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95–580 2015

HOW TAX COMPLIANCE OBLIGATIONS HINDER 

SMALL BUSINESS GROWTH 

HEARING 

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

HEARING HELD 

JULY 22, 2015 

Small Business Committee Document Number 114–020 

Available via the GPO Website: www.fdsys.gov 

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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 

TOM RICE, South Carolina 

CHRIS GIBSON, New York 

DAVE BRAT, Virginia 

AUMUA AMATA COLEMAN RADEWAGEN, American Samoa 

STEVE KNIGHT, California 

CARLOS CURBELO, Florida 

MIKE BOST, Illinois 

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 

STEPHEN DENIS, Deputy Staff Director for Policy 

JAN OLIVER, Deputy Staff Director for Operation 

BARRY PINELES, Chief Counsel 

MICHAEL DAY, Minority Staff Director 

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(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Hon. Steve Chabot ................................................................................................... 1 

Hon. Nydia Vela ́zquez ............................................................................................. 2 

WITNESSES 

Mr. J. Christopher Mihm, Managing Director, Strategic Issues, United States 

Government Accountability Office, Washington, DC ........................................ 4 

Mr. Donald Williamson, Professor, American University, Executive Director, 

Kogod Tax Center, Washington, DC ................................................................... 6 

Mr. Troy Lewis, Vice President, Heritage Bank, St. George, UT, testifying 

on behalf of the American Institute of Certified Public Accountants .............. 8 

Mr. Les Vitale, Partner, Local Markets Group, McGladrey, LLP, Boston, 

MA ......................................................................................................................... 9 

Mr. Stephen F. Mankowski, Partner, EP Caine & Associates, LLC, Bryn 

Mawr, PA .............................................................................................................. 11 

APPENDIX 

Prepared Statements: 

Mr. J. Christopher Mihm, Managing Director, Strategic Issues, United 

States Government Accountability Office, Washington, DC ..................... 33 

Mr. Donald Williamson, Professor, American University, Executive Director, Kogod Tax Center, Washington, DC .................................................... 112 

Mr. Troy Lewis, Vice President, Heritage Bank, St. George, UT, testifying 

on behalf of the American Institute of Certified Public Accountants ....... 124 

Mr. Les Vitale, Partner, Local Markets Group, McGladrey, LLP, Boston, 

MA .................................................................................................................. 137 

Mr. Stephen F. Mankowski, Partner, EP Caine & Associates, LLC, Bryn 

Mawr, PA ....................................................................................................... 144 

Questions and Answers for the Record: 

Question from Hon. Alma Adams to Mr. Christopher Mihm and Response ............................................................................................................. 149 

Question from Hon. Alma Adams to Mr. Donald Williamson and Response ............................................................................................................. 151 

Question from Hon. Alma Adams to Mr. Troy Lewis and Response ............ 154 

Question from Hon. Alma Adams to Mr. Les Vitale and Response ............. 156 

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(1) 

HOW TAX COMPLIANCE OBLIGATIONS 

HINDER SMALL BUSINESS GROWTH 

WEDNESDAY, JULY 22, 2015 

HOUSE OF REPRESENTATIVES, COMMITTEE ON SMALL BUSINESS, Washington, DC. 

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

2360, Rayburn House Office Building. Hon. Steve Chabot [chairman of the Committee] presiding. 

Present: Representatives Chabot, Luetkemeyer, Hanna, Rice, 

Brat, Radewagen, Knight, Hardy, Vela ́zquez, Payne, Meng, Lawrence, Adams, and Moulton. 

Chairman CHABOT. Good morning. Thank you all for being 

here. Special thanks to our witnesses who have taken the time 

away from their undoubtedly busy schedules to be with us here 

this morning. We really do appreciate that. 

Earlier this year, our Committee heard from a gentleman named 

Scott, who owns a small mattress factory in Franklin, Ohio. Scott 

wants to pay his taxes. He probably wishes he could pay less but 

more than anything he wishes the process could be simpler. He 

wants a flatter and fairer code that is more predictable. 

Scott is emblematic, I think, of many small businesses all across 

this country. There are millions of Americans out there just like 

Scott who feel the weight of the tax code every day. I speak to them 

every time I am back in my area, back in Ohio, and I hear the 

same concerns again and again. More Americans are frustrated 

with the process of paying their taxes, more so than even actually 

writing the check to the government. I am sure there are exceptions, but it is far too complicated. It is unacceptable and we must 

do better. 

Making the tax code simpler is particularly important for America’s small business owners, as they are disproportionately affected 

by the tax code’s complexity. This is a finding that unfortunately 

has not changed with time. Studies conducted for the Office of Advocacy at the SBA over the past 10 years found that small firms 

pay 67 percent more to comply with the tax code than large firms 

do. A recent update to those advocacy studies found that firms with 

less than 50 employees pay on average over $1,500 per employee 

in tax compliance costs, whereas, firms with more than 100 pay 

$647. 

It is because of statistics like that in 2013 this Committee asked 

the Government Accountability Office to examine the dynamics of 

small firms and their tax compliance burden. The GAO will be testifying today to outline their findings, and I would like to point out 

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2 

that right at the end of the report, the GAO outlines 25 separate 

recommendations that they have made to the IRS over the past few 

years that could, and probably would in my estimation, help reduce 

tax payer compliance burdens. The IRS has implemented none of 

them, and that is a problem. 

To be fair, I am not only blaming the IRS for this problem. Congress has been guilty as well. The tax code has grown to nearly 

74,000 pages. The IRS did not do that; Congress did. This Committee is and will continue listening to the American people and 

urging Washington to make the tax code simpler and less stressful. 

As I stated earlier, we have the GAO here today to discuss their 

illuminating report in greater detail, and we will also hear from 

tax experts who will suggest ways to reduce the strain on small 

firms through comprehensive tax reform that reduces the complexity faced by small business. 

I am looking forward to the testimony of everyone here today, 

and I again want to thank each one of you. And I would also mention, originally there may have been a case where we were going 

to have two panels, but I have found over the years when we do 

that, oftentimes members have a certain amount of time that they 

can be here and they have other Committees and obligations and 

will listen to one panel and then not the other, and this is really 

a much better way to hear from all of you. And so that is why we 

changed that around, so if it was any inconvenience to anybody, we 

apologize. 

And I would now like to yield to the ranking member, Ms. 

Vela ́zquez, for her opening statement. 

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman. 

The success of the American economy relies heavily on its vibrant small business community. Small businesses employ 50 percent of our workforce and generate nearly $6 trillion in revenue. 

When talking with small business owners, we often hear that an 

intense focus on the bottom line is necessary to succeed. They know 

every dollar counts and devote significant resources to work that 

goal. 

One area every small business owner must focus on is complying 

with our tax laws. The tax compliance burden on small businesses 

takes many forms. Most notably is the complexity of the code itself. 

With so much paperwork to fill out every year, the majority of 

firms report spending more than 40 hours preparing their tax returns. 

To better understand the costs of the burden and what the IRS 

is doing to reduce it, this committee requested the GAO report at 

the center of today’s hearing. That report reinforced much of the 

anecdotal evidence we have heard on previous occasions. The complexity of the tax code creates a number of fixed cost items that do 

not scale with the size of the company. As a result, smaller businesses are disproportionately impacted compared to their larger 

counterparts. 

One way to address this problem is by simplifying the tax code. 

By reducing its complexity, small businesses will see decreases in 

these fixed costs as the need for expert preparation and the time 

commitment will both be reduced. The complexity of the tax code 

cuts both ways. Taxpayers’ noncompliance costs the IRS nearly 

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$350 billion every year prompting numerous initiatives to close the 

gap. One of them is the use of Form 1099-K to track electronic payments. By collecting data directly from payment processors, like 

Visa and PayPal, the IRS intends to cut down on underreporting 

and spur more businesses to voluntarily comply. 

Unfortunately, if the information does not match up or errors are 

made, it could trigger costly and time-consuming audits for lawabiding firms. In response, the IRS began the Payment Mixed 

Comparison Tool (PMCT) pilot to reduce the burden which GAO 

was also asked to look at. While they found IRS’s payment card 

matching program has the potential to reduce noncompliance, it 

was unclear whether it would reduce taxpayers burden. 

GAO also found that the majority of small businesses use passthrough entities, like partnerships and S corporations, which prevent them from receiving a number of business friendly tax incentives. The average corporate tax rate is just 12.6 percent compared 

to 31.6 percent and 29.4 percent that S corporations and partnerships pay. 

Comprehensive tax reform, not only corporate, is necessary to 

spur additional economic growth in our small business sector. In 

other words, small entities are not looking for special treatment, 

just equal treatment with their larger counterparts. 

One of the principal tenets of tax policy is that we strive for simplicity and some semblance of certainty. The tax rules should specify when the tax is to be paid, how it is to be paid, and the amount 

to be paid. Through comprehensive tax reform, Congress can provide small firms with both, by limiting yearly policy changes which 

will help them more easily plan their business investments, operations, and estate planning based on those known laws. 

I look forward to hearing from today’s witnesses on the findings 

and recommendations contained in GAO’s report. And I thank you 

for being here today. 

Mr. Chairman, I yield back. 

Chairman CHABOT. Thank you very much. 

And if Committee members have opening statements prepared, 

we would ask that they submit them for the record. 

And I will take just a moment to—before I introduce the panel, 

to kind of explain our rules. You get five minutes to testify. There 

is a lighting system. A green light will be on for four minutes. The 

yellow light will let you know you have got a minute to wrap up, 

and then the red light will come on and we ask you to stay within 

that as much as possible, and impose those same rules on ourselves, so we get five minutes to ask questions. 

And I will now introduce our panel. We will begin with our first 

witness, Chris Mihm, the managing director for Strategic Issues at 

the United States Government Accountability Office. He leads 

GAO’s work on government oversight and transformation issues 

such as performance management and collaboration, federal budgeting, regulatory policy, and federal tax policy and administration. 

He is a fellow and former board chair of the National Academy of 

Public Administration and an adjunct lecturer in Public Administration at the University of Maryland Graduate School of Policy, 

and we welcome you here this morning. 

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Our next witness will be Don Williamson, professor in the Department of Accounting and Taxation at American University. He 

also serves as the executive director of the University’s Kogod Tax 

Center, a research institute focusing on the interests of small business. He has also served as an adjunct professor at American University’s Washington College of Law. Professor Washington published over 50 articles in professional and academic journals and 

was recognized as the Bureau of National Affairs’ Outstanding Author for 2007. Welcome this morning. 

Our next witness will be Troy Lewis, who is vice president and 

chief enterprise risk management officer at Heritage Bank in St. 

George, Utah. He is also the manager of Lewis and Associates, a 

small accounting firm in Draper, Utah. Additionally, he serves as 

adjunct faculty in the taxation department at Brigham Young University. He is also chair of the Tax Committee at the American Institute of Certified Public Accountants, whom he is testifying on behalf of today. We welcome you as well. 

Our next witness will be Les Vitale, managing director and partner at McGladrey and Pullen in Boston, Massachusetts. Mr. Vitale 

brings over 30 years of professional experience to his clients and 

his broad base of knowledge includes specialties in the traditional 

accounting, auditing, tax, and assurance services. He has authored 

technical articles and developed policy and procedural manuals for 

the firm in the areas of quality control, staff training and evaluation, recruiting, and technology. 

We thank you all for being here, and I would now like to yield 

to Ms. Vela ́zquez to introduce our final witness. 

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman. 

Stephen Mankowski is the vice president and national tax chair 

of the National Conference of CPA Practitioners, the nation’s second largest CPA organization. His firm has been advising small 

firms on accounting and taxation for over 30 years, helping 2,000 

clients annually. As an expert in the field, Mr. Mankowski has participated on IRS panels regarding compliance burden for small 

businesses and as a member of the NCCPAP, partook in the electronic payment pilot program that was examined by today’s GAO 

report. Mr. Mankowski graduated from LaSalle University. 

Welcome to the committee. Thank you. 

Chairman CHABOT. Thank you very much. 

We will begin with Mr. Mihm. You are recognized for five minutes. 

STATEMENT OF J. CHRISTOPHER MIHM, MANAGING DIRECTOR, STRATEGIC ISSUES, UNITED STATES GOVERNMENT ACCOUNTABILITY OFFICE 

Mr. MIHM. Well, thank you, Mr. Chairman, and Ms. Vela ́zquez, 

and members of the Committee. It is an enormous pleasure and 

honor to be able to be with you here today to discuss our report 

on Tax Compliance Burden and Small Businesses. That report is 

being released today and it is available, of course, on the GAO 

website at gao.gov. 

As this Committee is well aware, given the important role that 

small business plays in the U.S. economy, reducing the cost of compliance with the tax code frees up additional resources to expand, 

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hire new employees, and further contributes to economic growth. 

At the same time, small business tax issues are a significant contributor to the annual tax gap which is the difference between 

taxes owed and taxes paid on time. And as both the chairman and 

Ms. Vela ́zquez mentioned in their opening statements, and IRS 

takes as a given as well, the overwhelming majority of taxpayers 

want to pay their taxes in full and timely manner. It is just that 

we need to make sure that we create the environment and give 

them the tools that enable them to do that, including reforms to 

the tax code as you pointed out. Thus, the key challenge for IRS 

is that they must minimize taxpayer burden while encouraging, 

and as the chairman pointed out with his reference to his constituent Scott, making possible voluntary compliance with the tax 

code. 

My remarks today highlight the key findings of our report. I 

know you have seen it, so in the interest of brevity I will just hit 

four very key points on that. 

First, most small businesses are individuals, but most small 

business income is generated by partnerships and corporations. According to Treasury analysis, small businesses make up about 99 

percent of businesses in the United States. Treasury defines a 

small business for this purpose as individuals or entities with business activity that is less than $10 million in total income and deductions. Approximately 69 percent of small businesses, or about 

1–6 million, are individual taxpayers who report business income. 

The remaining 31 percent, or roughly 7.3 million, are partnerships 

or corporations. 

On the other hand, in 2010, individuals generated 23 percent of total income of all small businesses. This equates to about $1.4 trillion into the economy. Small business partnerships, S corps, and C 

corporations accounted for the remaining 77 percent of small business income, and that represented $4.5 trillion in income. 

My second point. Tax compliance burdens vary across small businesses. The variance is driven by factors such as business asset 

size, by type—for example, is it a sole proprietor or a C corporation—number of employees and industry type. Our report details 

how certain tax compliance-related activities create burden. The report groups these into general categories, such as income tax activities, employee-related tax activities, and third-party information 

reporting. 

As the chairman mentioned, SBA and IRS data has shown that 

there are very real costs both in terms of time and money with 

small businesses in order to be able to comply with the various requirements. 

My third point this morning is that IRS does consider small business compliance burden in its decision making, but improvements 

are clearly needed. We interviewed small business representatives, 

including those from the AICPA, who said that IRS’s outreach efforts have been effective in identifying opportunity to reduce compliance burden. As one example, IRS worked with stakeholders to 

develop a simplified method for small businesses to calculate the 

home office deduction. That change was introduced in January 

2013. Previously, businesses had to complete a complex property 

depreciation calculation. As I am sure you have heard from your 

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constituents over many years, that had been a very real pain point 

for small businesses. 

Nevertheless, and despite that real and important progress, 

stakeholders also pointed to a number of areas where IRS burden 

could be further reduced. These are areas of IRS customer service. 

Among others, those open recommendations that the chairman 

mentioned. We have recommendations in these areas that we believe need aggressive action from IRS and, that if effectively implemented, could improve service and help reduce the tax gap. 

Fourth and finally, IRS’s evaluation of its payment card pilot has 

strengths but needs to be more fully developed. This is obviously 

a point that Ms. Vela ́zquez was making in her statement. IRS 

began this pilot program in 2012, and what it does is it compares 

payment data from payment settlement entities, such as credit 

card companies, with income reported by small businesses. The 

evaluation plan that IRS has for the pilot has many elements of 

a well-designed evaluation, which is a bit of an anomaly for IRS. 

They typically do not do that good of a job with their evaluations. 

I mean that as a positive statement I should say. 

As a result, IRS has been able to make rapid and ongoing assessments of pilot activities and to make changes based on lessons 

learned. However, the overall evaluation lacks key performance 

measures for the pilot’s goals—so we do not know whether or not 

it should be implemented more broadly, clear evaluation criteria, 

and other elements. 

With that, let me end at that point and obviously take any questions that the Committee may have. 

Thank you, Mr. Chairman. 

Chairman CHABOT. Thank you very much. We appreciate that. 

Mr. Williamson, you are recognized for five minutes. 

STATEMENTS OF DONALD WILLIAMSON, PROFESSOR, AMERICAN UNIVERSITY, EXECUTIVE DIRECTOR, KOGOD TAX CENTER; TROY LEWIS, VICE PRESIDENT, HERITAGE BANK; LES 

VITALE, PARTNER, LOCAL MARKETS GROUP MCGLADREY, 

LLP; STEPHEN F. MANKOWSKI, PARTNER, EP CAINE & ASSOCIATES, LLC 

STATEMENT OF DONALD WILLIAMSON 

Mr. WILLIAMSON. Chairman Chabot, Ranking Member 

Vela ́zquez, and members of the Committee, thank you for the opportunity to offer my suggestions for reducing the tax compliance 

burden on small businesses when preparing their tax returns. 

My name is Don Williamson, and I am a professor of Taxation 

at American University’s Kogod School of Business, where for the 

past 30 years I have directed the school’s Master’s in Taxation degree program. The MST program at American offers graduate 

courses in federal taxation to CPAs, experienced accountants, attorneys, and others who wish to expand their knowledge of our nation’s tax law. As part of my responsibilities at American, I am also 

the executive director at the Kogod Tax Policy Center, which conducts nonpartisan research on tax issues affecting small businesses 

and emerging entrepreneurs that will enhance compliance while reducing compliance costs. And, for the past 25 years, I have had my 

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own tax preparation and tax planning practice for small businesses 

in Falls Church, Virginia. 

My written testimony describes some of the tax compliance burdens imposed on small businesses that consume time and resources 

that cannot be employed in their businesses to create more jobs. 

