U.S. GOVERNMENT PRINTING OFFICE

65–345 CC WASHINGTON : 2000

S. HRG. 106–561

IRS RESTRUCTING:

A NEW ERA FOR SMALL BUSINESS

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS

UNITED STATES SENATE

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

MAY 23, 2000

(

Printed for the Committee on Small Business

For sale by the Superintendent of Documents, Congressional Office

U.S. Government Printing Office, Washington, DC 20402

COMMITTEE ON SMALL BUSINESS

ONE HUNDRED SIXTH CONGRESS

CHRISTOPHER S. BOND, Missouri, Chairman

CONRAD BURNS, Montana

PAUL COVERDELL, Georgia

ROBERT F. BENNETT, Utah

OLYMPIA J. SNOWE, Maine

MICHAEL ENZI, Wyoming

PETER G. FITZGERALD, Illinois

MIKE CRAPO, Idaho

GEORGE V. VOINOVICH, Ohio

SPENCER ABRAHAM, Michigan

JOHN F. KERRY, Massachusetts

CARL LEVIN, Michigan

TOM HARKIN, Iowa

JOSEPH I. LIEBERMAN, Connecticut

PAUL D. WELLSTONE, Minnesota

MAX CLELAND, Georgia

MARY LANDRIEU, Louisiana

JOHN EDWARDS, North Carolina

EMILIA DISANTO, Staff Director

PAUL COOKSEY, Chief Counsel

PATRICIA R. FORBES, Democratic Staff Director and Chief Counsel

(II)

CONTENTS

OPENING STATEMENTS

Page

Bond, The Honorable Christopher S., Chairman, Committee on Small Business, and a United States Senator from Missouri ............................................. 1

WITNESS TESTIMONY

Rossotti, The Honorable Charles O., Commissioner, Internal Revenue Service,

Washington, D.C. ................................................................................................. 3

Ashby, Cornelia M., Associate Director, Tax Policy and Administration Issues,

General Government Division, U.S. General Accounting Office, Washington,

D.C., accompanied by Kirk R. Bayer, Senior Evaluator, Kansas City Field

Office, and James A. Wozny, Assistant Director, Tax Policy and Administration Issues, General Government Division ........................................................ 34

Abalos, Sandra A., President, Abalos & Associates, P.C., Phoenix, Arizona ...... 77

Quick, Roy M., Jr., EA, Principal, Quick Tax & Accounting Service, St.

Louis, Missouri ..................................................................................................... 84

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Abalos, Sandra A.

Testimony .......................................................................................................... 77

Prepared statement .......................................................................................... 79

Ashby, Cornelia M.

Testimony .......................................................................................................... 34

Prepared statement and attachment .............................................................. 37

Bond, The Honorable Christopher S.

Opening statement ........................................................................................... 1

Post-hearing questions posed to Mr. Rossotti and subsequent responses ... 101

Coverdell, The Honorable Paul

Prepared statement .......................................................................................... 95

Kerry, The Honorable John F.

Prepared statement .......................................................................................... 96

Quick, Roy M., Jr.

Testimony .......................................................................................................... 84

Prepared statement .......................................................................................... 87

Rossotti, The Honorable Charles O.

Testimony .......................................................................................................... 3

Prepared statement and attachment .............................................................. 8

Responses to post-hearing questions posed by Senator Bond ....................... 101

Snowe, The Honorable Olympia J.

Prepared statement .......................................................................................... 98

(III)

(1)

IRS RESTRUCTURING: A NEW ERA FOR

SMALL BUSINESS

TUESDAY, MAY 23, 2000

UNITED STATES SENATE, COMMITTEE ON SMALL BUSINESS, Washington, D.C.

The Committee met, pursuant to notice, at 10 a.m., in room SR–

428A, Russell Senate Office Building, the Honorable Christopher S.

Bond (Chairman of the Committee) presiding.

Present: Senator Bond.

OPENING STATEMENT OF THE HONORABLE CHRISTOPHER S.

BOND, CHAIRMAN, SENATE COMMITTEE ON SMALL BUSINESS, AND A UNITED STATES SENATOR FROM MISSOURI

Chairman BOND. Good morning, the Committee on Small Business is called to order.

My colleague and Ranking Member, Senator Kerry, has another

commitment. His staff informs me that he will be joining us shortly. But since we said we were going to start at 10, we will get on

with it right now.

As many of you know, this week is Small Business Week, and

I believe it to be very important for the Committee to focus its attention today on one of the most pervasive and continuing issues

confronting small-business owners, and that is their interaction

with the Internal Revenue Service. Over the past 2 years, the IRS

has been taking some major steps to streamline that interaction,

which I hope will take some of the frustration and fear out of

America’s entrepreneurs.

Today, the Committee will examine the progress that the IRS is

making on its modernization efforts. In particular, we will be looking at the new IRS division dedicated to small-business and selfemployed taxpayers in this country. To bring us up to date on the

agency’s work in this area, it is my pleasure to welcome IRS Commissioner Charles Rossotti back to the Committee this morning.

Welcome, Mr. Commissioner.

Nearly 2 years ago, Congress passed sweeping legislation, with

strong support of the Administration and the IRS, to rebalance the

focus of the Internal Revenue Service. Broadly speaking, the purpose of the 1998 Internal Revenue Service Restructuring and Reform Act was to transform one of the Nation’s most feared enforcement agencies. Our goal was for the IRS to become an agency that

balances the taxpayers’ needs for outstanding service with the

agency’s duty to collect tax revenues in a fair and uniform manner.

As a strong supporter of that legislation, I am pleased that it has

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allowed Commissioner Rossotti and his team of senior managers to

begin the massive effort of transforming an agency that had become such a significant part of the lives of taxpayers, and especially small-business owners.

A significant part of the IRS’ transformation is expected to occur

through the reorganization of the agency into four operating divisions, each dedicated to the particular needs of specific groups of

taxpayers like small-business owners and the self-employed. I have

asked Commissioner Rossotti to provide us with a progress report

today on the new Small Business/Self-Employed (SB/SE) Division

and the steps the IRS is taking to reduce the enormous tax filing

and reporting burdens that small businesses face every day.

I also see that the new Commissioner of the SB/SE Division, Mr.

Joe Kehoe, is here with Commissioner Rossotti today. We welcome

him as well. Having tried a little bit of retirement, he found that

it was not nearly as rewarding as being actively in the fight, and

he has got it. I admire a man who makes irrational decisions like

that for the greater public good.

A year ago I also asked the General Accounting Office to begin

an examination of the IRS’ plan for the new SB/SE Division. I am

pleased that Cornelia Ashby, Associate Director of the GAO for Tax

Policy and Administrative Issues, is here this morning to report on

the GAO’s findings.

I appreciate the extensive work that the GAO has done on this

project, and the periodic briefings that the Committee has received

over the past year. I also appreciate the IRS’ extraordinary cooperation with the GAO on this project. While the GAO has identified some challenges facing the IRS, I think the examination that

Ms. Ashby and her team have now completed validates the IRS’

plans for the SB/SE division and helps us to see some of the benefits that the Division will have for small-business taxpayers.

It is my hope that the new SB/SE Division will contribute to the

overall effort to swing the pendulum back from the heavy-handed

enforcement mentality of yesteryear to one that recognizes the importance of prompt, courteous, and fair service by the IRS for

America’s small-business taxpayers. For too long, small-business

owners and the self-employed have felt they have been treated like

tax cheats simply because they run a small business.

Commissioner Rossotti and Commissioner Kehoe, I urge you in

the strongest possible terms to ensure that, as the new SB/SE Division ‘‘stands up’’ later this year, that historic bias of ‘‘guilt by virtue of small business’’ will have no place in the new Division’s

front-line employees or its top management.

