U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

24–846 PDF 2006

REFORMING THE TAX CODE TO ASSIST SMALL

BUSINESSES

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

WASHINGTON, DC, SEPTEMBER 21, 2005

Serial No. 109–32

Printed for the use of the Committee on Small Business

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house

COMMITTEE ON SMALL BUSINESS 

DONALD A. MANZULLO, Illinois, Chairman 

ROSCOE BARTLETT, Maryland, Vice 

Chairman 

SUE KELLY, New York 

STEVE CHABOT, Ohio 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

JEB BRADLEY, New Hampshire 

STEVE KING, Iowa 

THADDEUS MCCOTTER, Michigan 

RIC KELLER, Florida 

TED POE, Texas 

MICHAEL SODREL, Indiana 

JEFF FORTENBERRY, Nebraska 

MICHAEL FITZPATRICK, Pennsylvania 

LYNN WESTMORELAND, Georgia 

LOUIE GOHMERT, Texas 

NYDIA VELA ́ ZQUEZ, New York 

JUANITA MILLENDER-MCDONALD, 

California 

TOM UDALL, New Mexico 

DANIEL LIPINSKI, Illinois 

ENI FALEOMAVAEGA, American Samoa 

DONNA CHRISTENSEN, Virgin Islands 

DANNY DAVIS, Illinois 

ED CASE, Hawaii 

MADELEINE BORDALLO, Guam 

RAU ́ L GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

LINDA SA ́ NCHEZ, California 

JOHN BARROW, Georgia 

MELISSA BEAN, Illinois 

GWEN MOORE, Wisconsin 

J. MATTHEW SZYMANSKI, Chief of Staff 

PHIL ESKELAND, Deputy Chief of Staff/Policy Director 

MICHAEL DAY, Minority Staff Director

(II) 

C O N T E N T S 

WITNESSES

Page 

Fortenberry, Hon. Jeff (NE-1), U.S. House of Representatives, U.S. Congress . 3

Sullivan, Hon. Thomas, Chief Counsel for the Office of Advocacy, U.S. Small 

Business Administration ..................................................................................... 7

Olson, Ms. Nina, National Taxpayer Advocate, Internal Revenue Service ........ 9

Rolnick, Ms. Thala, Price, Senior Tax Manager, Kong & Company, CPA .......... 11

Landis, Mr. Marilyn, Basic Business Concepts ..................................................... 12

Darien, Ms. Kristie, Executive Director, Legislative Offices, National Association for the Self-Employed ................................................................................... 14

Irons, Mr. John, Ph.D., Director, Tax and Budget Policy, Center for American 

Progress ................................................................................................................ 16

APPENDIX

Opening statements: 

Manzullo, Hon. Donald A. ................................................................................ 25

Prepared statements: 

Fortenberry, Hon. Jeff (NE-1), U.S. House of Representatives, U.S. Congress ............................................................................................................... 29

Sullivan, Hon. Thomas, Chief Counsel for the Office of Advocacy, U.S. 

Small Business Administration ................................................................... 35

Olson, Ms. Nina, National Taxpayer Advocate, Internal Revenue Service . 41

Rolnick, Ms. Thala, Senior Tax Manager, Price, Kong & Company, CPA .. 57

Landis, Mr. Marilyn, Basic Business Concepts .............................................. 65

Darien, Ms. Kristie, Executive Director, Legislative Offices, National Association for the Self-Employed ................................................................... 70

Irons, Mr. John, Ph.D., Director, Tax and Budget Policy, Center for 

American Progress ........................................................................................ 75

(III) 

(1)

REFORMING THE TAX CODE TO ASSIST 

SMALL BUSINESSES 

WEDNESDAY, SEPTEMBER 21, 2005

HOUSE OF REPRESENTATIVES

COMMITTEE ON SMALL BUSINESS

Washington, DC 

The Committee met, pursuant to call, at 2:18 p.m., inRoom 2360, 

Rayburn House Office Building, Hon. Donald Manzullo [Chairman 

of the Committee] Presiding. 

Present: Representatives Manzullo, Bartlett, Kelly, Velazquez, 

Lipinski, Faleomavaega, and Bordallo. 

Mr. BARTLETT. [presiding.] Our Committee will come to order. 

Chairman Manzullo is currently occupied on the floor of the House 

speaking on behalf of a manufacturing bill. He will join us as soon 

as he completes his speech on the floor. As acting chair, I welcome 

you to this hearing. 

Our first witness today will be Mr. Fortenberry from Nebraska. 

Before I yield to our ranking member for her statement I would 

like to note that from a personal perspective the best way we could 

help small business is to reform the Tax Code by abolishing it and 

putting in its place the fair tax. That would be very simple and 

would remove lots of pages of regulations. 