Specifically, today, in my testimony, I want to recommend to the 

Committee that our tax code be amended to permit more small 

businesses to adopt the cash method of accounting on their tax returns. Generally, a taxpayer using the cash method of accounting 

recognizes income or deductions when cash is received or paid. An 

accrual basis taxpayer, on the other hand, must recognize income 

or expenses when all events fixing the right or obligation have occurred, regardless of when cash is paid or received. 

As detailed in my written testimony, I believe that more small 

businesses should be allowed to adopt the cash method of accounting, rather than the current law requirement imposing the accrual 

method that is uniformly considered more complex and offers few 

advantages to small businesses whose chief concern with regard to 

their financial condition is their cash flow. It is important to note 

that the method of accounting adopted by a business, whether the 

cash method or the accrual method only affects the timing of when 

a business reports income or deductions on its tax return. The accounting method a business uses does not determine whether an 

item of income is taxable or expense is deductible, and does not affect the total income and deductions a business will recognize over 

its lifetime. 

However, despite the greater simplicity and better fit of the cash 

method for small businesses, the entire revenue code continues to 

deny the cash methods to corporations with average gross receipts 

exceeding $5 million. As discussed in the Senate’s Bipartisan Tax 

Working Group Report on business income tax issued this month, 

I urge Congress to increase the current threshold for use of the 

cash method to $10 million. Raising the threshold to $10 million 

will mean that 99 percent of all businesses in the United States 

could adopt the cash method. 

But even when the cash method is available to a small business, 

certain judicial doctrines, such as constructive receipt for the recognition of income, impose unnecessary complication on a small 

business simply to accelerate the reporting of income by, in most 

cases, a few months before actual cash is received. Also, the requirement that a cash method small business may not deduct its 

cash outlay to purchase or produce inventory until that product is 

sold may satisfy accounting theorists but offers no immediate tax 

benefit to small businesses that expend considerable sums creating 

jobs. 

To further reduce the compliance burden on small business 

therefore, I urge Congress to go beyond the proposals discussed in 

the Senate’s Bipartisan Tax Working Group Report, and enact a 

simplified cash method of accounting described in detail in my 

written testimony. Under this method of accounting, a small business would simply look to its checkbook to determine its taxable income. It sounds simple and it is. Permitting small businesses to 

elect a simplified cash method of accounting will reduce tax compliSBREP-219 with DISTILLER

8 

ance costs, ease the burden of tax administration, and clarify the 

measurement of taxable income. 

Thank you again for the opportunity to testify, and I would welcome any questions from the Committee. 

Chairman CHABOT. Thank you very much. 

Mr. Lewis, you are recognized for five minutes. 

STATEMENT OF TROY LEWIS 

Mr. LEWIS. Chairman Chabot, Ranking Member Vela ́zquez, and 

members of the Committee, thank you for the opportunity to testify 

today. 

My name is Troy Lewis. I am the vice president and chief enterprise management risk management officer at Heritage Bank in St. 

George, Utah. I am also a tax practitioner, adjunct faculty member 

at BYU, and chair of the Tax Executive Committee of the American 

Institute of CPAs. I am pleased to testify today on behalf of the 

AICPA. 

We applaud the leadership taken by the Committee to consider 

ways to reduce the complexity faced by small businesses when preparing their taxes. Small businesses are the foundation of the U.S. 

economy, employing over half of the private sector workforce and 

creating nearly two-thirds of this nation’s new jobs. 

Unfortunately, compliance with federal tax laws can act as a 

roadblock. Unlike large corporations, time spent by small businesses in complying with tax laws is much more costly because 

they do not have the luxury of a large customer base with which 

to spread those costs. 

We need to keep in mind that time devoted to tax law compliance 

has an impact on business creation, job growth, and economic prosperity. First, it is imperative that small businesses and their tax 

return preparers have the ability to communicate with the IRS 

when preparing their taxes and addressing compliance issues. 

However, there has been increasingly limited access to the agency. 

Through an informal survey we conducted earlier this year, we 

learned that over half of our members were either somewhat dissatisfied or very dissatisfied with the services they received from 

the IRS. This is no surprise considering that only 17 percent of our 

members said that the agency answered their telephone calls within a half hour. Most of our members were on hold for extended periods of time or did not have the time to wait that long. 

Let me share with you one member’s experience. ‘‘I was on hold 

for over an hour and a half. When the IRS agent finally picked up 

the call, they needed to transfer to another agent. I had to wait on 

hold for another hour. Finally, I received a recorded message that 

the office was now closed and I needed to call again the following 

day.’’ 

Unfortunately, this is not a unique experience. Many taxpayers 

also experience the IRS’s so-called courtesy disconnects where the 

IRS disconnects a call without taking a message if the caller has 

been on hold for two hours. Nothing is more discouraging, frustrating, or inefficient for a caller than being hung up on after waiting for nearly two hours. 

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We understand the IRS has new initiatives and obligations, but 

taxpayer services must remain a high priority in order for small 

businesses to receive the assistance they so desperately need. 

Another challenging tax compliance obligation that small businesses recently dealt with was the tangible property regulations. 

These rules, which address how businesses should report the purchase and improving a property are almost 500 pages of technical 

guidance and procedures. Now, to be fair, the regulations clarify 

some rules. However, they were still significantly burdensome for 

small businesses. The AICPA pushed hard for relief and stressed 

that time was of the essence. The IRS finally issued partial relief 

on February 13th, well into the filing season. Unfortunately, some 

small businesses and their tax practitioners had already spent time 

and resources attempting to comply with the regulations. If the 

IRS had acted sooner, small businesses could have been spared 

some administrative burden. 

There are other issues that remain open in regards to the repair 

regulations. Currently deducted amounts in excess of the Safe Harbor threshold, taxpayers must prove that expensing such amounts 

in the current year clearly reflects income. 

However, the clear reflection of income test can be challenging 

for any taxpayer, but especially for small businesses. These rules 

force taxpayers to depreciate the cost of items, such as a computer 

or a printer, over a number of years. To provide meaningful relief, 

Congress should increase the $500 Safe Harbor threshold to $2,500 

and index the amount annually for inflation. To further reduce burden, we also suggest that you allow taxpayers with reviewed financial statements to use the higher $5,000 threshold. 

Finally, we encourage you to examine all aspects of the code to 

reduce the complexity faced by small businesses when preparing 

their taxes. For example, penalty provisions need to consider their 

effect on voluntary compliance, and employers operating across 

state lines need a uniform, national standard for nonresident income tax withholding rules. The income tax deadline should also 

promote an efficient flow of taxpayer information to provide small 

businesses sufficient time to file accurate returns. 

In summary, small businesses and tax practitioners are interested in, and so desperately need, tax reform to reduce the burden 

that hinders growth. 

Again, with that, Mr. Chairman, thank you for the opportunity 

to testify, and I would be happy to answer any questions. 

Chairman CHABOT. Thank you very much. 

Mr. Vitale, you are recognized for five minutes. 

STATEMENT OF LES VITALE 

Mr. VITALE. Thank you. Thank you, Mr. Chairman, Ranking 

Member Ms. Vela ́zquez, and members of the Committee. 

My name is Les Vitale. I am a partner at McGladrey, a national 

firm. I work out of the Boston office, which is comprised of about 

650 professionals. McGladrey is a firm that has 8,000 professionals 

that practice in 80 cities across the country. In addition to that, the 

group I practice in specifically is a small practice group called the 

Local Market Group. The Local Market Group is made up of about 

50 professionals, including five partners. My client base in parSBREP-219 with DISTILLER

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ticular represents about 40 small businesses with sales ranging 

from under five million to up to 100 million in revenue with employees from 10 to just about 200. All of my clients are privately 

owned and many are family owned. The majority of my client companies are S corporations. 

In preparation for today’s testimony, I determined that it was 

best that I poll the practice group so that it was representational 

of the members of my firm. In trying to come up with some common themes, we did so, and we came up with three challenges that 

I would like to present to the Committee today. And those subjects 

include the TARS legislation relative to depreciation, privacy and 

security, and also S corporation basis. 

So the rules with regards to TARS legislation in a word are onerous. The depreciation rules were originally set out to spread the 

timing of a deduction so there really is no question about the fact 

that something is deductible. So it is a question of not if, but when. 

So one of the items that was pointed out by my colleague, Mr. 

Lewis, was that there are differences between small and large companies and what they are allowed to do under these regulations, 

which has created a burden for the small client. Many of my companies do not have what is referred to as an applicable financial 

statement. Large companies, in particular large public companies, 

so very large companies that have audits due, the rules therefore 

are different. They are allowed larger thresholds up to $5,000. The 

small clients in our practice unit, the small S corporations, the 

family-owned businesses, have a $500 de minimis exception 

amount only if they elect it. 

When polled, the members of my practice unit said that one of 

the things they have spent the most time on this year is the administrative and compliance requirements related to the TARS legislation. That legislation and those rules required and are requiring 

the filing of a Form 3115. 3115 could take on average from 10 to 

15 hours of time. Larger corporations, even longer. 

One of the suggestions and one of the recommendations that we 

would make in our firm, and we have talked about this internally, 

is the simplification of the election requirements in electing safe 

harbor for the de minimis rules. One method would be to simply 

modify the current Form 4562, which is the current depreciation 

form. It could simply be redesigned to include the questions that 

are asked of the 3115, and really reduce down the time requirements to prepare that form. 

We would also suggest that the safe harbor amounts be revisited 

and consider raising those levels to $5,000. One of the things that 

the laws do not take into account is the degree of differences between companies. Service companies versus innovation companies 

are very different. Their needs and their investment in capital and 

there is really nothing in the code and the current constitution of 

the forms that allows for that flexibility. 

In addition to that I wanted to cover briefly the privacy issues. 

In our firm, we have had over 20 breaches in the last four or five 

months. I have two going on right now. Those have required a significant amount of time, and I know I am not here to suggest that 

I have the answers to security and privacy breach, but the time 

that is spent on the phone, as also pointed out by my colleague, has 

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been significant, and I personally have spent probably 15 to 20 

hours trying to resolve two cases. 

The last item that I wanted to cover was S corporation basis. I 

have a client case right now that is under audit. The client has 

closed the business. They have been in business for about five 

years. They lost money each year, and the auditor has spent three 

days on the audit right now at great expense to the client, and it 

is all about the amount of basis that the client had. The basis rules 

and my dialogue are contained in my testimony feeder review. 

Thank you very much for your time to present these. 

Chairman CHABOT. Thank you very much. 

Mr. Mankowski, you are recognized for five minutes. 

STATEMENT OF STEPHEN F. MANKOWSKI 

Mr. MANKOWSKI. Chairman Chabot, Ranking Member 

Vela ́zquez, and members of the Committee, thank you for inviting 

me to testify today. 

My name is Stephen Mankowski, and I am a CPA. I am the executive vice president and tax policy chair of the National Conference 

of CPA Practitioners. 

Tax compliance burden has been defined in the GAO Report on 

Small Businesses as the time and money spent by the taxpayer to 

meet tax obligations, not the associated liabilities. An objective of 

the administration and the IRS has been to minimize taxpayer burdens and eliminate unnecessary ones. 

There has been a decided change in how business is transacted. 

Credit cards have become the norm. Business owners have had to 

accept the payment processing, compliance, and equipment rental 

costs as cost of doing business. Online sales have caused the IRS 

to question the voluntary compliance of reporting all revenue. 

As a result of a 2008 law, payment card processors had to begin 

reporting credit card receipts of the IRS and the merchant in 2011 

and added the number of monthly transactions for 2012. Once a 

merchant annually has 200 transactions and sales of at least 

$20,000, they will receive Form 1099-K, Merchant Card and Third 

Party Network Payments. Initially, 1099-K results were to be 

placed directly on the specific lines on tax returns. This changed 

as many issues arose. Specifically, there was confusion on how 

sales tax gratuities and merchandise returns were handled on 

1099-K. Those same concerns still exist and are just some of the 

reasons that the IRS has not taken a stronger stance on the use 

of the information on these forms. 

Business owners track revenue by specific categories, such as 

sales, consulting, or rental income. They do not track revenue 

based on how they are paid. Trying to accurately track revenue to 

match the 1099-K would actually result in an accounting nightmare. To further complicate the recordkeeping, businesses receive 

a 1099-K for each specific payment processor—one for MasterCard/ 

Visa, one for American Express, one for PayPal, and another for 

Discover. And even a second round if they change processing firms 

during the year. 

From the IRS viewpoint, this form has helped increase voluntary 

compliance among small businesses. Many virtual businesses that 

had previously flown under the radar are now filing income tax reSBREP-219 with DISTILLER

12 

turns and paying taxes. In addition, the 1099-K has allowed the 

IRS to establish a database whereby they can obtain a better understanding of the revenue sources within particular industries. 

The IRS instituted a pilot program for the 2015 filing season 

called the Payment Mixed Comparison tool that utilizes database. 

NCCPAP was invited to participate in this program, which allows 

our members to enter selected data from the client’s 1099-K. The 

tool accesses the IRS database by a specific merchant category code 

(MCC) and compares various ratios for a business. The result tells 

the CPA if the results are within the specifications of the database. 

A common flaw with the 1099-K is that if the payment processor 

enters an incorrect MCC code for a business, the results could be 

beyond the standard deviation, which may result in an IRS notice. 

The results from the tool have been strictly for the benefit of the 

taxpayer and for informational purposes only. 

Currently, the IRS is not capturing data from this tool. The database will continue to improve as the volume of 1099-K data is input 

into the tool. Unfortunately, the tool did not get the expected usage 

due to practitioner concerns. Specifically, many practitioners did 

not believe that the IRS was not tracking results, the name of the 

tool was not the best, and the tool did not go live until February 

2015, after most CPAs had already completed their training and 

had begun preparing tax returns. In addition, many felt there 

should be a better results besides typical or unusual. Hopefully, 

this program will continue and improve next year and we will see 

more uses by tax professionals. If used properly, this tool could actually reduce taxpayer burden by addressing issues of credit card 

revenue while the data is still fresh in the business owner’s mind. 

The form 1099-K program also has the potential to be a disaster. 

This is a repeat of warnings from NCCPAP and others in the practitioner community when the form 1099-K matching program was 

first proposed. The IRS should use all tools possible to ensure tax 

compliance and close the tax gap. However, as the GAO has correctly indicated, this is a flawed system with no reliability of 

matching gross income with the 1099-K reports. 

I would like to thank Chairman Chabot, Ranking Member 

Vela ́zquez, and all members of the Committee for the opportunity 

to present this testimony today. I will be happy to answer any 

questions. Thank you. 

Chairman CHABOT. Thank you very much. I think it was excellent testimony by all the witnesses here this morning, so we thank 

you for that. And we will go ahead and open up the questions, and 

I will yield myself five minutes to begin. 

I will start with you, Mr. Mihm, if I can. In your report, you 

identified around 25 past GAO recommendations that if implemented could help reduce compliance burden on small businesses. 

How seriously do you feel that the IRS has taken the GAO’s recommendations thus far? 

Mr. MIHM. I think on the whole, Mr. Chairman, the IRS does 

take our recommendations seriously. I mean, they have wide ranging and very difficult responsibilities. We are always making recommendations. 

Chairman CHABOT. Have they implemented any of them? 

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Mr. MIHM. They implement quite a few. The ones that we are 

talking about today are ones that we believe they have not yet implemented, and there are still plenty of opportunities on that. 

Just as an example, the telephone answering over the last year. 

2014, if you called 67 percent of the time you could get through. 

2015, you were getting through 59 percent of the time. I am sorry, 

39 percent of the time. These are the courtesy disconnects. What 

an Orwellian term that Mr. Lewis has mentioned. The wait 

times—— 

Chairman CHABOT. The courtesy disconnect as it was referred 

to, if you have been waiting on there for two hours, their courtesy 

is to basically hang up on you? 

Mr. MIHM. They hang up on you. Yeah. 

Now, very often though you beat them to the punch because the 

hang-up rate in 2014, the individual saying I cannot take this anymore was 29 percent of the calls. It was 57 percent this year. And 

that is also explained by the wait time. The wait time in 2014 was 

about 17 minutes and about 28 minutes this time. And these are 

averages. 

What we have urged IRS to do is a couple of things. One is that 

they need to benchmark their telephone assistance service. They 

are not the only organization in the United States that has a call 

center, and so there are plenty of other places that they can benchmark against. 

Second is that they need to then also be thinking of an integrated strategy that considers how they can provide service and information to taxpayers using both the phone and then also using 

and augmenting the IRS website and having more of an Internetbased strategy for getting information out there. 

And then finally, they need to engage the Congress. As their resources have been going down in recent years, they need to make 

sure that they take a strategic approach, sit down with the Congress and say these are the tradeoffs that are being made. If there 

are different tradeoffs that we should be making, please give us 

guidance on that. But those are all open recommendations. 

Chairman CHABOT. Thank you very much. 

Mr. MIHM. Yes, sir. 

Chairman CHABOT. Mr. Williamson, I will turn to you next. 

Now, you are a professor and you also have a tax preparation 

service yourself. What is the biggest one or two complaints that you 

hear from the small businesses that you do their taxes for? 

Mr. WILLIAMSON. Well, they do not understand the law. And 

when taxpayers do not understand the law, they come to disrespect 

the law. And we all know what happens next, and that is fraud, 

that is cheating. So what we need is simpler rules that I, as a tax 

return preparer, can explain to my clients and they can accept me 

to prepare the return and pay their fee to pay their tax. I think 

all of us here today have said taxpayers want to pay their tax. I 

hail from Utica, New York. I know the people in Utica, New York, 

want to pay their tax. But the problem is they do not understand 

the law. 

Chairman CHABOT. And you indicated that you feel strongly 

that going to a simplified cash method of accounting—— 

Mr. WILLIAMSON. Absolutely, sir. 

SBREP-219 with DISTILLER

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Chairman CHABOT.—would be one of those critical things we 

could do to make it more understandable? 

Mr. WILLIAMSON. The clients I represent, and I represent the smallest of the small probably at this table, where $300,000 or 

$400,000 a year of sales on a Schedule C is a living for your family. 

Those folks do not need to do depreciation schedules and be on the 

accrual method and do cost of goods sold. They know what they 

need. They need cash in the bank, and they are willing to take 

some of that cash and pay their tax with it. 

Chairman CHABOT. Thank you. 

