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FULL COMMITTEE HEARING ON 

IRS OVERSIGHT: ARE TAX COMPLIANCE COSTS 

SLOWING DOWN THE ECONOMIC RECOVERY? 

HEARING 

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

HEARING HELD 

APRIL 1, 2009 

Small Business Committee Document Number 111-014 

Available via the GPO Website: http://www.access.gpo.gov/congress/house 


Congress.#13
HOUSE COMMITTEE ON SMALL BUSINESS 

NYDIA M. VELA ́ ZQUEZ, New York, Chairwoman 

DENNIS MOORE, Kansas 

HEATH SHULER, North Carolina 

KATHY DAHLKEMPER, Pennsylvania 

KURT SCHRADER, Oregon 

ANN KIRKPATRICK, Arizona 

GLENN NYE, Virginia 

MICHAEL MICHAUD, Maine 

MELISSA BEAN, Illinois 

DAN LIPINSKI, Illinois 

JASON ALTMIRE, Pennsylvania 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

JOE SESTAK, Pennsylvania 

BOBBY BRIGHT, Alabama 

PARKER GRIFFITH, Alabama 

DEBORAH HALVORSON, Illinois 

SAM GRAVES, Missouri, Ranking Member 

ROSCOE G. BARTLETT, Maryland 

W. TODD AKIN, Missouri 

STEVE KING, Iowa 

LYNN A. WESTMORELAND, Georgia 

LOUIE GOHMERT, Texas 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

BLAINE LUETKEMEYER, Missouri 

AARON SCHOCK, Illinois 

GLENN THOMPSON, Pennsylvania 

MIKE COFFMAN, Colorado 

MICHAEL DAY, Majority Staff Director 

ADAM MINEHARDT, Deputy Staff Director 

TIM SLATTERY, Chief Counsel 

KAREN HAAS, Minority Staff Director 

(II) 

STANDING SUBCOMMITTEES 

Subcommittee on Contracting and Technology 

GLENN NYE, Virginia, Chairman 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

KURT SCHRADER, Oregon 

DEBORAH HALVORSON, Illinois 

MELISSA BEAN, Illinois 

JOE SESTAK, Pennsylvania 

PARKER GRIFFITH, Alabama 

AARON SCHOCK, Illinois, Ranking 

ROSCOE BARTLETT, Maryland 

TODD AKIN, Missouri 

MARY FALLIN, Oklahoma 

GLENN THOMPSON, Pennsylvania 

Subcommittee on Finance and Tax 

KURT SCHRADER, Oregon, Chairman 

DENNIS MOORE, Kansas 

ANN KIRKPATRICK, Arizona 

MELISSA BEAN, Illinois 

JOE SESTAK, Pennsylvania 

DEBORAH HALVORSON, Illinois 

GLENN NYE, Virginia 

MICHAEL MICHAUD, Maine 

VERN BUCHANAN, Florida, Ranking 

STEVE KING, Iowa 

TODD AKIN, Missouri 

BLAINE LUETKEMEYER, Missouri 

MIKE COFFMAN, Colorado 

Subcommittee on Investigations and Oversight 

JASON ALTMIRE, Pennsylvania, Chairman 

HEATH SHULER, North Carolina 

BRAD ELLSWORTH, Indiana 

PARKER GRIFFITH, Alabama 

MARY FALLIN, Oklahoma, Ranking 

LOUIE GOHMERT, Texas 

(III) 

Subcommittee on Regulations and Healthcare 

KATHY DAHLKEMPER, Pennsylvania, Chairwoman 

DAN LIPINSKI, Illinois 

PARKER GRIFFITH, Alabama 

MELISSA BEAN, Illinois 

JASON ALTMIRE, Pennsylvania 

JOE SESTAK, Pennsylvania 

BOBBY BRIGHT, Alabama 

LYNN WESTMORELAND, Georgia, Ranking 

STEVE KING, Iowa 

VERN BUCHANAN, Florida 

GLENN THOMPSON, Pennsylvania 

MIKE COFFMAN, Colorado 

Subcommittee on Rural Development, Entrepreneurship and Trade 

HEATH SHULER, Pennsylvania, Chairman 

MICHAEL MICHAUD, Maine 

BOBBY BRIGHT, Alabama 

KATHY DAHLKEMPER, Pennsylvania 

ANN KIRKPATRICK, Arizona 

YVETTE CLARKE, New York 

BLAINE LUETKEMEYER, Missouri, Ranking 

STEVE KING, Iowa 

AARON SCHOCK, Illinois 

GLENN THOMPSON, Pennsylvania 

(IV) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

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

Graves, Hon. Sam .................................................................................................... 2 

WITNESSES 

Shulman, Hon. Douglas, Commissioner, Internal Revenue Service .................... 3 

Smith Mr. Christopher, S.T.O.P.--Northland LLC, Pleasant Valley, MO ........... 17 

APPENDIX 

Prepared Statements: 

Vela ́zquez, Hon. Nydia M. ....................................................................................... 21 

Graves, Hon. Sam .................................................................................................... 23 

Shulman, Hon. Douglas, Commissioner, Internal Revenue Service .................... 25 

Smith Mr. Christopher, S.T.O.P.--Northland LLC, Pleasant Valley, MO ........... 35 

Statements for the Record: 

American Institute of Certified Public Accountants ............................................. 38 

(V) 

(1) 

FULL COMMITTEE HEARING ON 

IRS OVERSIGHT: 

ARE TAX COMPLIANCE COSTS SLOWING 

DOWN THE ECONOMIC RECOVERY? 

Wednesday, April 1, 2009 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

Washington, DC. 

The Committee met, pursuant to call, at 1:00 p.m., in Room 2360 

Rayburn House Office Building, Hon. Nydia Vela ́zquez [chairman 

of the Committee] presiding. 

Present: Representatives Vela ́zquez, Dahlkemper, Schrader, 

Altmire, Clarke, Graves and Luetkemeyer. 

Chairwoman VELA ́ ZQUEZ. I call this hearing of the House Small 

Business Committee to order. 

Every American circles April 15 on their calendar, but outside of 

a few eager CPAs, most people do not look forward to tax day. 

While this time of year brings an annual headache for us all, it is 

especially daunting for our nation’s entrepreneurs. Historically, tax 

code complexity has been the greatest source of frustration for 

small businesses. No surprise there, the tax code contains over 200 

small business provisions. 

Simplification is key, and this Committee has held hearings on 

this issue, but today in light of historic economic challenges, that 

matter has taken a back seat to more immediate concerns. 

This afternoon we will explore ways in which the IRS can help 

entrepreneurs meet tax obligations during a recession. We will also 

discuss the role of the agency in handling incentives within the 

stimulus. 

In February small businesses finally got their stimulus. Within 

that bill were critical tax incentives from bonus depreciation to net 

operating loss extensions. This is the kind of relief entrepreneurs 

need, but like most tax policies, these initiatives are complex. 

The IRS needs to insure their meanings are clear before small 

firms can take advantage of incentives. They need to understand 

how they work. Otherwise the benefits of these provisions and of 

the stimulus overall may be diminished. 

