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[Senate Hearing 106-561]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 106-561
 
             IRS RESTRUCTING: A NEW ERA FOR SMALL BUSINESS

=======================================================================

                                HEARING

                               BEFORE THE

                      COMMITTEE ON SMALL BUSINESS
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 23, 2000

                                     

                                     

              Printed for the Committee on Small Business

                                 ______

                      U.S. GOVERNMENT PRINTING OFFICE
65-345 CC                     WASHINGTON : 2000
_______________________________________________________________________
   For sale by the Superintendent of Documents, Congressional Office
         U.S. Government Printing Office, Washington, DC 20402

                      COMMITTEE ON SMALL BUSINESS
                       ONE HUNDRED SIXTH CONGRESS

                              ----------                              
                CHRISTOPHER S. BOND, Missouri, Chairman
CONRAD BURNS, Montana                JOHN F. KERRY, Massachusetts
PAUL COVERDELL, Georgia              CARL LEVIN, Michigan
ROBERT F. BENNETT, Utah              TOM HARKIN, Iowa
OLYMPIA J. SNOWE, Maine              JOSEPH I. LIEBERMAN, Connecticut
MICHAEL ENZI, Wyoming                PAUL D. WELLSTONE, Minnesota
PETER G. FITZGERALD, Illinois        MAX CLELAND, Georgia
MIKE CRAPO, Idaho                    MARY LANDRIEU, Louisiana
GEORGE V. VOINOVICH, Ohio            JOHN EDWARDS, North Carolina
SPENCER ABRAHAM, Michigan
                     Emilia DiSanto, Staff Director
                      Paul Cooksey, Chief Counsel
    Patricia R. Forbes, Democratic Staff Director and Chief Counsel

                                  (ii)

                            C O N T E N T S

                              ----------                              

                           Opening Statements

                                                                   Page

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

                           Witness Testimony

Rossotti, The Honorable Charles O., Commissioner, Internal 
  Revenue Service, Washington, D.C...............................     3
Ashby, Cornelia M., Associate Director, Tax Policy and 
  Administration Issues, General Government Division, U.S. 
  General Accounting Office, Washington, D.C., accompanied by 
  Kirk R. Bayer, Senior Evaluator, Kansas City Field Office, and 
  James A. Wozny, Assistant Director, Tax Policy and 
  Administration Issues, General Government Division.............    34
Abalos, Sandra A., President, Abalos & Associates, P.C., Phoenix, 
  Arizona........................................................    77
Quick, Roy M., Jr., EA, Principal, Quick Tax & Accounting 
  Service, St. Louis, Missouri...................................    84

          Alphabetical Listing and Appendix Material Submitted

Abalos, Sandra A.
    Testimony....................................................    77
    Prepared statement...........................................    79
Ashby, Cornelia M.
    Testimony....................................................    34
    Prepared statement and attachment............................    37
Bond, The Honorable Christopher S.
    Opening statement............................................     1
    Post-hearing questions posed to Mr. Rossotti and subsequent 
      responses..................................................   101
Coverdell, The Honorable Paul
    Prepared statement...........................................    95
Kerry, The Honorable John F.
    Prepared statement...........................................    96
Quick, Roy M., Jr.
    Testimony....................................................    84
    Prepared statement...........................................    87
Rossotti, The Honorable Charles O.
    Testimony....................................................     3
    Prepared statement and attachment............................     8
    Responses to post-hearing questions posed by Senator Bond....   101
Snowe, The Honorable Olympia J.
    Prepared statement...........................................    98

                                 (iii)

  

            IRS RESTRUCTURING: A NEW ERA FOR SMALL BUSINESS

                              ----------                              

                         TUESDAY, MAY 23, 2000

                              United States Senate,
                               Committee on Small Business,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 10 a.m., in room 
SR-428A, Russell Senate Office Building, the Honorable 
Christopher S. Bond (Chairman of the Committee) presiding.
    Present: Senator Bond.

    OPENING STATEMENT OF THE HONORABLE CHRISTOPHER S. BOND, 
  CHAIRMAN, SENATE COMMITTEE ON SMALL BUSINESS, AND A UNITED 
                  STATES SENATOR FROM MISSOURI

    Chairman Bond. Good morning, the Committee on Small 
Business is called to order.
    My colleague and Ranking Member, Senator Kerry, has another 
commitment. His staff informs me that he will be joining us 
shortly. But since we said we were going to start at 10, we 
will get on with it right now.
    As many of you know, this week is Small Business Week, and 
I believe it to be very important for the Committee to focus 
its attention today on one of the most pervasive and continuing 
issues confronting small-business owners, and that is their 
interaction with the Internal Revenue Service. Over the past 2 
years, the IRS has been taking some major steps to streamline 
that interaction, which I hope will take some of the 
frustration and fear out of America's entrepreneurs.
    Today, the Committee will examine the progress that the IRS 
is making on its modernization efforts. In particular, we will 
be looking at the new IRS division dedicated to small-business 
and self-employed taxpayers in this country. To bring us up to 
date on the agency's work in this area, it is my pleasure to 
welcome IRS Commissioner Charles Rossotti back to the Committee 
this morning. Welcome, Mr. Commissioner.
    Nearly 2 years ago, Congress passed sweeping legislation, 
with strong support of the Administration and the IRS, to 
rebalance the focus of the Internal Revenue Service. Broadly 
speaking, the purpose of the 1998 Internal Revenue Service 
Restructuring and Reform Act was to transform one of the 
Nation's most feared enforcement agencies. Our goal was for the 
IRS to become an agency that balances the taxpayers' needs for 
outstanding service with the agency's duty to collect tax 
revenues in a fair and uniform manner. As a strong supporter of 
that legislation, I am pleased that it has allowed Commissioner 
Rossotti and his team of senior managers to begin the massive 
effort of transforming an agency that had become such a 
significant part of the lives of taxpayers, and especially 
small-business owners.
    A significant part of the IRS' transformation is expected 
to occur through the reorganization of the agency into four 
operating divisions, each dedicated to the particular needs of 
specific groups of taxpayers like small-business owners and the 
self-employed. I have asked Commissioner Rossotti to provide us 
with a progress report today on the new Small Business/Self-
Employed (SB/SE) Division and the steps the IRS is taking to 
reduce the enormous tax filing and reporting burdens that small 
businesses face every day.
    I also see that the new Commissioner of the SB/SE Division, 
Mr. Joe Kehoe, is here with Commissioner Rossotti today. We 
welcome him as well. Having tried a little bit of retirement, 
he found that it was not nearly as rewarding as being actively 
in the fight, and he has got it. I admire a man who makes 
irrational decisions like that for the greater public good.
    A year ago I also asked the General Accounting Office to 
begin an examination of the IRS' plan for the new SB/SE 
Division. I am pleased that Cornelia Ashby, Associate Director 
of the GAO for Tax Policy and Administrative Issues, is here 
this morning to report on the GAO's findings.
    I appreciate the extensive work that the GAO has done on 
this project, and the periodic briefings that the Committee has 
received over the past year. I also appreciate the IRS' 
extraordinary cooperation with the GAO on this project. While 
the GAO has identified some challenges facing the IRS, I think 
the examination that Ms. Ashby and her team have now completed 
validates the IRS' plans for the SB/SE division and helps us to 
see some of the benefits that the Division will have for small-
business taxpayers.
    It is my hope that the new SB/SE Division will contribute 
to the overall effort to swing the pendulum back from the 
heavy-handed enforcement mentality of yesteryear to one that 
recognizes the importance of prompt, courteous, and fair 
service by the IRS for America's small-business taxpayers. For 
too long, small-business owners and the self-employed have felt 
they have been treated like tax cheats simply because they run 
a small business.
    Commissioner Rossotti and Commissioner Kehoe, I urge you in 
the strongest possible terms to ensure that, as the new SB/SE 
Division ``stands up'' later this year, that historic bias of 
``guilt by virtue of small business'' will have no place in the 
new Division's front-line employees or its top management.
    Small business owners bear incredible burdens when it comes 
to compliance with the overly complicated tax code, as the 
Committee saw in great detail at our hearing last April on tax 
filing and reporting burdens. With such complexity, honest 
mistakes will naturally occur, especially for small-business 
owners who often cannot afford professional tax assistance. 
Those taxpayers need help in avoiding mistakes and 
straightening them out when they occur, all in a manner that 
treats them as honest, upstanding citizens who are willing to 
pay their fair share of the taxes.
    Just as the IRS does not want to be judged by its worst 
employees, small-business owners do not want to be branded as 
criminals simply because of a few dishonest small enterprises.
    This is not to say that the IRS should look the other way 
when it comes to disreputable taxpayers who are trying to evade 
their tax liabilities. The IRS has a dual responsibility, part 
of which is to ensure that taxpayers who owe taxes, pay them. 
And I strongly support the IRS' efforts to collect taxes due in 
a fair and professional manner. We can hardly expect honest 
taxpayers to pay their fair share, if others are getting away 
with cheating the system.
    As one who just went through the annual ritual of paying my 
taxes, I sure do not want to see somebody else getting away 
with not paying the taxes they owe, when we pay the taxes we 
owe.
    Finally this morning, I have asked two individuals who 
currently serve as informal advisors to the IRS to provide the 
Committee with their perspective on the agency's new SB/SE 
Division and the steps the IRS is taking to reduce the 
compliance burdens on small businesses and the self-employed.
    Sandra Abalos is the owner of Abalos & Associates, an 
accounting firm in Phoenix, Arizona. This morning, we will be 
testing the boundaries of the Senate's technological 
advancement by having Ms. Abalos join us from Phoenix via video 
conferencing. We look forward to her insights as a member of 
the IRS Electronic Tax Administration Advisory Committee on the 
new SB/SE Division and the efforts underway to encourage and 
improve electronic tax filing.
    I should also note that this morning's proceedings are 
being broadcast on the Internet via the Committee's web page at 
sbc.senate.gov.
    Last, but certainly not least, will be Roy Quick, Jr., a 
fellow Missourian, a good friend, and a principal in the Quick 
Tax & Accounting Services. Mr. Quick is also a member of the 
IRS Advisory Council, and he will give us his perspective on 
the new SB/SE Division, as well as some of the agency's efforts 
to provide taxpayer education in the pre-filing stage in order 
to reduce errors and provide better compliance by small-
business taxpayers.
    With that, Mr. Commissioner, I know that you have a very 
full statement that we will accept for the record, and I ask 
now that you summarize your testimony and begin the 
proceedings.