Mr. Lewis, you said something which I agree with very much, 

and if you want to expand upon it briefly, you said that the time 

spent by your average small business person in compliance with 

the tax code is time that they are not spending on what their basic 

business is and having a successful business so they can perhaps 

expand and create more jobs for more people. Is that accurate, and 

did you want to comment on that? 

Mr. LEWIS. Yes, it is accurate. And I think one thing to keep 

in mind is any one particular provision when it starts out has a 

reason. These tax code laws that we are talking about, at one point 

there was either a motivation or something. But when added upon 

the ones from last year and adding upon the ones from last year 

and the last year and the last year, you find that you have got 

these layers. And what we have done is we are not taking everything away. So every single year you find yourself getting more and 

more. So even if you say this particular provision is not that burdensome, you have to take it in context of what about the last 20 

years and all of that added together. It is simple. They have so 

much time in a day. If you are taking their time by making them 

comply with regulations, you are taking time away from what they 

do. 

Chairman CHABOT. Thank you. 

I will be real brief in my last question, Mr. Vitale. 

Do you think it has reached the point where it is almost impossible for a small company nowadays to do their own taxes? 

Mr. VITALE. Yes. We have some very small clients similar to the 

professor, and even the smallest of small clients, they have access 

to TurboTax and a lot of tax programs that supposedly could make 

their life easier, but we get calls all the time from small, small 

companies that still need help with that. 

Chairman CHABOT. Thank you. 

Mr. Mankowski, I apologize. I ran out of time, but I am sure you 

will get more questions. 

So I now yield to the ranking member for questions. 

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman. 

Mr. Mihm, the payment card pilot essentially compares 1099 

forms from payment processors with tax returns to identify underreporting and inconsistencies. If the information on the forms does 

not match, the IRS sends out notices. What is the benefit of a notice if it leads honest companies to have to put in additional work 

to reconcile forms that may be mismatched for unrelated reasons 

such as self-tax, tips, so forth? 

Mr. MIHM. Yes, ma’am. There are actually two benefits. One is 

before the notice goes out, you would hope that the knowledge that 

SBREP-219 with DISTILLER

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IRS is receiving this payment card information and that this 

matching is taking place will be an incentive to get them to do 

that. IRS has seen some very early data that they believe is showing that that is the case. Again, this is a minority of taxpayers we 

are talking about. 

For the other taxpayers, it is, as clearly you are implying in the 

question, it is not much of an advantage for them if they have to, 

in a sense, go back and correct an IRS record on this. This gets to 

why we think it is so important for IRS to have a good evaluation 

strategy. The potential for this pilot, like a lot of third-party information reporting, is that it can really reduce burden, can help improve compliance, so it could be a big deal. And I realize that all 

three of those were conditionals that I used—could, could, could. 

But they have to make sure that they implement it the right way. 

They have to make sure that they reach out to the stakeholders 

and engage them in the design of the program, and they need to 

make sure that they are actually measuring the performance so 

that they know if they are actually getting more benefit for this 

program or are we sending out bogus notices to people that is actually causing more headaches for honest taxpayers. 

Ms. VELA ́ ZQUEZ. An important element, of course, is the type 

of outreach that the IRS will do. 

Mr. MIHM. Absolutely, ma’am. 

Ms. VELA ́ ZQUEZ. So when you look at tax compliance and the 

effect it could have on small businesses, did you also look at the 

fact that since 2010, the IRS lost 18 percent of its budget? Does 

that have anything to do—— 

Mr. MIHM. Yes, ma’am. And that was the reference I was making to the question of the chairman, is that the IRS needs to engage with the Congress, given how much their budget has gone 

down. Now, this has all been with added responsibilities. You 

know, both in the growth of the number of taxpayers, Affordable 

Care Act implementation responsibilities, other changes to the tax 

laws. They are in a very difficult position as an agency, and I realize there is not a lot of appetite to be looking to plus up the IRS 

budget. 

Ms. VELA ́ ZQUEZ. Right. 

Mr. MIHM. Which means why do we have to engage in that? 

Ms. VELA ́ ZQUEZ. But we need to understand that by cutting 

the budget so that it punishes the agency, in reality, it punishes 

small businesses because they will not get the type of services 

needed, such as when you place a call and expect for someone to 

be able to answer that call. 

Mr. Mankowski, you describe how accepting credit cards and 

their related fees is becoming the norm and just another cost of 

doing business. However, as you stated, the complexity of accepting 

different cards with different rules about deposits and deductions 

adds to taxpayers’ burden, how does the rising popularity of electronic payments impact your firm’s typical small business client? 

Mr. MANKOWSKI. Thank you. It has been a major impact on 

the clients. They are finding that in the past where they have just 

been able to just accept cash and checks, that more and more of 

the population, for whatever reason, has an aversion to carrying 

cash, and they are paying with credit cards even if it is for a two 

SBREP-219 with DISTILLER

16 

dollar soda at the convenience store or wherever else they are 

transacting business. So it is something that they have really been 

having to assume the burden of. And with that, they have added 

fees, not just with the processing fees that are going to vary based 

on the type of credit card that is being used, whether it is a points 

card or so forth that tend to have higher rates, in addition to the 

different rates that MasterCard/Visa, versus American Express or 

Discover. But now they are also finding that in addition, because 

of credit card fraud that has also been going on, that now they also 

have added compliance burdens that they are required to go 

through, whether it is some sort of training and annual webinars 

or seminars that they need to undergo to be aware of compliance 

and whether there are different rates and different services that 

they are required to do if the card is present or if the card is not 

present, to make sure that they are not participating in the fraud 

that they are trying to prevent. 

Chairman CHABOT. Thank you. 

The gentlelady’s time has expired. 

The gentleman from Missouri, Mr. Luetkemeyer, who is Vice 

Chairman of this Committee, is recognized for five minutes. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. I am way over 

here on the corner. 

Mr. Williamson, you mentioned in your testimony cash accounting, accrual accounting. You do business with a lot of small businesses, and there is a thought process of lowering the amount 

where you have to start going to accrual accounting. What would 

that do to a lot of the small businesses you deal with? 

Mr. WILLIAMSON. It would make it a lot easier for them to file 

their tax returns. 

Mr. LUETKEMEYER. If you lower it to—— 

Mr. WILLIAMSON. Lower it? No, we are advocating raising the threshold that would permit you to drop the cash method to $10 

million. To lower that, I think you would have serious compliance 

problems. 

It alludes to the point I was making a moment ago about disrespect for the system. And if people do not feel that filing their 

tax return adds any value other than having their money confiscated by the federal government, I do not know if you would get 

very many correct tax returns as a result. 

Mr. LUETKEMEYER. You were talking about noncompliance. I 

was reading the problem with Greece this past month or so here 

that they have 95 percent noncompliance with regards to paying—— 

Mr. WILLIAMSON. Well, I sincerely hope we never—— 

Mr. LUETKEMEYER. I do not know how in the world their economy can exist if they have got 95 percent noncompliance. 

Mr. WILLIAMSON. I think we see it is not. 

Mr. LUETKEMEYER. They have got a one percent problem, do 

they not? 

Mr. WILLIAMSON. Yes, sir. 

Mr. LUETKEMEYER. You also made a comment, and I want to 

follow up on this which is quite interesting, that your clients do not 

understand the law. 

Mr. WILLIAMSON. Yes, sir. 

SBREP-219 with DISTILLER

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Mr. LUETKEMEYER. If you have small business people who do 

not understand tax law, how can they make good plans? How can 

they make good business decisions? How can they make good judgments on how they want to run their business? Are you advising 

them on this? Are you taking an advisory role? Or are they just out 

there like a ship without a rudder? Because if you do not understand the tax implications of the business decisions you make, you 

can really mess up your business pretty quickly. 

Mr. WILLIAMSON. Precisely, Congressman. And too often that 

is the case. People make business decisions without understanding 

the tax consequences of them. And I like my clients to always know 

they can call me and ask a question and will not necessarily get 

a bill off the top, not like the lawyers. But I would hope that they 

would call me. But the problem is the law is so complex. 

Chairman CHABOT. The chair will strike that last remark from 

the record. Just kidding. 

Mr. WILLIAMSON. But you are absolutely right, Congressman. 

Businesses do not understand tax law, and too often make the 

wrong decision. 

Mr. LUETKEMEYER. And the complexity of it just adds to the 

problem. 

Mr. WILLIAMSON. Yes, sir. 

Mr. LUETKEMEYER. So we are adding to that problem every 

year as we go about our business here. 

Mr. Lewis, you are in the banking business. I have got a quick 

question for you here. We have created fewer businesses in the last 

six years than we have lost, so we have actually gone backwards. 

And of course, when you are talking about creating businesses, it 

is small businesses that we are talking about creating. And so have 

you seen in your business world, that the tax code and the complexity of it and the cost of compliance, all of this is a factor that 

has caused fewer businesses to actually be created? 

Mr. LEWIS. Yes, and that is a great question. I think the answer 

in short is yes. Again, it goes back to simple algebra. At some level 

there is only so many hours—— 

Mr. LUETKEMEYER. You better make simple algebra very simple for me. 

Mr. LEWIS. There are only so many hours in a day, and there 

is only so much time and there is only so much revenue coming in. 

And again, look at the banking, look at the financial services, for 

instance. The last decade there has been all this bank regulation 

that has come upon us. Just look at the bank itself. What you find 

is you find all this additional level of compliance that is required, 

and any one particular provision makes sense. There is a reason 

for it. But taken as a whole, it becomes problematic because in the 

end, really, as was mentioned here, a small business owner, what 

really matters to them is what they can put in their pocket at the 

end of the day. It is the cash in their pocket. It is what they can 

do. It is what they can consume. It is to take that money and pay 

for tuition for their child. It is to take a vacation. It is to pay a 

mortgage. That is what really matters. And all the rest of this that 

we are discussing is getting to that bottom line. 

So you asked the question, what kind of an impact does it have? 

First of all, I cannot advise a client right now on the tax law for 

SBREP-219 with DISTILLER

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the current year because we have the extenders that are still out 

there. How can I go to somebody and tell them what is going to 

happen with bonus depreciation? Or 179? They are going out to 

make a decision right now. They want to make a decision but instead they are paralyzed because they do not know. Tell me what 

the law is they will say, and then I will know how to react. You 

can help me, because after that it is an Excel spreadsheet. You can 

run it. But before then, without certainty, without permanency, you 

run into this problematic situation where, yeah, it does impact 

those businesses. 

Mr. LUETKEMEYER. That is interesting. You talk about 179 

depreciation. Last year we did the extender I think two weeks before the end of the year, and I have got a good friend of mine who 

runs a business that he sells a lot of rock crushers and drills and 

things like that for quarries. And he, over the course of the year, 

sold 11 different drills. Sold 11. But he sold six of them in the last 

two weeks of the year. Now, these things cost between $100,000 

and $125,000. And I can tell you the same story with regards to 

farmers buying tractors and farm equipment. They waited until the 

last two weeks of the year in order to make that decision because 

they were looking for this opportunity. 

Mr. LEWIS. It certainly was not because of Christmas; no. 

Chairman CHABOT. The gentleman’s time is expired, but if you 

wanted to comment. 

Mr. LEWIS. I was going to say and the reality is the commentary 

would be if the tax law has a shorter shelf life than say a carton 

of milk, it is probably something we ought to look at. That is going 

to impact them. 

Chairman CHABOT. The gentleman’s time is expired. 

The gentlelady from North Carolina, Ms. Adams, who is the 

ranking member in the Investigations, Oversight, and Regulations 

Subcommittee, is recognized for five minutes. 

Ms. ADAMS. Thank you, Mr. Chairman, Ranking Member 

Vela ́zquez, for hosting this hearing. 

Tax burden on small businesses buried in the complexities of the 

tax system is something that we must tackle head on. The state 

of North Carolina is home to more than 800,000 small businesses, 

which means that there are more than 800,000 small firms in my 

home state that potentially have tax compliance issues, including 

cost burdens associated with tax compliance. 

Mr. Williamson, how should the current tax code be altered to reduce that cost burden for small businesses? 

Mr. WILLIAMSON. Well, in terms of the tax return itself, we 

could make that a lot simpler. All of us have advocated here with 

respect to advancing more cash method of accounting so you do not 

have the need to compute your inventory, cost of goods sold, the depreciation schedules you have to keep. Basically, treat everything 

as 179 as was alluded to earlier, or as bonus depreciation, 100 percent depreciation. And so it is simply to prepare your tax return 

based upon your checkbook and the cash that comes in, the cash 

that goes out, and we net the two and that is your taxable income. 

That makes a very simple tax return. 

Ms. ADAMS. Okay. 

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Estimates by Internal Revenue Service of the size and the composition of the federal tax gap indicate that small businesses organized as a pass-through entity account for a substantial share of 

that gap. Their contributions are thought to be the result of honest 

mistakes born of the complexity of the code and tax evasion tied 

to cash payments for goods and services. How should the federal 

tax code be reformed to reduce noncompliance by small businesses? 

Mr. Williamson? 

Mr. WILLIAMSON. Well, as far as the pass-through entities go, 

and as was already pointed out here in the testimony, most revenue for small businesses is coming through pass-through entities. 

We can, again, through the cash method of accounting, easily determine what the net profit is of the business and allocate it to 

your partners or to your S company shareholders on the K1s. The 

complication that arises is they need to separately account for all 

the items on a partnership return or S company return because 

they might impact an individual partner or individual S company 

shareholder differently. That is a problem in terms of the passthrough entities. 

I would offer, and again, I think a proposal has been made, for 

earlier filing of pass-through entity returns so that the information 

forms through the individual partners or shareholders would be in 

their hands a lot sooner, and that way they would have more time 

to prepare their tax returns and that would increase compliance. 

Ms. ADAMS. Okay. I have one final question. 

Minority firms often have an even harder time getting off the 

ground and then staying afloat than other demographics of small 

businesses, particularly as it relates to lending. 

For Mr. Williamson and Mr. Mihm, have you studied the impact 

that tax compliance has on minority-owned firms, and if so, what 

is the rate of minority-owned firms closing their businesses as a result of the difficulty in the tax compliance compared to whiteowned firms? 

Mr. WILLIAMSON. Congressman Adams, I do not have those 

statistics in front of me. I can be happy to do my best to try to find 

some of that information for you but I have no information on the 

relative closures of minority firms versus nonminority firms at my 

fingertips. I am sorry. 

Ms. ADAMS. Would either of the other gentlemen like to respond? 

Mr. MANKOWSKI. Ma’am, we do not have that information either, but we would be happy to work with Mr. Williamson and others to make sure we answer your needs on that. 

Ms. ADAMS. Okay. 

One challenge to tax compliance for small businesses may be 

that the tax code has no uniform definition of a small business, so 

how should small businesses be defined for tax purposes? 

Mr. WILLIAMSON. What we have done in the Tax Policy Center 

is to define them as $10 million of gross receipts. If you look at provisions of the Internal Revenue Code, Uniform Capitalization 

Rules, some of the other provisions regarding, $10 million seems to 

be a generally accepted threshold. And I think that is what the 

GAO study used as well. 

SBREP-219 with DISTILLER

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Ms. ADAMS. Would either of the other gentlemen like to respond? 

Mr. MANKOWSKI. Yes, ma’am. We have used, taking Treasury’s lead, we use $10 million, although as you point out, there are a variety of different ways that you can do it. Number of employees. 

But we use the $10 million. I should also point out that the way 

IRS is organized implicitly assumes that the $10 million, their 

small business unit has a $10 million threshold to the organizations or entities that it looks at. 

Ms. ADAMS. Thank you. 

Mr. Chair, I yield back. 

Chairman CHABOT. Thank you. The gentlelady yields back. 

The gentleman from New York, Mr. Hanna, who is chair of the 

Subcommittee on Contracting and Workforce is recognized for five 

minutes. 

Mr. HANNA. Thank you, Chairman. 

The tax cap that you spoke of, Mr. Mihm, and everybody alluded 

to in one way or another, I would like to talk to you about the underground economy and the propensity for it to grow over time 

through difficulty in the tax code and what you see on the ground. 

It is a concern to a lot of people. I mean, there are all kinds of incentives not to pay your taxes. One of them is other people are not. 

In the aggregate nature of the 1099s and collecting credit cards, 

that is pretty subjective. It certainly can be. I am curious how it 

is fair. 

And Mr. Williamson, one of the problems with going from five to 

10 on a cash basis, and what the IRS does now is if you buy inventory on a cash basis, then basically, you are mixing your accrual 

system with your cash system. 

So Mr. Mihm, if you could address my question about the underground economy and its growth. If you are prepared to do that a 

little bit, or anybody who would like to. 

Mr. MIHM. Yes, sir. The tax gap as you are mentioning is enormous. I mean, IRS estimates—this is based on 2006 data—but it 

is about $450 billion a year. And this is the difference between legally owed and actually paid in a timely manner. Some of that is 

clearly the underground economy, meaning that it is nonfilers. In 

the technical term, this is people that ought to be filing that just 

are not. 

Mr. HANNA. Do you have any idea? How could anyone have an 

idea what that is? But do you have one? 

Mr. MIHM. Well, they have a national research program so it is 

an enormously complex estimation that they do. The size of the underground economy is probably the weakest aspect of that estimate. A lot of that, also the tax gap source is underreporting of 

people who do actually report but do not report the full amount. 

Mr. HANNA. But so much happens with compliance on the margin. 

Mr. MIHM. Yes, sir. 

Mr. HANNA. Virtually everything, right? 

Mr. MIHM. Right. 

Mr. HANNA. So marginally, difficulty with filing, as Mr. 

Williamson talked about, the cash basis, which is certainly easier, 

what do you think that looks like today? 

SBREP-219 with DISTILLER

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Mr. MIHM. Well, your point, sir, about it being marginal is exactly right, and it gets to what one of the key strategies needs to 

be, which is assuming that most people do want to pay their 

taxes—now, we are not talking about the underground economy in 

this case, but assuming that most people do want to pay their 

taxes, and then making it easier for them to do so, because in 

many cases where there is underreporting, the amount of underreporting makes it hard to justify going after any one individual. 

I mean, you have to in some senses to get a deterrent effect to 

make sure that people always know that they have to, but you do 

not want to spend a million dollars going after $5,000. You cannot 

do that in all cases. 