Unfortunately, clarification has never been an IRS strong point. 

After all, we are talking about the agency that handles the 54,000 

page tax code, but with new stimulus policies on the books, the IRS 

will have to improve communications. Part of that improvement 

process should include increased outreach and enhanced client 

services. 

2 

Entrepreneurs need to know they can count on the IRS to answer their tax question quickly and accurately. In an era of growing uncertainty, those kinds of resources are critical, especially considering recent increases in small businesses’ audits. Unlike big 

businesses, small firms do not have an army of tax attorneys and 

accountants. As a result, they are largely defenseless against the 

IRS, making them easy targets. 

In the two years between 2005 and 2007, small business audits 

shot up 41 percent. Meanwhile, investigation of the biggest companies plummeted 40 percent. It does not matter who you are or how 

big your business is. No one had the right to skirt their taxes. But 

at a time when small business audits are up and big business audits are down, you have to wonder where are the priorities. 

Small firms have been battered enough by the recession. The last 

thing they need is the added nightmare of an IRS investigation. In 

the face of deepening recession, tax policies should be a means for 

small business growth and not the straw that breaks the camel’s 

back. 

I would like to thank today’s witnesses and especially the Commissioner of the IRS, and in advance for the testimony. I know this 

is an especially busy time of the year, and I am pleased that they 

both can join us. 

With that I would like to yield to Ranking Member Graves for 

his opening statement. 

Mr. GRAVES. Thank you, Madam Chair, and thank you for calling 

this hearing on tax compliance costs for small businesses. 

I also want to extend my special thanks to our witnesses, Commissioner Shulman, and the witness on the second panel, which is 

Kit Smith, a constituent from Missouri whom I am going to introduce later. 

Every day it seems that we hear more bad news for entrepreneurs. The faltering economy, federal bailouts of big companies 

that owe back taxes, studies showing that small companies are increasingly targeted for audits. Our nation’s small company owners 

are in the trenches day in and day out working hard during the 

recession to keep their businesses afloat, contribute to the economy, 

purchase equipment, and create the majority of new jobs, and of 

course, pay their taxes. 

According to the Internal Revenue Service’s National Taxpayer 

Advocate, tax issues present the single most significant set of regulatory burdens for small firms. The Small Business Administration’s Office of Advocacy reports that firms with less than 20 employees spend more than $1,200 per employee to comply with tax 

paperwork, record keeping, and the reporting requirements that go 

along with it. 

This is twice the cost of compliance for larger firms, and surveys 

by the National Federation of Independent Business consistently 

ranked federal taxes among the top five issues of greatest concern 

to entrepreneurs. Small businesses have good reasons to be concerned. Most of them pay their taxes and on time, and they want 

others to do so as well. We have heard about the tax gap, or the 

difference between what is legally owed and what is actually paid 

voluntarily and on time. 

3 

One prong of the IRS strategy to reduce the tax gap is to increase enforcement. And it appears the IRS has small businesses 

in its crosshairs. A 2008 Syracuse University study revealed that 

small businesses were 41 percent more likely to be investigated 

than large firms, while the audit rate for the nation’s largest corporations fell to the lowest level in 20 years. One can only surmise 

that this is because small firms are less able to hire high-priced attorneys and accountants to fight back. 

Today we will hear from one of my constituents, Mr. Smith, who 

is going to describe the horrific IRS audit of his small business. If 

small firms did not have enough stress trying to run a small company in a recession, we burden them with countless laws, regulations, reporting requirements, and we continue to do so every year. 

We must simplify our tax code and require the IRS to do a better 

job of helping small businesses comply. Small businesses deserve 

better. 

Madam Chairman, again, I appreciate your work on this and the 

hearing you are having today. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

And now I welcome the Honorable Douglas Shulman, IRS Commissioner. Mr. Shulman is Commissioner of the Internal Revenue 

Service. He is the 47th Commissioner and began his five-year term 

on March 24th, 2008. 

Prior to joining the IRS, he worked for the Financial Industry 

Regulatory Authority, the private sector regulator of all security 

firms doing business in the United States. The IRS collects approximately $2.4 trillion in annual tax revenue that funds most 

government operations and public services. 

Welcome. 

STATEMENT OF THE HONORABLE DOUGLAS SHULMAN, 

COMMISSIONER, INTERNAL REVENUE SERVICE 

Mr. SHULMAN. Thank you, Chairwoman Vela ́zquez. I very much 

appreciate being at this hearing. Ranking Member Graves, other 

members of the Committee, I am happy to have an opportunity 

today to testify about the Internal Revenue Service’s efforts to assist America’s small businesses, particularly during the current 

economic downturn. 

As President Obama recently observed, our recovery in the 

present and our prosperity in the future depend upon the success 

of America’s small businesses and entrepreneurs. I believe, and I 

have been very public in this belief, that the IRS has two equally 

important parts of its mission: service and enforcement. We need 

to provide world class service to the small businesses, the individuals who are out there trying to wrestle with an incredibly complex 

tax code, and we have to have enforcement programs for those who 

aren’t paying their taxes across the spectrum. 

I have started two small businesses personally in my career, and 

therefore I am acutely aware of the many problems confronting a 

small business. From struggling with the economic environment to 

securing a loan, to hiring employees, to getting sales, to the obligation to pay their taxes. 

4 

I have included information in my written testimony about a 

number of issues. Let me highlight a couple of things we are doing 

now to try to help small businesses during this recession. 

It is inevitable during these kinds of times that taxpayers may 

fall behind in their taxes. As the IRS Commissioner, I am very 

committed to striking the right balance between collecting the revenues needed to fund the government and using all the tools that 

we have available to work with small businesses who find themselves unable to pay. I have told our people, from the most senior 

to those working on the front lines, that we need to be flexible, 

principled, and that we need to empower all of our people to use 

their judgment when they are working with taxpayers. 

As the economy got worse last summer, I sat down with our senior team and said what can we do for taxpayers and where are we 

going to find stress in our system between us and taxpayers. We 

did a number of things that benefit small businesses. Let me take 

you through a few. 

First, our employees were reminded of their ability to offer install agreements at the end of an audit when taxpayers are having 

difficulty satisfying their obligations to pay immediately. 

Second, I gave IRS employees more flexibility to suspend collection actions in certain hardship cases. 

Third, we gave employees more flexibility to work with previously compliant taxpayers in an existing installment agreement 

who cannot pay because of an economic hardship. 

Fourth, taxpayers unable to meet the payment terms of an accepted offer in compromise are now being informed of the options 

available to them to help them avoid a default. 

And, fifth, we are speeding up levy releases by easing requirements on taxpayers who request expedited levy release. 

Turning to the American Recovery and Reinvestment Act that 

you mentioned, Madam Chairwoman, the IRS announced last 

month that small businesses with deductions exceeding their income in 2008 can use a new net operating loss tax provision to get 

a refund of the taxes paid in prior years. This new provision enables small businesses with a net operating loss in 2008 to offset 

losses against income earned and allows a carry back of up to five 

years instead of the normal two years. 