Small business owners bear incredible burdens when it comes to

compliance with the overly complicated tax code, as the Committee

saw in great detail at our hearing last April on tax filing and reporting burdens. With such complexity, honest mistakes will naturally occur, especially for small-business owners who often cannot

afford professional tax assistance. Those taxpayers need help in

avoiding mistakes and straightening them out when they occur, all

in a manner that treats them as honest, upstanding citizens who

are willing to pay their fair share of the taxes.

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Just as the IRS does not want to be judged by its worst employees, small-business owners do not want to be branded as criminals

simply because of a few dishonest small enterprises.

This is not to say that the IRS should look the other way when

it comes to disreputable taxpayers who are trying to evade their

tax liabilities. The IRS has a dual responsibility, part of which is

to ensure that taxpayers who owe taxes, pay them. And I strongly

support the IRS’ efforts to collect taxes due in a fair and professional manner. We can hardly expect honest taxpayers to pay their

fair share, if others are getting away with cheating the system.

As one who just went through the annual ritual of paying my

taxes, I sure do not want to see somebody else getting away with

not paying the taxes they owe, when we pay the taxes we owe.

Finally this morning, I have asked two individuals who currently

serve as informal advisors to the IRS to provide the Committee

with their perspective on the agency’s new SB/SE Division and the

steps the IRS is taking to reduce the compliance burdens on small

businesses and the self-employed.

Sandra Abalos is the owner of Abalos & Associates, an accounting firm in Phoenix, Arizona. This morning, we will be testing the

boundaries of the Senate’s technological advancement by having

Ms. Abalos join us from Phoenix via video conferencing. We look

forward to her insights as a member of the IRS Electronic Tax Administration Advisory Committee on the new SB/SE Division and

the efforts underway to encourage and improve electronic tax filing.

I should also note that this morning’s proceedings are being

broadcast on the Internet via the Committee’s web page at

sbc.senate.gov.

Last, but certainly not least, will be Roy Quick, Jr., a fellow Missourian, a good friend, and a principal in the Quick Tax & Accounting Services. Mr. Quick is also a member of the IRS Advisory

Council, and he will give us his perspective on the new SB/SE Division, as well as some of the agency’s efforts to provide taxpayer

education in the pre-filing stage in order to reduce errors and provide better compliance by small-business taxpayers.

With that, Mr. Commissioner, I know that you have a very full

statement that we will accept for the record, and I ask now that

you summarize your testimony and begin the proceedings.

STATEMENT OF THE HONORABLE CHARLES O. ROSSOTTI,

COMMISSIONER, INTERNAL REVENUE SERVICE, WASHINGTON, D.C.

Mr. ROSSOTTI. Thank you very much, Mr. Chairman, and thank

you for having me here this morning. I think it is very helpful for

you to have this hearing at this particular point in time, when we

are really at the beginning of what I think is a whole new era in

tax administration with respect to especially the small business

community.

Of course, we are following, we think, the Restructuring and Reform Act as our road map as we embark on this huge modernization. We think that as we look across all of the parts of the taxpayer base that we serve, we really believe that the opportunities

we have to improve service to the small-business taxpayer are

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probably some of the best opportunities we have. Which is another

way of saying we have some of the greatest room for improvement.

We believe that we must help these taxpayers and I would stress

especially almost 800,000 new businesses that startup every year,

to understand what is expected of them and to stay in compliance

from day one.

Very much as you summarized in your opening statement, Mr.

Chairman, we are stressing the balanced approach to doing this tax

administration. We know that the vast majority of small-business

taxpayers do want to comply with their tax obligations. And we

have to help them do that every way we can, to make it as easy

as possible, and especially to prevent problems before they even

occur.

Of course, for that small minority who do refuse to meet their obligations, they cannot be allowed to unfairly burden the remainder,

and we need to take necessary steps to bring them into compliance.

What we are trying to do is take a short-term and long-term approach to this. We know we cannot do everything at once. In the

short term, we are working on new avenues of communication and

new technologies to help provide quality service at convenient

times. I think one of the important things we have done for hardpressed small-business owners who do not have a lot of time, is to

open our phone service 24 hours a day, 7 days a week, so that people can communicate with us when it is convenient for them.

We have also created a CD–ROM that has a great deal of information that any small-business owner could benefit from.

Chairman BOND. I imagine that is a best seller.

Mr. ROSSOTTI. It is actually a pretty good seller. I think your

staff has copies of this and have been looking at it. Of course, we

have all of this on the web site as well. Our small business corner

on the web site, which I think is very helpful in terms of being able

to assist small businesses since most small businesses now have

some computer capability, gives them a chance to go to the web site

and get what they need.

We are also trying, of course, to make it easier to actually file

and pay taxes. On the quarterly return side, which is some of the

most frequent filings, small businesses can now do that either by

touch tone phone or filing online directly from their own computer.

Something new for the next filing season, which we think will be

very popular with many self-employed taxpayers and small businesses, is a checkbox on the form 1040 which will basically allow

people to, just by checking this box, allow their preparer or the person that prepared their return to communicate with us without

having to file still another return—another form just to be able to

authorize them to do that. This seems to have gotten a good response and we look forward to expanding that potentially to other

forms after we test it the first time.

We are also expanding our voluntary tip compliance program, so

that people can now devise their own tip agreements, in addition

to the standard ones that we provide. Any industry now, where tipping is a customary practice, we think this will expand what has

been already a successful program, to use voluntary agreements to

encourage compliance rather than having to go in and audit things

after the fact.

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Those are some short-term things. We know that they only

scratch the surface. We do not, in any way, claim that these are

anywhere close to what we need to do to relieve the burden and

to make ourselves more efficient with small-business taxpayers.

But we think they are some steps.

Now of course, the other big step that we are taking, which you

mentioned in your opening statement as the key focus of this hearing, is the establishment of four operating divisions as the primary

units of operation in the IRS. One of the most important of those

will be the Small Business and Self-Employed Division. We are still

targeting to get that division operational officially as of October 1.

We have much to do to make that happen but we are definitely setting that as our goal.

As you noted, Mr. Kehoe who is here with me today is the Division Commissioner. And Dale Hart, who is an experienced IRS executive, also has been sworn in as the Deputy Commissioner.

Just briefly, to outline what we are going to have in this unit,

we will have three major components that actually deal with taxpayers. I think that, right off the bat, is an important statement

because it is an attempt to be balanced in the very structure of the

division itself.

The first one is our Taxpayer Education and Communication division, which will have not only a national office but a field staff

that will operate in 86 territory offices throughout the United

States. I will note that one of these will be in St. Louis, Mr. Chairman. I think that once this office is fully staffed, it will have about

six times as many staff across the country as we currently have

today devoted to this function. Of course, that is because we have

very few devoted to this function right now.

But in the future, we will have a fully staffed, across the country

set of offices. For example, in St. Louis, we would expect that they

will work very closely with some of the local offices, the State of

Missouri for example, in order to generate one-stop shopping with

the State. We would work closely with local small business association offices, and especially something that we are working very

hard on, working with the Small Business Development Centers.

They are very effective educational organizations that already offer

many courses for small businesses, and we want to partner with

them.

In addition, the taxpayer education group will pick up the responsibility that is currently done on sort of a detail, part-time

basis during our filing season to help taxpayers who have questions, either in our direct field offices or over the phone. That will

also help both taxpayers and also help us avoid what is today a

major problem in that we have our compliance people, our revenue

agents, get off their cases in order to work on things during the filing season.

So that is a very important and, I think, one of the most important new initiatives, our Taxpayer Education and Communications

organization.