 STATEMENT OF THE HONORABLE CHARLES O. ROSSOTTI, COMMISSIONER, 
           INTERNAL REVENUE SERVICE, WASHINGTON, D.C.

    Mr. Rossotti. Thank you very much, Mr. Chairman, and thank 
you for having me here this morning. I think it is very helpful 
for you to have this hearing at this particular point in time, 
when we are really at the beginning of what I think is a whole 
new era in tax administration with respect to especially the 
small business community.
    Of course, we are following, we think, the Restructuring 
and Reform Act as our road map as we embark on this huge 
modernization. We think that as we look across all of the parts 
of the taxpayer base that we serve, we really believe that the 
opportunities we have to improve service to the small-business 
taxpayer are probably some of the best opportunities we have. 
Which is another way of saying we have some of the greatest 
room for improvement.
    We believe that we must help these taxpayers and I would 
stress especially almost 800,000 new businesses that startup 
every year, to understand what is expected of them and to stay 
in compliance from day one.
    Very much as you summarized in your opening statement, Mr. 
Chairman, we are stressing the balanced approach to doing this 
tax administration. We know that the vast majority of small-
business taxpayers do want to comply with their tax 
obligations. And we have to help them do that every way we can, 
to make it as easy as possible, and especially to prevent 
problems before they even occur.
    Of course, for that small minority who do refuse to meet 
their obligations, they cannot be allowed to unfairly burden 
the remainder, and we need to take necessary steps to bring 
them into compliance.
    What we are trying to do is take a short-term and long-term 
approach to this. We know we cannot do everything at once. In 
the short term, we are working on new avenues of communication 
and new technologies to help provide quality service at 
convenient times. I think one of the important things we have 
done for hard-pressed small-business owners who do not have a 
lot of time, is to open our phone service 24 hours a day, 7 
days a week, so that people can communicate with us when it is 
convenient for them.
    We have also created a CD-ROM that has a great deal of 
information that any small-business owner could benefit from.
    Chairman Bond. I imagine that is a best seller.
    Mr. Rossotti. It is actually a pretty good seller. I think 
your staff has copies of this and have been looking at it. Of 
course, we have all of this on the web site as well. Our small 
business corner on the web site, which I think is very helpful 
in terms of being able to assist small businesses since most 
small businesses now have some computer capability, gives them 
a chance to go to the web site and get what they need.
    We are also trying, of course, to make it easier to 
actually file and pay taxes. On the quarterly return side, 
which is some of the most frequent filings, small businesses 
can now do that either by touch tone phone or filing online 
directly from their own computer.
    Something new for the next filing season, which we think 
will be very popular with many self-employed taxpayers and 
small businesses, is a checkbox on the form 1040 which will 
basically allow people to, just by checking this box, allow 
their preparer or the person that prepared their return to 
communicate with us without having to file still another 
return--another form just to be able to authorize them to do 
that. This seems to have gotten a good response and we look 
forward to expanding that potentially to other forms after we 
test it the first time.
    We are also expanding our voluntary tip compliance program, 
so that people can now devise their own tip agreements, in 
addition to the standard ones that we provide. Any industry 
now, where tipping is a customary practice, we think this will 
expand what has been already a successful program, to use 
voluntary agreements to encourage compliance rather than having 
to go in and audit things after the fact.
    Those are some short-term things. We know that they only 
scratch the surface. We do not, in any way, claim that these 
are anywhere close to what we need to do to relieve the burden 
and to make ourselves more efficient with small-business 
taxpayers. But we think they are some steps.
    Now of course, the other big step that we are taking, which 
you mentioned in your opening statement as the key focus of 
this hearing, is the establishment of four operating divisions 
as the primary units of operation in the IRS. One of the most 
important of those will be the Small Business and Self-Employed 
Division. We are still targeting to get that division 
operational officially as of October 1. We have much to do to 
make that happen but we are definitely setting that as our 
goal.
    As you noted, Mr. Kehoe who is here with me today is the 
Division Commissioner. And Dale Hart, who is an experienced IRS 
executive, also has been sworn in as the Deputy Commissioner.
    Just briefly, to outline what we are going to have in this 
unit, we will have three major components that actually deal 
with taxpayers. I think that, right off the bat, is an 
important statement because it is an attempt to be balanced in 
the very structure of the division itself.
    The first one is our Taxpayer Education and Communication 
division, which will have not only a national office but a 
field staff that will operate in 86 territory offices 
throughout the United States. I will note that one of these 
will be in St. Louis, Mr. Chairman. I think that once this 
office is fully staffed, it will have about six times as many 
staff across the country as we currently have today devoted to 
this function. Of course, that is because we have very few 
devoted to this function right now.
    But in the future, we will have a fully staffed, across the 
country set of offices. For example, in St. Louis, we would 
expect that they will work very closely with some of the local 
offices, the State of Missouri for example, in order to 
generate one-stop shopping with the State. We would work 
closely with local small business association offices, and 
especially something that we are working very hard on, working 
with the Small Business Development Centers. They are very 
effective educational organizations that already offer many 
courses for small businesses, and we want to partner with them.
    In addition, the taxpayer education group will pick up the 
responsibility that is currently done on sort of a detail, 
part-time basis during our filing season to help taxpayers who 
have questions, either in our direct field offices or over the 
phone. That will also help both taxpayers and also help us 
avoid what is today a major problem in that we have our 
compliance people, our revenue agents, get off their cases in 
order to work on things during the filing season.
    So that is a very important and, I think, one of the most 
important new initiatives, our Taxpayer Education and 
Communications organization.
    The second major component will be our customer account 
services. Actually, it will be the part of the organization 
that probably most taxpayers will most interact with, because 
this will be the one to which you actually send in your 
returns, and get refunds and payments, and deal with the normal 
kinds of transactions that take place every day in any business 
operation.
    I think the key thing here is that once we get this fully 
established, we will then have account representatives who will 
be dedicated and specialized to deal with small-business and 
self-employed taxpayers. So they will be more capable, we hope, 
in fact I am certain, will be more specialized in understanding 
particular problems that occur with small businesses who 
interact with us more frequently, of course, than the 
individual taxpayer who sends in their return once a year.
    Their job will be to make that process, which is actually 
the most frequent interaction process, as smooth as possible.
    Of course, the third component will be our compliance 
organization, which will have a full field organization, as 
well as phone and other resources, to perform the traditional 
functions of examining returns and collecting overdue accounts, 
which is a very important function. But they will also assist 
in the overall strategy of developing voluntary compliance to 
its maximum.
    Finally, one of our goals in the compliance area, which 
will take some new technology to enable, but which over time I 
think has tremendous potential. When we do intervene with the 
taxpayer we want to do it as quickly as possible after we find 
a problem. Oftentimes, in collection from small businesses, the 
problem is not that the customer will not pay, it is that they 
cannot pay because we have gotten to them so late, by that time 
the money is gone or they have just gotten into an intractable 
problem.
    So one of our key goals in compliance is to speed 
everything up, so that if we are going to talk to a taxpayer 
about a problem, let us do it as quickly as possible, get it 
resolved, and get in and out. That is what we hear as one of 
the main things that our taxpayers tell us, and it is just 
common sense.
    Those are kind of the main outlines of where we are going. 
I believe that if we can sustain this program, Mr. Chairman, we 
really can, I think, be more effective on both of the missions 
that you have mentioned in your statement, to provide quality 
service to all of the compliant taxpayers, which are the 
majority of them, and also to ensure fairness in the system by 
enforcing compliance where that is required.
    We do need some resources, and I have to mention that our 
fiscal year 2001 budget is still up for consideration. Frankly, 
it is very important that we get that budget so that we will 
have the resources to staff some of these things that I have 
mentioned, and also to invest in the technology that we think 
is really critical in order to improve service, especially in 
the account area, which is where most of our small-business 
taxpayers really interact with us most of the time.
    So with the support of Congress, in committees like your 
Committee and our other committees, which I am very happy to 
say so far has been very positive, at least so far this year, I 
think we can continue this tremendous transformation. And I 
think in the next year to 2 years really begin to seriously 
deliver on our commitments to improving the way tax 
administration works for all taxpayers, but especially for 
small-business and self-employed taxpayers.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Mr. Rossotti follows:]