This could throw a lifeline to struggling businesses with an infusion of cash. I have made sure that we have the resources to move 

quickly to get cash into the hands of small businesses when they 

apply for such a refund. We are going to be monitoring this on a 

daily basis, and if we find a backlog or any clogging in the system, 

I am going to apply more resources so that we can implement this 

smoothly and seamlessly. 

Madam Chairwoman, the IRS is always looking for ways to better serve taxpayers through outreach and education. As you said, 

a lot of small businesses do not have all of the high priced lawyers 

and accountants and other sort of service providers, and so we are 

acutely aware that we need to be directly helping small businesses. 

Last year we participated in more than 2,600 meetings with 

small businesses, reaching directly 162,000 small businesses 

through outreach efforts. We hold national and local small business 

forums to have an avenue of communication with the IRS. At the 

5 

local level we have special business units that work with Chambers 

of Commerce, small business development centers, better business 

bureaus, and other groups that assist small business owners. 

We also work with the Small Business Administration to get the 

word out to taxpayers. We are also very focused that we are never 

going to be able to get to all of the taxpayers ourselves, and so we 

try to work with associations to reach taxpayers. 

Finally, we recognize that we are not going to be able to reach 

everybody through direct contact. We have phone-in forums. People 

can call our 1-800 number if they have questions or concerns. 

We also have an E-newsletter for small businesses with 140,000 

small businesses subscribing. 

Let me just say that again I want to thank you for the opportunity to testify about what we’re doing to help small businesses, 

as we are all trying to be on this road to recovery. We have made 

some progress, but I am a believer that institutions can always get 

better, and you have my assurance that I am going to push the institution to work with small businesses. 

I look forward to working with you, other members of the Committee, and the staff to make sure that this great engine of economic growth and prosperity of the country continues to operate at 

its full potential.[The prepared statement of Mr. Shulman is included in the appendix at page 25.] 

Chairwoman VELA ́ ZQUEZ. Thank you. 

I recognize Mr. Schrader. 

Mr. SCHRADER. Thank you, Madam Chair. I appreciate that. 

Commissioner Shulman, I will not blame the IRS for all of the 

rules and regulations you have to deal with because obviously they 

came from somewhere, and oftentimes that is this great, august 

body as we try and help people, but recognize fully that things are 

very complex. There has been a lot of interest in simplifying the 

tax code. As Chairman of the Subcommittee on Tax and Finance, 

I am interested in your thoughts on for particularly small businesses, let’s say, under that $15 million gross threshold. Are there 

certain ways one could really simplify their filing of taxes and 

make it very, very simple? 

Mr. SHULMAN. Let me say a couple of things about it. One is I 

could not agree with you more. The tax code is incredibly complex, 

and we certainly can do better in administering it, but a lot of the 

complexity is in the law, not in the administration of it, and so I 

appreciate the observation. 

As you know, the President has appointed a working group to 

look at a variety of tax issues, and certainly simplification is one 

of the things on the agenda. We are going to keep trying to do everything we can to simplify our forms to things like, for very small 

businesses, we have recently said that you do not need to file quarterly employment taxes. You only have to file annually. We can do 

things like that. 

I do not have big, broad policies to announce around simplification. Clearly, the administration is going to be working with Congress on those kinds of things. 

Mr. SCHRADER. There has been interest, and it has been articulated by different small business groups, members of this ComVerDate Aug 31 2005 18:18 May 04, 2009 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\48125.TXT DARIEN
6 

mittee with regard to some sort of flat tax for very small businesses. What are your comments on that extreme simplification? 

Mr. SHULMAN. I will reserve judgment. I recognize there has 

been a lot of debate about all of the taxes, including the flat tax, 

and I will not make any comments on it. 

Mr. SCHRADER. I guess I will defer my questions then at this 

point. 

Thank you, Madam Chair. I yield back. 

Chairwoman VELA ́ ZQUEZ. Mr. Graves. 

Mr. Luetkemeyer. 

Mr. LUETKEMEYER. Thank you, Madam Chair and Ranking Member Graves. 

Just kind of quickly, thank you for your service. I know you have 

a difficult task, and sometimes I am sure it is maligned in many 

instances, but I would just ask you to continue to do the good job 

you are doing. Obviously most taxpayers are more concerned with 

fairness. I think that is the issue that most are most concerned 

with, from the standpoint that while they do not like to pay taxes, 

they are more than willing to do so as long as they believe that 

their neighbor and everybody else that they are acquainted with 

pays their fair share as well. 

And I think it is incumbent on us as legislators to make sure we 

pass laws that do not impact things in an unfair way, and hopefully you will enforce those laws in a fair manner as well. 

Along that line, I have an E-mail here, if you will bear with me 

just a moment. One of my constituents E-mailed me this, and we 

were talking about instances where we have concerns with impacts 

on small business, and he’s a stock broker. He is with Morgan 

Stanley, and his CPA filed his tax return the 24th of March electronically and did not get his refund back in a timely fashion and 

tried to check with the IRS office, and the only explanation was 

that because he had a Morgan Stanley tax ID, it must have been 

flagged because of the TRAP funds. 

Are we flagging certain businesses for oversight, for further audits? I mean this an isolated instance where somebody just shot an 

opinion off the top of their head, or is that kind of stuff going on? 

Mr. SHULMAN. Oh, I do not think anyone would have said that. 

So I am happy to look into that, and I encourage you to send it 

to my office. We are not targeting any individuals because of any 

broad government program. So that is a surprise to me. 

Mr. LUETKEMEYER. Okay. Well, I was just curious because obviously the Morgan Stanley folks do have some TARP funds. I am 

just wondering if that is a broad category that you are as well looking at a little bit differently. 

Mr. SHULMAN. We certainly are not looking at any individuals. 

There are a lot of new moving pieces that are happening as the federal government is getting involved in trying to shore up financial 

institutions and lots of pieces of the economy. We are quite aware 

that when people or institutions are given support by the federal 

government, they have got an obligation to pay their taxes, but we 

are not doing anything to target any individuals of institutions 

with any sort of other piece. 

And so if they filed on March 24, if you file electronically and get 

a direct deposit, you usually get a refund within about ten days. 

7 

If you file using paper and you get a check, it can be up to six 

weeks, and so I am assuming this person, if they filed electronically, is trying to use direct deposit. I encourage them to call our 

800 number and find out where they are in the process. They can 

let them know. 

Mr. LUETKEMEYER. All right. Thank you. 

To follow up further, I noticed one of the things I think is important, we are talking about small businesses today, and many of 

them are partnerships, S corps. who oftentimes run those dollars 

through their personal income taxes. 

And I am just kind of curious if you have some thoughts. I know 

that the administration, the tax policy in the new budget is indicating they are going to try and tax those individuals over 250,000, 

which would put a lot of these partnerships and S corp. folks directly into the category of being taxed. 

Do you have any idea of how many businesses that would be or 

how many individuals file partnerships and S corps. as a percentage of the small businesses in this country? 