Ms. Velazquez. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. Given the fact that 

the world is not that simple, let me just make my statement. 

With the recent disaster in the Gulf region, our country is again 

reminded of the powerful role small businesses play in our economic recovery. Through our Nation’s history it has been small 

firms that have been credited with acting as an economic stimulus, 

creating jobs and bolstering recovery during times of economic 

hardship. When it comes to providing assistance and assuring 

small firms have the tools they need to succeed, one thing has been 

clear: The Tax Code only continues to create barriers for a sector 

that does not need any more challenges. 

As we continue to rely heavily on our small businesses for economic revitalization, we need to ensure these small companies start 

seeing some tax relief. The truth is many entrepreneurs have not 

seen any real tax relief from the series of tax cuts that have been 

passed over the past 5 years. Only 1 percent of all small business 

owners actually see any benefits from the top rate cut, rather, what 

they have gotten are increasing compliance costs, and little or no 

savings. 

There are several reasons for this. One is the increasing complexity of the Tax Code. While there have been a number of tax 

2

cuts over the last 4 years, the complexity of the Tax Code has increased significantly. Despite the fact that the Bush administration 

recognized the problem, the last two bills, tax bills, have actually 

increased the complexity of the Tax Code even further. 

The complexity has serious implications for small business owners. The IRS has noted that it takes the typical American family 

8 hours more to do their taxes than it did a decade ago. Given that, 

small business owners’ tax returns are much more complicated 

than the average American family’s. They are now having to spend 

more and more resources on their tax returns. 

The Office of Advocacy released a study in 2001 that showed tax compliance costs for small firms, $1,200 per employee for a small 

firm versus 562 per employee for their larger counterparts. This is 

clearly an injustice to our Nation’s small businesses. Instead of 

helping them cope with the Tax Code, small businesses are being 

overburdened with costs and time. What good is passing a tax cut 

which may give $500 to a small business when they only have to 

turn around and spend $1,000 on an accountant or an attorney so 

they are able to comply with the Tax Code. 

Small business owners do not have the resources to deal with 

this change. As a result of this, small firms are making fewer investments back into their businesses and more are hiring accountants and attorneys. 

To compound these problems, the IRS is now going after small 

firms in an attempt to close the tax gap. There are increasing audits on small businesses. Once again it is this Nation’s entrepreneurs that are bearing the burden of a Tax Code that no one 

can figure out. 

Clearly the administration needs to step back and examine who, 

if anyone, is benefiting from the current Tax Code. What needs to 

happen now is that the administration start listening to the needs 

of small businesses who want to see provisions such as section 179 

made permanent so they can successfully invest in capital expenditures and expand. 

Right now, as the Gulf Coast region and our Nation gears up to 

recover from Hurricane Katrina, we will be reminded of the critical 

role small firms play in making an economic recovery a reality. 

What Louisiana, Alabama and Mississippi need today is revitalization, and in order to do that there must be investment in small 

businesses. For an economic recovery with robust job creation, tax 

policies must be in place that makes small firms the centerpiece 

rather than an afterthought. 

It is time the administration recognizes that they have put small 

businesses at the back of the line. They need to start making 

changes to the Tax Code that would allow small businesses to 

flourish and expand so the Gulf region and our Nation’s economy 

can finally move forward. 

Thank you, Mr. Chairman. 

Mr. BARTLETT. Thank you very much. 

In a former life I was a small business owner. I am one of maybe 

35 who came to the Congress as a member of NFIB. We always 

filled out our own taxes. Not only did we have a small business, 

we did land development and built homes. We also ran a farm. So 

we had to fill out those forms. And we filled out the itemized deVerDate 0ct 09 2002 13:54 Jan 04, 2006 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 G:\HEARINGS\24846.TXT MIKE
3

ductions and we did the taxes ourselves. So I am very familiar with 

the tax burden on both the individual taxpayer and on small businesses. 

We are very happy to have one of our own here today as our first 

witness. Mr. Fortenberry, the floor is yours. 

I am sorry. Different committees have different procedures for 

opening statements. I would like to ask now are there opening 

statements from other members? Okay, thank you. 

Mrs. KELLY. I didn’t realize that you weren’t going to call for 

opening statements, I am sorry. But since you have given me the 

floor, I want to thank our colleague and friend, Jeff Fortenberry, 

and I look forward to hearing about the work that he is doing. 