The second major component will be our customer account services. Actually, it will be the part of the organization that probably

most taxpayers will most interact with, because this will be the one

to which you actually send in your returns, and get refunds and

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payments, and deal with the normal kinds of transactions that take

place every day in any business operation.

I think the key thing here is that once we get this fully established, we will then have account representatives who will be dedicated and specialized to deal with small-business and self-employed

taxpayers. So they will be more capable, we hope, in fact I am certain, will be more specialized in understanding particular problems

that occur with small businesses who interact with us more frequently, of course, than the individual taxpayer who sends in their

return once a year.

Their job will be to make that process, which is actually the most

frequent interaction process, as smooth as possible.

Of course, the third component will be our compliance organization, which will have a full field organization, as well as phone and

other resources, to perform the traditional functions of examining

returns and collecting overdue accounts, which is a very important

function. But they will also assist in the overall strategy of developing voluntary compliance to its maximum.

Finally, one of our goals in the compliance area, which will take

some new technology to enable, but which over time I think has

tremendous potential. When we do intervene with the taxpayer we

want to do it as quickly as possible after we find a problem. Oftentimes, in collection from small businesses, the problem is not that

the customer will not pay, it is that they cannot pay because we

have gotten to them so late, by that time the money is gone or they

have just gotten into an intractable problem.

So one of our key goals in compliance is to speed everything up,

so that if we are going to talk to a taxpayer about a problem, let

us do it as quickly as possible, get it resolved, and get in and out.

That is what we hear as one of the main things that our taxpayers

tell us, and it is just common sense.

Those are kind of the main outlines of where we are going. I believe that if we can sustain this program, Mr. Chairman, we really

can, I think, be more effective on both of the missions that you

have mentioned in your statement, to provide quality service to all

of the compliant taxpayers, which are the majority of them, and

also to ensure fairness in the system by enforcing compliance

where that is required.

We do need some resources, and I have to mention that our fiscal

year 2001 budget is still up for consideration. Frankly, it is very

important that we get that budget so that we will have the resources to staff some of these things that I have mentioned, and

also to invest in the technology that we think is really critical in

order to improve service, especially in the account area, which is

where most of our small-business taxpayers really interact with us

most of the time.

So with the support of Congress, in committees like your Committee and our other committees, which I am very happy to say so

far has been very positive, at least so far this year, I think we can

continue this tremendous transformation. And I think in the next

year to 2 years really begin to seriously deliver on our commitments to improving the way tax administration works for all taxpayers, but especially for small-business and self-employed taxpayers.

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Thank you very much, Mr. Chairman.

[The prepared statement of Mr. Rossotti follows:]

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Chairman BOND. Thank you very much, Mr. Commissioner.

Those are very encouraging words, and we commend you for the direction you are taking.

Before I turn to questions, though, I want to close the loop on

a project that you were kind enough to help us initiate at the Committee’s hearing last April on small business tax filing and recordkeeping burdens. After that hearing, as you recall, we posted on

the Committee’s web page the ‘‘IRS Paperwork Unpopularity Poll.’’

For the past year, we have collected input from small-business

owners on the IRS forms, instructions, and publications, letters and

notices most in need of revision.

This morning, I am pleased to present you with the results of

that poll. May I have the envelope, please? I always wanted to do

that.

Mr. ROSSOTTI. I cannot wait to see what is coming out of that

envelope.

Chairman BOND. We have preserved the anonymity of each participant. We are providing you with the complete documents and

the votes cast on each type. Without reviewing the entire report,

let me announce the winners.

The five most unpopular IRS forms are: No. 1, Form 1040, the

U.S. Individual Income Tax Return. No surprise.

No. 2, Form 941, the Employer’s Quarterly Federal Tax Return.

No. 3, Form 4562, Depreciation and Amortization. No. 4, Form 940,

the Employer’s Annual Federal Unemployment Tax Return. And

No. 5, Form 1065, U.S. Partnership Return of Income.

To give you a flavor of how candid the comments were, let me

just quote from two of our participants regarding the depreciation

and amortization, Form 4562. One participant wrote:

I have a degree in accounting with honors from the University of Texas . . . and

I have to read the rules on depreciation at least three times every year, and then

just pray that I’m interpreting them correctly.

And on Form 941, the Employer’s Quarterly Federal Tax Return,

a participant noted:

Way too confusing for anyone without a degree or a CPA. Trying to figure out if

I have a credit or owe money is difficult. My monthly liability and my quarterly liability is always just a few cents different. It’s a lot of useless paperwork to find

I’ve overpaid by 12 cents.

He has the same problem I have with my checkbook.

Commissioner, your willingness to examine these forms and documents is a testament to the IRS’ overall efforts to provide greater

service to America’s taxpayers. It is an important step forward in

reducing tax filing and recordkeeping burdens that small business

and the self-employed encounter every day. I look forward to working with you to reduce the filing and compliance burdens.

I thank you very much for participating with us in that poll.

Mr. ROSSOTTI. Thank you very much, Mr. Chairman. We have it

right here and we will be looking at these comments very carefully.

Of course, I think getting rid of the 1040 may be a little beyond

our capacity.

Chairman BOND. I do not think anybody asked to get rid of it,

but perhaps some of the comments can help translate it into readily understandable language.

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Let me turn now to a series of questions. First, in your testimony

you described the SB/SE Division’s Taxpayer Education and Communication component. How will you assess whether these efforts

are getting to the taxpayers, as opposed to the tax preparer, and

whether they are effective?

Mr. ROSSOTTI. I think that one of the techniques that we have

begun to use on evaluating all of our programs, and we will most

definitely use it for these programs, the simplest way is just to ask

the customer. In other words, survey the taxpayers on a regular

basis. We are already doing this on many of our programs, and we

are actually not only serving them but we are actually building this

into the performance measures for our managers in our whole organization.

Although we have not gotten this unit established yet, I feel sure

that we will do that. We have some pilot projects that have been

very interesting in different parts of the country that we are going

to build on, and we have already been doing some surveying of the

participants.

A lot of times what you find, especially with the new business

owners, is that they have a trade or a skill. I was out in California

last week, and we have a program out there that is a good prototype I think of what we want to do for home-health care providers.

There is quite a booming industry, people using people to come into

their homes to provide help or health care for elderly people and

others who need care. These people do have to get licensing, but

many times they do not know anything at all about business or

taxes.

Both we and the State of California, in this case, found out that

they were getting behind. We were going in and auditing them or

finding they had not paid something and shutting down and that

was not benefiting anybody. So we developed this program in the

State of California, as part of the process where they get their licensing to give them basically a fairly simple 2-hour kind of primer

on what needs to be done to file and pay their taxes.

Then we went back and surveyed them and got very good responses from the participants in that kind of a program that say

this is really helpful, I did not know anything about this. It really

is a way to keep them where they need to be. So a very simple

method of just simply asking them and seeing if they have gotten

something out of it.

In the longer term, we want to actually measure the effect on

compliance of these activities, which is a more difficult thing to do,

but we will definitely have that as part of our longer term plan.

Chairman BOND. This Committee has taken a real interest in the

plight of home-health care agencies. Last year we held hearings on

it. The question is whether the Health Care Financing Administration will eliminate them, execute them before they can get around

to paying their taxes. So I would say that, in this one area, you

are probably not the least favorite agency of the Federal Government with which the home-health care providers have to deal.

I am sure, as you talk to home-health care people, you will encounter some of those questions. I guess, fortunately or unfortunately, that is not your problem. It is ours, and a great concern of

many members of this Committee and mine.

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With respect to the customer account service of the new SB/SE

Division, do you have some problems with the aging technological

capabilities? You mentioned in your comments the need for technology. Will it be a hurdle to overcome the technological gap to provide the kind of customer service improvements you envision?