Mr. SHULMAN. Yes, small businesses come in a number of forms, 

and that is why sometimes when you look at our statistics, it is 

hard to get a grasp on small businesses. The vast majority actually 

come in 1040 Schedule C, sole proprietors and others. Then there 

are a number of C corps., which are small corporations, which if 

you look at our statistics there, and then there are lots of people 

who have flow-throughs, S corps., partnerships, LLCs. 

I do not have the exact number on me now. I can get back to you. 

What I will tell you though is since 2000 the number of flowthrough entities, filing returns for those entities, so S corps., LLCs, 

partnerships, has increased about 50 percent while the number of 

C corporations has been relatively flat. For us that is an interesting phenomenon because if you think about us doing our job, my 

belief is any time you are running a regulatory agency or government agency, there are all sorts of incorporations that make a difference, but what really matters is the economics that you are looking at. So it makes our job much harder, I will tell you, because 

it is much more complex to look at a partnership where it is really 

a network of lots of other activities happening flowing through that 

partnership than it is C corporation where the taxes and the entity 

all stops right there. 

Mr. LUETKEMEYER. I see my time is up. Thank you, Madam 

Chair. 

Chairwoman VELA ́ ZQUEZ. Mr. Altmire. 

Mr. ALTMIRE. Thank you, Madam Chair. 

And, Commissioner Shulman, thank you for being here. 

Last week the IRS stated that COBRA provisions in the stimulus 

plan are a top priority, and I understand that one of the outstanding items for the IRS is defining involuntarily terminated to 

determine that eligibility. 

When does the IRS expect to issue guidance on this matter that 

affects COBRA obligations and rights? 

Mr. SHULMAN. We issued the first set of guidance several weeks 

ago. Today some questions and answers were put up on the IRS 

Website to try to answer a lot more of those pieces. The COBRA 

provision is one of the most complex for us to administer because 

8 

right now when an employer sends their form 941 into us, we actually do not have individual taxpayer information. They just send 

gross employment tax to us. And so really the employer is going 

to have to do all of the true-up with the individuals, which we recognize them, and it is the way the law was written. The decision 

was to provide this medical benefit through the employment tax 

system. We have tried to simplify it. 

Your specific issue, I will check and see if it is on the Q&As that 

went out to day. If not, I can get back to you with the information. 

Mr. ALTMIRE. Okay. Thank you. 

I wanted to ask a question about home-based businesses. For 

many entrepreneurs running a home-based business, the home office deduction is simply too complex and time consuming. It is clear 

that something needs to be done since only nine million of the 

nearly 30 million home-based businesses even took that deduction. 

Is the IRS considering writing new regulations that would make 

it easier for small businesses to take that deduction? 

Mr. SHULMAN. Yes. I will tell you when I said I have started a 

couple of small businesses, the first one I started, started in my 

home, and then we moved, and then we put phones in, and then 

we got employees, et cetera. So I am well aware of the complexity 

of that deduction. 

I know it is very hard for taxpayers. It is very hard for the IRS. 

The law is pretty clear about it. We are trying to administer the 

law, but I am interested in this issue, and these are broader conversations within the administration and with Congress. I would 

encourage Congress to simplify it and create a safe harbor, but it 

would not be out of the question for us to at least explore if there 

is a way to have some sort of safe harbor because we recognize this 

is a very complex area of the law. 

Mr. ALTMIRE. Great. I want to ask one more question to what 

Mr. Luetkemeyer was asking. You may not have these numbers in 

front of you, I realize. 

With regard to the flow-through that you were talking about and 

that $250,000 income threshold, you were addressing the question 

that you were asked, which was how many total small businesses 

are there that fall into that category. How many are there that 

would be over that $250,000 threshold that would actually be subject to that new level of taxation? 

Mr. SHULMAN. I am going to have to come back to you on that. 

There are a lot of small business owners, the ones who are fortunate enough to make $250,000, and obviously if you are a flowthrough, it shows up on your individual tax return. 

Mr. ALTMIRE. Do you have any idea of the percentage with regard to businesses? 

Mr. SHULMAN. I do not. I am sorry, but I can get back to you 

with those numbers. 

Mr. ALTMIRE. Okay. Thank you. 

Thank you, Madam Chair. 

Chairwoman VELA ́ ZQUEZ. Mr. Graves. 

Mr. GRAVES. Thank you, Madam Chair. 

I want to follow up on Jason Altmire’s point, I appreciate what 

you said about trying to make the IRS do a better job, and you can 

always do a better job, and I very much appreciate that. And I 

9 

know you understand, but do your auditors and the folks below you 

understand, the people who are making the decisions, you know, 

what it is like to start a small business and run a small business? 

Then I also wanted to ask you, too, I mentioned the Syracuse 

study from 2007. I did not know if you were aware of it, but my 

curiosity is, is it more likely for small businesses to get audited 

than larger businesses? 

The study was pretty clear, but you know, I would just ask you 

to comment on that. 

Mr. SHULMAN. A couple of things. One, on your question about 

people understanding small businesses, one of the first things I did 

when I came in because I am a big believer that if you are going 

to run a government agency and if you are going to operate with 

the power and authority of law that a government agency has, you 

need to be very focused on understanding the impact on the people 

that you affect. 

And so the phrase I always use with our people is we need to 

walk a mile in the taxpayer’s shoes, and we talk a lot about that. 

You know, the fortunate thing that we have is everybody who 

works at the IRS is a taxpayer. So I think everyone files every year 

and has to wrestle with the code. So they understand that. 

And I am very focused on doing what we can to increase outreach, increase dialogue and make sure people are really kind of 

stepping out of their mind and sitting on the other side of the table 

and feeling what it is like. 

So I cannot say we are all the way there. No business or government entity is all the way there, but it is a big focus of mine while 

I am here. 

Let me give you a couple of numbers that I think are interesting 

and tell you, one, if you looked at any of the public comments I 

have made in the last year in any of my testimony, I have talked 

about three focus areas. One is international tax evasion. Two is 

large business, and three is high net worth individuals. And so that 

is where my emphasis has been. 

If you look at businesses with less than $10 million of assets, and 

this is kind of how we break it down, we are eight times more likely to audit a business between ten and $250 million of assets than 

we are a business with less than ten million of assets, and we are 

18 times more likely to audit a business with over 250 million of 

assets, so the big businesses, than we are a business with less than 

ten million of assets. 

And so, you know, I am the IRS Commissioner. One of my jobs 

is to have every American feel like we are keeping an eye on everyone so that your neighbor is paying and your competitor is paying. 

So I would not say that we do not have good audit coverage everywhere. I would not be doing my job if I said that. But I really do 

not believe that we are unfairly targeting small businesses, and the 

numbers pretty much speak for themselves. You are a lot more 

likely to get audited, 18 times more if you are a very big business, 

than you are if you are a very small, and you are eight times more 

likely if you are a mid- size business than a very small business. 

Mr. ALTMIRE. Thank you, Madam Chair. 

Chairwoman VELA ́ ZQUEZ. Ms. Dahlkemper. 

Ms. DAHLKEMPER. Thank you, Madam Chair. 