Mr. HANNA. But is that not part of the problem? 

Mr. MIHM. Yes, sir. 

Mr. HANNA. I mean, because what you are really doing is you 

are sending a message that you are incentivizing smaller taxpayers’ amounts of money because you are only after those people 

where the money is. Right? Willie Sutton. 

Mr. MIHM. Yes, sir. 

Mr. HANNA. But when you look at the aggregate number, you mentioned $450 billion, that would draw you towards an opposite 

conclusion. It might. 

Mr. MIHM. Well, that is why good customer service is so important. That is why third party reporting that makes compliance relatively easy for people is so important. Because obviously, you are 

making exactly the right point here. Trying to chase the money 

after the fact is ultimately not going to be very good. It is not going 

to be good for the businesses because of the mistakes that could be 

made as the ranking member mentioned. It is not going to be good 

for the IRS because of the cost benefit of that. We need to make 

sure that we have in place the right independent third party reporting. We make sure we have the customer service. 

Mr. HANNA. So even though the money is not there, the value 

of going after those people who fall completely under the radar, not 

paying at all, the underground economy, there is value in that? 

Mr. MIHM. Yes, sir. You cannot do that in all cases but we need 

to do enough of it so that as the vice chair was mentioning in his 

questions, is that we do not get basically a sucker tax system 

where the people who are paying their taxes are the criminals. 

Mr. HANNA. Mr. Williamson, how do you reconcile, if you got to 

5 to 10 on a cash basis and get rid of accrual for everybody under 

that, how do you reconcile—and I have got about 38 seconds—the 

inventory? 

Mr. WILLIAMSON. That is the point. That was the point in my 

written testimony, Congressman. We would eliminate cost of goods 

sold and that the purchases or construction of inventory would be 

deducted as those costs are incurred regardless of when the product is actually sold. 

Mr. HANNA. But are you not giving bonus depreciation to everything that used to be called inventory? 

Mr. WILLIAMSON. That is what we were saying. In a world 

that we would be advocating, bonus depreciation would be extended to inventory. 

Mr. HANNA. Thank you. My time is expired. 

SBREP-219 with DISTILLER

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Chairman CHABOT. Okay. Thank you very much. The gentleman yields back. 

The gentlelady from American Samoa, Ms. Radewagen, who is 

the Subcommittee chairman on Health and Technology is recognized for five minutes. 

Ms. RADEWAGEN. Thank you, Mr. Chairman. 

My question is for Mr. Vitale. Is it safe to say that the higher 

cost associated with the tax compliance obligations that tax professionals endure push small business owners to waste their time preparing their own complicated taxes instead of growing their business? 

Mr. VITALE. Great question. There is probably an element of 

truth to that. The fundamental problem is going to remain until 

the code is simplified and clarified. The person who has invested 

in their business and has a lot at stake is, more often than not, 

going to eventually reach out to the professional to try to get the 

right answer and the best answer possible. And that is an expensive proposition. But the cost of them not doing that and going the 

other way at the end of the day could probably be much more costly by their failure to comply. 

Ms. RADEWAGEN. Thank you. 

Thank you, Mr. Chairman. I yield back. 

Chairman CHABOT. The gentlelady yields back. 

I now recognize the gentleman from South Carolina, Mr. Rice, 

who is chairman of the Subcommittee on Economic Growth, Tax, 

and Capital Access for five minutes. 

Mr. RICE. Gentlemen, thank you so much for being here today. 

I heard directed stated or allusions to the fact in all of your testimony that small businesses are the backbone of the economy and 

the backbone of job creation in this country; right? Pretty much everybody agrees with that. 

Beginning in 2009, for the first time since it has been recorded, 

more American businesses are closing than are opening. Do you 

think this outdated and burdensome tax code has anything to do 

with that, Mr. Mihm? 

Mr. MIHM. That is something, sir, that we really have not 

looked at directly, so I will have to defer to my colleagues on the 

panel if I may. 

Mr. RICE. Okay. Well, do you think overburdening government 

regulation, do you think that has anything to do with it? 

Mr. MIHM. Well, there are certainly, as we pointed out in this 

testimony, other findings looking at regulations in general. There 

are costs associated with the implementation of regulations. There 

are costs to small businesses. And we have a table that shows that 

for corporations, if you have less than five employees, it can be between, you know, around $4,500 per employee in order to comply. 

That is a substantive cost that is imposed. 

Mr. RICE. Do you think the complexity of our tax code creates 

a barrier to formation of small business? 

Mr. MIHM. Certainly, the complexity of the tax code creates a 

barrier to any economic activity. It creates a barrier to compliance. 

It creates a barrier to economic growth. 

Mr. RICE. Mr. Williamson, for the first time, beginning in 2009 

and continuing through today for the first time more American 

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businesses are closing than forming. Do you think our complicated 

tax code has anything to do with that? 

Mr. WILLIAMSON. In my personal experience, what it is usually 

about is ‘‘I better get out of business because I cannot pay my payroll taxes for my employees.’’ 

Mr. RICE. Mr. Lewis, do you think—same question to you. Do 

you agree our tax code is a burden to formation of small business 

and to continuing small business? 

Mr. LEWIS. I think the tax code is certainly a contributor. One 

of the things that I think is missing in most of our regulation, 

which is in essence what tax law is, is we failed to adequately address the cost benefit. I know I hear it. I see it. People talk about 

it. But are we really looking at cost benefit from the small business 

lens? That is the question. Right? I mean, you will hear people, 

they will espouse from the floor this is a good thing and it weighs, 

outweighs, but I think the real issue is from a small business lens. 

One of the things we have is a fundamental—— 

Mr. RICE. Mr. Lewis, it is not that I do not want to hear; I do 

want to hear, but I only have five minutes left to keep going. 

Mr. LEWIS. All right. 

Mr. RICE. Mr. Vitale, I am going to shift questions on you. 

Since 2010, notably the date that Dodd-Frank was enacted, bank 

formations have slipped from an average of 100 per year to three 

per year. Do you think that will have any effect on small business 

given that new banks are typically small banks and they are typically the ones who lend to small business? 

Mr. VITALE. I believe the answer is yes based upon—I will af- firm in our client base, we are a $1.6 billion revenue firm. Sixty, 

70 percent of our business is labeled as small to midmarket, and 

with the reduction in the number of banks that we have seen— 

community banks, local banks, we have seen many of our clients 

go to alternative markets for their financing. That financing is 

often much more expensive. 

Mr. RICE. But the really small businesses, those alternative 

markets are not really available to them, are they? 

Mr. VITALE. The alternative market is usually an angel investor 

or private investor, and that money is even more expensive. 

Mr. RICE. Mr. Mankowski, do you think that the slippage of an 

average of 100 bank formations to three, which these new banks 

are typically the lenders to new banks, do you think that will have 

an effect—to small businesses, excuse me—do you think that will 

have an effect on business formation? 

Mr. MANKOWSKI. I think as far as business formation, not necessarily, because a lot of the businesses, recently they have been 

the byproduct of the overall economy where they have been 

downsized out of their current opportunities, and now they have 

exhausted their unemployment benefits and they have kind of been 

forced into their own businesses. So the bank formation, not so 

much of causing people to not form their businesses, but I think 

it hurts them if they are looking for additional revenue because I 

do agree that the smaller banks and the community banks seem 

to be the ones that really are more in tune to lending to the small 

businesses. 

Chairman CHABOT. The gentleman’s time has expired. 

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The gentleman from Nevada, Mr. Hardy, who is chair of the Subcommittee on Investigations, Oversight, and Regulations, is recognized for five minutes. 

Mr. HARDY. Thank you, Mr. Chairman. 

I just happen to be a small business owner myself, or at least I 

used to be. And Mr. Williamson made the statement, Mr. Lewis, 

just a few minutes ago, the fact that people, businesses want to pay 

their taxes. And I agree. As a small business person, I want to pay 

my taxes. Would you agree the reason we want to pay our taxes 

is because we have to have a good, sound foundation to make sure 

we are profitable in paying taxes in order to receive revenue from 

banks? 

Mr. LEWIS. Yeah. I mean, one way to look at it is that small 

business owner is in a partnership with the federal government. 

There are a lot of services, a lot of economic ability to make money. 

And so there is this agreement. And the tax code is sort of like the 

partnership agreement. It defines how we are each going to behave 

with each other, and I think the majority of Americans that own 

these small businesses are hard-working, they are entrepreneurial, 

and they want to do what is right. It is when you start adding in 

complexity, the lack of certainty, the perception of inequality, I 

think that is where you start getting the fringes where people start 

to take a step back and either through overt or covert actions 

maybe are a little less complaint. But I think the majority want to 

comply. 

Mr. HARDY. I believe there are a number of things that are 

causing small businesses to fail, but in 2012, 64 percent of all employees working were working for small businesses. Today, we have 

the lowest number of small businesses in the last three decades or 

further. Is it because of our tax regulations? Do you think it is a 

combination of a number of things? Anybody care to address that? 

Mr. WILLIAMSON. Well, I will just say that it is very difficult 

for my clients when they decide whether they are going to take the 

next step and hire someone. As we have seen here today, it is very 

expensive. Just the tax compliance costs are very expensive. The 

941s, the W-2s, the payments every two weeks or a month. That 

is very intimidating for a small businessman to take on that first, 

second, or third employee, and then to have the cash flow, of 

course, to be able to pay them their wage. 

So regarding small businesses, that, in my practice, holds them 

back as to whether they are going to hire those first two or three 

people. That is a big, big deal with them, and the tax rules impede 

that. 

Mr. HARDY. Some months ago we had a hearing here and they 

discussed other tax causes to small businesses, and once you grow 

just even your business a little bit, the average, I think it was, 

about $1.2 to $1.5 million per year for people to get their taxes 

done once they reach a certain threshold. Have you seen that, Mr. 

Williamson, on your avenues? That is just to prepare it to get it 

to you folks. 

Mr. WILLIAMSON. That is true. To assemble the books and 

records to put them on my desk so I can do the return is quite a 

procedure for them. And to ask me, or anyone at this table to do 

that kind of work can be very, very expensive, and it is very hard 

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to find people that have the skills to assemble that financial information for them in order to have me even begin the tax return. No 

question about that. 

Mr. HARDY. The 1099 form, Mr. Mankowski, why does the 1099 

requires so much for small businesses, is such a burden? Can you 

go into a little deeper process of what your discussion was there? 

Mr. MANKOWSKI. Yes, there are two aspects. First is that there 

is common belief that there are items that to go onto the credit 

card receipts that are not revenue to the business owner, such as 

sales tax, gratuities, and even if someone has a return of merchandise that they purchased. 

Take a restaurant as an example. If you put your gratuity onto 

your credit card, that will show up on the 1099-K, but that is not 

revenue to the business owner. Another concern from a 1099-K perspective is if you have one of your vendors that pays you with a 

credit card, where normally they would issue you a 1099-MISC depending on the type of service, if you pay with a credit card, you 

no longer have that responsibility to issue that person the 1099- 

MISC if their only payments were credit cards in excess of $600 

total for the year. If you now have payments under the $600 that 

were totaled under with cash or checks, you are relying on the 

credit card processor to issue the 1099-MISC. In essence, it falls on 

the 1099-K, not through the 1099-MISC, a form that the government is not really using for full verification of the income for the 

business owner. 

Mr. HARDY. Okay. Let me ask one last question. 

Mr. Vitale, as far as the IRS, can you elaborate how they can and 

should be providing us better security for small businesses and all 

businesses in their businesses to make sure we are protecting that 

security of those tax returns? 

Mr. VITALE. Sure. One of the things that I highlighted in my 

written testimony was the use of PINs. We have some experts in 

the office that specialize in security, cybersecurity, and I believe 

the way the world is going towards a PIN-based system, the current Social Security Number is very vulnerable, very easy to get at. 

It is very easy to hack, and that is the gateway to a lot of theft. 

And I believe the transition has to happen sooner rather than 

later. 

Chairman CHABOT. The gentleman’s time has expired. 

We are going to move into a second round, and we are going to 

start off with Ranking Member, Ms. Vela ́zquez, for five minutes. 

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman. 

Mr. Williamson, we know that there has been a movement away 

from businesses organizing as C corporations in favor of passthrough entities. Today, corporate tax revenue makes up less than 

10 percent of our federal revenue. What is it about pass-through 

entities that make them such an attractive business structure, and 

what is the effect on small firms when our tax policy hinders their 

use? 

Mr. WILLIAMSON. Well, that is an excellent question, and obviously, the answer is, of course, C corporations are subject to two 

levels of tax, once at the C corporation and then a second tax when 

any sums are distributed to the shareholders. That is why you 

have a continuing decline in C corporations, particularly when you 

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have S corporations available that are corporations for all purposes 

other than the IRS revenue code. And also, now you have the LLC, 

the limited liability company, that provides the same limitation on 

personal liability of the owners of the business. So that is why you 

see C corporation numbers go down and pass through numbers go 

up. 

Ms. VELA ́ ZQUEZ. Thank you. 

Can you elaborate on whether individual tax rates influence 

business decisions? 

Mr. WILLIAMSON. Well, that goes in, again, and my written 

testimony referred to that, is that if we are going to reduce the corporate tax rate in this country, some consideration must be given 

to small businesses; that the LLC, the S corporation, indeed the 

sole proprietor, will be paying effectively higher rates than C corporations. And C corporations do not have to pay dividends. And 

the owner of a C corporation can sell the stock rather than take 

distributions. So some consideration must be given to the sole proprietorship and partnership and LLC industry. 

Ms. VELA ́ ZQUEZ. Thank you. 

Mr. Mankowski, you mentioned the PMCT pilot program had 

some drawbacks, including an overly simplistic, typical, or initial 

response when comparing a client’s data to the database. What recommended changes would you make to better implement the program this coming tax season? 

Mr. MANKOWSKI. Thank you. As far as the implementation, if 

the IRS really wants to maintain the anonymity for the users, they 

really can have some of the specific results that many of us practitioners would be looking for to know where their ranking is inside 

of the usual or the unusual. So it is almost a catch-22. How much 

information do you really want to get to see where you are at in 

the specific categories? I think having the ability to have it rolled 

out earlier this year as year two to the practitioner community, at 

least for those who have been in the pilot program already, will 

just add on to the number of users that are going to be familiar 

with the tool that now when they are doing their preseason training, it will be more at the forefront that this tool exists, even to 

the extent to go back and look at the 2014 tax data and see where 

the results came in, meet with their business owners and say, 

‘‘Here is where some of the results were coming out.’’ Use it as a 

preseason tool and potentially have the ability to advise our clients 

and work with them so that they can avoid that love letter from 

the IRS that they get usually about a year, year and a half after 

the fact, that at least if it is addressed and have some general information and answers when they get a letter from the IRS if their 

results were out of spec, you can pull the results out of your file 

and say, ‘‘Mr. Business Owner, remember we talked about this last 

year? Here is some of the information. We have done the leg work.’’ 

And then they are better able to answer the notices at that point. 

Ms. VELA ́ ZQUEZ. Thank you. 

Thank you, Mr. Chairman. I yield. 

Chairman CHABOT. Thank you. The gentlelady yields back. 

In my five minutes, I would like to do something a little bit different. We have had some great answers to some, I think, very 

good questions as well. But rather than ask specific questions, I 

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would just like to, you know, we are making a record here. If there 

is just one point that you would like to leave with the Committee, 

something you would like us to implement, or act upon, or consider, 

you know, I would be happy to hear. And since I did not get to you, 

Mr. Mankowski, maybe I will begin with you and we will just go 

down the line. But you have got about a minute each. You do not 

have to take it all up but I would ask you not to probably go any 

further than that. 

You are recognized. 

Mr. MANKOWSKI. Thank you. 

As far as one parting comment, I think that the IRS has almost 

been in a catch-22 recently. They have been asked to do more and 

more between implement the Affordable Care Act last year along 

with repair regulations, and for the current year, also implement 

the Employer Shared Responsibility portions. They are doing this 

with, I believe, one of the congressmen had mentioned that their 

budget has been down 17 or 18 percent over the last few years, and 

that is an annual decrease that they have been getting. So they 

have been getting—having to do more and more with less resources. And even now they are looking at saying, ‘‘Well, how come 

you have not done more with the 1099-K.’’ You reach a point where 

they are in a hiring freeze, they cannot bring on staff, and as not 

bringing on staff, they are also having the attrition from the higher 

level people. The people who are not coming on now are the ones 

that may be a little bit more tech savvy that can really take the 

service to the next level to make it a better service for all the practitioner and taxpayer community. 

Chairman CHABOT. Thank you. 

And maybe I will just—one quick thing in response. If perhaps 

they should not use at least some of the resources for targeting 

groups who have a certain political persuasion and wasting resources on that, and then having to have their people come and testify and defend themselves and records are lost and all the rest, 

too. But I hear what you are saying and tend to agree with it. 

Mr. Vitale? 

Mr. VITALE. Sure. I think to that point, the one observation I 

have and the recommendation would be to have the service reevaluate how it deploys its resources, where it spends its time. 

With my clients with businesses, those that are very successful 

have good strategic plans. They have a plan. They invest the right 

time and money into the areas that yield the best benefit. 

As a case in point, in my written testimony I spoke at the end 

of a client that I have under audit. The client has lost money, restaurant business, five years, very difficult, two partners put all 

their own money in, lost it, borrowed money, paying that off, lost 

it. And the auditor has spent three days auditing a company where 

even if she makes a change, it is not going to make a difference. 

So I think those three days, 24 business hours, could be spent by 

people at the service doing better things than that. 

Chairman CHABOT. Thank you. 

I have only got two minutes left. Mr. Lewis? 

Mr. LEWIS. I will be quick. 

Chairman CHABOT. You have got 45 seconds. 

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Mr. LEWIS. Two things. Number one, what can Congress do? 

Congress can support small businesses by reforming the tax code. 

It needs to be simple, it needs to be fair, and it needs to be equitable. You give that to small business owners and they will respond. They want it, they need it, you can give that to them. That 

would be wonderful. 

Second thing, IRS services. There is no substitute, there is no additional reference point or no additional source that we can go to 

to serve those clients and to serve those taxpayers. 

Chairman CHABOT. And the third one real quickly? 