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    Chairman Bond. Thank you very much, Mr. Commissioner. Those 
are very encouraging words, and we commend you for the 
direction you are taking.
    Before I turn to questions, though, I want to close the 
loop on a project that you were kind enough to help us initiate 
at the Committee's hearing last April on small business tax 
filing and recordkeeping burdens. After that hearing, as you 
recall, we posted on the Committee's web page the ``IRS 
Paperwork Unpopularity Poll.'' For the past year, we have 
collected input from small-business owners on the IRS forms, 
instructions, and publications, letters and notices most in 
need of revision.
    This morning, I am pleased to present you with the results 
of that poll. May I have the envelope, please? I always wanted 
to do that.
    Mr. Rossotti. I cannot wait to see what is coming out of 
that envelope.
    Chairman Bond. We have preserved the anonymity of each 
participant. We are providing you with the complete documents 
and the votes cast on each type. Without reviewing the entire 
report, let me announce the winners.
    The five most unpopular IRS forms are: No. 1, Form 1040, 
the U.S. Individual Income Tax Return. No surprise.
    No. 2, Form 941, the Employer's Quarterly Federal Tax 
Return. No. 3, Form 4562, Depreciation and Amortization. No. 4, 
Form 940, the Employer's Annual Federal Unemployment Tax 
Return. And No. 5, Form 1065, U.S. Partnership Return of 
Income.
    To give you a flavor of how candid the comments were, let 
me just quote from two of our participants regarding the 
depreciation and amortization, Form 4562. One participant 
wrote:

    I have a degree in accounting with honors from the 
University of Texas . . . and I have to read the rules on 
depreciation at least three times every year, and then just 
pray that I'm interpreting them correctly.

    And on Form 941, the Employer's Quarterly Federal Tax 
Return, a participant noted:

    Way too confusing for anyone without a degree or a CPA. 
Trying to figure out if I have a credit or owe money is 
difficult. My monthly liability and my quarterly liability is 
always just a few cents different. It's a lot of useless 
paperwork to find I've overpaid by 12 cents.