The small businesses in the Hudson Valley are constantly telling 

me that they want a simple and a fair Tax Code. The amount of 

time and money that we small business owners spend on complying 

with the Tax Code is just mind boggling and everything that we 

spend in terms of time affects our ability to do business. That is 

really a disservice to the American economy. And I just simply 

know that we saw benefits in the aftermath of September 11th and 

the resulting recession because small businesses, three-quarters of 

them—new jobs are created by small businesses and that worked 

for New York. 

We employ half of the private sector workforce, and we pay 44 

percent of the U.S. Tax private payroll. One of the interesting 

things to me is that women-owned small businesses in the United 

States of America employ more than all the Fortune 500 companies 

put together. 

With this emergency in Katrina, I think it is absolutely important that we knock down the barriers to success that are in the 

U.S. Tax Code. So I look forward to hearing what you have to say, 

Mr. Fortenberry, and I am delighted you are willing to come from 

the Committee today. 

Thank you, Mr. Chairman. 

Mr. BARTLETT. Thank you. Without objection, the opening statements of all of our members, those who are here and not here, are 

made part of the Record. 

Ms. Bordallo. 

Ms. BORDALLO. Thank you, Mr. Chairman. I really don’t have an 

opening statement, but I do have some questions of the witnesses. 

Mr. BARTLETT. Thank you very much. 

Are there other opening statements? Okay. Anyone who wishes 

to have an opening statement in the record we would ask unanimous consent for that to be done. 

Now, Mr. Fortenberry, the floor is yours. 

STATEMENT OF THE HON. JEFF FORTENBERRY (NE-1), U.S. 

HOUSE OF REPRESENTATIVES, U.S. CONGRESS 

Mr. FORTENBERRY. Thank you so much, Mr. Chairman. I really 

appreciate the opportunity to be with you. And Ranking Member 

Velazquez, thank you so much for the opportunity to speak. 

I want to speak about a particular issue regarding tax reform 

that I think could be extraordinarily helpful to small businesses. At 

the outset, though, I want to talk to you about a fascinating trend, 

4

and I recognize this trend myself intuitively but had it affirmed recently by more empirical data. 

Young adults, commonly known as Generation X, are interested 

in two ideals, family life and entrepreneurship, and I really believe 

that these ideals flow from the same desire, a desire for self-possession and a desire for self-donation. And if you think about it, in the 

family, a person enters through a commitment into a community 

of intimacy and builds a community of love and life. And this most 

solemn ideal is a great gift of the human experience and also a serious responsibility, and one that many young people are eager to 

embrace, even given the difficulties that they may have faced in 

their own upbringing. 

The second ideal of entrepreneurship embraces the freedom to 

use one’s own gifts to produce a good for the community, to build 

something that is the very imprint of one’s own self, to create, 

using one’s own hands and mind, receiving in turn the full fruits 

of one’s own labor. Again, this ideal is the essence of rewarding 

hard work and is a desire expressed readily by young people. 

Mr. Chairman, no more 40 years and a gold watch it appears. I 

think we may very well be entering the age of entrepreneurship.In 

recognizing this reality, I believe we must work to adjust our tax 

laws to assist those who want to create new opportunities for themselves and their families. 

I will soon introduce two bills promoting entrepreneurship and 

long-term economic security. First, I will proposal allowing individuals to roll over portions of their retirement accounts into health 

savings accounts. Second, I will propose to change the traditional 

IRA to allow small business investors to take loans from these retirement accounts similar to the existing loan provisions in 401(k) 

plans. These bills address two key areas of concern for small businesses, providing increased access to insurance coverage and gaining access to capital. 

Before I go into the details of these proposals I believe it is important to review why small businesses are so important—and Mrs. 

Kelly you pointed out many of the facts that we all already know. 

Small businesses are the most productive sector. It is where most 

people work, earn, try to get a little bit ahead in life. 

According to the SBA, small businesses account for 75 percent of 

net new jobs added to the economy, and employ half of all private 

sector workers. They represent 99 percent of all employees and 97 

percent of all U.S. Exporters. I believe we must develop policies to 

encourage this important sector of the economy. 

I have a keen interest in reducing barriers to entry into small 

businesses. I initially focused on access to capital issues, but quickly saw how the lack of available health insurance and rising 

healthcare costs decreases productivity and distorts social and economic decisions. For instance, it is not uncommon in my district 

among farm families for a spouse to drive very long distances simply to maintain a job for healthcare coverage. How can we count 

the loss of new ideas and new productivity because someone makes 

an undesired economic decision based solely on health insurance 

coverage reasons? 

As we have learned, the rising cost of providing health coverage 

for employees is a growing obstacle for small business owners, or 

5

those who wish to join the ranks. It is not surprising that only 63 

percent of smaller companies can even afford to offer health insurance, and this is a primary reason why three out of five uninsured 

persons in our Nation are small business owners, their employees 

and their families. 