Mr. LEWIS. That is the second one. That is the two. Just IRS 

services, focus on those. 

Chairman CHABOT. Very good. Thank you. 

Mr. Williamson? 

Mr. WILLIAMSON. Yes. Strategically, you can have carve outs 

for small businesses. You are considering international tax reform 

as we speak. You can have carve outs for small businesses of under 

$10 million so they do not have the same level of compliance. They 

will not go overseas. Take a look at the forms. Take a look at the 

requirements. Tactically, and I think it has been mentioned here, 

the $2,500 increase to the allowance to simply deduct anything and 

not have to depreciate it. 

Chairman CHABOT. Thank you very much. 

And you have got my last 50 seconds. 

Mr. MIHM. I will do my best not to take the full 50, Mr. Chairman. 

I think you have got excellent ideas, so I will not repeat them, 

but just align myself with those and go off on a bit of a different 

direction, and that is on the identity theft at IRS. It costs them 

about $5.8 billion in 2013, IRS estimates, in which they pay to 

identity thieves. Now, they stopped or recovered, they estimate, 

about $24 billion before it goes out. That is a real target of opportunity for them to be more strategic in going after—and it is a priority area for them to reduce the amount of identity theft as it affects IRS. 

Chairman CHABOT. Thank you. My time is expired. 

The gentleman from New York, Mr. Hanna is recognized. 

Mr. HANNA. Mr. Williamson, I will get back to your cash basis. 

How do you manage? I mean, we know even if you are on accrual 

now, you are on accrual. It does not matter the size necessarily. I 

mean, the $5 million point for cash. But how can you—how do you 

avoid cheating on your—by essentially buying inventory, growing 

your business, or maybe that is what you want to happen. How do 

you—— 

Mr. WILLIAMSON. I agree, Congressman. That is not cheating; 

that is growing. 

Mr. HANNA. Right. Right. But I mean does it not become manipulative if you are essentially, with 179, you are saying go out 

and buy a piece of equipment, which may or may not be good. You 

have to hope the owner does that smartly. On the other hand, you 

could conjecture that the same thing would happen with inventory 

simply to avoid paying taxes. But I guess that is part of your point, 

is it not? 

SBREP-219 with DISTILLER

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Mr. WILLIAMSON. Frankly, I cannot think of anything less manipulative than a totally cash basis of accounting, and simply use 

the checkbook as we are advising. 

Now, clearly, it may not be as financially accurate, and I am not 

here to say that if you are filing SEC reports you need to be on 

the cash basis. Certainly not. 

Mr. HANNA. What you are suggesting though is ultimately it 

works itself out. 

Mr. WILLIAMSON. Oh, yes. 

Mr. HANNA. Over time, whether you do something more one 

year or not as much the next year, over a period of time—— 

Mr. WILLIAMSON. Over the life of the business you recognize 

the same amount of income and have the same amount of expenses. 

Mr. HANNA. I understand. 

Mr. WILLIAMSON. It is all timing. 

Mr. HANNA. Mr. Mihm, do you want to speak to that at all? 

Mr. MIHM. No, sir. That is not an issue that we looked at in any 

detail. 

Mr. HANNA. So with the IRS cutting back on their budget, I 

mean, it really is kind of, you know, everyone here has complaints 

with the IRS for one reason or another. But back to the 1099-K, 

I am guessing, Mr. Mankowski, that you do not like it that much. 

You do not like aggregating, turning a lot of it into guesswork, 

comparing businesses on the aggregate, and then coming up with 

conclusions that this person or that person, company or not, has 

complied or not? 

Mr. MANKOWSKI. I do not believe, I mean, the form itself, at 

least in my estimation, was kind of created to get a lot of your people who have been conducting business on the Internet. Your eBay 

sellers. And from that perspective, I think the form has been very 

successful. There are clients that have come in that have no idea 

that they had a million dollars worth of business that they had 

done on eBay. So it does not mean they made a million dollars, 

they just sold goods to that level. 

So from that perspective, it has been accurate. Unfortunately, 

the majority of businesses are not conducting their business on the 

Internet, and it has really been—they are collateral damage because they are out there reporting their revenue as it is, and they 

have been doing that all along, but they are the ones that are getting the notices. 

Mr. HANNA. The ones being like Dragnet. You throw this giant 

net in the water and some people deserve to be caught, others do 

not. 

Mr. MANKOWSKI. Right. 

Mr. HANNA. But everybody may be inconvenienced based on 

some subjective notion that the IRS has about the general idea of 

what that business ought to be paying or this business. 

Mr. MANKOWSKI. Right. Unfortunately, a lot of those businesses that are getting the large credit card sales through their online businesses—I will take someone, a client who is on eBay. By 

the time they have their listing fees, their shipping fees, their 

PayPal fees, and then their cost for the product, they do not make 

a lot of money. 

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Mr. HANNA. I am going to take a rare moment to defend the 

IRS. If you were them and your budget was going down every year, 

this would be exactly what you would want to try to do, to aggregate businesses based on numbers from 1099s, come up with broad 

conclusions about who is good and who is bad. 

Mr. MANKOWSKI. From that perspective, yes. I think time will 

hash out what needs to be adjusted out of this form, specifically the 

restaurant owner with gratuities, sales tax, and how that is going 

to be affected and how they are looking, because the IRS is sending 

out soft notices that as long as the taxpayer responds, here is my 

brief reconciliation, here is my gratuities, and this is my number 

I reported, they are fine with that. It is just a lot of extra work on 

the business owner to really go back and try to figure out whether 

it is right or wrong because they do not track their revenue based 

upon whether it is credit card, cash, or checks. 

Mr. HANNA. Right. And if the IRS published those numbers I 

suppose it would be another problem, what they are looking for, 

what they are not looking for. 

My time is expired. Thank you, Chairman. 

Chairman CHABOT. Thank you. The gentleman yields back. 

The gentleman from South Carolina, Mr. Rice, is recognized for 

five minutes. 

Mr. RICE. Mr. Mankowski, you were talking a minute ago, just 

when I was speaking in my first five minutes, I was talking about 

maybe some of the reasons why for the first time in American history we are seeing business dissolutions outpace business formation. And you said earlier that the IRS has had to implement 

Obamacare in the last two years and we did not give them any 

more resources to do that. Has not small business had to implement Obamacare in the last two years, too? 

Mr. MANKOWSKI. If you look under the IRS description of 

small business being the $10 million and less, they have been because they are the business—— 

Mr. RICE. Okay, they did have to implement, too. 

Mr. MANKOWSKI. Yes. 

Mr. RICE. Did we give them any additional resources to do that 

with? 

Mr. MANKOWSKI. I do not know the answer to that, sir. 

Mr. RICE. Could that have something to do with the slowdown 

in formation of small businesses? 

Mr. MANKOWSKI. Yes. 

Mr. RICE. Okay. The tax code, I was a tax lawyer and a CPA 

for 25 years. This stuff is fun to me. The tax code was designed 

50–60 years ago and it was competitive at the time. Does anybody 

up there believe that our tax code remains competitive in the 

world? 

Mr. MANKOWSKI. I will use an example that a friend of mine 

recently had a baby and she was saying, ‘‘Oh, well, over in France, 

as an example, they get paid so many months of childcare or maternity leave.’’ And a quick search said, ‘‘Well, that is great, but 

based on your income level, you would be paying 40-plus percent 

in annual tax just to the government compared to what you are 

paying now.’’ So, yeah, you may get an extra two months or so of 

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paid maternity leave, but every year you would be paying in 10 to 

15 to 20 percent more in tax. 

Mr. RICE. Okay. I have got to keep going. 

Do you think our tax code is competitive for American—does our 

tax code make American business more or less competitive? More 

or less? 

Mr. MANKOWSKI. I would say less just from a compliance perspective. 

Mr. RICE. Do you agree with that across the board? 

Mr. MANKOWSKI. Yes. 

Mr. RICE. Thank you. 

Do you think that that has something to do with the decline in 

business formation in America? Mr. Mankowski? And I have to ask 

an answer quick. 

Mr. MANKOWSKI. Yes, I do. 

Mr. RICE. Okay. 

Next question. Did each of you have the chance—I assume all of 

you had the chance to review Dave Camp’s tax reform proposal last 

year. I want to know just a one-word answer from you all, would 

that make the United States Tax Code more or less competitive in 

the world. 

Mr. Mihm? 

Mr. MIHM. I cannot give you a bottom line on that. We did review it. I mean, we worked with the Committee and they used a 

lot of our work as they were putting it together, but we did not 

come to a bottom line decision. 

Mr. RICE. You do not think it would be preferable to what we 

have now? 

Mr. MIHM. I really cannot speak to that, sir. 

Mr. RICE. Mr. Williamson? 

Mr. WILLIAMSON. I have not looked at it in quite a while but 

I would say it would make American more competitive. 

Mr. RICE. Mr. Lewis? 

Mr. LEWIS. Representative, Dave Camp should be commended 

for what he did. It showed us what real reform would look like, and 

that effort itself, I know we will have issues with any particular 

provision, but that overall effort, that is exactly what we are talking about. 

Mr. RICE. Mr. Vitale? 

Mr. VITALE. I believe that is a better start. 

Mr. RICE. And Mr. Mankowski? 

Mr. MANKOWSKI. I believe it is a good start but it would also 

complicate things a lot as well. 

Mr. RICE. Okay. And that came out of the House Ways and 

Means Committee. 

Mr. Mihm, have you had a chance to review the president’s tax 

reform proposal? 

Mr. MIHM. No, sir, we have not. 

Mr. RICE. Have you seen it, Mr. Williamson? Have you gone 

through it? 

Mr. WILLIAMSON. I have not gone through it. I have seen portions of it. Most notably, regarding the cash method of accounting 

rules, that he will take the $25 million with some carve outs for 

some qualified personal service corporations, I think. 

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Mr. RICE. Mr. Lewis? 

Mr. LEWIS. Yeah. The same thing as Mr. Williamson. I have 

just seen particular provisions, and some of those were not necessarily small business favorable. 

Mr. RICE. Have you seen the whole package put together? 

Mr. LEWIS. No, I would not say the whole package. No. 

Mr. RICE. I have not either. I do not think there is one. 

Mr. LEWIS. I have seen parts of it. 

Mr. RICE. My point in this is I do not think the president has 

made a specific proposal. I think Dave Kamp and the House Ways 

and Means Committee made one. I do not think the president has 

put one forward. And if we are going to get tax reform done, we 

have got to have leadership. And when you look at these things 

that I have been talking about, between the imposition of 

Obamacare, between Dodd-Frank, ancient tax code, you can understand, if you look at the statistics on the decline in formation of 

small businesses, you can understand why this is happening, just 

to put a perspective on it. 

Thank you very much. 

Chairman CHABOT. The gentleman yields back. 

And we want to thank our distinguished panel for being here 

this morning and now this afternoon. We appreciate it. I think the 

GAO report has certainly confirmed that small firms are having a 

tough time dealing with the tax code and we need to simplify it 

and reform it. I would like to say we are close to that. However, 

I like to be truthful, and I do not think we are close to that, although we are working on it. But you all have given us, I think, 

some very good ideas. And particularly as it would affect small 

business folks, so thank you for that. 

And I would ask unanimous consent that members have five legislative days to submit statements and supporting materials for the 

record. And if there is no further business to come before the Committee, we are adjourned. Thank you. 

[Whereupon, at 12:37 p.m., the Committee was adjourned.] 

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Testimony of 

Donald T. Williamson 

Kogod Eminent Professor of Taxation 

Howard S. Dvorkin Faculty Fellow 

Executive Director, Kogod Tax Policy Center 

Kogod School of Business 

American University 

Washington, D.C. 

Committee on Small Business 

United States House of Representatives 

Hearing on 

‘‘How Tax Compliance Obligations 

Hinder Small Business Growth’’ 

July 22, 2015 

Chairman Graves, Ranking Member Velazquez and Members of 

the Committee, thank you for the opportunity to testify on the need 

to alleviate the federal tax compliance costs on small business. 

My name is Don Williamson and I am a professor of taxation at 

American University’s Kogod School of Business where for the past 

thirty years I have been the Director of the School’s Masters in 

Taxation degree program. The MST program at American University offers graduate courses in federal taxation to CPAs, experienced accountants, attorneys and others who wish to expand their 

knowledge of our nation’s tax law. Our course offerings not only include traditional classes in subject areas such as the taxation of 

corporations and partnerships, international taxation and tax policy but also more specialized areas of the tax law such IRS practice 

and procedure that address the compliance issues of this hearing. 

In addition, for the past 25 years I have had my own tax preparation and tax planning practice, LaMonaca & Williamson, CPAs, 

in Falls Church, Virginia. In my professional practice I prepare 

many tax returns for small businesses and represent taxpayers 

daily before the IRS examination and collection divisions. 

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I. Emerging Entrepreneurs and the Kogod Tax Policy 

Center 

As part of my responsibilities at American University, I am also 

the Executive Director of the Kogod Tax Policy Center which conducts nonpartisan research on tax issues affecting small business 

and entrepreneurs. The Center develops and analyzes proposed solutions to tax-related problems faced by small business and promotes public dialogue concerning tax issues critical to small businesses. 

Currently, the Center is focused on developing research on the 

tax and compliance issues impacting ‘‘Emerging Entrepreneurs,’’ 

who are America’s latest iteration of small business owners. 

Emerging Entrepreneurs are the workers who are powering the 

evolving on-demand digital economy. These Emerging Entrepreneurs are renting rooms, providing ride-sharing services, running errands, and selling goods for consumers in business transactions coordinated online and through app-based platforms developed by companies such as Airbnb, Flipkey, Onefinestay, Uber, 

Lyft, Taskrabbit and Instacart. Emerging Entrepreneurs need maximum flexibility to grow their businesses and enhance their contributions to this dynamic new sector of the American economy. 

But, as reported by the Wall Street Journal earlier this year, some 

Emerging Entrepreneurs are facing penalty and audit exposure, despite the fact that in some cases income earned from short-term 

residential rentals coordinated through a platform provider (e.g., 

Airbnb, HomeAway, Onefinestay and Flipkey) is, in fact, tax free. 

Our preliminary research has identified these and other related 

issues as unnecessary burdens notwithstanding that most Emerging Entrepreneurs ‘‘want to be honest and pay what they owe, but 

the tools and resources don’t exist.’’ Derek Davis, in discussion with 

the author, April 9, 2015. The predominantly electronic nature of 

transactions conducted by this new sector of our economy offers opportunities to reduce the burden on and increase the compliance of 

Emerging Entrepreneurs. In the coming months, we will publish 

tax research and corresponding policy recommendations for the 

Committee to review. 

II. Complexity of the Law 

Over the course of my tenure as an academic and tax practitioner I have seen with dismay the Internal Revenue Code grow in 

complexity, becoming intrusive and pervasive in its reach and incomprehensible to all but those who devote their careers to its 

study. This complexity arises, in part, from the almost annual 

amendments to the Internal Revenue Code that has a profound, 

even paralyzing affect on small businesses resulting in their inefficient operation and impeding their ability to grow and create jobs. 

In fact, since 2001, there have been approximately 5,000 amendments to sections of the Internal Revenue Code, about one per day 

on average. Consequently, not only small business persons but 

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their tax advisers are overwhelmed by the complexity resulting in 

steady increases in fees these advisers charge to their small business clients. 

The National Taxpayer Advocate estimates that each year small 

businesses spend approximately 2.5 billion hours preparing tax returns or otherwise meeting tax filing requirements, the equivalent 

of 1.25 million full-time jobs. In meeting these requirements 70% 

of small businesses use paid tax return preparers at a cost of more 

than $16 billion for the services of attorneys, accountants and other 

professionals. While generating a lucrative ‘‘cottage industry’’ for 

tax professionals, our nation suffers from this burden that diverts 

time and resources to activities that neither encourages business 

growth nor creates jobs. 

Because most small business owners do not understand the law 

they increasingly turn their tax filing obligations to outside advisers for planning and return preparation of both their income taxes 

as well as their employment tax obligations. A survey conducted by 

the National Federation of Independent business found that professional tax return preparers prepared, at least in part, 91% of all 

tax returns filed by its members. When small business owners believe they are unable to file their own tax returns or understand 

the tax law, resentment towards the ‘‘system’’ arises creating a cynicism and disrespect toward our tax law that will foster non-compliance and ultimately fraud. 

Compounding this complexity and further increasing the cost of 

compliance and inefficiency upon small business is the annual crisis of the so called ‘‘tax extenders.’’ Over thirty business provisions 

of the Internal Revenue Code periodically expire, being reenacted, 

often retroactively, for an additional year or two. Rules relating to 

the treatment of qualified small business stock, bonus depreciation, 

S corporation built-in gains tax, and most importantly, § 179 expensing are vital to the small business community and Congress 

should make these provisions permanent. In the case of bonus depreciation and § 179 expensing, small businesses today must make 

decisions regarding the purchase of equipment without certainty of 

what the deduction will be for such acquisitions. Aside from the additional compliance costs associated with such uncertainty, tax 

planning is impossible thereby undermining growth in the small 

business economy that provides most of the new jobs in our country. 

III. Legislative Recommendations 

To reduce the compliance costs of small businesses in the filing 

of their tax returns the Kogod Tax Policy Center advocates two legislative proposals, i.e. a simplified cash method of accounting and 

a unified rate schedule for all businesses regardless of their legal 

form. 

A. Simplified Cash Method of Accounting 

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Liberalizing the law to permit more small businesses to adopt 

the cash method of accounting, rather than the more burdensome 

accrual method, will reduce record keeping and tax compliance 

costs with a minimal loss of accuracy or tax revenue to the government. Even where the law currently permits a small business to 

use the simpler cash method of accounting, the requirement to 

maintain inventory records creates compliance burdens that may 

only influence by a few months the timing of a small business’s 

taxable income. 

Therefore, we urge Congress to not only expand the number of 

businesses eligible to use the cash method of accounting as discussed in the Senate Finance Committee Working Group Report on 

Business Income Tax but to enact a ‘‘simplified’’ cash method of accounting for small businesses that will further reduce unnecessary 

record keeping and compliance burdens. We believe such simplification will neither adversely affect the accuracy of tax returns nor 

impact the ability of the IRS to collect tax. 