    He has the same problem I have with my checkbook.
    Commissioner, your willingness to examine these forms and 
documents is a testament to the IRS' overall efforts to provide 
greater service to America's taxpayers. It is an important step 
forward in reducing tax filing and recordkeeping burdens that 
small business and the self-employed encounter every day. I 
look forward to working with you to reduce the filing and 
compliance burdens.
    I thank you very much for participating with us in that 
poll.
    Mr. Rossotti. Thank you very much, Mr. Chairman. We have it 
right here and we will be looking at these comments very 
carefully. Of course, I think getting rid of the 1040 may be a 
little beyond our capacity.
    Chairman Bond. I do not think anybody asked to get rid of 
it, but perhaps some of the comments can help translate it into 
readily understandable language.
    Let me turn now to a series of questions. First, in your 
testimony you described the SB/SE Division's Taxpayer Education 
and Communication component. How will you assess whether these 
efforts are getting to the taxpayers, as opposed to the tax 
preparer, and whether they are effective?
    Mr. Rossotti. I think that one of the techniques that we 
have begun to use on evaluating all of our programs, and we 
will most definitely use it for these programs, the simplest 
way is just to ask the customer. In other words, survey the 
taxpayers on a regular basis. We are already doing this on many 
of our programs, and we are actually not only serving them but 
we are actually building this into the performance measures for 
our managers in our whole organization.
    Although we have not gotten this unit established yet, I 
feel sure that we will do that. We have some pilot projects 
that have been very interesting in different parts of the 
country that we are going to build on, and we have already been 
doing some surveying of the participants.
    A lot of times what you find, especially with the new 
business owners, is that they have a trade or a skill. I was 
out in California last week, and we have a program out there 
that is a good prototype I think of what we want to do for 
home-health care providers. There is quite a booming industry, 
people using people to come into their homes to provide help or 
health care for elderly people and others who need care. These 
people do have to get licensing, but many times they do not 
know anything at all about business or taxes.
    Both we and the State of California, in this case, found 
out that they were getting behind. We were going in and 
auditing them or finding they had not paid something and 
shutting down and that was not benefiting anybody. So we 
developed this program in the State of California, as part of 
the process where they get their licensing to give them 
basically a fairly simple 2-hour kind of primer on what needs 
to be done to file and pay their taxes.
    Then we went back and surveyed them and got very good 
responses from the participants in that kind of a program that 
say this is really helpful, I did not know anything about this. 
It really is a way to keep them where they need to be. So a 
very simple method of just simply asking them and seeing if 
they have gotten something out of it.
    In the longer term, we want to actually measure the effect 
on compliance of these activities, which is a more difficult 
thing to do, but we will definitely have that as part of our 
longer term plan.
    Chairman Bond. This Committee has taken a real interest in 
the plight of home-health care agencies. Last year we held 
hearings on it. The question is whether the Health Care 
Financing Administration will eliminate them, execute them 
before they can get around to paying their taxes. So I would 
say that, in this one area, you are probably not the least 
favorite agency of the Federal Government with which the home-
health care providers have to deal.
    I am sure, as you talk to home-health care people, you will 
encounter some of those questions. I guess, fortunately or 
unfortunately, that is not your problem. It is ours, and a 
great concern of many members of this Committee and mine.
    With respect to the customer account service of the new SB/
SE Division, do you have some problems with the aging 
technological capabilities? You mentioned in your comments the 
need for technology. Will it be a hurdle to overcome the 
technological gap to provide the kind of customer service 
improvements you envision?
    Mr. Rossotti. Unfortunately, Mr. Chairman, I have to say it 
is a major hurdle, especially in that area. Let me put it this 
way, it is an obstacle or a barrier. By that, we do not mean 
that we are going to just wait and do nothing until we have 
replaced all our technology, because that is not a good 
approach. We are trying to do what we can.
    But just to give you a couple of examples, one of the 
problems we have is with just simply the timing of updating our 
files. Somebody calls us in and says I have paid such and such 
an amount, and it takes anywhere from--it could take as long as 
16 days, because of the way our systems work, to actually get 
that transaction updated on what we call our master file.
    So in the meantime, it is possible that the person could 
get another notice or could call in again. You get this kind of 
cycle that is very, very bad. A lot of the times when people, 
you probably get complaints from your constituents, every 
member virtually does, about this kind of thing. From the 
taxpayer's point of view, it seems inexplicable. I have already 
called up. I have paid. I have settled this. And then they get 
another letter, and then they call up again.
    It is simply the fact that we have a 35-year-old system 
that takes up to 2\1/2\ weeks. That is a major problem.
    Another problem is with the notices. We send out 180 
million notices a year. Many of them go to small businesses. 
Many of those people complain that they cannot understand what 
it is. I got a complaint recently from one of your colleagues, 
Senator Domenici, from one of his constituents, where he said 
the taxpayer was furious. I got a notice that said he had not 
paid by 1 cent and he got a penalty for $286. It looked very 
much like that, if you read this notice, like that is exactly 
what happened.
    Of course, we looked into this, and the reality was the 
penalty was not for the 1 cent. The 1 cent had nothing to do 
with it. It had to do with some late payments on a previous 
filing that just carried over to this notice. But the notice 
did not tell him anything about this. So it just looked to him 
like that is what the problem was.
    And yet, although we are trying to fix some of these 
notices, we do not have, in all cases, the data in our system, 
in our data base, to be able to actually carry it forward, to 
be able to explain fully to the taxpayer what is in these 
notices. So it is not just a matter of rewriting them, it is 
the underlying computer systems.
    These are just two examples. But fundamentally, we have a 
tax system, Mr. Chairman, that depends on computer systems that 
were, many of the key parts of it, actually designed and built 
in the 1960's and 1970's, and we are now in the 21st century. 
So we cannot really deliver what is expected appropriately by 
the taxpayers.
    That, of course, is why we have our whole technology 
modernization program which has begun, but which is a long-term 
program and which, of course, will require continued funding in 
order to be successful.
    Chairman Bond. I can sympathize with the fellow that had 
the notice. One of my first encounters with the IRS some 35 
years ago when I was called in to the office because they 
claimed I had not paid the quarterly taxes I owed. I brought in 
the canceled check stubs, and I sat down with a gentleman who 
had not had his coffee that morning, he was not really awake. 
And I said here is our problem. You say I have not paid, but 
here is the canceled check that you deposited.
    He said let me go talk to my supervisor. So he came back 
after 10 minutes, and he said, ``Well, we are willing to 
compromise this.'' That is when I lost it. I said, ``No, no, 
no, I paid it. We are not compromising anything.''
    I hope that that is long gone, but I know that my first 
experience set my teeth on edge a bit, so I think that is 
important, as well.
    In the testimony, you note that the third component of the 
SB/SE Division will be a traditional compliance function. As I 
indicated, I support that in order to ensure that the system is 
fair, the taxes owed are collected. Because of the complexity 
of the tax code, however, would you consider implementing a 
program under which penalties for first time taxpayer errors in 
mitigating circumstances are waived?
    Mr. Rossotti. As a matter of fact we do have, of course, 
the authority to abate penalties. The most common case where 
that occurs is the first time somebody has had to make, for 
example, a tax deposit. We actually have a program in effect 
right now, which we just fairly recently implemented within the 
last couple of years, where we automatically waive the 
penalties.
     I did find out that we were not, however, until very 
recently, notifying the taxpayer that they had this problem and 
that we had waived the penalty. So therefore, they were in the 
position where they could have done it a second time and gotten 
the penalty. This was an interesting finding.
    So we have got a system now where we at least send the 
taxpayer a letter when that happens to tell them look, you did 
not do this and we waived the penalty because obviously it was 
your first time, just to let them know what they are supposed 
to do the second time. I think that is a better system.
    So I agree with you, in many cases, we should do that. As a 
matter of fact, we have that program in the case of the tax 
deposits program. We certainly would look at that as a key 
criteria for abating penalties in any other situation where it 
was a first-time filer.
    We are not really trying to use penalties to penalize 
people, except where it is really a legitimate issue. It is 
just part of the tax system. We do have, fortunately, the 
authority in most cases to waive the penalties if it is 
justified.
    Chairman Bond. When can we tell small businesses they could 
expect to start seeing some substantive changes in the kind of 
assistance the IRS provides and/or the way it provides the 
information, as you describe in your testimony?
    Mr. Rossotti. Well, I think we could claim that, at a 
limited level, it has already begun, it has already happened. 
We have not waited until we have the new division started up.
    I mention some of the things, that is why I mentioned them 
in my testimony. I will not repeat them again, but the 24-hour 
phone service, the web site, the other forms of communication.
    And I think more generally, just our whole mission, our 
more balanced focus of how we want to administer the tax 
system, I think has had considerable effect in the way our 
employees--which have responded to this very well--deal with 
taxpayers. We have had a considerable focus on training and 
balance measurement of performance, for example.
    So those things have already happened. I think that there 
are some other things in the pipeline for next season, next 
filing season. I mentioned the checkbox. And we will begin, we 
hope, to specialize some of the phone service a little bit 
more.
    So I think that we have already done some things. We will 
have more things next year. I think over the following 2 years, 
2001 and 2002, we will have then at least a major part of our 
organization in place. Assuming we can get the funding we 
requested for the staffing and the technology, we can then put 
in place some of these new initiatives that we have requested.
    So I think we have seen some improvement already, and I 
think there has been some feedback from our taxpayers to that 
effect. I hope it will accelerate over the next 2 years.
    Chairman Bond. Mr. Commissioner, as I said, there are 
several of my fellow Committee members who wanted to come. 
Obviously, they have been held up. We will leave the record 
open for questions that I have, which we will submit in 
writing. We will ask staff to prepare, by the end of this week, 
any questions that they have for you.
    We very much appreciate your willingness to come and be 
with us today. We will be hearing from the GAO next, and 
others, but I know your time is very busy so we appreciate your 
being with us. Commissioner Kehoe thank you for joining us, as 
well as the rest of your staff. We look forward to continuing 
to work with you and expect very good things from the SB/SE 
Division.
    Thank you very much for being with us today.
    Mr. Rossotti. Thank you very much, Mr. Chairman.
    Chairman Bond. Our next panel is Ms. Cornelia Ashby, 
Associate Director for Tax Policy and Administration Issues at 
the General Accounting Office. Ms. Ashby, it is a real pleasure 
to have you with us.
    I am also pleased this morning to release the study that 
the GAO undertook at my request on the IRS' efforts to 
construct a model that will estimate the tax burdens imposed on 
America's taxpayers. This first stage of this model focuses on 
taxpayers with wage and investment income and is expected to 
assess the pre-filing, filing, and post-filing burdens that 
taxpayers encounter.
    While this part of the model does not directly affect 
small-business owners and the self-employed, it will be the 
basis for what we anticipate will be the next stage, a burden 
model covering small-business taxpayers.
    I applaud the IRS for attempting to update its antiquated 
burden-estimation process, and I greatly appreciate the GAO's 
review and evaluation of the IRS' efforts as the agency works 
toward a model that will accurately assess the enormous tax 
compliance burdens borne by small-business owners in America.
    With that, Ms. Ashby, we will make your full statement and 
this other information part of the record. We thank you for 
your excellent assistance, and welcome you here today.

