this, even mundane correspondence audits can have significant cost, even for small disputes the cost of representation can 

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easily exceed the taxes in question. Many business owners do the 

math and decide to just pay the extra tax instead of fighting it. For 

those instances when small businesses respond to correspondence 

audit notices and auditors reject their records or legal position, outside practitioner costs can quickly add up to thousands of dollars. 

Longer more complex field audits can be even more cost prohibitive 

for taxpayers. 

Another problem area for taxpayers that cost both time and 

money is when responses are seemingly lost or delayed in the system. The deadlines come and go and taxpayers believe that they 

have responded. The nature of the Correspondence Audit process is 

that it is almost wholly automated. If the computer at the examination campus does not know taxpayers have responded it continues 

to send out notices, deadlines will continue to not be met, as the 

IRS claim marches inevitably into assessment and collection. The 

IRS seems to have gotten better over the years at tracking cases 

but approximately a million cases go through Campus Examination 

centers each year. Cases can either be lost, not processed correctly, 

or they are not submitted in a timely manner. It is important to 

keep in mind that there is no one point of contact taxpayers or 

their representatives can call at the center to track down a particular case. This lack of a responsible human being within the bureaucracy is often the most frustrating aspect of the Correspondence Audit. 

A similar problem, except on the taxpayer side, is the non-receipt 

of notices because taxpayers have moved, or for whatever reason 

are not receiving them. Taxpayers are blissfully ignorant. And on 

top of that the computer processing correspondence audits is blissfully ignorant as well, belching out notice after notice until cases 

end up in collections. Taxpayers can first learn they have a problem when their business checking accounts are frozen or another 

collection action has been taken. Once again unwinding these cases 

can be particularly time consuming and expensive. 

Finally, our franchise owners have experienced inconsistent quality in personnel. It is readily apparent that older more experienced 

auditors have the benefits of more training, a deeper understanding of the law, and more real life experience to guide them. 

Younger personnel only have a basic understanding of the law or 

do not have the experience that only time can provide. This lack 

of experience can cause delays, or even worse an incorrect determination. There has been a long term practice of allowing more 

complicated Correspondence Audits to be transferred to a local area 

office at the request of taxpayers. It has become very difficult to 

have these transfers approved. Similarly, requests to speak to managers and referrals to appeals can be ignored. The IRS is clearly 

experiencing a shortage of personnel and suffering from a lack of 

training. 

The small business taxpayer is also at the mercy of the knowledge and experience of their tax preparer or representative. Additionally, a less qualified tax preparer may be the very reason the 

small business owner finds themselves in the mess they find themselves in. 

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At the end of the day no matter if it’s the small business taxpayer, the tax practitioner, or the individual from the IRS, the cost 

of an extended process will be paid by the small business owner. 

So, what can the IRS improve even within the constraints of 

fewer resources? We believe they better facilitate the tracking of 

cases. If Federal Express can manage millions of packages all over 

the world, it seems that the IRS could come up with some sort of 

bar code or other tracking system that would allow both the IRS 

and the taxpayers to track correspondence responding to notices 

and the status of their cases. Most importantly, the IRS may need 

to be willing to assign cases earlier to an auditor or a team of auditors if the taxpayer believes such a request is in their best interest. 

And finally, leading to my next discussion, the IRS needs to drive 

a large part of the Correspondent Audit communications to the interest. 

IRS Future State Vision for Small Businesses and Practitioners 

The IRS vision for Future State could provide significant relief 

to many of the problems associated with Correspondence Audits. A 

taxpayer receiving one of these notices could simply activate an individual account through IRS.GOV, view their status online, scan 

the requested documents and email them to the examination campus, and respond to any follow ups. All of these communications 

would be done through a secure email system that would track all 

communications. If taxpayers are required to make payments, they 

can do so through their accounts or enter into installment agreements all online. We believe strongly that Future State accounts 

could provide their greatest return on investment in managing Correspondence Audits. 

Unfortunately, like most things there is good news and bad 

news. First, IRS plans to roll out online applications for individual 

taxpayers over the next year or so. Similar accounts for practitioners, however, will not be available for at least a year or two beyond that. It is important to keep in mind that over 70 percent of 

small businesses choose to have an enrolled agent, CPA or lawyer 

deal with notices from the IRS. This means that most small businesses will effectively be stuck in the current snail-mail process. 

Another considerable problem has to do with authentication. In 

order to access these accounts, taxpayers must provide information 

associated with their tax returns, their account numbers for a loan 

or credit cards, and cell phone numbers associated with their name 

and social security number. Unfortunately, for taxpayers who have 

not filed a tax return, or do not have loans or credit cards, or have 

cell phones provide by work or a family member, they will be effectively locked out of their own accounts. The IRS estimates that 

only 30 percent of taxpayers will be able to authenticate themselves and use their accounts. Currently, unlike a typical financial 

institution, there is no 800 line planned that taxpayers could use 

to authenticate themselves over the phone. 

Additionally, the agency has no real plans for providing business 

level accounts. Luckily, most sole proprietors or LLCs filing a 

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schedule C will be able to use the individual accounts. More complex small businesses organized as C corporations or partnerships 

will not have access to these accounts. 

Generally, because of the real threat of online hackers, the IRS 

is creating a very high authentication barrier to access online accounts. The reality is, however, that most taxpayers will rarely, if 

ever, need access to their accounts. They will try once, with 70 percent of the time failing to gain access, and then picking up the 

phone or using the U.S. Mail as their primary method of contract. 

While practitioners and businesses, both of whom have many more 

interactions with the agency, will do whatever it takes to go 

through the authentication juggernaut in order to access the accounts. 

Additionally, in the case of practitioners, they are well known to 

the IRS, having registered for a PTIN and a Central Authorization 

File number. Further, if necessary, the IRS could require a one 

time in-person authentication similar to the FAA’s PreCheck system. 

In short, as the IRS moves forward with online accounts, it must 

include access by practitioners—enrolled agents, CPAs, and attorneys—and businesses in order for the strategy to be successful. The 

agency needs to find practical methods to authenticate Circular 230 

practitioners and to authorize them to solve their clients’ problems. 

Any solution that omits practitioners fails to recognize many taxpayers benefit from representation because they (a) do not want to 

represent themselves, (b) recognize they are not proficient enough 

to represent themselves, or (c) are afraid to engage with IRS enforcement staff. Forcing a portal to face taxpayers only will place 

taxpayers with practitioners at a disadvantage, as a result, practitioners will continue to be parked on phone lines, and it will significantly impede taxpayers’ rights to be represented before the 

agency. 

We urge the Internal Revenue Service to consider four important policies: 

1. Develop robust individual and practitioner online accounts 

at he same time. 

2. Allow Circular 230 practitioners to execute and file authorizations electronically and immediately represent those clients. 

3. Allow the use of electronic signatures for all power of attorney and disclosure authorization forms. 

4. More expeditiously to provide access to business accounts. 

Thank you for this opportunity to testify today and Padgett Business Services looks forward to working with the Committee on this 

crucial area of tax administration. 

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