Mr. ROSSOTTI. Unfortunately, Mr. Chairman, I have to say it is

a major hurdle, especially in that area. Let me put it this way, it

is an obstacle or a barrier. By that, we do not mean that we are

going to just wait and do nothing until we have replaced all our

technology, because that is not a good approach. We are trying to

do what we can.

But just to give you a couple of examples, one of the problems

we have is with just simply the timing of updating our files. Somebody calls us in and says I have paid such and such an amount,

and it takes anywhere from—it could take as long as 16 days, because of the way our systems work, to actually get that transaction

updated on what we call our master file.

So in the meantime, it is possible that the person could get another notice or could call in again. You get this kind of cycle that

is very, very bad. A lot of the times when people, you probably get

complaints from your constituents, every member virtually does,

about this kind of thing. From the taxpayer’s point of view, it

seems inexplicable. I have already called up. I have paid. I have

settled this. And then they get another letter, and then they call

up again.

It is simply the fact that we have a 35-year-old system that takes

up to 21⁄2 weeks. That is a major problem.

Another problem is with the notices. We send out 180 million notices a year. Many of them go to small businesses. Many of those

people complain that they cannot understand what it is. I got a

complaint recently from one of your colleagues, Senator Domenici,

from one of his constituents, where he said the taxpayer was furious. I got a notice that said he had not paid by 1 cent and he got

a penalty for $286. It looked very much like that, if you read this

notice, like that is exactly what happened.

Of course, we looked into this, and the reality was the penalty

was not for the 1 cent. The 1 cent had nothing to do with it. It had

to do with some late payments on a previous filing that just carried

over to this notice. But the notice did not tell him anything about

this. So it just looked to him like that is what the problem was.

And yet, although we are trying to fix some of these notices, we

do not have, in all cases, the data in our system, in our data base,

to be able to actually carry it forward, to be able to explain fully

to the taxpayer what is in these notices. So it is not just a matter

of rewriting them, it is the underlying computer systems.

These are just two examples. But fundamentally, we have a tax

system, Mr. Chairman, that depends on computer systems that

were, many of the key parts of it, actually designed and built in

the 1960’s and 1970’s, and we are now in the 21st century. So we

cannot really deliver what is expected appropriately by the taxpayers.

That, of course, is why we have our whole technology modernization program which has begun, but which is a long-term program

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and which, of course, will require continued funding in order to be

successful.

Chairman BOND. I can sympathize with the fellow that had the

notice. One of my first encounters with the IRS some 35 years ago

when I was called in to the office because they claimed I had not

paid the quarterly taxes I owed. I brought in the canceled check

stubs, and I sat down with a gentleman who had not had his coffee

that morning, he was not really awake. And I said here is our problem. You say I have not paid, but here is the canceled check that

you deposited.

He said let me go talk to my supervisor. So he came back after

10 minutes, and he said, ‘‘Well, we are willing to compromise this.’’

That is when I lost it. I said, ‘‘No, no, no, I paid it. We are not compromising anything.’’

I hope that that is long gone, but I know that my first experience

set my teeth on edge a bit, so I think that is important, as well.

In the testimony, you note that the third component of the SB/

SE Division will be a traditional compliance function. As I indicated, I support that in order to ensure that the system is fair, the

taxes owed are collected. Because of the complexity of the tax code,

however, would you consider implementing a program under which

penalties for first time taxpayer errors in mitigating circumstances

are waived?

Mr. ROSSOTTI. As a matter of fact we do have, of course, the authority to abate penalties. The most common case where that occurs is the first time somebody has had to make, for example, a tax

deposit. We actually have a program in effect right now, which we

just fairly recently implemented within the last couple of years,

where we automatically waive the penalties.

I did find out that we were not, however, until very recently, notifying the taxpayer that they had this problem and that we had

waived the penalty. So therefore, they were in the position where

they could have done it a second time and gotten the penalty. This

was an interesting finding.

So we have got a system now where we at least send the taxpayer a letter when that happens to tell them look, you did not do

this and we waived the penalty because obviously it was your first

time, just to let them know what they are supposed to do the second time. I think that is a better system.

So I agree with you, in many cases, we should do that. As a matter of fact, we have that program in the case of the tax deposits

program. We certainly would look at that as a key criteria for abating penalties in any other situation where it was a first-time filer.

We are not really trying to use penalties to penalize people, except where it is really a legitimate issue. It is just part of the tax

system. We do have, fortunately, the authority in most cases to

waive the penalties if it is justified.

Chairman BOND. When can we tell small businesses they could

expect to start seeing some substantive changes in the kind of assistance the IRS provides and/or the way it provides the information, as you describe in your testimony?

Mr. ROSSOTTI. Well, I think we could claim that, at a limited

level, it has already begun, it has already happened. We have not

waited until we have the new division started up.

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I mention some of the things, that is why I mentioned them in

my testimony. I will not repeat them again, but the 24-hour phone

service, the web site, the other forms of communication.

And I think more generally, just our whole mission, our more

balanced focus of how we want to administer the tax system, I

think has had considerable effect in the way our employees—which

have responded to this very well—deal with taxpayers. We have

had a considerable focus on training and balance measurement of

performance, for example.

So those things have already happened. I think that there are

some other things in the pipeline for next season, next filing season. I mentioned the checkbox. And we will begin, we hope, to specialize some of the phone service a little bit more.

So I think that we have already done some things. We will have

more things next year. I think over the following 2 years, 2001 and

2002, we will have then at least a major part of our organization

in place. Assuming we can get the funding we requested for the

staffing and the technology, we can then put in place some of these

new initiatives that we have requested.

So I think we have seen some improvement already, and I think

there has been some feedback from our taxpayers to that effect. I

hope it will accelerate over the next 2 years.

Chairman BOND. Mr. Commissioner, as I said, there are several

of my fellow Committee members who wanted to come. Obviously,

they have been held up. We will leave the record open for questions

that I have, which we will submit in writing. We will ask staff to

prepare, by the end of this week, any questions that they have for

you.

We very much appreciate your willingness to come and be with

us today. We will be hearing from the GAO next, and others, but

I know your time is very busy so we appreciate your being with us.

Commissioner Kehoe thank you for joining us, as well as the rest

of your staff. We look forward to continuing to work with you and

expect very good things from the SB/SE Division.

Thank you very much for being with us today.

Mr. ROSSOTTI. Thank you very much, Mr. Chairman.

Chairman BOND. Our next panel is Ms. Cornelia Ashby, Associate Director for Tax Policy and Administration Issues at the General Accounting Office. Ms. Ashby, it is a real pleasure to have you

with us.

I am also pleased this morning to release the study that the GAO

undertook at my request on the IRS’ efforts to construct a model

that will estimate the tax burdens imposed on America’s taxpayers.

This first stage of this model focuses on taxpayers with wage and

investment income and is expected to assess the pre-filing, filing,

and post-filing burdens that taxpayers encounter.

While this part of the model does not directly affect small-business owners and the self-employed, it will be the basis for what we

anticipate will be the next stage, a burden model covering smallbusiness taxpayers.

I applaud the IRS for attempting to update its antiquated burden-estimation process, and I greatly appreciate the GAO’s review

and evaluation of the IRS’ efforts as the agency works toward a

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model that will accurately assess the enormous tax compliance burdens borne by small-business owners in America.

With that, Ms. Ashby, we will make your full statement and this

other information part of the record. We thank you for your excellent assistance, and welcome you here today.