Recently the Small Business Committee held a field hearing in 

my district, and during this forum we examined the increasing cost 

of health insurance and possible solutions. The hearing emphasized 

the importance of an underutilized tool for small business, the 

health savings account, which were established as a part of the 

Medicare prescription drug law. These tax preferred accounts, coupled with high deductible health insurance, help alleviate the ever 

increasing cost of traditional health insurance premiums and empower families to better control their own healthcare costs as well. 

According to a survey conducted by the Kaiser Family Foundation and Health Research and Educational Institute, or Educational Trust, only 20 percent of employers who offer health insurance provide a high deductible policy option. The same survey 

found that only 2.4 million workers outside the Federal Government are enrolled in such plans. 

While the number of individuals utilizing health savings accounts is increasing, I believe we need to do more to give small 

business owners and entrepreneurs the ability to take advantage of 

this important new policy innovation. In fact, of the new policies, 

37 percent were taken out by individuals who were previously uninsured and 27 percent were taken out by employers who did not 

previously offer their workers health insurance. 

As mentioned in my proposed legislation, individuals will be able 

to roll over portions of their retirement accounts into health savings accounts. This rollover will not subject the retirement account 

to the usual 10 percent penalty for an early distribution. Moreover, 

all individuals with retirement accounts would be eligible to take 

advantage of this opportunity. This will help meet the important 

policy objectives of increasing access to health insurance coverage 

and overcoming a major barrier entry into small business. 

An additional barrier that entrepreneurs often encounter is gaining access to capital, as we all know. Earlier this year the Committee considered and passed House Resolution 22, the Small Business Bill of Rights, which identified access to capital as a key concern for small businesses. According to the SBA again, the majority 

of small businesses use some form of external credit. Sadly, 46 percent of all these small business owners are using their own personal credit cards as a source of capital. The bill I propose will provide additional sources of capital by changing the traditional IRA 

to allow small business investors to take loans from these retirement accounts. 

The provisions of these IRA loans are similar to the existing loan 

provisions of the 401(k) plan in several ways. First, they permit individuals to borrow up to the greater of half of their IRA account 

balance or $10,000. In either case the loan would be capped at a 

maximum of $50,000. 

Second, the provisions will require the individual to use the 

money to finance small business capital expenditures. And third, 

6

individuals will have 5 years to repay the loan to ensure that the 

loan is not treated as a simple withdrawal from the IRA. 

Mr. Chairman, I believe these initiatives will encourage young 

people to jump-start and give them a jump-start into promising 

business opportunities, enable more advance workers to potentially 

have greater access to capital for the formation of small businesses, 

and potentially allow more senior workers who must often be risk 

averse potentially start new spin-off side ventures. 

These goals are consistent with the purpose of retirement savings in that they will allow more persons to be owners, possess the 

means of production, and provide long-term economic security for 

their families. 

Again, what a privilege it is to be on this side of the table today 

to have the opportunity to speak with you. This is a little bit different experience, but I really appreciate the opportunity to be before you. 

Thank you, Mr. Chairman. 

[Mr. Fortenberry’s testimony may be found in the appendix.] 

Mr. BARTLETT. Thank you very much. As is my custom, I will reserve my comments and questions until the other members of the 

Committee have had a chance to make their comments and ask 

their questions. 

Ms. Velazquez. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. I have no questions. 

Mr. BARTLETT. Ms. Kelly. 

Mrs. KELLY. Thank you, Mr. Chairman. I have no questions. 

Ms. BORDALLO. Mr. Chairman, I don’t have any questions. 

Mr. FALEOMAVAEGA. Mr. Chairman, I thank our colleague and 

good friend from Nebraska for his testimony. And as it is customary, also, most members, we don’t have questions of your testimony, but we do thank you for your eloquent statement and look 

forward to working with you on your legislation, also. Thank you 

very much. 

Mr. BARTLETT. Thank you very much. Just one quick comment. 

Fourteen years ago, when I was running for this House seat, Pat 

Rooney, President of Golden Rule Insurance Company, explained 

what I thought was a surprising new concept. He called them medical savings accounts. We now tend to call them health savings accounts. 

I like the idea of health savings accounts. I tell people we don’t 

really have a healthcare system in our country, we have a really 

good sick care system, and I hope we can move from that to the 

true healthcare system, and the medical savings accounts, now 

called health savings accounts, help move us in that direction. 

Thank you for your initiative in making these more broadly 

available. Thank you very much for your testimony. 

Mr. FORTENBERRY. Thank you, Mr. Chairman. 