STATEMENT OF CORNELIA M. ASHBY, ASSOCIATE DIRECTOR, TAX POLICY 
 AND ADMINISTRATION ISSUES, GENERAL GOVERNMENT DIVISION, U.S. 
  GENERAL ACCOUNTING OFFICE, WASHINGTON, D.C.; ACCOMPAINED BY 
KIRK R. BOYER, SENIOR EVALUATOR, KANSAS CITY FIELD OFFICE, AND 
      JAMES A. WOZNY, ASSISTANT DIRECTOR, TAX POLICY AND 
       ADMINISTRATION ISSUES, GENERAL GOVERNMENT DIVISION

    Ms. Ashby. Thank you, Mr. Chairman.
    We are pleased to be here today to discuss factors that 
have complicated small businesses' efforts to comply with 
Federal tax laws and IRS' efforts to provide better service to 
this important group of taxpayers. James Wozny and Kirk Boyer 
are accompanying me today.
    The IRS Restructuring and Reform Act of 1998 required IRS 
to place greater emphasis on meeting taxpayers' needs and to 
establish new operating units to serve groups of taxpayers with 
similar needs. In response, IRS is reorganizing into four 
operating divisions. No. 1, the Small Business/Self-Employed 
Operating Division will serve small corporations, partnerships, 
farmers and other self-employed individuals, a group that we 
will refer to as ``small businesses.''
    Our remarks are based on results of the two studies that 
have been mentioned this morning that the Committee asked us to 
do, one on the extent to which the IRS' plans for SB/SE address 
factors that have complicated past interactions between small 
businesses and the IRS; and another on the IRS' new taxpayer 
burden estimation models.
    The first study is ongoing and our remarks today are based 
on preliminary results. We have completed the second study and 
you have just released our report.
    In summary, factors that have complicated interactions 
between small businesses and the IRS relate to the potential 
for non-compliance among small businesses, the way the IRS has 
structured its organization and allocated its resources, and 
the reluctance of small businesses to go to the IRS for help. 
Although the IRS' plans for SB/SE address these complicating 
factors, the IRS will face several challenges as it implements 
those plans.
    First, I will discuss the complicating factors. According 
to the IRS, small businesses are more likely than other 
taxpayers to have compliance problems. IRS data show, for 
example, that small businesses tend to have more collection 
cases involving withheld employment taxes than do larger 
businesses. Complexity, in combination with the resources 
available for dealing with that complexity, may account for 
some small business non-compliance.
    While small businesses, like larger ones, encounter complex 
tax issues and are subject to multiple layers of filing, 
reporting, and deposit requirements, they do not always have 
the kinds of resources on a continual basis that they need to 
understand and deal with those issues and requirements.
    Other factors that may contribute to a small business's 
potential for non-compliance are cash-flow limitations and the 
fact that business income, unlike wage and investment income, 
is generally not subject to withholding or some form of third 
party reporting.
    Because the IRS is organized and allocates its resources 
along geographic and functional lines, it is designed to handle 
a wide range of issues pertaining to all taxpayers with little 
or no focus on specific taxpayer segments, such as small 
businesses. As a result, the IRS does not have any easy means 
of accessing comprehensive information about small-business 
taxpayer accounts. This can inhibit its ability to identify and 
resolve tax-compliance problems of small businesses.
    Further, the IRS has historically allocated most of its 
resources to correcting problems rather than preventing them. 
This emphasis is especially problematic for small businesses 
that need assistance up front and that, absent help, are at a 
high risk of going out of business if problems arise.
    The results of our survey of a stratified random sample of 
1,000 small businesses representing a study population of 
398,105 small businesses nationwide showed that many small 
businesses were unaware of key IRS services or knew of the 
services but did not use them. Many expressed negative feelings 
about their past interactions with the IRS. Small business 
owners participating in IRS focus groups indicated that they 
had limited familiarity with or use for IRS' products and 
services because they relied on tax practitioners.
    Small business representatives told us that small 
businesses would rather rely on tax practitioners because they 
are too busy, they do not trust the IRS, or the IRS' services 
are not conveniently offered.
    IRS' plans for SB/SE indicate that it will address the 
factors we identified as complicating interactions between the 
IRS and small businesses by dedicating an operating division to 
small businesses, determining the characteristics and needs of 
that population, shifting more resources to prevention, 
partnering with tax practitioners and other organizations from 
which small businesses are likely to seek help, and by 
customizing its products and services to meet the needs of 
small businesses.
    The IRS should be in a better position to provide small 
businesses improved customer service. However, it will not be 
easy for the IRS to implement its plans for SB/SE. The IRS and 
the new division must confront several challenges.
    First, SB/SE will serve a large and diverse population, the 
members of which can migrate between operating divisions as 
their circumstances change from year to year. The diversity of 
the small business population will require the SB/SE staff to 
specialize in a wide range of tax issues and deal with a wide 
range of taxpayer needs.
    In addition, SB/SE is expected to do examination and 
collection work for other operating divisions. These 
responsibilities could stretch the capabilities of management 
and staff of SB/SE and dilute its taxpayer focus. Taxpayer 
migration also poses a challenge to the taxpayer focus intended 
by the reorganization.
    Antiquated information systems and a shortage of staff with 
needed skills will also challenge SB/SE. Antiquated computer 
systems have long hindered the IRS' efforts to manage 
operations and serve taxpayers, and improvements are critical 
to SB/SE's overall success. A shortage of staff with needed 
skills can also adversely affect SB/SE's ability to deliver new 
programs and services.
    For example, SB/SE intends to improve taxpayer education 
and assistance through research and analysis of taxpayer 
characteristics and behavior. However, according to the IRS, it 
does not have enough employees who possess the requisite skills 
such as market research, forecasting, and trend analysis.
    SB/SE, like the rest of the IRS, is challenged to develop 
an integrated performance management system that creates 
incentives for employee behavior that support organizational 
goals. Although the IRS has clearly made progress in 
implementing new performance measures, it does not have a 
measure for voluntary compliance. The absence of such a measure 
could hinder SB/SE more than other operating divisions because 
the SB/SE population generally has a greater potential for non-
compliance.
    A second critical aspect of performance management is an 
employee evaluation system that reflects the organization's 
mission. The IRS recognizes that, with respect to SB/SE, a 
successful blend of customer service and compliance activities 
will require not only a substantial shift in employees' skills 
and abilities but also a significant change in employees' 
attitudes and behavior. A change that is dependent on employees 
being able to see a clearer connection between their day-to-day 
activities, their performance evaluations, and the overall 
organization's goals.
    Finally, in closing, let me briefly address another area of 
interest to the Committee, the IRS' efforts to estimate 
compliance burden on taxpayers. Besides measuring voluntary 
compliance, it is also important that the IRS be able to 
measure compliance burden. To do that, the IRS is pursuing a 
multi-phase strategy. Initially, the IRS is focusing on the 
design and implementation of models for estimating the Federal 
income tax compliance burden on taxpayers who are served by the 
new Wage and Investment Income Operating Division. The 
conceptual definition of compliance burden developed for that 
group, and the theoretical framework for measuring that burden 
are supposed to build the foundation for developing burden 
estimates for other taxpayer groups, including small 
businesses.
    The IRS has begun to implement its strategy by contracting 
for the development of two models that, when combined, should 
provide more reliable estimates of W&I taxpayers' Federal 
income tax compliance burden than current methodology. The 
models are also designed to provide the IRS with a greater 
capacity to analyze the impact of tax law and administrative 
changes on that burden. As with all such modeling, the specific 
capabilities and precision of the new models will depend on the 
quality of the underlying data.
    Mr. Chairman, this concludes my statement. We would be glad 
to answer any questions you have.
    [The prepared statement of Ms. Ashby follows:]