STATEMENT OF CORNELIA M. ASHBY, ASSOCIATE DIRECTOR,

TAX POLICY AND ADMINISTRATION ISSUES, GENERAL GOVERNMENT DIVISION, U.S. GENERAL ACCOUNTING OFFICE,

WASHINGTON, D.C.; ACCOMPAINED BY KIRK R. BOYER, SENIOR EVALUATOR, KANSAS CITY FIELD OFFICE, AND JAMES

A. WOZNY, ASSISTANT DIRECTOR, TAX POLICY AND ADMINISTRATION ISSUES, GENERAL GOVERNMENT DIVISION

Ms. ASHBY. Thank you, Mr. Chairman.

We are pleased to be here today to discuss factors that have complicated small businesses’ efforts to comply with Federal tax laws

and IRS’ efforts to provide better service to this important group

of taxpayers. James Wozny and Kirk Boyer are accompanying me

today.

The IRS Restructuring and Reform Act of 1998 required IRS to

place greater emphasis on meeting taxpayers’ needs and to establish new operating units to serve groups of taxpayers with similar

needs. In response, IRS is reorganizing into four operating divisions. No. 1, the Small Business/Self-Employed Operating Division

will serve small corporations, partnerships, farmers and other selfemployed individuals, a group that we will refer to as ‘‘small businesses.’’

Our remarks are based on results of the two studies that have

been mentioned this morning that the Committee asked us to do,

one on the extent to which the IRS’ plans for SB/SE address factors

that have complicated past interactions between small businesses

and the IRS; and another on the IRS’ new taxpayer burden estimation models.

The first study is ongoing and our remarks today are based on

preliminary results. We have completed the second study and you

have just released our report.

In summary, factors that have complicated interactions between

small businesses and the IRS relate to the potential for non-compliance among small businesses, the way the IRS has structured its

organization and allocated its resources, and the reluctance of

small businesses to go to the IRS for help. Although the IRS’ plans

for SB/SE address these complicating factors, the IRS will face several challenges as it implements those plans.

First, I will discuss the complicating factors. According to the

IRS, small businesses are more likely than other taxpayers to have

compliance problems. IRS data show, for example, that small businesses tend to have more collection cases involving withheld employment taxes than do larger businesses. Complexity, in combination with the resources available for dealing with that complexity,

may account for some small business non-compliance.

While small businesses, like larger ones, encounter complex tax

issues and are subject to multiple layers of filing, reporting, and

deposit requirements, they do not always have the kinds of reVerDate 11-MAY-2000 08:21 Sep 19, 2000 Jkt 066223 PO 00000 Frm 00038 Fmt 6633 Sfmt 6601 E:\HEARINGS\65345 pfrm02 PsN: 65345
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sources on a continual basis that they need to understand and deal

with those issues and requirements.

Other factors that may contribute to a small business’s potential

for non-compliance are cash-flow limitations and the fact that business income, unlike wage and investment income, is generally not

subject to withholding or some form of third party reporting.

Because the IRS is organized and allocates its resources along

geographic and functional lines, it is designed to handle a wide

range of issues pertaining to all taxpayers with little or no focus

on specific taxpayer segments, such as small businesses. As a result, the IRS does not have any easy means of accessing comprehensive information about small-business taxpayer accounts.

This can inhibit its ability to identify and resolve tax-compliance

problems of small businesses.

Further, the IRS has historically allocated most of its resources

to correcting problems rather than preventing them. This emphasis

is especially problematic for small businesses that need assistance

up front and that, absent help, are at a high risk of going out of

business if problems arise.

The results of our survey of a stratified random sample of 1,000

small businesses representing a study population of 398,105 small

businesses nationwide showed that many small businesses were

unaware of key IRS services or knew of the services but did not

use them. Many expressed negative feelings about their past interactions with the IRS. Small business owners participating in IRS

focus groups indicated that they had limited familiarity with or use

for IRS’ products and services because they relied on tax practitioners.

Small business representatives told us that small businesses

would rather rely on tax practitioners because they are too busy,

they do not trust the IRS, or the IRS’ services are not conveniently

offered.

IRS’ plans for SB/SE indicate that it will address the factors we

identified as complicating interactions between the IRS and small

businesses by dedicating an operating division to small businesses,

determining the characteristics and needs of that population, shifting more resources to prevention, partnering with tax practitioners

and other organizations from which small businesses are likely to

seek help, and by customizing its products and services to meet the

needs of small businesses.

The IRS should be in a better position to provide small businesses improved customer service. However, it will not be easy for

the IRS to implement its plans for SB/SE. The IRS and the new

division must confront several challenges.

First, SB/SE will serve a large and diverse population, the members of which can migrate between operating divisions as their circumstances change from year to year. The diversity of the small

business population will require the SB/SE staff to specialize in a

wide range of tax issues and deal with a wide range of taxpayer

needs.

In addition, SB/SE is expected to do examination and collection

work for other operating divisions. These responsibilities could

stretch the capabilities of management and staff of SB/SE and diVerDate 11-MAY-2000 08:21 Sep 19, 2000 Jkt 066223 PO 00000 Frm 00039 Fmt 6633 Sfmt 6601 E:\HEARINGS\65345 pfrm02 PsN: 65345
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lute its taxpayer focus. Taxpayer migration also poses a challenge

to the taxpayer focus intended by the reorganization.

Antiquated information systems and a shortage of staff with

needed skills will also challenge SB/SE. Antiquated computer systems have long hindered the IRS’ efforts to manage operations and

serve taxpayers, and improvements are critical to SB/SE’s overall

success. A shortage of staff with needed skills can also adversely

affect SB/SE’s ability to deliver new programs and services.

For example, SB/SE intends to improve taxpayer education and

assistance through research and analysis of taxpayer characteristics and behavior. However, according to the IRS, it does not have

enough employees who possess the requisite skills such as market

research, forecasting, and trend analysis.

SB/SE, like the rest of the IRS, is challenged to develop an integrated performance management system that creates incentives for

employee behavior that support organizational goals. Although the

IRS has clearly made progress in implementing new performance

measures, it does not have a measure for voluntary compliance.

The absence of such a measure could hinder SB/SE more than

other operating divisions because the SB/SE population generally

has a greater potential for non-compliance.

A second critical aspect of performance management is an employee evaluation system that reflects the organization’s mission.

The IRS recognizes that, with respect to SB/SE, a successful blend

of customer service and compliance activities will require not only

a substantial shift in employees’ skills and abilities but also a significant change in employees’ attitudes and behavior. A change

that is dependent on employees being able to see a clearer connection between their day-to-day activities, their performance evaluations, and the overall organization’s goals.

Finally, in closing, let me briefly address another area of interest

to the Committee, the IRS’ efforts to estimate compliance burden

on taxpayers. Besides measuring voluntary compliance, it is also

important that the IRS be able to measure compliance burden. To

do that, the IRS is pursuing a multi-phase strategy. Initially, the

IRS is focusing on the design and implementation of models for estimating the Federal income tax compliance burden on taxpayers

who are served by the new Wage and Investment Income Operating Division. The conceptual definition of compliance burden developed for that group, and the theoretical framework for measuring that burden are supposed to build the foundation for developing burden estimates for other taxpayer groups, including small

businesses.

The IRS has begun to implement its strategy by contracting for

the development of two models that, when combined, should provide more reliable estimates of W&I taxpayers’ Federal income tax

compliance burden than current methodology. The models are also

designed to provide the IRS with a greater capacity to analyze the

impact of tax law and administrative changes on that burden. As

with all such modeling, the specific capabilities and precision of the

new models will depend on the quality of the underlying data.

Mr. Chairman, this concludes my statement. We would be glad

to answer any questions you have.

[The prepared statement of Ms. Ashby follows:]

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Chairman BOND. Thank you very much, Ms. Ashby.