Mr. BARTLETT. The second panel is taking the cue and they are 

taking their seats, I see. Thank you. Thank you very much. I would 

like to welcome the members of our second panel. 

Thomas Sullivan, Chief Counsel for the Office of Advocacy, U.S. 

Small Business Administration; Nina Olson, National Taxpayer 

Advocate; Thala Rolnick, Price, Kong & Company, CPA, Phoenix, 

Arizona; Marilyn Landis, Basic Business Concepts, Pittsburgh, 

7

Pennsylvania—I grew up near Pittsburgh—Kristie Darien, Executive Director of Legislative Offices, National Association for the 

Self-Employed; and John Irons, Director, Tax and Budget Policy, 

Center for American Progress. 

There is something about the Office of Chief Counsel for Advocacy. I noted in the prior Administration that the person who held 

that when he talked and said ′′we′′ he was talking about small 

business and when he said ′′them′′ he was talking about government bureaucrats, and I think that that is a characteristic of the 

people who serve in this very important office. 

Our first witness this afternoon is Tom Sullivan, the Chief Counsel of Advocacy at the Small Business Administration. Mr. Sullivan 

is no stranger to this Committee, having appeared before on several occasions in the past. He will discuss his recommendations for 

assisting small business through the Tax Code, as well as certain 

provisions in the Small Employer Tax Relief Act of 2005. Mr. Sullivan, the floor is yours. 

STATEMENT OF THE HONORABLE THOMAS SULLIVAN, OFFICE 

OF ADVOCACY, U.S. SMALL BUSINESS ADMINISTRATION 

Mr. SULLIVAN. Thank you, Congressman Bartlett, Congresswoman Velazquez, members of the Committee. Thank you for giving me the opportunity to appear this afternoon. 

As you know, my office is an independent office within the SBA, 

so therefore the comments expressed in this statement don’t necessarily reflect the position of the administration or the SBA. 

This testimony was not shared in draft form for comment with 

OMB; however, I distributed copies of the testimony to colleagues 

at OMB and at the Department of Treasury as a courtesy. 

I am honored to join these panelists to help the Committee’s deliberations, and I believe that recent research already cited by the 

previous witness done by the Office of Advocacy will add weight to 

the support for tax reforms beneficial to small business. 

These studies are cited in detail in my written statement, and 

with the Chair’s permission I would like to summarize key points. 

Without objection, I will summarize. 

Lower marginal rates. First of all, the research conducted by 

Donald Bruce and Tami Gurley published this past March entitled, 

Taxes and Entrepreneurial Activity: An Empirical Investigation 

Using Longitudinal Tax Return Data reveals that decreasing marginal tax rates across the board will spur entrepreneurship by increasing the rate of new firm formation and slowing the rate of 

firm closing. 

Decreasing the complexity of the Tax Code. A study released 2 

days ago by my office updates the study that Congresswoman 

Velazquez cited in her opening statement. This is a study that is 

published about every 4 years, and it shows the regulatory burden 

on small business. The study released 2 days ago continues to show 

the disproportionate impact of Federal regulations on small business. The study shows that on average it costs small businesses 45 

percent more to comply with Federal rules than their larger business counterparts. The cost disparity and compliance costs between 

small and large business is most severe when it examines small 

8

manufacturers and how much they have to spend to comply with 

the Tax Code. 

The study by Dr. Mark Crain shows that tax compliance costs are $2,582 per employee for very small manufacturers compared to 

$767 per employee for their larger business counterparts. Very 

small firms in the sector pay three times more per employee to figure out the Tax Code versus the large firms. 

Lower marginal tax rates. The concepts of lower marginal rates 

and less complexity, two of the key parts of my testimony, echo 

throughout the Small Employer Tax Relief Act of 2005 that was introduced in the House of Representatives this morning. The act 

makes permanent the expensing provisions of section 179, allows 

health insurance premiums to be deducted against self-employed 

payroll taxes and eliminates the AMT. These are key to achieving 

the tax reforms necessary for small business. 

Expanded expensing provisions. The Office of Advocacy and the 

small business community have consistently applauded the benefits 

of the expanded section 179 provision, specifically within the 2003 

Jobs and Growth law. The expanded limits will sunset on December 31, 2007. Small businesses have asked that the increased limits 

be made permanent. The President’s 2006 budget request also proposes that the expensing provisions of section 179 be made permanent. The Small Employer Tax Relief Act would grant permanence 

to the increased provisions of section 179, certainly a benefit to 

small business. 

Tax deduction on self-employment taxes for health insurance. We 

have already heard about healthcare even before the witnesses 

started testifying, but there is really no greater crisis issue than 

healthcare if you ask any small business man or woman anywhere 

in the country. I applaud this Committee’s action that has already 

taken place, Congresswoman’s Velazquez’s leadership, Chairman 

Manzullo’s leadership in passing association health plans. Obviously there is more to do. 