1. Cash Method vs. Accrual Methods of Accounting 

Before describing our proposal for a simplified cash method, I 

would like to explain, for the benefit of the members of the Committee who may not be familiar with tax accounting rules, the two 

major tax accounting methods used by businesses, i.e. the cash 

method and the accrual method. I believe this explanation will 

highlight why for small businesses the accrual method is more burdensome than the cash method; and demonstrates that while the 

accrual method may in some cases more accurately measure economic net income, why the complexity and cost of any additional 

precision is unnecessary and ultimately provides no greater tax 

revenue for the IRS. 

Once a business adopts a tax year, and for most small businesses 

this will be the calendar year, it must adopt an accounting method 

which will determine the time at which the business recognizes an 

item of income or may deduct an expense. It is important to note 

that a business’s accounting method only affects the timing of when 

a business reports income or deductions on a tax return. The accounting method a business uses does not determine whether an 

item of income is taxable or an expense deductible and does not affect the total income and deductions a business will recognize over 

its lifetime. 

Publicly traded corporations and many large businesses generate 

financial statements for the SEC or commercial banks based on 

generally accepted accounting principles (GAAP). Small businesses 

usually do not keep their books and records in accordance with 

GAAP, almost always relying upon their tax returns to provide 

lenders and owners with sufficient information to determine the 

success and credit worthiness of the business. 

Under the Internal Revenue Code a small business is only required to choose an accounting method that ‘‘clearly reflects income’’ and apply that method consistently from year to year. Consistent with this requirement, most small businesses adopt the 

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cash method of accounting unless the law requires them to use the 

accrual method. 

a. Cash Method 

A business adopting the cash method of accounting recognizes income when it receives actual payment for the goods or services 

sold, regardless of when the business sells the good or performs the 

service. Similarly, a cash method business is entitled to a deduction 

on its tax return only when payment for an ordinary and necessary 

business expense is actually made. However, even cash method 

businesses may not deduct certain types of payments when made. 

For example where a business incurs a cash expenditure that creates an asset with a useful life of more than one year, the business 

must ‘‘capitalize’ the cost and depreciate (deduct) that cost over a 

prescribed ‘‘recovery period’’ in which the tax law presumes the 

asset will be consumed in the business. There are other types of 

cash payments subject to similar treatment. Thus, even the cash 

method adopts certain principles of the accrual method described 

below resulting in a mismatch of the time an expenditure is made 

and the time at which it can be deducted. 

(1) Judicial Doctrines of Income 

In addition to requirements to capitalize certain expenditures 

there are several other technical requirements for a business computing taxable income under the cash method that are unnecessarily complex. Under the judicial doctrine of ‘‘constructive’’ receipt, 

a cash basis taxpayer must recognize income even when cash has 

not come into the physical possession of the business but is merely 

available to the business at its discretion. Similarly, the mere receipt of a promise results in recognizable income under the cash 

method if the promise is convertible to cash before it matures, in 

which case the fair market value (that is, the ‘‘cash equivalent’’) of 

the obligation is recognized at the time of receipt of the promise. 

Finally, under the ‘‘economic benefit’’ doctrine, a cash method business must immediately recognize income on the receipt of property 

whenever the business’s right to the property is absolute, even if 

not immediately assignable and even though it cannot be immediately converted to cash. 

Such judicial theories that require a business using the cash 

method to pay tax on income deemed received prior to the receipt 

of cash unnecessarily imposes a severe cash flow problem on small 

businesses—a problem that creates only a marginal timing benefit 

to the IRS, since small businesses would most certainly receive the 

cash shortly after constructive receipt, economic benefit, or a cash 

equivalent arises. While these concepts offer comfort to theorists, 

small businesses must pay next month’s bills, and the acceleration 

of any taxable income before the receipt of cash under these theories requires small businesses to use their operating cash to pay 

tax on amounts they have not yet received instead of using that 

cash to run their businesses. 

(2) Accounting for Expenses 

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An even more challenging problem encountered by small businesses using the cash method of accounting is the compliance costs 

and complexity associated with computing deductible expenses. 

Generally, the cash method permits a deduction for ordinary and 

necessary business expenses when actual payment is made. Thus, 

a promise to pay is not deductible until payment is actually made. 

In addition to the natural confusion surrounding when and if a 

payment has been made, small businesses confront even greater 

difficulties when computing allowable deductions under the cash 

method because of four exceptions to the general rule that a deduction is permitted when payment is made, i.e. prepayments, depreciation, inventory and capitalization of some expenses. Prepayments for property or services are not deductible if the goods or 

services are provided more than one year after the prepayment. 

Costs exceeding $5,000 associated with creating a new business are 

not deducted when paid but amortized over 15 years. For inventory, the costs of its acquisition or production are deducted only 

when the inventory is sold. Similarly, property with a useful life of 

more than one year is generally subject to depreciation, requiring 

its deduction be spread over recovery periods ranging from three to 

39 years. 

These examples demonstrate that the current cash method of accounting is too often not based upon cash receipts and disbursements, but rather on principles that attempt to match costs with 

income similar to the accrual method. For small businesses that 

have no government regulators to whom financial statements must 

be submitted and have no banks or other creditors in need of profit 

and loss determinations that conform to the rules of GAAP, tax 

rules based on the accrual method serve no practical purpose when 

economic success and taxable income can simply be measured on 

cash receipts and expenditures—that is, cash flow. In short, while 

the current cash method is substantially simpler than the accrual 

method, certain refinements to the current rules could make the 

cash method even simpler and more easily enable small businesses 

to comply with tax record keeping and reporting requirements 

without the loss of accuracy on their tax returns. 

b. Accrual Method 

The other major accounting method, the accrual method, attempts to determine the time at which ‘‘all events’’ occur that give 

rise to the right to income and the amount of that income can be 

determined with reasonable accuracy. Similarly, an expense may 

be deducted when the obligation to pay an expense is fixed, the 

amount of that obligation can be determined with reasonable accuracy and economic performance has occurred. Thus, businesses 

must report income on their tax returns when earned and may deduct expenses when incurred without regard to the receipt or payment of cash. 

The accrual method and its ‘‘all events’’ test creates substantial 

complexity in an effort to better identify the financial success or 

failure of a business. This complexity calls for small businesses, 

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mine its financial well-being in a manner that adds no value to its 

success. From the perspective of the IRS, while the timing of income and expense reported under the accrual method may provide 

some acceleration of tax upon income that must be recognized before any cash is received, such acceleration is clearly unfair if the 

cash is never received, and may only accelerate tax collection by no 

more than one year if the cash is subsequently receive shortly after 

the accrual. 

The complexity of the accrual method is illustrated by prepayments. In the case of prepaid rent or interest received, income 

must be reported immediately upon receipt even if ‘‘all events’’ entitling the business to the income have not occurred. Similarly, 

where goods or services have not been delivered but cash payment 

has been received, the general rule under the accrual method that 

delays reporting the cash receipts on the business’s tax return until 

‘‘all events’’ have occurred, i.e. the goods are delivered or services 

performed, is disregarded. Thus, in the case of prepayments a business otherwise on the accrual method finds itself using the cash 

method for prepayments. Not an easy concept for a small business 

owner to understand. 

Another complexity of the accrual method is the necessity to account for bad debts when a business reports as income an account 

receivable for which it never receives actual payment. Each year 

businesses on the accrual method must determine which previously 

reported receivables are uncollectible and claim them as tax deductions. This can be a time consuming, confusing and expensive process. Businesses using the cash method do not deduct bad debts because they do not include receivables in taxable income. 

Finally, even when a business on the accrual method meets the 

‘‘all events’’ test with respect to an expense, a deduction may be 

claimed only when ‘‘economic performance’’ occurs. Therefore, in 

the case of receiving goods and/or services from another party, the 

business may deduct the obligation to pay the other party only as 

the goods or services are received regardless of when the business 

pays for the goods or services, subject to an exception permitting 

deduction in the year of prepayment if the other party provides the 

goods or services within three and one-half months of the next taxable year. Again, not an easy concept for small businesses to understand. 

The above illustrations of the complexity required by the accrual 

method of accounting demonstrate that in the case of small businesses the purported technical accuracy resulting from these rules 

offers no practical benefit to the business in measuring its economic performance, and over the life cycle of the business, offers 

no additional tax revenue to the government. 

2. Tax Accounting for Inventories 

Regardless of whether a business is on the cash or accrual method of accounting, if inventory is a material income producing factor, 

the business must account for gross profit, i.e. sales minus cost of 

goods sold, using the accrual method, even if they have adopted the 

cash method as their overall accounting method. Thus, a business 

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cannot deduct the cost of the inventory (finished goods) to the extent it has not sold the product by the end of the business’s taxable 

year. Businesses selling inventory must maintain records documenting their cost of unsold, finished goods, partially finished 

goods and ‘‘raw’’ materials on hand that will be used in the future 

to manufacture or product inventory. In addition, inventory cost accounting principles call for the deduction of indirect costs (overhead) associated with manufacturing or producing the inventory 

only when the inventory is sold. 

In determining its cost of inventory, a business must adopt an 

inventory costing method, i.e. the first-in, first-out (FIFO) method, 

the last-in, last-out (LIFO) method or the specific identification 

method. The FIFO and LIFO methods relieve businesses of the 

need to keep track of the cost of each item they sell, but where the 

items are unique or relatively high-cost, low volume products (e.g., 

jewelry, antiques, cars, etc.) the specific identification method is 

used. 

As an exception to the requirement to maintain inventory accounts, the IRS (not the Internal Revenue Code) permits a cash 

method business to use the cash method to account for their gross 

profit from the sale of inventory if the business’s average annual 

gross receipts for the three year period prior to the current year do 

not exceed $10,000,000 and the business’s primary activity is to 

provide services to customers but also offers a product for sale incidental to the performance of services. Thus, a veterinarian using 

the cash method of accounting need not use the accrual method to 

account for the sale of medicines or other goods associated with the 

business of caring for animals because such sales are incidental to 

the veterinarian’s professional practice. But when the average 

gross receipts of the business exceeds $10,000,000, businesses must 

not only account for inventory using the accrual method, but also 

must apply certain ‘‘uniform cost capitalization’’ (UNICAP) rules 

that require an allocation to inventory of an array of indirect costs 

beyond those ordinarily associated with producing goods. Thus, 

under the UNICAP rules, a business must add to the cost of inventory a portion of compensation paid to employees who may not be 

involved in producing the inventory but may merely indirectly support the production process. 

A final illustration of the complexity of the accrual method deals 

with the perceived abuse of an accrual method business accruing 

(deducting) an amount owed to a related party using the cash 

method. In this case the business using the accrual method nay not 

deduct the amount owed to the related party until the amount is 

actually paid and recognized as taxable income by the cash method 

party. This issue frequently arises where a business employs the 

owner or a relative of an owner. Related parties, for this purpose, 

include family members and certain businesses owned by the same 

individual(s). 

3. Comparison of Cash and Accrual Methods 

As the above descriptions demonstrate, the primary advantages 

of the cash method over the accrual method are its clarity and 

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flexibility in measuring income and expenses and its less cumbersome bookkeeping and record keeping requirements. While the 

accrual method is generally considered a more accurate reflection 

of a business’s financial condition, the price of this accuracy is 

mind numbing complexity and inevitably increased compliance and 

record keeping costs. 

However, the Internal Revenue Code limits the adoption of the 

cash method to the following businesses: (1) sole proprietorships; 

(2) S corporations; (3) certain corporations engaged predominantly 

in the performance of services by their owners, (4) corporations 

with average gross receipts over the preceding three years of 

$5,000,000; (5) partnerships with no corporate shareholder whose 

gross receipts exceed $5,000,000; and (6) farms. 

Suggestions for simplifying and liberalizing the use of the cash 

method were made by the Treasury Department in 2007, the 

Bowles-Simpson Commission in 2010 and most recently the options 

proposed by former Senator Baucus and Representative Camp described in the Senate Finance Committee’s Bipartisan Tax Working 

Group Report on Business Income Tax. These proposals simplify 

the reporting of income and expenses on tax returns filed by small 

businesses that will then reallocate resources otherwise spent on 

compliance to more productive purposes, ultimately stimulating job 

growth. In addition, the IRS Taxpayer Advocate has consistently 

recommended simplifying accounting methods for small business as 

a way to ease compliance burdens and reduce tax administration. 

4. Simplified Cash Method of Accounting (‘‘SCM’’)—The 

‘‘Checkbook’’ Method 

Based on this brief description of the accounting methods available to small businesses and the observations of Treasury, IRS and 

Congressional tax reform studies, small businesses clearly need 

and deserve legislative relief in measuring and reporting their taxable income and deductible expenses. Therefore, the Internal Revenue Code should be amended to not only permit the adoption of 

the cash method by more small businesses, but also the adoption 

of a ‘‘simplified cash method of accounting’’ (‘‘SCM’’). This proposed 

simplification of the existing cash method of accounting will reduce 

time-consuming, expensive administrative burdens on small businesses in keeping records and reporting their income and expenses 

on their returns, thereby unleashing resources that will create 

more productive, job creating activities. 

Besides reducing compliance costs the SCM will enable small 

businesses to better understand their tax returns, thereby reducing 

the general public’s cynicism that the Internal Revenue Code is replete with loopholes only accessible to businesses with resources to 

employ expensive tax professionals. In short, simplifying reporting 

on tax returns will increase compliance, ease the burden of tax administration, increase tax revenue and ultimately reduce the gap 

between what taxpayers should pay and what the IRS actually collects. 

Under the SCM the computation of taxable income is reduced to 

the following formula: 

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Cash Receipts 

Less: Cash Expenses including: 

• Inventory 

• Prepayments 

• Materials/Supplies 

• Depreciable Property 

Taxable Income 

In short, the derivation of taxable income is based solely on 

amounts actually received or paid during the tax year, by means 

of examining the business’s checkbook for when checks were cut 

and deposits made. Under SCM, income consists only of cash, property or services received during the tax year without regard to imputed income under the constructive receipt, cash equivalence, or 

economic benefit doctrines. While determining and valuing the receipt of in-kind goods and services would continue to be a problematic, small businesses would otherwise be able to arrive at their income by adding up their bank deposits for the year. Any timing advantage to businesses from not being subject to the judicial doctrines just mentioned would be minimal given that small businesses cannot, as a practical matter, defer recognition of cash by 

more than a few months without creating severe cash flow problems for the payment of their own bills. The complexity of the judicial doctrines does not warrant their application to small businesses. 

SCM offers even greater simplification for the determination of 

deductible expenses. Under SCM, all current expenditures, including those for the acquisition or construction of inventory, would be 

deducted when paid. Although a technical violation of GAAP’s 

matching principle of accounting, GAAP is not a particularly useful 

concept in measuring the ability of a small business to pay tax, or 

even stay in business. More than one small business that had a 

profit under GAAP has failed because of cash flow problems. Allowing for the immediate deduction of the cost of inventory simplifies 

small business record keeping at relatively little cost to the government. For a small business to say in business, inventory paid for 

and deducted in one year likely will be sold no later than the next 

year to ensure sufficient cash flow for business operations. Also, 

permitting the expensing of inventory before its sale recognizes the 

fact that by the IRS’s own admission, small businesses are not following the rules for the computation of cost of goods sold, in that 

audits reveal more than 50 percent of cost of goods sold calculations are incorrect. 

Finally, permitting the immediate expensing of depreciable property simply adopts a 100 percent bonus depreciation approach for 

acquired property with a useful life in excess of one year and the 

current section 179 expense allowance for purchased depreciable 

property. Thresholds and limitations similar to the present 

$10,000,000 limitation for uniform capitalization rules and the current IRS allowance for the cash method may be adopted to restrict 

SCM to small businesses. 

With a $10 million threshold for the general adoption of the cash 

method coupled with an election to adopt the SCM, simplification 

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would be available to approximately 99% of all businesses in the 

United States, thereby reducing the tax compliance burden for almost every person owning and operating a business in America. 

B. Single Business Tax Rate 

Perhaps even more important from the perspective of compliance 

costs, small businesses need a rate structure that is not dependent 

on the legal form they adopt. Currently sole proprietorships, partnerships and S corporations are taxed at a maximum rate of 39.6%, 

while the taxable income of a C corporation is taxed at a maximum 

rate of 35%. Most of the corporate tax reform proposals focus upon 

eliminating deductions and credits to broaden the tax base upon 

which a lower corporate tax rate would apply. If corporate tax reform simply reduces rates on C corporations, unincorporated small 

businesses will have an increased tax burden relative to C corporation. Additionally, such a result will increase the tax planning and 

compliance costs of every start-up business in analyzing the tax 

burden of operating in one legal form or another. Our tax system 

should not promote inefficiency by incentivizing small businesses to 

make decisions based on tax considerations, rather than for business reasons. 

Therefore, rather than reduce the tax rates only on C corporations, small businesses need a tax rate structure that applies to all 

businesses regardless of their legal form. While corporate earnings 

are subject to tax both at the corporate level and the shareholder 

level (when distributed) and earnings of unincorporated businesses 

are taxed only once, there are well documented approaches, e.g. integration, beyond the scope of this testimony to ensure tax neutrality in the decision of business entity choice. 

A single integrated business tax rate schedule could have graduated rates providing a lesser tax burden to businesses with less 

taxable income. A single integrated business tax rate schedule 

would not be difficult to administer because income from followthrough businesses (sole proprietorships, partnerships and S corporations) already separately appears on schedules on individual 

tax returns, Schedule C for income for sole proprietorships and 

Schedule E for income from partnerships and S corporations. Individuals would simply total their business taxable income and apply 

the ‘‘business tax rate schedule,’’ a practice no different from the 

special tax rate schedule that currently applies to qualified dividends and capital gains on Schedules B and D. 

In short, what is needed is ‘‘business tax reform’’ not corporate 

tax reform. A single business rate schedule will create a uniform, 

comprehensive system of business taxation that taxes all businesses equally without regard to their legal form thereby easing 

the tax burden on small businesses and increasing simplicity and 

fairness. 

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IV. Conclusion 

The burden of compliance costs on small business arises from the 

complexity of the tax law coupled with the almost exponential 

change in the Internal Revenue Code over the past few decades. As 

a result, small businesses have outsourced their tax planning and 

compliance responsibilities to tax professionals whose fees have 

added to the compliance burden. 