10 

Mr. Shulman, I want to go back to the COBRA issue because I 

have had a calls from small business owners regarding this, and 

although they agree with it and they think it is a great way to 

cover some of their employees that they have had to let go, they 

are concerned about the up-front payment. 

And how long currently under your current guidance, how long 

until they can be reimbursed for their out-of-pocket expenses on 

that 65 percent? 

Mr. SHULMAN. Yes. I have heard this issue. I think you are referring to people usually have to reimburse for premiums and pay 

premiums monthly, but do not get reimbursed until the end of the 

quarter, and so the time that you can take the 65 percent out of 

your payroll taxes is when you file your 941 quarterly returns. 

This is a timing issue that is in the law. There is not a lot we 

can do about it. What we have done is while it was going through 

the legislative process first we made sure Congress knew that this 

was going to be a problem. 

Two, we actually pushed back and we think we eliminated some 

complexity. One of the issues that was on the table is to make this 

reporting on the W-2, which would have made payroll processors 

and employers all have to change their W-2s, which we pushed 

back and did not do. 

We are well aware that this is an issue for small businesses. We 

have looked at it. We are going to do what we can, but some of 

these timing issues are really through the legislation, and there is 

not a lot we can do. 

Ms. DAHLKEMPER. And I know it is quite a financial burden on 

a lot of companies who are just living on a shoestring right now. 

Anyway, I appreciate your answer on that. 

My other question is regarding, you know, the meetings and the 

forums that you had, you know, for small business communities. 

Often we have these meetings and we have forums and everyone 

voices their concerns, but that does not lead to any reforms. Can 

you tell me some specifics, some action that the IRS has taken as 

reforms as a result of the meetings and the forums that you had 

last year or any time in recent history? 

Mr. SHULMAN. Yes, there are a couple of things. One, a big purpose of these meetings is because a lot of small businesses are not 

hiring accountants and lawyers and others; it is literally to give 

them face-to-face advice. So a lot of what we are doing is saying 

how do you open a business, how do you close a business, how do 

you work through an audit, what kind of information and record 

keeping do you take. So it is not all feedback. A lot of it is education and outreach. 

A few examples of things that have happened because of feedback from small business community in recent years. One is when 

there is a lifetime exchange of property. A small business sells a 

building and then buys another building, and it is a lifetime exchange of property. They have to actually hold the proceeds in an 

escrow account. 

The law allows that the proceeds in the escrow account to pay 

interest, and if they are not paying a certain amount of interest, 

there is imputed interest to the small business. We heard a lot of 

11 

small business owners say that I was not getting any interest and 

then there is this imputed interest. I have to pay a tax. We have created an exemption for under $2 million. The other 

thing we heard is there are a lot of people who are very small businesses who were having to file quarterly employment taxes. We extended that. We heard from a lot of small businesses that when 

you filed an extension of your income tax, especially Schedule C filers, you had to file a four-month extension and then another twomonth extension. Through hearing from many people, including 

small businesses, we made that a one time six-month extension. 

The other thing we have done is we increased the threshold to file the Schedule C EZ to $5,000 of business expenses, and so we 

tried through the dialogue to hear from people. Do we do a perfect 

job of it? Absolutely not. Could we do better? Yes. But we are quite 

committed to trying to hear and do what we can, again, within the 

confines of knowing we also have a job to fund the government. 

We need to work with the Treasury Department on these pieces, 

and there are a lot of issues that are really purely legislative. 

Ms. DAHLKEMPER. I appreciate that, and I think, you know, listening to the people who are out there every day trying to create 

jobs and keep this economy going and seeing what you can do within the constraints that you have is important because I think a lot 

of people who are doing their job in your agency really do not know 

what small businesses are going through every day. So I appreciate 

your listening to them. 

Thank you. I yield back. 

Mr. SHULMAN. Thank you. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

And now the Committee is going to stand in recess until we finish up voting on the floor. 

[A recess was taken.] 

Chairwoman VELA ́ ZQUEZ. The Committee is called back to order. 

Thank you, Mr. Commissioner, for your indulgence. 

I will recognize Ms. Clarke. 

Ms. CLARKE. Thank you, Madam Chairwoman and Ranking 

Member Graves, for holding this hearing on tax complying costs 

and whether it is slowing this country’s economic recovery. 

As I have always stated, as we move forth in the 21st Century, 

small businesses will become more and more an essential element 

in driving the U.S. economy. About 30 million small businesses operate in the U.S., which employs virtually 80 million workers. 

When it comes to tax compliance issues, small businesses benefit 

from greater flexibility and fewer bureaucratic controls. But today 

during these tough economic times, small businesses are having 

difficulty staying open. Now, is the time for the IRS to do much 

more in outreach and education to small businesses to answer the 

many questions and address their legitimate concerns. 

For small business the tax code is simply too complex and burdensome, and I hope that our conversation here today will enable 

us to come out with recommendations to assist in those outreach 

efforts. 

So, Mr. Shulman, a lot of the tax issues are not merely about the 

money, but about the compliance problems when dealing with the 

government, especially when it comes to reporting. Most sole proVerDate Aug 31 2005 18:18 May 04, 2009 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\48125.TXT DARIEN
12 

prietorships have to pay federal and state payroll taxes, as well as 

unemployment insurance, and therefore have to meet so many 

deadlines. And yet when the IRS alleges that a small business tax 

return is incomplete, they attempt to reprimand the small business 

without any inquiry to determine what may have happened. 

If that is the temperament and culture of the IRS, do you think 

that the burden of proof should then be on your agency to show 

paper work was, indeed, not reported by a small business? 

Mr. SHULMAN. Thanks for all of your comments and I could not 

agree with you more that in this tough time everyone is counting 

on small businesses bouncing back. The President has been very 

clear that small businesses and entrepreneurs are an essential part 

of the engine that is important for the country. 

I talked quite a bit in my oral testimony about the outreach efforts we have, about the things that I ask every person in the agency to do around making sure we are flexible with businesses who 

are experiencing hard times. 

I guess I have not experienced the culture that you are talking 

about. We have got a lot of employees, and there are always going 

to be exceptions, but in general, our people I think try to work with 

taxpayers. They have a job to do, obviously, to make sure that they 

audit businesses and individuals, nonprofits to make sure they are 

abiding by the law. 

When it comes to paper work, one of the things that I know for 

sure, I have talked with our Commissioner of Small Business, who 

is here today, who has actually gone out and done round tables 

with our agents. We seldom disallow expenses because records are 

not there for small businesses. Our agents usually work with the 

taxpayer to try to reconstruct those records. 

So I guess I would not necessarily agree with the characterization, but I very much agree with the sentiment that you put forward, which is that we need to go out, we need to be reasonable, 

we need to work with taxpayers. We need to assume that the majority of small businesses are wrestling with an incredibly complicated code and just trying to get it right. 

Ms. CLARKE. Fair enough, Mr. Shulman. The hope is that there 

can be that level of engagement sustained in terms of quality 

across the span of the agency. As you have said, you know, you 

send forth a certain culture within the agency, and you hope that 

is followed through to the end, and certainly there are nuances 

with each individual business that you may confront. 