The Small Employer Tax Relief Act of 2005 helps make 

healthcare more accessible. Under the bill, self-employed taxpayers 

would be permitted to deduct their health insurance premiums 

when calculating their payroll tax. 

Repealing the individual Alternative Minimum Tax. I think it is 

unfortunate that when I say AMT, more and more people realize 

what the acronym stands for. The small business community has 

consistently supported repeal or reform of the AMT. Repeal of the 

AMT will lower marginal rates on small business, simplify compliance by eliminating a notoriously complex calculation, and it will 

increase predictability of the Tax Code and as a result small firms 

will gain more time and capital to grow their business. 

In conclusion, my office believes that the Small Employer Tax 

Relief Act will be helpful for small business, and for that reason 

you can count on my support. 

Thank you. 

[The Honorable Sullivan’s testimony may be found in the appendix.] 

Mr. BARTLETT. Thank you very much. 

Our second witness this afternoon is Nina Olson, the National 

Taxpayer Advocate at the IRS. As a National Taxpayer Advocate, 

9

Ms. Olson serves as an advocate for tax payers to the IRS and Congress. She included a number of proposals in her most recent report to Congress that impacts small businesses in the Small Employer Tax Relief Act of 2005, and we look forward to your testimony. Thank you very much. 

STATEMENT OF NINA OLSON, INTERNAL REVENUE SERVICE 

Ms. OLSON. Thank you, Congressman Bartlett, Congresswoman 

Velazquez and distinguished members of the Committee. Thank 

you for inviting me to testify today about the tax burdens facing 

small businesses and proposals to reduce these burdens through 

changes to the Internal Revenue Code. I commend Chairman Manzullo for introducing the Small Employer Tax Relief Act of 2005, 

which contains a number of proposals that I have long advocated 

and believe would benefit small businesses considerably. 

For many small business owners tax issues are the single most 

significant set of regulatory burdens. Now it seems to me that Congress and the executive branch should try to identify the behavior 

they want to promote, and then make it as easy as possible for taxpayers to comply with these expectations. However, sometimes tax 

law provisions have unintended consequences despite our best intentions. Thus Congress should periodically review the tax rules 

applicable to small businesses to ensure that they are narrowly tailored to accomplish their objectives and do not require small business owners to jump through unnecessary hoops. 

The tax treatment of married couples who are business co-owners 

is an example of this law of unintended results. An unincorporated 

business jointly owned by a married couple is classified as a partnership for Federal income tax purposes. As such, the business is 

subject to complex record keeping requirements and must file a 

partnership income tax return. In practice, most couples merely report their business income on one spouse’s sole proprietorship return. As a result, that spouse alone receives credit for purposes of 

Social Security and Medicare. The spouse for whom no earned income is reported, the ineligible spouse, does not receive credit for 

paying Social Security or Medicare tax. In the event of disability, 

this ineligible spouse would not qualify for Social Security, disability or Medicare benefits. In the event of the death of the ineligible spouse, the surviving spouse and children would not qualify 

for Social Security benefits. 

To make matters worse, the Internal Revenue code imposes a 

penalty on taxpayers who fail to file a required partnership return. 

The IRS, however, has issued guidance that in the case of partnerships with 10 or fewer partners it won’t impose the penalty because 

these partnerships have reasonable cause for not filing because of 

their size. 

So here we have government passing a law that requires certain 

taxpayers to behave in a way that is counterintuitive to their practice, then we impose a penalty on these taxpayers for failure to 

comply with that requirement, and then finally we issue guidance 

that says we won’t impose that penalty after all. All of this instead 

of just simply enacting the appropriate law that drives the appropriate behavior. 

10

I am pleased that Chairman Manzullo has adopted my recommendation to amend the Code to address the problems experienced by married co-ownersof unincorporated businesses. 

In my written testimony, I describe several other legislative proposals and administrative initiatives that will ease the tax and 

compliance burden for small businesses,including changing the due 

date for electing statuses of small business corporations under subchapter S of the Code. 

On consistency and equity grounds I, too, have recommended 

that self-employed individuals be allowed to deduct the cost of 

health insurance in computing net earnings of a sole proprietor 

from self-employment. This approach places the tax treatment of 

health insurance for self-employed taxpayers on a par with the tax 

advantages enjoyed by wage earners. 

And of course one of the most complex provisions in the Code, 

which I identified as the most serious problem for taxpayers in 

2003, is the individual Alternative Minimum Tax. For business 

owners the AMT recaptures section 179 expensing and can postpone the benefits of business tax credits. Quite simply, Congress 

must repeal the AMT or revamp it substantially to achieve its 

original objectives. 