The Kogod Tax Policy Center recommends that increasing the 

availability of the cash method of accounting to small businesses 

and adopting a uniform tax rate schedule for all businesses regardless of their legal form will reduce the burden small businesses currently bear in complying with their filing responsibilities. These 

proposals will improve tax compliance at lower administrative costs 

to businesses with little or no loss of tax revenue to the government. Such reforms are needed for the continued viability of our 

voluntary tax compliance system. 

* * * 

Thank you for the opportunity to testify today. I welcome any 

questions from the Committee or its staff. In addition, I or any others at the Kogod Tax Policy Center would be pleased to respond to 

any other questions you may have in the future. 

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1Small Business Administration Office of Advocacy, Frequently Asked Questions, September 

2012. 

INTRODUCTION 

Chairman Chabot, Ranking Member Velazquez, and Members of 

the House Committee on Small Business, thank you for the opportunity to testify today on ‘‘How Tax Compliance Obligations Hinder 

Small Business Growth.’’ My name is Troy Lewis. I am the vice 

president and chief enterprise risk management officer at Heritage 

Bank in St. George, Utah. I am also a sole tax practitioner, adjunct 

faculty member at Brigham Young University and Chair of the Tax 

Executive Committee of the American Institute of Certified Public 

Accountants (AICPA). I am pleased to testify today on behalf of the 

AICPA. 

The AICPA is the world’s largest member association representing the accounting profession, with more than 400,000 members in 145 countries and a history of serving the public interest 

since 1877. Our members advise clients on federal, state and international tax matters, and prepare income and other tax returns for 

millions of Americans. Our members provide services to individuals, not-for-profit organizations, small and medium-sized business, 

as well as America’s largest businesses. 

The AICPA applauds the leadership taken by the Committee to 

consider ways to reduce the complexity faced by small businesses 

when preparing their taxes. Small businesses are the foundation of 

the U.S. economy, employing over half of the private-sector workforce and creating nearly two-thirds of this nation’s net new jobs 

over the past decade and a half.1

Unfortunately, compliance with federal tax laws can act as a 

road block in the growth of small business. Unlike large multi-national corporations, the time spent by small businesses in complying with tax laws is much more costly because small businesses 

do not have the luxury of critical mass and a large customer base 

with which to efficiently spread non-value added compliance costs. 

Time devoted to complying with tax laws has an impact on business creation, job growth and economic prosperity of these small 

businesses. 

At the same time, we recognize that tax compliance is necessary. 

However, to help small businesses grow, Congress and the Internal 

Revenue Service (IRS) should seek to lessen these compliance burdens on all small businesses. When evaluating whether or not a tax 

compliance requirement should be mandated for a small business, 

a cost/benefit analysis should first be considered. Nowhere is it 

more important to ask if the end result is worth the effort than in 

the area of tax compliance for small businesses. 

Using this cost/benefit approach, may I suggest a few areas 

where Congress can act to reduce the burden of tax compliance in 

a way that allows small businesses to grow without creating undue 

hindrances. 

IRS TAXPAYER SERVICES 

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2 Commissioner Koskinen, Prepared Remarks of John A. Koskinen Commissioner, Internal 

Revenue Service, Before the National Press Club, dated March 31, 2015. 

3 National Taxpayer Advocate Report, Volume I: FY 2016 Objectives Report to Congress; Part 

II: Review of the 2015 Filing Season, dated July 14, 2015. 

4 Joint Operations Center, Customer Account Services, Account Management Paper Inventory 

Reports, Inventory Age Report, (Jan 1 - Apr 6 statistics). 

5 Id. 

6 National Taxpayer Advocate Report, Volume I: FY 2016 Objectives Report to Congress; Part 

II: Review of the 2015 Filing Season, dated July 14, 2015. 

It is imperative that small businesses and their tax return preparers have the ability to communicate with the IRS when preparing their taxes and addressing compliance issues. However, 

there has been increasingly limited access to the agency and, as reported by IRS Commissioner John Koskinen, ‘‘abysmal’ level of taxpayer service this year.2

Our members have expressed their deep concerns regarding their 

ability to effectively represent small businesses and other taxpayers in an environment where the IRS service levels are so degraded that: 

• During the 2015 tax season, the IRS answered only 37% 

of the telephone calls received from taxpayers seeking to speak 

with an assistor;3

• The average hold time for the Practitioner Priority Service 

telephone line reached 47 minutes;4 and 

• According to the National Taxpayer Advocate, the IRS’s 

ability to process taxpayer correspondence in a timely manner 

declined by 16% since 2014, leaving a backlog of almost 79,000 

cases.5

Through an informal membership survey we conducted earlier 

this year, we learned that over half of our members were either 

somewhat dissatisfied or very dissatisfied with the services they received from the IRS this filing season. This is no surprise considering that only 17% of our members responded that the IRS generally answered their telephone calls within 30 minutes. Most of 

our members were on hold for extended periods of time and other 

members noted that they generally had to end their own calls because they did not have the time to wait on hold for an IRS agent 

to answer. 

As reported by one of our members, ‘‘I was on hold for over an 

hour and a half. When the IRS agent finally picked up the call, 

they needed to transfer to another agent. I had to wait on hold for 

another hour. Finally, I received a recorded message that the office 

was closed and I needed to call again the following day.’’ 

Many of our members also experienced what the IRS refers to as 

‘‘courtesy disconnects.’’ According to the IRS, they terminate telephone calls from small businesses and other callers, without taking 

a message or getting contact information, if the caller has been on 

hold for two hours. As of April 18th this year, approximately 8.8 

million calls received by the IRS were subject to their ‘‘courtesy disconnect’’ policy, which represents an increase from approximately 

544,000 over last year.6 Nothing is more discouraging, frustrating 

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7 Joint Operations Center, Customer Account Service, Account Management Paper Inventory 

Reports, Inventory Age Report, (Jan 1 - Apr 6 statistics). 8 AICPA’s Tax Policy Concept Statement No. 1: Guiding Principles for Good Tax Policy: 

Framework for Evaluating Tax Proposals, issued March 2001. 

or inefficient for a caller (whether they are a small business or a 

tax preparer calling on behalf of a small business) than being hung 

up on by the IRS after waiting on hold for two hours. 

Our survey also indicated similar, unacceptable patterns with regards to delays in written correspondence. On average over half of 

the correspondence sent to the IRS is not responded to within 90 

days of receipt.7 Often small businesses are anxiously awaiting a 

response to a notice. Furthermore, the longer the response tine by 

the IRS, the more interest and penalties are accrued as the small 

business attempts to resolve their issue. 

We appreciate and understand that the IRS has new initiatives 

and vital unmet obligations and responsibilities (such as addressing identity theft), but taxpayer service must remain a high priority in order for small businesses to receive the assistance they 

need on tax issues. 

GOOD TAX POLICY 

In order to reduce the overall tax compliance burden on small 

businesses, the AICPA urges the Committee to consider comprehensive tax reform that focuses on simplification, transparency 

and other Principles of Good Tax Policy.8 We believe it is important 

to promote a tax system that is perceived as balanced, fair to all, 

administrable, economically efficient, transparent, and neutral in 

its effect on economic activity. 

Our current tax system is heavily burdened by complexity. Multiple and duplicative tax calculations, definitions, and preferences 

lead to taxpayer confusion and, thus, errors and frustration. Attempts to adjust tax liabilities through special rules affecting taxable income rather than the rate schedule add to complexity. Business provisions that require retention of records solely for tax purposes increase compliance costs. We urge consideration of removing 

duplicative rules and definitions, and reducing recordkeeping and 

calculations, to achieve simplicity, without adding new complexities. 

It is also important for an effective tax system and informed citizenry that taxpayers understand the tax system and how it affects 

them. Clarity of the tax consequences of taxpayers’ regular activities is a must. Transparency also helps improve voluntary compliance. 

Additionally, it is critical for taxpayers to have certainty to perform any long-term tax planning. Permanence of tax provisions can 

have substantial impacts on the growth of small businesses. The 

uncertainty of tax legislation creates unnecessary confusion, anxiety and administrative financial burdens. Without permanency in 

the Internal Revenue Code (‘‘Code’’), we are concerned about the 

following consequences: 

• Impact on a company’s financial accounting and reporting; 

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• Complexity and administrative burden for taxpayers and 

the IRS; 

• Adverse impact on small businesses and ultimately jobs 

and growth; 

• Effect on economic decisions and tax payments; and 

• Lack of transparency and certainty with short-term, retroactive extensions 

We recognize that it is not always possible for each tax provision 

and the overall tax system to equally meet each of the ten principles of good tax policy. However, it is important to carefully balance these principles to achieve a respected and administrable tax 

system. 

TANGIBLE PROPERTY REGULATIONS 

A challenging tax compliance burden that small businesses had 

to deal with this year was the new final tangible property regulations (TD 9636). These tax rules, which address how businesses 

should report the acquisition and improvement of tangible property, comprise almost 500 pages of technical guidance and procedures. 

While we appreciated that the regulations clarified some rules 

and provided several small business favorable provisions, we were 

concerned that they were significantly burdensome for many small 

business taxpayers because of the required retrospective analysis 

and reporting requirements. 

The AICPA pushed hard for relief and stressed that time was of 

the essence as a significant portion of the burdens placed on small 

businesses (and their tax practitioners) would occur prior to filing 

season. However, despite these pleadings, the IRS issued the muchneeded relief, Rev. Proc. 2015–20, on February 13, well into the filing season. Unfortunately, some small businesses and their tax 

practitioners had already spent time and resources attempting to 

comply with the new regulations prior to the IRS’s issuance of relief. If the IRS had acted in a timely manner, small businesses 

could have been spared some administrative burden. 

Currently, small businesses must prove that expensing such 

amounts ‘‘clearly reflects income’’ to deduct amounts higher than 

the $500 threshold. The clear reflection of income test can be challenging for any taxpayer, especially for small businesses. The test 

is based on the taxpayer’s facts, circumstances, and interpretations 

of those facts and circumstances by the taxpayer and IRS. Thus, 

it is arbitrary and often difficult to apply. Large businesses (e.g., 

taxpayer with an AFS), however, are allowed the higher $5,000 

threshold. Subjecting small businesses to the clear reflection of income test at merely $500, adds unnecessary complexity and compliance burdens to small businesses. 

There are other issues that remain open in regards to the repair 

regulations. The AICPA recommends that you take immediate action to increase the $500 de minimis safe harbor threshold for taxpayers without an AFS to $2,500, and provide for annual adjustSBREP-219 with DISTILLER

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9For a detailed explanation of the differences between a compilation, a review, and an audit, 

please reference the AICPA Comparative Overview document. 

10 AICPA comment letter on ‘‘AICPA Tax Penalties Legislative Proposals,’’ dated April 11, 

2013; and AICPA report on ‘‘AICPA Report on Civil Tax Penalties,’’ submitted April 11, 2013. 

11 AICPA submitted letters and written statement on Option 1 and Option 2 of Chairman 

Camp’s Small Business Tax Reform Draft: See Option 1 comments at ‘‘AICPA testimony on 

Small Business and Pass-through Entity Tax Reform,’’ dated May 17, 2013; and Option 2 comments, ‘‘AICPA Comments on Option 2 of Chairman Camp’s Small Business Tax Reform Discussion Draft’’ dated July 30, 2013. 

ments for inflation, to offer meaningful relief to small business taxpayers. To further reduce administrative burden on these rules, we 

also recommend that you expand the AFS definition to include a 

reviewed set of financial statements 9 to permit more business to 

benefit from the higher $5,000 de minimis safe harbor threshold. 

CIVIL TAX PENALTIES 

An additional concern 10 for small businesses is the numerous 

unfair or untargeted penalty provisions in the Code pertaining to 

tax compliance. Penalties should deter bad conduct without deterring good conduct or punishing small businesses which are acting 

in good faith. 

Targeted, proportionate penalties that clearly articulate standards of behavior and that are administered in an even-handed and 

reasonable manner encourage voluntary compliance with the tax 

laws. On the other hand, overbroad, vaguely-defined, and disproportionate penalties, particularly those administered as part of 

a system that automatically imposes penalties or that otherwise 

fail to provide basic due process safeguards, create an atmosphere 

of arbitrariness and unfairness that is likely to discourage voluntary compliance. 

For example, penalties should apply prospectively to future conduct and not retroactively to conduct that was appropriate at the 

time the conduct occurred. Good tax policy would also suggest that 

we avoid strict liability provisions that do not grant the IRS discretion to take into consideration the facts and circumstances of a particular business’ situation. 

The AICPA points out the following specific penalty-related 

issues with the current system below. 

Repeal Technical Termination Rule 

The AICPA recommends a repeal of section 708(b)(1)(B) regarding the technical termination of a partnership as it is a trap for the 

unwary.11 Under current law, when a partnership is technically 

terminated, the legal entity continues, but for tax purposes, the 

partnership is treated as a newly formed entity. The current law 

requires the partnership to select new accounting methods and periods, restart depreciation lives, and make other adjustments Furthermore, under the current law, the final tax return of the ‘‘old’’ 

partnership is due the 15th day of the fourth month after the 

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12For example, a partnership that technically terminated on April 30 of the current year due 

to a transfer of 80% of the capital and profits interests in the partnership to be timely filed 

must file its tax return for that final tax year on or before August 15 of the current year. 

month-end in which the partnership underwent a technical termination.12

A technical termination most often occurs when, during a 12- 

month period there is a sale or exchange of 50% or more of the 

total interest in partnership capital and profits. Because this 12- 

month time frame can span a year-end, the partnership may not 

realize that a 30% change (a minority interest) in one year followed 

by a 25% change in another year, but within 12 months of the first, 

has caused the partnership to terminate. 

In practice, this earlier required filing of the old partnership’s 

tax return often goes unnoticed because the company is unaware 

of the accelerated deadline due to of the equity transfer. Penalties 

are often assessed upon the business as a result of the missed 

deadline. Although ignorance is not an acceptable excuse, this technical termination area is often misunderstood and misapplied. The 

acceleration of the filing of the tax return, to reset depreciation 

lives and to select new accounting methods, serves little purpose in 

terms of abuse prevention and serves more as a trap for the unwary. 

Late Filing Penalties 

Sections 6698 and 6699 impose a penalty of $195 per partner related to late-filed partnership or S corporation returns. The penalty 

is imposed monthly not to exceed 12 months, unless it is shown 

that the late filing is due to reasonable cause. 

The AICPA proposes that a partnership (or S Corporation), comprised of 50 or fewer partners/shareholders, each of whom are natural persons (who are not nonresident aliens), an estate of a deceased partner, a trust established under a will or a trust that becomes irrevocable when the grantor dies, and domestic C corporations, will be considered to have met the reasonable cause test and 

will not be subject to the penalty imposed by section 6698 or 6699 

if: 

• The delinquency is not considered willful under section 

7423; 

• All entity income, deductions and credits are allocated to 

each owner; and 

• Each partner/shareholder fully reported its share of income, deductions and credits of the entity on its timely filed 

federal income tax return. 

Failure to Disclose Reportable Transactions 

Taxpayers who fail to disclose a reportable transaction are subject to a penalty under section 6707A of the Code. For penalties assessed after 2006, the amount of the penalty is 75% of the decrease 

in tax shown on the return as a result of the transaction (or the 

decrease that would have been the result if the transaction had 

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13 AICPA comment letter on ‘‘Tax Reform Administrative Relief for Various Statutory Elections,’’ submitted January 23, 2015. 

been respected for federal tax purposes). If the transaction is a listed transaction (or substantially similar to a listed transaction), the 

maximum penalty is $100,000 for individuals and $200,000 for all 

other taxpayers. In the case of reportable transactions other than 

listed transactions, the maximum penalty is $10,000 for individuals 

and $50,000 for all other taxpayers. The minimum penalty is 

$5,000 for individuals and $10,000 for all other taxpayers. 

The section 6707A penalty applies even if there is no tax due 

with respect to the reportable transaction that has not been disclosed. There is no reasonable cause exception to the penalty. The 

Commissioner may, however, rescind all or a portion of a penalty, 

but only in the case of transactions other than listed transactions, 

where rescinding the penalty would promote efficient tax administration and only after the taxpayer submits a lengthy and burdensome application. In the case of listed transactions, the IRS has no 

discretion to rescind the penalty. The statute precludes judicial review where the Commission decides not to rescind the penalty. 

The AICPA proposes for an amendment of section 6707A to allow 

an exception to the penalty if there was a reasonable cause for the 

failure and the taxpayer acted in good faith for all types of reportable transactions, and to allow for judicial review in cases where 

reasonable cause was denied. Moreover, we propose an amendment 

of section 6664 to provide a general reasonable cause exception for 

all types of reportable transactions, irrespective of whether the 

transaction was adequately disclosed or the level of assurance. 

9100 Relief 

Section 9100 relief, which is currently available with regard to 

some elections, is extremely valuable for taxpayers who miss the 

opportunity to make certain tax elections. Congress should make 

section 9100 relief available for all tax elections, whether prescribed by regulation or statute. The AICPA has compiled a list 13

of elections (not all-inclusive) for which section 9100 relief currently is not granted by the IRS as the deadline for claiming such 

elections is set by statute. Examples of these provisions include 

section 174(b)(2), the election to amortize certain research and experimental expenditures, and section 280C(c), the election to claim 

a reduced credit for research activities. We do not believe small 

businesses are likely to abuse or exploit hindsight, as the IRS 

would continue to have discretion as to whether to grant relief for 

each specific request. 

Form 5471 Penalty Relief 

On January 1, 2009, the IRS began imposing an automatic penalty of $10,000 for each Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, filed with a delinquent Form 1120 series return. When imposing the penalty on 

corporations in particular, the IRS does not distinguish between: a) 

large public multinational companies, b) small companies, and c) 

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14 AICPA comment letter on ‘‘Recommendations - Automatic Penalties assessments Policy with 

the Late Filing of Form 5471,’’ dated March 26, 2013. 

15 AICPA written testimony before the House Committee on the Judiciary Subcommittee, Regulatory Reform, Commercial and Antitrust Law on Nexus Issues: Legislative Hearing on H.R. 