Recognizing that most small businesses use tax preparers and

that there seems to be a reluctance on the part of small business

to go to the IRS for help, what do you think the IRS’ role should

be in providing help to small-business taxpayers?

Ms. ASHBY. We think, and the IRS in its plans seems to recognize this, that one avenue to help small businesses is to go to tax

preparers, to use them as a resource, by first of all making sure

the tax preparers understand what the requirements are and using

them and partnering with them in getting the word to small-business owners and managers.

Chairman BOND. I can see some happy tax preparers. I know

they will be glad for that.

To what extent are there small businesses these days who still

try to do it on their own, and do not use tax preparers?

Ms. ASHBY. I will let my colleague, Mr. Boyer, who is more familiar with the results of our survey, answer, but overwhelmingly I

think we found that most small businesses do use tax preparers.

Mr. BOYER. Yes, sir. Based on our survey results, we found that

94 percent of small businesses use tax preparers of one sort or another. That does lead, as Ms. Ashby said, to a great challenge of

communicating or providing up-front input for the taxpayers, when

so many of them go through tax preparers.

Chairman BOND. I would say that 6 percent is either very brave

and very well-informed, or brave and . . . anyhow.

Ms. ASHBY. I wanted to make the point that while there is a

higher-percentage usage of tax preparers to prepare tax returns,

small businesses really need advice at other times during the year.

They lack the availability of continual resources as they are planning their activities to put themselves in the best position tax-wise,

and as they are doing the things they need to do during the course

of a year to be prepared for that year-end filing. That is where

small businesses have difficulty.

Chairman BOND. Your testimony mentions several challenges

facing the IRS as it implements its new operating division. Which

of these challenges do you think will be most difficult to overcome?

And how do you see them dealing with those challenges?

Ms. ASHBY. I think the most difficult challenge will be the computer systems.

Chairman BOND. Getting back to the technology side of it.

Ms. ASHBY. Yes, as the Commissioner explained to us. He is

right, the IRS cannot wait until those systems are sufficiently improved in order to do something. The IRS has to operate with what

it currently has.

But the difficulties involve, for one thing, identifying who small

businesses are in order to be able to look at their characteristics

and assess their needs. Right now, with the two master files, the

individual master file and the business master file, some small

businesses are in one, some are in another. They are intermingled

with other types of taxpayers. So that, in and of itself, provides difficulty in terms of doing some of the things that the IRS would like

to do in the future.

And then, as the Commissioner stated, the problem with delays

in posting transactions, and inaccuracies in the records themselves

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are a problem throughout the IRS and for anything it encounters

or anything it tries to do.

Chairman BOND. That is very helpful to know. I do not happen

to serve on the Treasury Postal Subcommittee anymore, but we

will be communicating to Chairman Campbell the information that

both you and the Commissioner provided us.

A final question, sort of a broader goal, what do you see, in addition to the computer issue, as being the principal risk to the success of the IRS efforts to develop the improved burden estimation

models? Is there anything that they could be doing that they are

not, that could minimize those risks?

Ms. ASHBY. I am going to let Mr. Wozny answer that, and I will

just say, as I mentioned in my short statement and as we state further in our longer official statement, the underlying data that is

the basis for the statistical equations that are used in the model

are the most problematic. But I will let Mr. Wozny say more.

Mr. WOZNY. Right, and the most difficult data to come by are the

information on the burden itself. The IRS, and its contractor, have

decided to try to obtain that data through a survey. Past efforts

have indicated that taxpayers have limited ability to recall the burdens very precisely.

But the contractor is expert in conducting mail surveys and they

will be trying to increase the response rate and to provide guidance

to taxpayers in order to prompt their memory on the burdens.

Chairman BOND. I would have to say they probably have the

fisherman’s veracity problem, because that 12-inch bass that you

release today is 16 inches long by tomorrow. And next week you

are telling everybody how you threw a 20-inch bass back. So I can

imagine that there are some difficulties in concluding that.

As I said earlier, we will keep the record open. We may have

some further questions, and I invite my fellow Committee members

and their staffs to submit their questions for the record by the end

of this week. We thank you very much for your good work. As always, the General Accounting Office is most helpful to us in obtaining an independent review in order to confirm or amplify the information that we have received.

Ms. Ashby, Mr. Wozny, Mr. Boyer, thank you very much for

being with us today.

Ms. ASHBY. Thank you, Mr. Chairman.

Chairman BOND. Now, Ms. Abalos, can you hear me?

Ms. ABALOS. Yes, I can. Can you hear me?

Chairman BOND. Yes, the wonders of modern technology come

through, and we are very pleased that you can be with us today.

We also will have, at the table, Mr. Roy Quick. We thank you both

very much for joining us today, for taking the time to come and be

with us through the means of modern technology.

As I indicated before, we will invite Ms. Abalos to summarize her

testimony, and we will include the full written testimony in the

record. Ms. Abalos, we invite you to make your comments.

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STATEMENT OF SANDRA A. ABALOS, CPA, PRESIDENT, ABALOS

& ASSOCIATES, P.C., PHOENIX, ARIZONA

Ms. ABALOS. Thank you so much for providing the opportunity to

give testimony via the teleconference. I did not hear the opening

remarks, but the sound seems to be fine now.

Taxation and all the issues surrounding tax compliance is one of

the difficult aspects of running a small business. Compliance becomes not an issue of intent, but it becomes an issue of education,

awareness and resources.

Historically, the relationship between the Internal Revenue Service and the small business community could be likened to ‘‘swimming with the sharks’’. This fear factor approach, however, fosters

an ‘‘us against them’’ mentality that has produced really less than

desirable results.

I have reviewed the mission and organizational structure of the

Small Business/Self-Employed Operating Division of the IRS and I

must say that I am very encouraged by the concentrated customer

service focus of the SB/SE Operating Division. I think the IRS is

to be commended for their efforts in identifying the distinct market

segments of the taxpaying community and then developing an organizational structure that will provide meaningful customer service

and support.

I am particularly interested in the organizational segment

named, Taxpayer Education and Communication Organization, the

TEC. This is described as a ‘‘customer-focused organization that

routinely solicits information concerning the needs and characteristics of its customers and implements programs based on the information received.’’ Within the TEC structure is the TEC Partnership Management arm that will interface with certain user groups.

The TEC Partnership Management will proactively partner with

Government agencies, small business organizations, practitioner

groups, and other professional and volunteer organizations.

The ETAAC, Electronic Tax Administration Advisory Committee,

prepares an annual report to Congress, which is forthcoming. It is

due at the end of June. In considering a strategy to increasing electronic filing participation within the business community, we included ‘‘Community Alliance Initiatives’’ within the report.

I happened to author this section of the ETAAC report and I included it in full in my written testimony. The report describes a

formal working relationship between the IRS and the respective

user groups very similar to what is envisioned in the TEC partnership management initiative.

I had envisioned this working relationship between the small

business community and the IRS before really reviewing the express directives of the IRS SB/SE Operating Division. Thus, I was

really excited to see this concept in the structure.

The community alliance initiatives of the ETAAC report reads in

part:

The electronic filing goals established by Congress require considerable participation from a broad spectrum of taxpayers and tax practitioners. The simple wage and

interest type of returns account for the majority of electronically filed returns to

date. The future growth and success of electronic filing will largely depend on the

increased participation of the tax preparer community and the sanction of the small

business community.

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The tax preparer community is extremely diverse in tax practice procedures and

in client profiles. For some preparers, electronic filing provides efficiencies and incentives. For other preparers, electronic filing presents a burden. There are tremendous opportunities for tax preparer associations to provide constructive input, opinion, and direction into electronic filing process and procedures as they specifically

relate to divergent preparer practices and taxpayer profiles.