I would like to draw your attention to one proposal not in the bill 

because I think it really provides relief to small businesses that are 

trying to comply with the labyrinth of tax laws and regulations, 

and because it illustrates the common sense approach to tax administration that I believe we should strive for. 

The first time penalty waiver, which I also call the one-time-stupid-act proposal, authorizes the Secretary to grant a one-time 

abatement of the failure to file and failure to pay penalties for taxpayers who have a history of compliance. Given the complexity of 

the tax law and the tax administration system, it is easy to see 

how taxpayers can make mistakes, even stupid ones. Traffic cops 

are permitted to give warnings rather than tickets for first time or 

minor infractions, why can’t the IRS? 

In closing, there are many common sense proposals that can help 

eliminate burdens on small business. I appreciate the opportunity 

to testify before you today about a few of them, and I commend the 

continuing efforts of this Committee and look forward to answering 

any questions. 

Thank you. 

[Ms. Olson’s testimony may be found in the appendix.] 

Chairman MANZULLO. [presiding.] Our third witness this afternoon is Thala Rolnick. Ms. Rolnick is a senior tax manager of 

Price, Kong & Company in Phoenix, Arizona, where she specializes 

in providing tax services to small businesses. In addition, she is CoTax Chair for Region IX of the White House Conference on Small 

Business, and also serves on the Council on Small Business in the 

U.S. Chamber of Commerce. 

She appears before us today on behalf of the U.S. Chamber of 

Commerce, which I am proud to say has endorsed the Small Employer Tax Act of 2005. We look forward to your testimony. 

[Chairman Manzullo’s opening statement may be found in the 

appendix.] 

11

STATEMENT OF THALA ROLNICK, PRICE, KONG & COMPANY, 

CPA 

Ms. ROLNICK. Thank you, Mr. Chairman, and Ranking Member 

Velazquez. Thank you very much for inviting me to speak here 

today. 

As has been said, my name is Thala Rolnick and I am a CPA 

from Phoenix, Arizona. And as you know, I am here also supporting the U.S. Chamber, who applauds you and supports your 

leadership on introducing the Small Employment Tax Relief Act of 

2005. 

The Chamber has spelled out its small business priorities in detail in the written testimony. I would like to address IRS’s current 

audit programs of small business, which has become a growing concern. 

We all know that the IRS has announced plans to carry out the 

National Research Program to audit 5,000 randomly selected S corporations. The Commissioner said that this is necessary to make 

sure that corporations and high income individuals are paying 

their fair share. 

Right after this announcement ETAAC released its findings of 

IRS’s audits that it made during 2001 through 2004 of small businesses and S corporations with assets of under $10 million. Over 

this period, the IRS audited over 27,000 S corporation returns. This 

average is about the same average as they hope to cover in the 

NRP audits. Of those returns, 42 percent, or over 11,500 returns, 

resulted in a no change. Only about 1,300 of those returns resulted 

in a change of tax liability to the individual shareholder. The report stated that IRS is doing a very poor job of selecting returns 

to audit. That is why they say they need this program. I counter 

with, why can’t they obtain the statistics they need from the audits 

they have already completed? 

This is the announced program, but there are two unannounced 

programs that are truly affecting my small business clients. The 

first is an audit program for first and second year S corporations. 

The second is an audit of individual returns where there are W-2 

wages and Schedule C losses. I asked the agent why, and she said 

that the IRS wants to make sure new businesses are doing it right 

from the beginning. I believe the taxpayer education and communications are the first people from the IRS that should be visiting 

my small clients, not the IRS audit agent. 

I am currently working on an S corp audit. The taxpayer actually 

had wages, a small profit and minimal distributions. That means 

that she did everything right. We feel that if the auditor were to 

make an adjustment of $20,000, which we really don’t believe will 

happen, this will result in an additional $3,000 of taxes and we expect our fees to run about $5,000. I don’t see where this benefits 

the small business or the IRS. 

I have just completed one of the schedule C audits. The client I 

represented was a start-up dentist. She had wages and a small 

Schedule C loss in the year of the audit. The following year she had 

no wages and a small profit. And in the current year she expects 

her income to be that of what she would have expected in her fifth 

year of practice. If the auditor had been allowed to lay these 3 

years side by side, he would have seen the progression of a startVerDate 0ct 09 2002 13:54 Jan 04, 2006 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 G:\HEARINGS\24846.TXT MIKE
12

up business. And if he would have been able to limit his audit 

scope to, say, her working capital loan, then maybe we could have 

reduced the time of the audit from 4 days to 1 day. 