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    Chairman Bond. Thank you very much, Ms. Ashby.
    Recognizing that most small businesses use tax preparers 
and that there seems to be a reluctance on the part of small 
business to go to the IRS for help, what do you think the IRS' 
role should be in providing help to small-business taxpayers?
    Ms. Ashby. We think, and the IRS in its plans seems to 
recognize this, that one avenue to help small businesses is to 
go to tax preparers, to use them as a resource, by first of all 
making sure the tax preparers understand what the requirements 
are and using them and partnering with them in getting the word 
to small-business owners and managers.
    Chairman Bond. I can see some happy tax preparers. I know 
they will be glad for that.
    To what extent are there small businesses these days who 
still try to do it on their own, and do not use tax preparers?
    Ms. Ashby. I will let my colleague, Mr. Boyer, who is more 
familiar with the results of our survey, answer, but 
overwhelmingly I think we found that most small businesses do 
use tax preparers.
    Mr. Boyer. Yes, sir. Based on our survey results, we found 
that 94 percent of small businesses use tax preparers of one 
sort or another. That does lead, as Ms. Ashby said, to a great 
challenge of communicating or providing up-front input for the 
taxpayers, when so many of them go through tax preparers.
    Chairman Bond. I would say that 6 percent is either very 
brave and very well-informed, or brave and . . . anyhow.
    Ms. Ashby. I wanted to make the point that while there is a 
higher-percentage usage of tax preparers to prepare tax 
returns, small businesses really need advice at other times 
during the year. They lack the availability of continual 
resources as they are planning their activities to put 
themselves in the best position tax-wise, and as they are doing 
the things they need to do during the course of a year to be 
prepared for that year-end filing. That is where small 
businesses have difficulty.
    Chairman Bond. Your testimony mentions several challenges 
facing the IRS as it implements its new operating division. 
Which of these challenges do you think will be most difficult 
to overcome? And how do you see them dealing with those 
challenges?
    Ms. Ashby. I think the most difficult challenge will be the 
computer systems.
    Chairman Bond. Getting back to the technology side of it.
    Ms. Ashby. Yes, as the Commissioner explained to us. He is 
right, the IRS cannot wait until those systems are sufficiently 
improved in order to do something. The IRS has to operate with 
what it currently has.
    But the difficulties involve, for one thing, identifying 
who small businesses are in order to be able to look at their 
characteristics and assess their needs. Right now, with the two 
master files, the individual master file and the business 
master file, some small businesses are in one, some are in 
another. They are intermingled with other types of taxpayers. 
So that, in and of itself, provides difficulty in terms of 
doing some of the things that the IRS would like to do in the 
future.
    And then, as the Commissioner stated, the problem with 
delays in posting transactions, and inaccuracies in the records 
themselves are a problem throughout the IRS and for anything it 
encounters or anything it tries to do.
    Chairman Bond. That is very helpful to know. I do not 
happen to serve on the Treasury Postal Subcommittee anymore, 
but we will be communicating to Chairman Campbell the 
information that both you and the Commissioner provided us.
    A final question, sort of a broader goal, what do you see, 
in addition to the computer issue, as being the principal risk 
to the success of the IRS efforts to develop the improved 
burden estimation models? Is there anything that they could be 
doing that they are not, that could minimize those risks?
    Ms. Ashby. I am going to let Mr. Wozny answer that, and I 
will just say, as I mentioned in my short statement and as we 
state further in our longer official statement, the underlying 
data that is the basis for the statistical equations that are 
used in the model are the most problematic. But I will let Mr. 
Wozny say more.
    Mr. Wozny. Right, and the most difficult data to come by 
are the information on the burden itself. The IRS, and its 
contractor, have decided to try to obtain that data through a 
survey. Past efforts have indicated that taxpayers have limited 
ability to recall the burdens very precisely.
    But the contractor is expert in conducting mail surveys and 
they will be trying to increase the response rate and to 
provide guidance to taxpayers in order to prompt their memory 
on the burdens.
    Chairman Bond. I would have to say they probably have the 
fisherman's veracity problem, because that 12-inch bass that 
you release today is 16 inches long by tomorrow. And next week 
you are telling everybody how you threw a 20-inch bass back. So 
I can imagine that there are some difficulties in concluding 
that.
    As I said earlier, we will keep the record open. We may 
have some further questions, and I invite my fellow Committee 
members and their staffs to submit their questions for the 
record by the end of this week. We thank you very much for your 
good work. As always, the General Accounting Office is most 
helpful to us in obtaining an independent review in order to 
confirm or amplify the information that we have received.
    Ms. Ashby, Mr. Wozny, Mr. Boyer, thank you very much for 
being with us today.
    Ms. Ashby. Thank you, Mr. Chairman.
    Chairman Bond. Now, Ms. Abalos, can you hear me?
    Ms. Abalos. Yes, I can. Can you hear me?
    Chairman Bond. Yes, the wonders of modern technology come 
through, and we are very pleased that you can be with us today. 
We also will have, at the table, Mr. Roy Quick. We thank you 
both very much for joining us today, for taking the time to 
come and be with us through the means of modern technology.
    As I indicated before, we will invite Ms. Abalos to 
summarize her testimony, and we will include the full written 
testimony in the record. Ms. Abalos, we invite you to make your 
comments.

    STATEMENT OF SANDRA A. ABALOS, CPA, PRESIDENT, ABALOS & 
               ASSOCIATES, P.C., PHOENIX, ARIZONA

    Ms. Abalos. Thank you so much for providing the opportunity 
to give testimony via the teleconference. I did not hear the 
opening remarks, but the sound seems to be fine now.
    Taxation and all the issues surrounding tax compliance is 
one of the difficult aspects of running a small business. 
Compliance becomes not an issue of intent, but it becomes an 
issue of education, awareness and resources.
    Historically, the relationship between the Internal Revenue 
Service and the small business community could be likened to 
``swimming with the sharks''. This fear factor approach, 
however, fosters an ``us against them'' mentality that has 
produced really less than desirable results.
    I have reviewed the mission and organizational structure of 
the Small Business/Self-Employed Operating Division of the IRS 
and I must say that I am very encouraged by the concentrated 
customer service focus of the SB/SE Operating Division. I think 
the IRS is to be commended for their efforts in identifying the 
distinct market segments of the taxpaying community and then 
developing an organizational structure that will provide 
meaningful customer service and support.
    I am particularly interested in the organizational segment 
named, Taxpayer Education and Communication Organization, the 
TEC. This is described as a ``customer-focused organization 
that routinely solicits information concerning the needs and 
characteristics of its customers and implements programs based 
on the information received.'' Within the TEC structure is the 
TEC Partnership Management arm that will interface with certain 
user groups. The TEC Partnership Management will proactively 
partner with Government agencies, small business organizations, 
practitioner groups, and other professional and volunteer 
organizations.
    The ETAAC, Electronic Tax Administration Advisory 
Committee, prepares an annual report to Congress, which is 
forthcoming. It is due at the end of June. In considering a 
strategy to increasing electronic filing participation within 
the business community, we included ``Community Alliance 
Initiatives'' within the report.
    I happened to author this section of the ETAAC report and I 
included it in full in my written testimony. The report 
describes a formal working relationship between the IRS and the 
respective user groups very similar to what is envisioned in 
the TEC partnership management initiative.
    I had envisioned this working relationship between the 
small business community and the IRS before really reviewing 
the express directives of the IRS SB/SE Operating Division. 
Thus, I was really excited to see this concept in the 
structure.
    The community alliance initiatives of the ETAAC report 
reads in part:

    The electronic filing goals established by Congress require 
considerable participation from a broad spectrum of taxpayers 
and tax practitioners. The simple wage and interest type of 
returns account for the majority of electronically filed 
returns to date. The future growth and success of electronic 
filing will largely depend on the increased participation of 
the tax preparer community and the sanction of the small 
business community.
    The tax preparer community is extremely diverse in tax 
practice procedures and in client profiles. For some preparers, 
electronic filing provides efficiencies and incentives. For 
other preparers, electronic filing presents a burden. There are 
tremendous opportunities for tax preparer associations to 
provide constructive input, opinion, and direction into 
electronic filing process and procedures as they specifically 
relate to divergent preparer practices and taxpayer profiles.
    The small business community, on the other hand, is very 
sensitive to the change, complexity and cost. A seemingly 
simple initiative will emerge as a compliance nightmare within 
the small business community. The advance input and endorsement 
of the small business community will ensure a successful 
program.