2315, The ‘‘Mobile Workforce State Income Tax Simplification Act of 2015,’’ H.R. 1643, the ‘‘Digital Goods and Services Tax Fairness Act of 2015,’’ and H.R.—the ‘‘Business Activity Tax Simplification Act of 2015’’, dated June 2, 2015. 

16 Note that New Hampshire and Tennessee, which are included in the 43 states, do not tax 

wages and only subject to tax interest and dividends earned by individuals. 17The seven states with no personal income tax are Alaska, Florida, Nevada, South Dakota, 

Texas, Washington and Wyoming. 

companies that may only have insignificant overseas operations, or 

loss companies. This one-size-fits-all approach inadvertently places 

undue hardship on smaller corporations that do not have the same 

financial resources as larger corporations. The AICPA has submitted recommendations 14 regarding the IRS administration of the 

penalty provision applicable to Form 5471. Our recommendations 

focus on the need for relief from automatic penalties assessed upon 

the late filing of Form 5471 in order to promote the fair and efficient administration of the international penalty provisions of the 

Code. 

MOBILE WORKFORCE 

Another burden on small businesses that Congress should address involves the tremendous burden of tracking and complying 

with the many different state non-resident employee tax withholding and reporting rules for just a few days of work by an employee in a non-resident state. The state personal income tax treatment of nonresidents is inconsistent and often bewildering to 

multistate employers and employees. 

H.R. 2315, the Mobile Workforce State Income Tax Simplification 

Act of 2015, introduced by Representative Bishop on May 14, 2015, 

addresses this issue. We are pleased that members of this Committee cosponsor this bill, and hope many others of you will also 

consider cosponsoring it. The AICPA strongly supports H.R. 2315 

and urges Congress 15 to enact this legislation to help small businesses in this country ease their non-resident state income tax 

withholding and compliance burdens. 

Small businesses must understand each of the states’ treatment 

of non-resident employee withholding and assessment of taxes and 

the unique de minimis and definitions. Currently, 43 16 states plus 

the District of Columbia impose a personal income tax on wages, 

and there are many different requirements for withholding income 

tax for non-residents among those states. There are seven states 

that currently do not assess a personal income tax.17 Employees 

traveling into all the other states are subject to the confusing myriad of withholding and tax rules for non-resident taxpayers. 

A number of states have a de minimis threshold, or exemption 

for non-residents working in the state before taxes must be withheld and paid. Others have a de minimis exemption based on the 

amount of the wages earned, either in dollars or as a percent of 

total income, while in the state. Further complicating the issue is 

that a number of these states have reciprocity agreements with 

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other, usually adjoining, states regarding the withholding of nonresident state income taxes. 

Where many businesses once tended to be local, they now have 

a national reach. This change has caused the operations of even 

small businesses to move to an interstate basis. Because of the 

interstate operations of these companies, many providers of services to these companies, such as certified public accountants 

(CPAs), find that they are also operating on an interstate basis. 

What once were local taxation issues have now become national in 

scope, and burdens must be eased in order to promote interstate 

commerce and ensure businesses run efficiently. These burdens 

take significant resources away from operating their business. 

The complex filing rules impact everyone who travels for work. 

The recordkeeping and the requirement of having to withhold and 

file many state non-resident tax returns for just a few days of work 

in various states is overly burdensome and too complicated for both 

employers and employees. Additionally, the amount of research 

that goes into determining what each state law requires is expensive and time-consuming. A small firm or business will often be required to engage outside counsel to research the laws of the other 

states on an ongoing annual basis. 

This issue affects all industries—retail, manufacturing, real estate, technology, food, services, etc. The current system as a whole 

unnecessarily creates complexity and costs for both employers and 

employees, without yielding a substantive benefit to most states. 

H.R. 2315 is needed to solve this problem and burden for small 

businesses. 

Having a uniform national standard for non-resident income taxation, withholding, and filing requirements, as H.R. 2315 provides, 

will enhance compliance and significantly relieve these unnecessary administrative burdens on businesses and their employees. 

Additionally, H.R. 2315 provides a needed 30-day de minimis exemption before an employee is obligated to pay taxes to a state in 

which they do not reside. Many small businesses need Congress to 

enact this legislation. 

TAX RETURN DUE DATE SIMPLIFICATION 

Another challenging compliance issue for small businesses is the 

current illogical order of due dates for various types of tax returns. 

Taxpayers and preparers have long struggled with problems created by the inefficient timeline and flow of information. Federal 

Schedules K-1s are often delivered late, sometimes within days of 

the due date of taxpayers’ personal returns and up to a month after 

the due date of their business returns. Late schedules make it difficult, if not impossible, to file a timely, accurate return. The current inefficient timeline of tax return due dates is a problem for 

taxpayers as well as their tax practitioners. 

The AICPA strongly supports this provision. It would alleviate 

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mation between pass-through entities and their owners. The proposal includes the changes as follows: 

Current Tax Due Dates: 

• March 15: S corporation and C corporation Forms 1120S 

and 1120; and 

• April 15: Individual, Trust and Estate, and Partnership 

Forms 1040, 1041, and 1065 

Proposed Tax Due Dates: 

• March 15: Partnership Form 1065; 

• March 31: S corporation Form 1120S; and 

• April 15: Individual, Trust and Estate, and C Corporation 

Forms 1040, 1041, and 1120 

The provision would also revise the extended due dates to be six 

months after the original filing due dates for all these forms, except 

the trust and estate Form 1041, which would be extended five and 

half months. 

The AICPA urges you to support this provision to change the 

dates for tax returns of partnerships, S corporations and C corporations because it would: 

• Improve the accuracy of tax and information returns by allowing corporations and individuals to file using current data 

from flow-through returns that have already been filed rather 

than relying on estimates; 

• Better facilitate the flow of information between taxpayers 

(i.e., corporations, partnerships, and individuals); 

• Reduce the need for extended and amendment tax returns; 

and 

• Simplify tax administration for the government, taxpayers, 

and practitioners. 

CONCLUDING REMARKS 

The AICPA has consistently supported tax reform simplification 

efforts and permanent tax legislation because we are convinced 

such actions will significantly reduce taxpayers’ compliance costs 

and encourage voluntary compliance through an understanding of 

the rules. The uncertainty of tax legislation creates unnecessary 

confusion, anxiety and administrative financial burdens. Good tax 

policy would promote a tax system that is balanced, economically 

efficient and transparent. 

We encourage you to examine all aspects of the tax code to improve the current rules that have led to compliance hurdles for 

small businesses and administrative complexity. For example, additional relief is needed for small businesses with regards to the tangible property rules, penalty provisions need to consider their effect 

on voluntary compliance, and employers operating across state 

lines need a uniform standard on non-resident income tax withholding rules. The income tax deadlines should also promote an efficient flow of taxpayer information to provide small businesses sufficient time to file timely, accurate returns. 

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Finally, if small businesses are going to be allowed to grow, it is 

imperative that the IRS’s taxpayer service issues are addressed. 

Small businesses and their tax preparers need to be able to contact 

the IRS regarding their compliance issues. 

Again, Mr. Chairman, thank you for the opportunity to testify. 

I would be happy to answer any questions. 

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NATIONAL CONFERENCE OF CAP PRACTITIONERS 

22 Jericho Turnpike, Suite 110 T: 516–333–8282 

Mineola, NY 11501 F. 516–333–4099 

Mr. Chairman and members of the Committee, thank you for inviting me to testify today. My name is Stephen Mankowski. I am 

a Certified Public Accountant, member of the American Institute of 

CPAs (AICPA) and the National Executive Vice President and National Tax Policy Chair of the National Conference of CPA Practitioners, (NCCPAP - the countries’ second largest CPA organization). NCCPAP is a professional organization that advocates on 

issues that affect Certified Public Accountants in public practice 

and their small business and individual clients located throughout 

the United States. NCCPAP members serve more than one million 

business and individual clients and are in continual communication 

with regulatory bodies to keep them apprised of the needs of the 

local CPA practitioner and its clients. Accompanying me is Ms. 

Sandra Johnson, National President of NCCPAP. 

My firm has been preparing tax returns for over 30 years. My 

firm annually prepares well over 2,000 small business and individual tax returns as well as sales tax, payroll tax returns, highway use tax returns and 1099 informational returns. We are in the 

trenches with clients discussing their tax, financial and personal 

issues, and the impact events and proposed tax law changes may 

have on them. Although our clients are mostly in the Pennsylvania, 

New Jersey and Delaware area, we serve clients in over 30 states 

and also provide services to clients in Canada and Europe. In this 

respect our practice is the same as many members of NCCPAP 

and other smaller CPA firms throughout the United States. 

Tax compliance burden has been defined in the GAO report 

‘‘SMALL BUSINESSES IRS Considers Taxpayer Burden in Tax 

Administration, but Needs a Plan to Evaluate the Use of Payment 

Card Information for Compliance Efforts’’ as the time and money 

spent by the taxpayer to meet tax obligations. This includes federal, state and local obligations, but NOT liabilities. The time spent 

on tax compliance related activities can include working with paid 

professionals, tax planning, record keeping, filing and submitting 

tax forms, learning tax laws, and working with the IRS and other 

jurisdictions on tax related issues. The monetary burdens can include the expenses of accounting and tax professionals, tax and accounting software, payroll services, and legal fees. An objective of 

the Administration and the IRS has been to minimize these burdens and eliminate unnecessary ones. For purposes of my testimony, I will simply use the term taxpayer burden to refer to tax 

compliance burden. 

My first exposure to taxpayer burden was in November 2012. I 

was invited to represent NCCPAP and participate in an IRS panel 

with other tax professionals at IRS headquarters to discussed compliance burdens for both individuals and small businesses. As a 

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CPA, I had always viewed my role as one to reduce client burden. 

I had not viewed my role as a source of taxpayer burden as indicated in the GAO report, which says that CPAs and tax services 

are part of the monetary burden of business owners. We take many 

of the above tasks away from the business owner to allow him/her 

to focus on running their business. So it is easy to see how this 

team can be easily mistaken. This new appreciation of what comprises taxpayer burden has allowed me to be an even better resource for my clients. 

It seems that every year business owners are more in tune with 

how specific tax legislations could affect their business. Clients 

often ask how the Tax Extender legislation will affect their operations and what the Section 179 deduction limit is for the current 

year. While the answers tend to be similar—if you need a piece of 

equipment, you should buy it—that answer is not always the right 

answer for a business owner. Often the tax impact of the Sec. 179 

deduction can be a deal-breaker. Equipment costing $100,000 could 

have a net cost of $60,000 with these write-offs. The $40,000 tax 

savings is often the deciding factor when making the purchase. 

While the IRS does not have control over which of the Extenders 

are passed, it is still a significant factor in assessing taxpayer burden. 

Over the last few years, there has been a decided change in how 

business is conducted. As consumers have been more reluctant to 

carry cash, customers have forced the hand of many businesses 

that have historically limited payment options to cash or checks to 

now accept credit cards. Initially, business owners might have 

added a surcharge for these transactions, but with savvy consumers, credit cards and the related fees have simply become yet 

another cost of doing business. And another element of taxpayer 

burden. These business owners quickly realized that they cannot 

simply apply one rate for these transactions. Even after researching the processing firms to obtain the best processing rates, they 

learn that MasterCard and VISA have different merchant fees 

when compared to American Express and Discover. If the consumer 

uses a credit card that includes member programs or ‘‘points’’, an 

even higher processing rate may be charged by the merchant bank. 

In addition, there might also be monthly and compliance fees as 

well as equipment rental costs. And if that’s not enough, the processing companies do not always deposit funds in the same manner. 

Most will simply deposit the gross amount of the charge and deduct 

the processing fees as a separate transaction. Yet many companies 

will deposit the net amount after deducting the processing fees, 

which makes the merchant’s record keeping more complicated. 

Most business owners have accepted these changes in how to 

conduct their business and accurately report their income. The IRS 

questioned the voluntary compliance of reporting all revenue, especially with the surge in online sales through PayPal. Under a 2008 

law, the processing companies had to begin reporting credit card 

receipts to the IRS and the merchant in 2011 and had to add the 

reporting of the number of monthly transactions for 2012. This 

data appears on Form 1099-K, Merchant Card and Third Party 

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essor once a merchant annually has 200 transactions and sales of 

at least $20,000. 

Initially, the IRS had added rows onto personal returns on 

Schedule C and Schedule E as well as the business returns to incorporate the revenue information from Form 1099-K. However, 

prior to the start of the filing season, the IRS eliminated the requirement to complete these fields because too many issue arose 

creating much confusion. Specifically, there was confusion on how 

to treat sales tax, gratuities, cash back and returns on the 1099- 

K. Those same concerns still exist and are just some of the reasons 

that the IRS hasn’t taken a stronger view on the use of the information on these forms. 

The Form 1099-K has been a new source of taxpayer burden for 

the small business owner. Business owners track revenue by specific categories (i.e. sales, repairs, consulting, rent, etc.). They have 

not needed to track revenue based on how they are paid. Trying to 

accurately track revenue in the same way as the 1099-K presents 

data would result in an accounting nightmare. To further complicate the record keeping, businesses receive a Form 1099-K for 

each specific payment processor. So, if the business accepts 

MasterCard/VISA and American Express they would receive a form 

from MasterCard/VISA and one from AMEX. If they also use 

Paypal, they would receive a third form. If they changed their payment processing company during the year, additional forms would 

be received from the new processing company. The overall burden 

to accurately track revenue by each credit card type can be significant and generate no results that benefit the owner. 

Another issue with the Form 1099-K revolved around payments 

for vendors that would receive a Form 1099MISC. Any payments 

related to these services would not be included on the Form 

1099MISC. This adds a different and unique level of taxpayer burden as this would relate to both the payer and recipient. Just as 

businesses are not setup to track revenue by payment source, the 

payer would have an additional burden to exclude credit card payments from the total payment they are required to report on Form 

1099MISC to the recipient. 

From the IRS viewpoint, however, this form has helped increase 

voluntary compliance among small businesses. Many virtual businesses that had previously flown under the radar (part of the underground economy) are now filing income tax returns and paying 

taxes. In addition, the Form 1099-K has allowed the IRS to establish a database whereby they can obtain a better understanding of 

the revenue sources of a particular industry. Even though the IRS 

has not been able to assess taxpayers based solely on these databases, the IRS has been sending letters to taxpayers whom they 

feel have significantly under reported revenue. Initially, the IRS 

was accepting reasonable responses to these notices, but with the 

additional data in their databases, the IRS has a better understanding of the egregious filers, specifically those businesses reporting that 100% of their revenue was from credit card transactions. 

To assist tax professionals, the IRS instituted a pilot program for 

the 2015 filing season called the Payment Mix Comparison Tool 

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(PMCT). NCCPAP was invited to participate in the program. This 

program allows our members to enter selected data from the client’s Form 1099-K (Merchant Category Code (MCC), zip code, total 

transactions and total revenue) along with the total business income into a tool. PMCT accesses the IRS database and compares 

various ratios for a business with a specific MCC code against the 

Form 1099-K. The result tells the CPA if the results are within 

specifications of the database. A common flaw with the Form 1099- 

K is that if the payment processor applies an incorrect MCC code 

for a business, the PMCT results could be beyond the standard deviation which nay result in an IRS notice. 

The results from the PMCT have been strictly for the benefit of 

the taxpayer and is for informational purposes only. Currently, the 

IRS is not capturing data from this tool. The database will continue 

to improve as the volume of historical data input into the tool increases. The PMCT, unfortunately, did not get the expected usage 

due to a few practitioner concerns. Specifically, the name of the tool 

was not the best, many practitioners did not believe that the IRS 

was not tracking the results and the fact that PMCT did not go live 

until the beginning of February 2015 after most CPAs have completed their training and had already begun preparing tax returns. 

In addition, many felt that there should be a better result besides 

‘‘typical’’ or ‘‘unusual’’ depending on where in the range their client’s data fell. Hopefully, this program will continue next year and 

will see more usage by tax professionals. If used property, PMCT 

could actually reduce taxpayer burden by addressing issues of credit card revenue while the data is still fresh in the business owner’s 

mind. 

In conclusion, taxpayer burden exists on two primary levels— 

time and money—to remain in compliance with today’s complicated 

tax codes. Often, both components are viewed as one, except when 

contacting the IRS. Staffing and budgetary issues have resulted in 

longer than expected wait times and reaching IRS employees that 

are not able to address the caller’s issues and concerns. Compliance 

with tax codes and dealing with new forms adds to taxpayer burden. New forms, such as Form 1099-K, are a prime example. The 

results may be of use to the IRS, but does not have any practical 

use for the business owner. Businesses do not tracked revenue by 

number of transactions or type of payment. Any attempt at 

verifying the data on the Form 1099-K would be fruitless, especially in industries, such as restaurants where customers charges 

often include gratuities and sales tax, neither of which are revenue 

to the business. 

Accepting credit cards has become the norm. Most businesses 

historically have included all of their sales, regardless of source. 

With the information on Form 1099-K, the IRS now has a means 

to ensure that all business, especially virtual ones, are tax compliant with regard to credit card sales. With this form comes additional burdens to the taxpayer including how to reconcile sales to 

the revenue reported on these forms. The question that the taxpayer needs to answer is how to best run his or her business. If 

the business owner has systems in place to accurately track all revenue, the burden of reconciling the Form 1099-K data should be 

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minimal. It is extremely important that the IRS has the tools to 

determine tax compliance and reduce the tax gap. 

As various states learned that the IRS was beginning the income 

matching program, many decided to use this as a tool to understand the sales mix of credit cards vs. cash and checks. Currently 

these states have also indicated that they have no plans to use this 

information for audit selection or any purpose other than the collection of information. However, neither the IRS nor the participating 

states have assured the tax practitioners or business communities 

that this information will not be used in the future as a tool for 

audit selection despite its flaws. 

This program has the potential of a disaster. This is a repeat of 

warnings from NCCPAP and others in the tax practitioner community when the Form 1099-K matching program was first proposed. It is well understood that the IRS should use all tools possible to find tax cheats. However, as the GAO has correctly indicated, this is a flawed system with no real ability of matching gross 

income with Form 1099-K reports. Additionally, the ratio tools now 

being used are very imperfect as certain assumptions used (such as 

NAICS codes) will skew the information. 

Thank you for the opportunity to present this testimony. 

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