So we are looking for that consistency and quality, commitment 

to small business, and I am glad to hear that that is your goal, 

your aim, your philosophy within the agency. 

I understand that recently you held a program called Super Saturdays, and this program provided free tax help to communities 

nationwide. My question is why has there been no Super Saturday 

directly focused on small business, especially during these tough 

economic times. 

Mr. SHULMAN. Yes. Last year actually was the first year we did 

Super Saturday, while we were trying to get 120 million stimulus 

checks out to the American people. There was a whole category of 

seniors and veterans who usually would not have to file a tax return but did last year because of the stimulus. 

13 

It was such a success, and frankly, we had employees from all 

over the agency work directly with taxpayers. One of the things I 

talked about before is a key and a focus of mine is to make sure 

we walk in the shoes and we understand what it is like to be the 

taxpayer. 

So having our executives from across the country deal face to 

face with taxpayers was a great experience. So we did it again. We 

opened up on Saturdays. We had people come in. This was open to 

individuals; it was open to small businesses, to any taxpayer. 

Last year we actually held 2,600 seminars, education events, forums for small businesses, and I will refer to my written testimony 

so that I do not go through it again, but I think we have a lot of 

outreach for small businesses. We could always have more, and one 

of my jobs is to triage the resources between our phone people, people who make the Internet work, people who do service, people who 

do enforcement around small businesses, large businesses, individuals, both service and enforcement, and so we are just trying to 

balance that. 

But you have my commitment that we are very focused on trying 

to give support to small businesses. 

Ms. CLARKE. Thank you very much. 

My time has expired and I yield back. 

Chairwoman VELA ́ ZQUEZ. Mr. Commissioner, the IRS procedures 

require consideration of whether a collection against a taxpayer 

will impose an economic hardship. In a March 11 release, the IRS 

stated it would be flexible when considering collectability during 

these times. Could you be more specific? 

And you mentioned that you are telling your staff to be more 

flexible, to even suspend collection or work out agreements. Can 

you be more specific regarding any procedures the IRS plans to implement in light of the economic downturn? 

Mr. SHULMAN. Yes. So a couple of things we did. When I mentioned postponing collection, we give thresholds which are not public about how much tax is due, where the front-line employee who 

is talking to the taxpayer can actually take that collection case and 

put it back to the queue because of economic hardship. We actually 

raised those thresholds, meaning it can be a larger amount of tax 

and our front-line employee has that flexibility. So that is one of 

the things we did. 

In the past, if you missed one payment, if you either had had an 

offer-in-compromise or an installment agreement, it was an automatic default. We actually gave, again, flexibility to people that you 

could miss more than one if you show some economic hardship. 

We gave some flexibility that that can be a discussion with people because, as you have all mentioned, at the end of the day you 

have got to trust the judgment of your people out in the field. If 

you are going to tell them to use their judgment, you have got to 

trust them, and so we gave them more flexibility and less rigorous 

documentation requirements. 

With liens, we actually have now made it clear. A lot of small 

businesses, the way they get a loan is they actually have the security be their house, and so we have actually made it that if somebody in this down real estate market is either trying to refinance 

14 

their house or renegotiate or sell their house, that our lien will not 

stand in the way of that action. 

There is more which I would be happy to give you. What we have 

tried to do is do all of this, but also we have to protect against a 

flood of people who can pay their taxes saying they cannot pay 

their taxes, and so we are just trying to get this balance right. 

I think some have criticized and said I have leaned too far towards the taxpayer. I think in these times it called for extraordinary measures, and that is why we took some of them. 

Chairwoman VELA ́ ZQUEZ. Okay. You mentioned that you are 

going to pay more attention to recoup some of the money in terms 

of international tax evasion, do more audits of international tax 

evasions; is that right? 

Mr. SHULMAN. Yes, yes. 

Chairwoman VELA ́ ZQUEZ. So do you have the manpower, the resources to go after this type of tax evasion? 

Mr. SHULMAN. A couple of issues. One is once you leave our border and we do not have all of the authorities we have inside the 

border to follow the money trail, we have to coordinate with other 

governments. There is a lot of diplomacy that is needed, and it is 

easier to hide money. So this is some of the toughest work that we 

do. 

When we started a continuing resolution at the end of last September, we essentially had a freeze on staffing. What I did was 

move some staffing from other areas so that we could keep staffing 

up in international, and you might have seen in President Obama’s 

budget he put a line item for robust international enforcement efforts from the IRS, and we anticipate getting significant increases 

in agents, both civil and criminal, for international lawyers so that 

we can work through some of the complex issues, et cetera. 

Chairwoman VELA ́ ZQUEZ. Well, you are saying you are reprogramming the manpower that you have so that you are going 

to use the staff for international compliance? 

Mr. SHULMAN. It is a priority. I have already done some shifts, 

and we are certainly as we get more staff going to lean towards 

international. 

Chairwoman VELA ́ ZQUEZ. So my concern is how then will you 

have the people in your staff, the numbers that are required to be 

able to answer the questions coming up from small businesses who 

need to call the IRS or for you to process some of the returns in 

an appropriate manner. 

Mr. SHULMAN. Yes. So we have three appropriations. We have a 

support appropriation, we have an enforcement appropriation, and 

a service appropriation. This is in our enforcement appropriation. 

We are not planning on taking people out of service roles. We really triage our enforcement people. 

And so it is a perennial issue. I mean, just an interesting statistic, we have had a nine percent decline in staffing over the last 

five years and a ten percent increase in returns filed. We have had 

a 23 percent increase in productivity. Technology and electronic filing helps. The Web helps, but we are always having to manage resources. 

But a lot of people ask you when you become the IRS Commissioner are you going to focus on enforcement, are you going to focus 

15 

on service. I have been very clear. I am going to focus on both. By 

no means am I going to overemphasize enforcement at the expense 

of service. 

Chairwoman VELA ́ ZQUEZ. Okay. So we know that so many businesses are experiencing a downturn and many will be taking advantage of the expanded net operating loss provision in the recovery bill. What special steps has the IRS taken to insure a timely 

processing of returns so many small businesses can get an infusion 

of capital? 

Mr. SHULMAN. Yes. Right when this conversation started around 

increasing net operating losses we brought together our teams who 

work on this. We assigned an executive to review the procedures 

and make sure there were not any clogs in the system. 

There are two ways to get these expedited returns. One is by filing form 1139 for the Schedule C filers or for corporations, and one 

is form 1045 for the Schedule C filers. We have actually staffed up. 

So some of these areas we have been triaging we have made sure 

there is enough staff there. I am very confident that we are going 

to get these out quickly. We have made a commitment that all of 

them will get out within 45 days, but I have challenged the staff 

to get it sooner, and that is quicker than these usually get processed, and I am going to be monitoring it daily. 

If we see a surge beyond what we are expecting, we will put 

more staff. We are going to make sure that we do this right. We 

recognize how important it is. 