    When I am sitting in the ETAAC meetings, just as an 
example, one of the Committee members said, ``Gosh, the small 
business community had a cow with EFTPS. We do not get it.'' 
Well, had I been on the Committee at that time, I could have 
told you exactly what the cow was going to be about and perhaps 
prevented some of that from happening.
    The TEC Partnership Management Division is the vehicle to 
produce such results. The IRS needs to identify and resolve the 
barriers to electronic filing during the process development 
phase, rather than reacting to an outcry after the program 
rolls out.
    In our ETAAC meeting of March 1, 2000 we heard from Sherill 
Fields regarding the current State of business e-file. The 
issues and barriers impeding business e-file, as she presented, 
are substantial and material. One of the issues was limited 
research has been conducted on business products and customers. 
In listening to the well structured presentation on the 
business e-file program, I could not help but feel like the IRS 
is building a bad field of dreams. I even said that at the 
meeting. I told her, you can build it, but they will not come. 
Electronic filing will be a success if it is embraced 
voluntarily due to ease of use and appropriate user incentives.
    Congress established an e-filing goal of 80 percent by the 
year 2007. My single request, on behalf of the small business 
community, is that the electronic filing be successful as a 
viable option and not be made into another Government mandate.
     The IRS SB/SE Operating Division mission statement talks 
the talk of a new partnership and relationship building with 
the small business community. Now they need to walk the walk. 
Because done right, electronic filing will flourish.
    I sincerely appreciate the opportunity to testify and I 
would welcome any questions that you may have.
    [The prepared statement of Ms. Abalos follows:]

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    Chairman Bond. Thank you very much, Ms. Abalos.
    You already answered the first question I was going to ask, 
whether the 80 percent should be a goal or a mandate. I have 
long taken the position that if this electronic filing is the 
best thing since sliced bread, then we ought to be able to sell 
it to small business as sliced bread and not make it a mandate.
    I will come back to you with questions, but first I want to 
have the testimony of our other witness, and we will have an 
opportunity for you to listen to his testimony. If you wish to 
make any comments on each other's testimony, that always makes 
it fun.
    Now I will turn to our good friend Roy Quick, EA, 
Principal, Quick Tax and Accounting Service of St. Louis, 
Missouri. Roy, welcome, glad to have you back

  STATEMENT OF ROY M. QUICK, JR., EA, PRINCIPAL, QUICK TAX & 
            ACCOUNTING SERVICE, ST. LOUIS, MISSOURI

    Mr. Quick. Thank you very much, Mr. Chairman.
    My name is Roy Quick, I am an enrolled agent and a 
principal in Quick Tax & Accounting Service, a private, home-
based tax and accounting service located in St. Louis County, 
Missouri. I am also a member of the IRS Commissioner's advisory 
Council, or IRSAC, since November of last year. I am pleased to 
present this testimony on the IRS modernization effort.
    First of all, let me say that I am very glad to see a 
change in the way the IRS does business by way of involving 
``outsiders'' in the strategic planning process. A few examples 
of this are the consulting firm of Booz-Allen & Hamilton, a 
contractor to the IRS, invited the White House Conference on 
Small Business tax chairs to review the strategic planning 
process in the initial phases of the design and modernization.
    Commissioner Rossotti has selected seven members of his 15 
member advisory council who have small business experience. In 
addition to the IRSAC, other specialized advisory councils with 
interested stakeholders have been formed, for example the ETAAC 
that Sandy serves on.
    Two other initiatives that are a sign of the ``new IRS'' 
are the establishment of ``problem solving days'' and the 
Electronic Tax Administration road shows. The problem solving 
days bring together representatives from the IRS and taxpayers 
with unresolved problems to try and find common solutions. 
Also, a representative from the Taxpayer's Advocates Office is 
available at these locations to assist taxpayers with still 
unresolved problems. At a recent problem solving day in St. 
Louis, which was held on a Saturday, the IRS and the Missouri 
Department of Revenue joined forces for a one-stop shop.
    Electronic Tax Administration road shows that I mentioned 
are designed to educate and encourage the practitioner 
community to embrace electronic filing. Key elements of these 
shows are the availability of national office personnel to 
speak on topics of interest to the practitioner community and 
also the vendor displays on products that the practitioners 
would be able to use.
    You have heard from previous witnesses regarding the 
different operating divisions, so I will not go into detail 
here, except to say that this diverse group of small-business 
and self-employed taxpayers will have interaction with the 
service during the pre-filing, filing, and post-filing phases. 
It is estimated they will have between 4 and 60 contacts per 
year.
    Taxpayer Education and Communication, or the TEC, will 
handle the pre-filing function. The three key functions within 
TEC are research and product development, partnership outreach, 
and taxpayer education. The strategy behind the establishment 
of TEC, which I think is excellent, is to assist taxpayers 
initially to avoid or reduce problems and burden in the filing 
and post-filing phases. Basically, if you solve a problem on 
the front or educate the taxpayer on the front end, you will 
not have problems later on.
    If this strategy is successful, it should reduce the 
overall costs of tax administration. Therefore, it is critical 
to the reorganization effort that the TEC be fully staffed and 
fully funded as soon as possible.
    The IRS has developed two products that should be key in 
the delivery of taxpayer education. The first product is the 
IRS web site. Taxpayers are able to obtain up to date 
information and forms by accessing www.irs.gov on a 24/7 basis. 
According to Commissioner Rossotti, there have been over 1 
billion hits to this web site. The Service has done a good job 
in developing this web site, but the addition of a hypertext 
search engine would make it far more useful. With the addition 
of this tool, one could search for information on regulations 
and forms of a particular topic of interest.
    The second product of interest in the taxpayer education is 
the small business resource CD that was mentioned earlier. This 
computer program covers the life cycle of a small business from 
pre-startup to closing a business. The product was developed 
jointly by the IRS and the SBA. I understand that it is being 
distributed to all the Small Business Development Centers 
across the country. The contents of this CD, however, should be 
on the IRS web site, as well as in all the public libraries for 
access.
    This type of partnership or strategic alliance is another 
function of TEC. I am encouraged by the effort to work with the 
various stakeholder groups. The IRS, practitioner groups, trade 
organizations, educational institutions, and other Government 
agencies have so much to gain by being partners in tax 
administration.
    At the same time, the Service is looking to provide 
taxpayer education to the small business community, this same 
community may not be looking to the Service as the best source 
of information. The figure I had was over 80 percent of small 
business tax returns are prepared by a tax professional. I was 
interested to hear Mr. Boyer's figure this morning, as well.
    Chairman Bond. Even better news.
    Mr. Quick. For the same reason that I do not fix my own 
car, a lot of people do not prepare their own taxes. It is not 
the highest and best use of my time. Therefore, outreach to the 
professional community and trade groups is essential.
    One area of concern in taxpayer education is the ability of 
the IRS to educate taxpayers. The Service has many technically 
proficient employees, well versed on tax law and procedures, 
but these same employees may not possess the necessary skills 
to be a good teacher.
    I would suggest the possibility of pairing knowledgeable 
IRS personnel with trained educators to develop suitable 
training materials. It may be necessary to look outside the 
Service for adjunct faculty. Sufficient funding needs to be 
available to accommodate this reality.
    Another area of concern is the ability of the Service to 
retrain some of its examination and collection personnel and 
their perception of small business. Most earners are very hard 
working and law-abiding taxpayers willing to pay their fair 
share of taxes but not a penny more. In light of today's 
complex tax code, there is a big difference between an honest 
mistake and tax fraud. This trust building will take time on 
both sides of the table.
    In talking with other IRSAC members, there are some 
concerns about the intradivisional and cross-divisional 
communications. This was a valid complaint in the old IRS. The 
design teams are trying to address this issue and I will be 
interested to see their results.
    It is important to remember that this reorganization is a 
work in progress and no doubt there will be a few glitches, as 
there are in any private sector corporate reorganization. The 
ability of the Service to correct these problems in a timely 
manner, and the success of the TEC function, will greatly 
enhance the success of the entire process.
    One final message that I would like to suggest to Congress 
is that they ensure adequate funding is available for this 
reorganization effort, specifically in the information systems 
area.
    While admittedly, the Service has not always spent 
technology dollars wisely in the past, I believe the IRS is on 
the right track in upgrading their--for lack of a better word--
mature systems and technology. The installation of new 
equipment and the establishment of integrated real-time 
information systems will take several years to accomplish. 
However, once in place, these systems should enable the IRS to 
deliver timely and accurate customer service that the American 
people deserve.
    Thank you for the opportunity to present this testimony, 
and I would be pleased to answer any questions.
    [The prepared statement of Mr. Quick follows:]