The small business community, on the other hand, is very sensitive to the change,

complexity and cost. A seemingly simple initiative will emerge as a compliance

nightmare within the small business community. The advance input and endorsement of the small business community will ensure a successful program.

When I am sitting in the ETAAC meetings, just as an example,

one of the Committee members said, ‘‘Gosh, the small business

community had a cow with EFTPS. We do not get it.’’ Well, had

I been on the Committee at that time, I could have told you exactly

what the cow was going to be about and perhaps prevented some

of that from happening.

The TEC Partnership Management Division is the vehicle to

produce such results. The IRS needs to identify and resolve the

barriers to electronic filing during the process development phase,

rather than reacting to an outcry after the program rolls out.

In our ETAAC meeting of March 1, 2000 we heard from Sherill

Fields regarding the current State of business e-file. The issues and

barriers impeding business e-file, as she presented, are substantial

and material. One of the issues was limited research has been conducted on business products and customers. In listening to the well

structured presentation on the business e-file program, I could not

help but feel like the IRS is building a bad field of dreams. I even

said that at the meeting. I told her, you can build it, but they will

not come. Electronic filing will be a success if it is embraced voluntarily due to ease of use and appropriate user incentives.

Congress established an e-filing goal of 80 percent by the year

2007. My single request, on behalf of the small business community, is that the electronic filing be successful as a viable option

and not be made into another Government mandate.

The IRS SB/SE Operating Division mission statement talks the

talk of a new partnership and relationship building with the small

business community. Now they need to walk the walk. Because

done right, electronic filing will flourish.

I sincerely appreciate the opportunity to testify and I would welcome any questions that you may have.

[The prepared statement of Ms. Abalos follows:]

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Chairman BOND. Thank you very much, Ms. Abalos.

You already answered the first question I was going to ask,

whether the 80 percent should be a goal or a mandate. I have long

taken the position that if this electronic filing is the best thing

since sliced bread, then we ought to be able to sell it to small business as sliced bread and not make it a mandate.

I will come back to you with questions, but first I want to have

the testimony of our other witness, and we will have an opportunity for you to listen to his testimony. If you wish to make any

comments on each other’s testimony, that always makes it fun.

Now I will turn to our good friend Roy Quick, EA, Principal,

Quick Tax and Accounting Service of St. Louis, Missouri. Roy, welcome, glad to have you back

STATEMENT OF ROY M. QUICK, JR., EA, PRINCIPAL, QUICK

TAX & ACCOUNTING SERVICE, ST. LOUIS, MISSOURI

Mr. QUICK. Thank you very much, Mr. Chairman.

My name is Roy Quick, I am an enrolled agent and a principal

in Quick Tax & Accounting Service, a private, home-based tax and

accounting service located in St. Louis County, Missouri. I am also

a member of the IRS Commissioner’s advisory Council, or IRSAC,

since November of last year. I am pleased to present this testimony

on the IRS modernization effort.

First of all, let me say that I am very glad to see a change in

the way the IRS does business by way of involving ‘‘outsiders’’ in

the strategic planning process. A few examples of this are the consulting firm of Booz-Allen & Hamilton, a contractor to the IRS, invited the White House Conference on Small Business tax chairs to

review the strategic planning process in the initial phases of the

design and modernization.

Commissioner Rossotti has selected seven members of his 15

member advisory council who have small business experience. In

addition to the IRSAC, other specialized advisory councils with interested stakeholders have been formed, for example the ETAAC

that Sandy serves on.

Two other initiatives that are a sign of the ‘‘new IRS’’ are the establishment of ‘‘problem solving days’’ and the Electronic Tax Administration road shows. The problem solving days bring together

representatives from the IRS and taxpayers with unresolved problems to try and find common solutions. Also, a representative from

the Taxpayer’s Advocates Office is available at these locations to

assist taxpayers with still unresolved problems. At a recent problem solving day in St. Louis, which was held on a Saturday, the

IRS and the Missouri Department of Revenue joined forces for a

one-stop shop.

Electronic Tax Administration road shows that I mentioned are

designed to educate and encourage the practitioner community to

embrace electronic filing. Key elements of these shows are the

availability of national office personnel to speak on topics of interest to the practitioner community and also the vendor displays on

products that the practitioners would be able to use.

You have heard from previous witnesses regarding the different

operating divisions, so I will not go into detail here, except to say

that this diverse group of small-business and self-employed taxVerDate 11-MAY-2000 08:21 Sep 19, 2000 Jkt 066223 PO 00000 Frm 00088 Fmt 6633 Sfmt 6601 E:\HEARINGS\65345 pfrm02 PsN: 65345
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payers will have interaction with the service during the pre-filing,

filing, and post-filing phases. It is estimated they will have between 4 and 60 contacts per year.

Taxpayer Education and Communication, or the TEC, will handle the pre-filing function. The three key functions within TEC are

research and product development, partnership outreach, and taxpayer education. The strategy behind the establishment of TEC,

which I think is excellent, is to assist taxpayers initially to avoid

or reduce problems and burden in the filing and post-filing phases.

Basically, if you solve a problem on the front or educate the taxpayer on the front end, you will not have problems later on.

If this strategy is successful, it should reduce the overall costs of

tax administration. Therefore, it is critical to the reorganization effort that the TEC be fully staffed and fully funded as soon as possible.

The IRS has developed two products that should be key in the

delivery of taxpayer education. The first product is the IRS web

site. Taxpayers are able to obtain up to date information and forms

by accessing www.irs.gov on a 24/7 basis. According to Commissioner Rossotti, there have been over 1 billion hits to this web site.

The Service has done a good job in developing this web site, but

the addition of a hypertext search engine would make it far more

useful. With the addition of this tool, one could search for information on regulations and forms of a particular topic of interest.

The second product of interest in the taxpayer education is the

small business resource CD that was mentioned earlier. This computer program covers the life cycle of a small business from prestartup to closing a business. The product was developed jointly by

the IRS and the SBA. I understand that it is being distributed to

all the Small Business Development Centers across the country.

The contents of this CD, however, should be on the IRS web site,

as well as in all the public libraries for access.

This type of partnership or strategic alliance is another function

of TEC. I am encouraged by the effort to work with the various

stakeholder groups. The IRS, practitioner groups, trade organizations, educational institutions, and other Government agencies

have so much to gain by being partners in tax administration.

At the same time, the Service is looking to provide taxpayer education to the small business community, this same community may

not be looking to the Service as the best source of information. The

figure I had was over 80 percent of small business tax returns are

prepared by a tax professional. I was interested to hear Mr. Boyer’s

figure this morning, as well.

Chairman BOND. Even better news.

Mr. QUICK. For the same reason that I do not fix my own car,

a lot of people do not prepare their own taxes. It is not the highest

and best use of my time. Therefore, outreach to the professional

community and trade groups is essential.

One area of concern in taxpayer education is the ability of the

IRS to educate taxpayers. The Service has many technically proficient employees, well versed on tax law and procedures, but these

same employees may not possess the necessary skills to be a good

teacher.

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I would suggest the possibility of pairing knowledgeable IRS personnel with trained educators to develop suitable training materials. It may be necessary to look outside the Service for adjunct

faculty. Sufficient funding needs to be available to accommodate

this reality.

Another area of concern is the ability of the Service to retrain

some of its examination and collection personnel and their perception of small business. Most earners are very hard working and

law-abiding taxpayers willing to pay their fair share of taxes but

not a penny more. In light of today’s complex tax code, there is a

big difference between an honest mistake and tax fraud. This trust

building will take time on both sides of the table.

In talking with other IRSAC members, there are some concerns

about the intradivisional and cross-divisional communications. This

was a valid complaint in the old IRS. The design teams are trying

to address this issue and I will be interested to see their results.