Chairwoman VELA ́ ZQUEZ. It is important since small businesses 

right now are having problems getting access to capital. You know, 

the credit crunch is incredible and it is impacting them. So this is 

a tool that would help get money back to small businesses, and I 

hope that our offices would not be inundated with phone calls telling us that they are not getting the rebates that were promised to 

them. 

Mr. SHULMAN. No, I do, too. I know a lot of this came through 

with your leadership. Clearly, the President has asked every agency to prioritize the Recovery Act and making sure we implement 

it well. The Treasury Secretary has asked me this as well, and this 

is something that I am personally engaged in. 

If your office gets any information to the contrary, please reach 

out because we are focused on this. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. Graves. 

Mr. GRAVES. Thank you, Madam Chairman. 

I just want to follow up again on Representative Altmire, I too 

am concerned about the possible consequences to small business 

when it comes to the tax rates of $250,000 for couples and $200,000 

for individuals, how many small businesses that is going to affect. 

You had said before that you were going to get that information, 

and I definitely want to make sure that we get it. I think it is 

something that is very important, and I would like to know just 

how many small firms that is going to affect. 

Mr. SHULMAN. Absolutely. We will follow up. 

Chairwoman VELA ́ ZQUEZ. Ms. Clarke, any other questions? 

Ms. CLARKE. Thank you, Madam Chair. 

16 

Mr. Shulman, I guess we keep reiterating how hard these times 

are for small businesses, but I guess it is a point that is worth driving home because they are really having a hard time paying tax 

liabilities, which not only impacts their businesses, but their families, too. 

You know, I believe that this is a time when some of the reporting responsibilities really need to be reexamined when it comes to 

small businesses. For example, credit card companies can report to 

the IRS sales of small businesses, such as restaurants, which in 

the past was a chronic source of noncompliance. Do you agree that 

the IRS should be trying to reduce the noncompliance burden on 

small businesses? 

And what is your agency doing to come up with new guidance to 

address this matter? 

Mr. SHULMAN. A couple of things. One is, I think the biggest 

compliance burden is the law, very complicated. My favorite statistic is that the tax code is four times as long as War and Peace, 

and we are going to do everything we can within the confines of 

the laws that are passed by Congress and debated to make things 

simpler. 

We have done a number of things that I walked through earlier 

that I would be happy to go through with you and meet with you 

individually or send you a letter about, that we have done to try 

to reduce the burden on the administrative side. 

You mentioned the credit card reporting. A lot of information and 

all of the statistics show there is always higher compliance when 

there is third party reporting. The best compliance is the teacher 

or the firemen or the employee who has a W-2 because they know 

we are going to get information, and they get reported to them in 

a simple format exactly what their wages are. They copy it onto 

their 1040. They send it in to us. It is much easier. 

My hope is that information reporting like credit cards, first of 

all, that reporting is not going to happen until 2012. So there is 

plenty of time to get a lot of input from the community as we do 

that. 

But more importantly, my hope is third party reporting actually 

can simplify and get the information in a simple format for people, 

and so that is always my hope. 

Ms. CLARKE. Thank you very much, Commissioner. 

Thank you, Madam Chair. I yield back. 

Chairwoman VELA ́ ZQUEZ. Sure. Commissioner, I have a last 

question, and that is a major concern for some taxpayers is the 

lack of review of certain civil penalties, and one of the most draconian penalties is found on 6707(a). This section imposes mandatory 

penalties of up to $200,000 for failure to make disclosures of certain listed transactions. 

Mr. SHULMAN. Yes. 

Chairwoman VELA ́ ZQUEZ. Unfortunately, there is no regulatory 

process or public comment period involved in determining what 

should be listed, a listed transaction. So is it possible for the IRS 

to suspend these penalties until a better review process is implemented? 

Mr. SHULMAN. Yes. We have actually looked at this. I would 

agree with you. Let me just step back for a minute. The listed 

17 

transactions were an important thing that the IRS did, which was 

to put taxpayers on notice that there are certain transactions designed for big corporate tax evasion kind of transactions, tax shelters that we are going to be looking at that you need to file information on. 

We recognize that some taxpayers have gotten caught up in this 

that the law never presented. We are trying to have dialogue about 

that. Right now we think our hands are tied, that the legislation, 

if I have this correct, and I will come back to you, is actually we 

do not have a lot of leeway for us to suspend it. But this is something that we are going to want to talk about. You know, we are 

in discussions and the administration is going to need to be discussions with Congress because we recognize this is an issue. 

Chairwoman VELA ́ ZQUEZ. Very good. Thank you. And let me take 

this opportunity to thank you, and I am sorry that we have so 

many votes on the floor, but this is the way it goes here. 

Mr. SHULMAN. The people’s business. 

Chairwoman VELA ́ ZQUEZ. Okay. So thank you so much. 

Mr. SHULMAN. Thank you very much. 

Chairwoman VELA ́ ZQUEZ. The gentleman is dismissed. 

So now we call on the second panel, and that will be Mr. Christopher Smith. 

Are you going to introduce him? 

Mr. GRAVES. Thank you, Madam Chair. 

I am pleased to introduce Kit Smith. He is a constituent and 

owner of S.T.O.P. Restoration, LLC, and S.T.O.P.—Northland, 

LLC, in Pleasant Valley, Missouri. Mr. Smith is certified in fire 

and water restoration, mold remediation, door and window installation. He is also a certified restoration, remediation, and recovery 

instructor. 

He is a non-combat disabled veteran. Mr. Smith served six years 

in the United States Navy. He has been an entrepreneur and 

owner of his own small business since he was 16 years old. 

Mr. Smith, thanks for coming. We want to welcome you to the 

Committee, and we appreciate your coming here to Washington to 

tell us your story. 

STATEMENT OF CHRISTOPHER ‘‘KIT’’ SMITH, S.T.O.P.— 

NORTHLAND, LLC 

Mr. SMITH. Chairwoman Vela ́zquez and Ranking Member 

Graves, my name is Kit Smith, and I am owner of a small business 

in Pleasant Valley, Missouri. I am pleased to be here today to testify of the burden of tax compliance for small businesses. 

My company has been battling with the IRS since 2007 on a matter that generated an audit going back to 1989. It started because 

an employee had embezzled $58,000. She was trying to hide this 

by switching my EIN numbers around and making deposits with 

them to the State of Missouri and the IRS. This encompassed a 

sole proprietary, a corporation, and two LLCs. 

The deposits owed for the taxpayer in question were, in fact, 

paid. The IRS person who received the deposits placed the money 

where they deemed needed and not where it was supposed to go 

per the forms that the deposits accompanied. The agent and I proceeded to uncover the fact that the payments were made. They 

18 

were misplaced, and the agent would locate and identify where to 

correctly put the payments. 

After a short period of 30 to 45 days, I received a call from the 

agent and was informed that there was a small refund from past 

years and that the payments would need to be placed correctly if 

I agreed, and of course, I did. 

I was then informed that there was a slight overpayment on my 

part and did I wish a refund or place it on account. I chose the refund. 

After about a month or so I received a call from the agent stating 

that there was a mistake by them in the calculations placement of 

the funds, and I needed to repay approximately $2,300. I gave the 

agent the check number and wrote the check for the amount and 

put it in the night mail. 