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    Chairman Bond. Thank you very much, Roy. You answered my 
second question, about how they can improve the education and 
outreach effort by saying they need to get somebody who knows 
how to be an educator.
    Let me turn back to Ms. Abalos.
    Ms. Abalos, are there any barriers that will prevent small 
business from electronically filing their taxes? Can you 
explain how this electronic filing could be a burden on small 
businesses?
    Ms. Abalos. This year was the first year that our practice 
offered electronic filing for customers. They had two 
questions, every time they came around, two questions regarding 
electronic filing. What does it cost? And how does it benefit 
me?
    The answer was it costs more because it takes us more time 
to file the return electronically. This year, just to get some 
familiarity with the process, I provided that service to my 
clients free of additional charge. But then honestly, for our 
practice profile, there was no benefit.
    A CPA practice does not do the run-of-the-mill H&R Block 
type returns where somebody comes in and presents their 
information and they sit there and have a return done, sign the 
8453 and be off and it is finished. We gather information. 
Sometimes there is additional information that comes in. And 
when we finish that return and send it out, we want to be 
completed with it.
    So there was even additional time and correspondence back 
and forth with the client and the practitioner in getting the 
signed signature forms and so forth.
    With the business community, there is even an additional 
barrier. This is just an example of where I cannot imagine that 
the Internal Revenue Service would understand these kinds of 
barriers or identify them because they are not practicing in 
the mode we are.
    I will give you a perfect example. In filing most of the 
business returns, depreciation is a big component of the tax 
return, and it is very, very complex. We do not use the 
depreciation part of our software. The software package that 
would file the returns electronically has a depreciation 
component. We do not use that in computing the depreciation for 
our business clients.
    We have a separate package that is a full-blown 
depreciation package that we can use year-round in doing 
planning or preparing financial statements and so forth. And 
that is how we do the depreciation part or component of the 
return.
    That prints a physical paper, 4562, which we include with 
the paper business return. So just as an example, how would 
that work in electronic filing? How would you capture this data 
that is on a separate, independent, software package into the 
e-file return when we do not do it that way?
    So it is just an example of it taking more time and there 
not being an offsetting benefit to either the small business 
community or the practitioner community. Does that answer the 
question?
    Chairman Bond. That is a very good point. If it takes 
longer and costs more, that is a problem. I can certainly 
understand how your clients need to use this information 
throughout the year. And unless technologically we can figure 
out a way to move from one program into the other, it does 
sound like a real burden.
    One other question I have, Ms. Abalos. In the 
Commissioner's testimony, he notes the IRS has expanded the 
online filing program for Form 941, the Employer's Quarterly 
Federal Tax Return. Have you had any experience with this 
program and its potential benefits or downsides for a small 
firm?
    Ms. Abalos. Most small businesses do not prepare their own 
payroll tax reports. I will tell you that as a CPA 
practitioner, and I have probably 200 small business accounts. 
I represent a wide array of the small business community. We do 
not prepare them anymore, either. I do not even do my own 
payroll tax reports.
    We have out-sourced that function to a payroll service 
provider. No. 1, they do it faster. And again, they do it at 
less cost and that provides us with a real benefit.
    So the electronic filing of the 941s, I see that as a real 
benefit for the payroll service providers like Paychex or ADP, 
those are two of the bigger ones here in Arizona. I really do 
not see the small business community benefiting from a direct 
941 e-file because they are not preparing their 941s to begin 
with.
    Chairman Bond. Thank you, Ms. Abalos.
    Mr. Quick, would you like to comment on any of those items 
before we move on to questions?
    Mr. Quick. Certainly, Mr. Chairman. We do electronic filing 
for all of our clients. The only impediment we have found with 
electronic filing is that not all the forms are acceptable. 
There are certain forms that some of our clients have that 
cannot be filed electronically.
    One advantage that we have with the electronic filing is 
that returns go in error free. There is an error checking 
mechanism to make sure that the returns go in without any 
errors. It cross-checks Social Security numbers, which is one 
of the prime errors on paper filed returns. It eliminates all 
math errors. The Service gets the return error free and the 
taxpayer gets an acknowledgement or a receipt that the Service 
got their return and they know that it has been accepted.
    Our clients, even the ones with balances due, have been 
filed electronically and they seem to enjoy it. It does create 
some additional data entry for us but we feel that it is worth 
it.
    Chairman Bond. How would you assess the IRS efforts to 
include the Taxpayer Advocate in the new SB/SE Division? And 
what has been your experience as a practitioner with the 
Advocate?
    Mr. Quick. My experience with the Advocate's office has 
been excellent. I cannot say enough for Val Oveson and his 
staff. The Taxpayer Advocate will have, or there will be a 
Taxpayer Advocate's representative in each of the SB/SE 
territories.
    The one experience we had, which I cannot go into great 
detail due to client privacy, but they were able to solve a 
long-standing problem in a matter of a day with the service 
center.
    Chairman Bond. That probably sets a record.
    In closing the formal questions, first Mr. Quick, if you 
could tell the IRS one thing to do in the new SB/SE Division, 
what would be the most important one?
    Mr. Quick. My feeling on this, Senator, is that most small-
business owners are law-abiding tax paying citizens and willing 
to pay their fair share. I would ask that they be not presumed 
guilty by virtue of being small-business owners, and that the 
IRS live up to its mission statement.
    Chairman Bond. Thank you very much, Mr. Quick.
    Ms. Abalos.
    Ms. Abalos. I would ask that they formally activate that 
TEC Partnership arm and let us help you. We are doing the work 
here in the trenches and we can provide constructive input that 
will help this process. So before you develop something and 
roll it out, take our comments, consider them, and act on them, 
just like this directive says.
    Chairman Bond. Those are all very worthwhile, very useful 
comments. We sincerely appreciate your testimony. We are 
delighted to have the practical view from the tax preparers for 
small business on how this is working, can work, and should 
work.
    Before I conclude, once again I want to express my thanks 
to Commissioner Rossotti as well as, to Ms. Ashby and her team 
at the GAO, and especially our witnesses serving small 
business. Your insights and efforts on behalf of small business 
are greatly appreciated, and we urge everybody to continue 
their hard work for small business and the self-employed.
    As we have heard this morning, the IRS' new Small Business/
Self-Employed Division is expected to stand up on October 1 of 
this year. I extend my support, encouragement, good wishes, and 
sympathy to Joe Kehoe and his deputy, Dale Hart, as they 
undertake the enormous task of getting this critically 
important division off the ground.
    While I think there have been great efforts that have gone 
into planning, the real work will begin when the new division 
becomes operational. To ensure the IRS improvements in small 
business service do not stop in the planning stages, I will be 
asking the GAO to undertake a new evaluation of the SB/SE 
Division and report back to the Committee next year on the 
changes, and I am confident improvements, that the agency has 
made for taxpayers in this incredibly important sector of our 
economy.
    I thank all of our participants. The record will remain 
open for 2 weeks for those of you who are watching this, either 
here in the room or by means of our web site, we do invite 
further comments. I think there have been many good ideas that 
have been aired today and we would welcome comments, either 
supportive or adding a different perspective, that will enable 
us to share with the IRS suggestions that may be most helpful.
    With that, I thank all participants.
    The hearing is adjourned.
    [Whereupon, at 11:17 a.m., the Committee was adjourned.]

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