It is important to remember that this reorganization is a work

in progress and no doubt there will be a few glitches, as there are

in any private sector corporate reorganization. The ability of the

Service to correct these problems in a timely manner, and the success of the TEC function, will greatly enhance the success of the

entire process.

One final message that I would like to suggest to Congress is

that they ensure adequate funding is available for this reorganization effort, specifically in the information systems area.

While admittedly, the Service has not always spent technology

dollars wisely in the past, I believe the IRS is on the right track

in upgrading their—for lack of a better word—mature systems and

technology. The installation of new equipment and the establishment of integrated real-time information systems will take several

years to accomplish. However, once in place, these systems should

enable the IRS to deliver timely and accurate customer service that

the American people deserve.

Thank you for the opportunity to present this testimony, and I

would be pleased to answer any questions.

[The prepared statement of Mr. Quick follows:]

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Chairman BOND. Thank you very much, Roy. You answered my

second question, about how they can improve the education and

outreach effort by saying they need to get somebody who knows

how to be an educator.

Let me turn back to Ms. Abalos.

Ms. Abalos, are there any barriers that will prevent small business from electronically filing their taxes? Can you explain how

this electronic filing could be a burden on small businesses?

Ms. ABALOS. This year was the first year that our practice offered electronic filing for customers. They had two questions, every

time they came around, two questions regarding electronic filing.

What does it cost? And how does it benefit me?

The answer was it costs more because it takes us more time to

file the return electronically. This year, just to get some familiarity

with the process, I provided that service to my clients free of additional charge. But then honestly, for our practice profile, there was

no benefit.

A CPA practice does not do the run-of-the-mill H&R Block type

returns where somebody comes in and presents their information

and they sit there and have a return done, sign the 8453 and be

off and it is finished. We gather information. Sometimes there is

additional information that comes in. And when we finish that return and send it out, we want to be completed with it.

So there was even additional time and correspondence back and

forth with the client and the practitioner in getting the signed signature forms and so forth.

With the business community, there is even an additional barrier. This is just an example of where I cannot imagine that the

Internal Revenue Service would understand these kinds of barriers

or identify them because they are not practicing in the mode we

are.

I will give you a perfect example. In filing most of the business

returns, depreciation is a big component of the tax return, and it

is very, very complex. We do not use the depreciation part of our

software. The software package that would file the returns electronically has a depreciation component. We do not use that in

computing the depreciation for our business clients.

We have a separate package that is a full-blown depreciation

package that we can use year-round in doing planning or preparing

financial statements and so forth. And that is how we do the depreciation part or component of the return.

That prints a physical paper, 4562, which we include with the

paper business return. So just as an example, how would that work

in electronic filing? How would you capture this data that is on a

separate, independent, software package into the e-file return when

we do not do it that way?

So it is just an example of it taking more time and there not

being an offsetting benefit to either the small business community

or the practitioner community. Does that answer the question?

Chairman BOND. That is a very good point. If it takes longer and

costs more, that is a problem. I can certainly understand how your

clients need to use this information throughout the year. And unless technologically we can figure out a way to move from one program into the other, it does sound like a real burden.

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One other question I have, Ms. Abalos. In the Commissioner’s

testimony, he notes the IRS has expanded the online filing program

for Form 941, the Employer’s Quarterly Federal Tax Return. Have

you had any experience with this program and its potential benefits or downsides for a small firm?

Ms. ABALOS. Most small businesses do not prepare their own

payroll tax reports. I will tell you that as a CPA practitioner, and

I have probably 200 small business accounts. I represent a wide

array of the small business community. We do not prepare them

anymore, either. I do not even do my own payroll tax reports.

We have out-sourced that function to a payroll service provider.

No. 1, they do it faster. And again, they do it at less cost and that

provides us with a real benefit.

So the electronic filing of the 941s, I see that as a real benefit

for the payroll service providers like Paychex or ADP, those are two

of the bigger ones here in Arizona. I really do not see the small

business community benefiting from a direct 941 e-file because

they are not preparing their 941s to begin with.

Chairman BOND. Thank you, Ms. Abalos.

Mr. Quick, would you like to comment on any of those items before we move on to questions?

Mr. QUICK. Certainly, Mr. Chairman. We do electronic filing for

all of our clients. The only impediment we have found with electronic filing is that not all the forms are acceptable. There are certain forms that some of our clients have that cannot be filed electronically.

One advantage that we have with the electronic filing is that returns go in error free. There is an error checking mechanism to

make sure that the returns go in without any errors. It crosschecks Social Security numbers, which is one of the prime errors

on paper filed returns. It eliminates all math errors. The Service

gets the return error free and the taxpayer gets an acknowledgement or a receipt that the Service got their return and they know

that it has been accepted.

Our clients, even the ones with balances due, have been filed

electronically and they seem to enjoy it. It does create some additional data entry for us but we feel that it is worth it.

Chairman BOND. How would you assess the IRS efforts to include the Taxpayer Advocate in the new SB/SE Division? And what

has been your experience as a practitioner with the Advocate?

Mr. QUICK. My experience with the Advocate’s office has been excellent. I cannot say enough for Val Oveson and his staff. The Taxpayer Advocate will have, or there will be a Taxpayer Advocate’s

representative in each of the SB/SE territories.

The one experience we had, which I cannot go into great detail

due to client privacy, but they were able to solve a long-standing

problem in a matter of a day with the service center.

Chairman BOND. That probably sets a record.

In closing the formal questions, first Mr. Quick, if you could tell

the IRS one thing to do in the new SB/SE Division, what would be

the most important one?

Mr. QUICK. My feeling on this, Senator, is that most smallbusiness owners are law-abiding tax paying citizens and willing to

pay their fair share. I would ask that they be not presumed guilty

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by virtue of being small-business owners, and that the IRS live up

to its mission statement.

Chairman BOND. Thank you very much, Mr. Quick.

Ms. Abalos.

Ms. ABALOS. I would ask that they formally activate that TEC

Partnership arm and let us help you. We are doing the work here

in the trenches and we can provide constructive input that will

help this process. So before you develop something and roll it out,

take our comments, consider them, and act on them, just like this

directive says.

Chairman BOND. Those are all very worthwhile, very useful comments. We sincerely appreciate your testimony. We are delighted to

have the practical view from the tax preparers for small business

on how this is working, can work, and should work.

Before I conclude, once again I want to express my thanks to

Commissioner Rossotti as well as, to Ms. Ashby and her team at

the GAO, and especially our witnesses serving small business. Your

insights and efforts on behalf of small business are greatly appreciated, and we urge everybody to continue their hard work for

small business and the self-employed.

As we have heard this morning, the IRS’ new Small Business/

Self-Employed Division is expected to stand up on October 1 of this

year. I extend my support, encouragement, good wishes, and sympathy to Joe Kehoe and his deputy, Dale Hart, as they undertake

the enormous task of getting this critically important division off

the ground.

While I think there have been great efforts that have gone into

planning, the real work will begin when the new division becomes

operational. To ensure the IRS improvements in small business

service do not stop in the planning stages, I will be asking the GAO

to undertake a new evaluation of the SB/SE Division and report

back to the Committee next year on the changes, and I am confident improvements, that the agency has made for taxpayers in

this incredibly important sector of our economy.

I thank all of our participants. The record will remain open for

2 weeks for those of you who are watching this, either here in the

room or by means of our web site, we do invite further comments.

I think there have been many good ideas that have been aired

today and we would welcome comments, either supportive or adding a different perspective, that will enable us to share with the

IRS suggestions that may be most helpful.

With that, I thank all participants.

The hearing is adjourned.

[Whereupon, at 11:17 a.m., the Committee was adjourned.]

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