When we thought the audit was about done, up pops a new IRS agent on the phone stating that I owed approximately $2,300. I disagreed, and after two to three minutes on the phone, I asked if the 

phone agent could give the particulars to my office staff so that we 

could again research this. 

To my complete amazement, my office staff came in and proudly proclaimed she had my amount reduced to approximately $1,800. 

How on earth can an employee negotiate with an IRS agent the 

amount of a tax due when during an audit they ask specific questions to qualify you as the appropriate person to be liable? 

I just paid this tax for the third time. The tax advocate informed 

me of information that contradicted the supervisor’s statement 

made to me via my message machine. I informed the tax advocate 

that they were hiding a big mistake. The agent was no longer to 

speak with me, and I was informed this matter was closed. 

Who regulates this arm of government? What oversight do they 

have? How far can they go? Why do they have immunity from repercussions? They need checks and balances, one, to insure the tax 

due is paid, but, two, that when they are wrong they do not cover 

it up, destroy lives or businesses. 

The burden placed on my business alone was over 150 hours of 

my personal time at $175 an hour to keep my doors open. Well over 

100 hours of my staff time. The reams of paper and phone bill 

time. I cannot even think of the amount of business I lost focusing 

on this instead of my company. I will never get over this loss. 

We as small businesses need a flat tax so we can plan for what 

tax is due instead of wondering what will be due. This would take 

the unknown out of taxes. It’s funny, but not too long ago I had 

an IRS agent on the phone. She stated to me, ‘‘Mr. Smith, the IRS 

does not make mistakes.’’ And I still have that tape! Can you believe the audacity? We are all human. Heck, I may have made a 

mistake coming here. 

The stimulus package: There is nothing in the stimulus package 

for my business. I cannot afford to go further in debt, period! Buy 

equipment? Get an SBA loan for 35,000? No to further debt. 

What the small businesses need , the available loan opportunity 

to lower their loan payments. Lower taxes to be able to afford and 

retain good employees instead of having to lay them off. Lower 

taxes to afford to give themselves a raise, I have not had one in 

five years. Lower taxes to insure the benefits package available 

19 

matches the larger institutional ones. Lower taxes to be able to afford, without a loan, improvements to facilities and equipment. 

The stimulus package should not help mega companies that affect our economy. They need to fail just like if I failed no one would 

help me except me. If the big dogs fail, let them. Then smaller entrepreneurial companies will sprout up and take over where they 

failed. That is the spirit of America, freedom and hard work! 

The stimulus package should not be for earmarked projects. They 

don’t help small business. The package is wild spending of money 

that is not even printed yet. We need Congress to control spending 

and lower taxes. Small business will help pull us out of this faster. 

Government is in place to keep peace, not to create jobs! They 

implement laws and govern, not dictate how much someone can 

make. The government can help create jobs by helping people who 

create jobs, us, the small business people of America who give 

every day! 

In my State of Missouri, 90 percent of the employed people are 

employed by companies with fewer than 25 employees, small businesses! Unbridle the small business community. Give them the 

ability to rebuild the economy, and watch what we’re capable of, 

but do not give us more burden, more taxes, and more administrative burdens such as more COBRA regulations. 

Thank you for the opportunity to testify today.[The prepared 

statement of Mr. Smith is included in the appendix at page 35.] 

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Smith. 

Mr. Graves. 

Mr. GRAVES. Thank you, Madam Chair. 

I actually brought up a Syracuse University study that small 

businesses are targeted because they do not have the ability to hire 

expensive counsel or expensive representation to work on the audit, 

and I was just curious if you were able to do that and if you have 

heard of other small businesses that have been targeted by audits 

who are not able to hire counsel or get the expensive resources to 

be able to represent themselves before the IRS. 

Mr. SMITH. Mr. Graves, with the amount of burdens placed on 

by local taxes, increased property taxes, and the tax burden that 

we already have, I couldn’t afford an attorney. I hired an attorney 

in the first place, and it came to no resolve. It was not worth the 

money that I was spending. So I opted to go through this myself 

with the agent, and it was successful. 

And I know of other gentlemen and women in business who have 

had this similar type of situation, not to this complete amount, but 

they have had the same situation where they have had employees 

that are embezzling, whether they have a gambling problem or 

whatever it is, that embezzle money, and now we are at a disadvantage because we do not have the capital to fight the IRS. 

Ms. CLARKE. In your opinion, was it a situation where one agent 

did not know what the other agent was doing, the left hand does 

not know what the right hand is doing, or is it a situation of as 

far as they were concerned you were guilty until proven innocent, 

in your opinion at least? 

How did you feel? You know, what could have made it a whole 

lot more user friendly, I guess, approach, you know, in working 

20 

with you in this? What would you have done different if you were 

on the other side? 

Mr. SMITH. I really appreciate that question. The original agent 

that came into my office and flipped their badge was awesome. She 

went back to 1989 like my testimony said, and she uncovered 

where these payments went. She found them. She was diligent in 

her job, and she did it well. 

Where the breakdown came was when we got the phone call from 

an agent on the phone that said mysteriously we owed this money 

again, and I went and said, ‘‘What is going on here?’’ 

I tried to talk to that agent. I was not allowed to. I went to the 

tax advocate, thanks to your office, and that is an oxymoron because she is an employee of the IRS. Through her we contacted this 

department again, and I was given conflicting stories. I did talk to 

the agent very shortly and very briefly, and I was told I had to go 

to the supervisor. 

The supervisor told me that I had to go to the tax advocate, and 

I told the tax advocate this, and she said, no, that is not what he 

said, and he left a contradictory response to that on my answering 

machine. So I could not figure out. 

I am thinking, okay, why doesn’t the IRS just, and I asked them, 

‘‘Why don’t you just bring this file that the original agent did, let’s 

sit down at a table, and let me see what you have so that I can 

see where she went?’’ 

And all they would divulge to me was this unknown, unbeknownst jumble of figures that unless I was an IRS agent I would 

not know how to discern what was there. But she went back all the 

way to 1989 and covered money that they owed me from a long 

time ago, but they did not give that up! But she found out where 

I made the payments and where they were sidelined because this 

person was trying to throw a smoke screen, and she found that we, 

in fact, did make the payments, and then I found out I had to do 

it again. 

So I would say that in this case that they should have brought 

the file, sat down with me and said, ‘‘Mr. Smith, this is what we 

found.’’ They would not do it. They said you are not allowed to talk 

to the agent and this matter is closed. And I think that’s wrong. 

Mr. GRAVES. Thanks, Madam Chair. 

Chairwoman VELA ́ ZQUEZ. Ms. Clarke, no questions? 

Okay. So we have got some stuff here from the IRS, and I guess 

there are some pending issues. We could use that opportunity after 

the hearing to continue the conversation. 

With that I ask unanimous consent that members will have five 

days to submit a statement and supporting materials for the 

record. Without objection, so ordered. 

This hearing is now adjourned. 

Thank you. 

[Whereupon, at 3:14 p.m., the Committee meeting was adjourned.] 

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