What complicated this audit even further was that the agent requested information the taxpayer was prohibited from providing 

based on HIBR rules. He wanted to see every patient’s charge 

sheet and every lab’s expense. The client’s patient sheet filled a 

four-inch binder. We finally got him to agree to 1 month. All these 

documents had to be sanitized before we could present them, and 

it took her time away from her practice. As I said, we are expecting 

a no change audit, and this audit cost her from our fees some place 

between $2,000 and $3,000. Again, I see no benefit. 

When I discussed these audits with a friend of mine, his response was, as a taxpayer I am a shareholder in the IRS, and this 

does not sound like a good return on my investment. 

I started by stating, sharing with you the Commissioner’s reasons for these audits. I don’t see how these audits accomplish that 

goal of making sure corporations and the highly wealthy pay their 

fair share. 

Thank you for allowing my time to share my experiences. 

[Ms. Rolnick’s testimony may be found in the appendix.] 

Chairman MANZULLO. Thank you very much. 

Our next witness is Marilyn Landis, President of Basic Business 

Concepts, Incorporated, which provides consulting services to small 

businesses located in Pennsylvania. In addition, she is Chair of the 

National Small Business Association’s Legislative Action Committee. She appears before us today on behalf of the National 

Small Business Association, which I am proud to say has also endorsed the Small Employer Tax Relief Act of 2005. We look forward 

to your testimony. 

STATEMENT OF MARILYN LANDIS, BASIC BUSINESS 

CONCEPTS 

Ms. LANDIS. Thank you. 

Chairman Manzullo, Ranking Member Velazquez, members of 

the Committee, thank you for inviting me to provide testimony on 

an important topic, the intersection of small business and the Tax 

Code. 

As introduced, I am Marilyn Landis. I am the President of Basic 

Business Concepts, a company that I founded, a multi-faceted service that provides financial consulting to small businesses in Pennsylvania and throughout the Northeast. 

I also have a background prior to starting my own business of 

working for three of the largest SBA lenders in the country, marketing and originating SBA loans. I had a career in a variety of finance related fields that touched small business, from consumer 

loans to mortgage development, delinquent collection and a coordination of the operations of a multibank merger. And outside the 

business world, I dedicate my time to serving on several nonprofit 

boards that oversee social and economic development. 

So I am here today first as a business owner, which I am, second 

as the Chair of the National Small Business Organization’s Legislative Action Committee. 

13

As you know, SBA is the Nation’s oldest nonpartisan small business advocacy group, and we represent 150,000 small business 

owners, and my role as the Chair of that Committee is to oversee 

the formation of the policy issues for those small business owners. 

Both my personal experience, as I have outlined it, my role in 

NSBA, have allowed me to see small business owners wrestle with 

a complicated tax system. In fact, in the 108th Congress two of my 

fellow NSBA members have testified on the difficulties a small 

business faces with the Tax Code. 

Many excellent studies have been conducted.They estimate a cost 

of complying with the Tax Code when calculated. It is important 

to remember that this cost is not the money paid to the Treasury, 

but as we have talked about here, the time, opportunity lost, the 

changing practices, maintaining records, paying professionals go 

into the cost of complying. 

The National Small Business Office of Advocacy, as we have 

talked about, have done numerous studies. Chief Counsel for Advocacy, Tom Sullivan, has detailed those, the results are the same. 

Because of their size, because of the availability of resources, small 

business owners pay a disproportionate amount of time and money 

to comply with the Tax Code. 

Compounding compliance costs to the costs faced by employers 

and employees at small firms who are prohibited from participating 

in tax advantage benefits that are available to companies of larger 

sizes, being financially excluded from pension plans, pretax health 

savings and fringe benefit plans have a real economic impact on 

entrepreneurs. 

The issues facing small business owners of the Tax Code are so 

vast we that we at NSBA commissioned a study to root through the 

Code and return the most egregious examples of inequities. Members of NSBA have testified before this and other committees on 

the findings of the studies. We are very pleased that some of our 

top priorities are included in Chairman Manzullo’s recently introduced legislation, the Small Business Tax Relief Act. 

One recommendation from the NSBA tax equity report that has 

been addressed by Chairman Manzullo and Representative Velazquez in past legislation—and National Taxpayer Advocate in recent 

reports—is the repeal of the self-employment tax on healthcare. As 

the law stands now, self-employed individuals still pay for their 

healthcare with money that has been subjected to the self-employment tax. All employed individuals pay the FICA tax on their wage 

income, 6.2 percent is allocated to Social Security, 1.4 percent for 

Medicare. Employers are required to match that with 7.6 percent. 

Self-Employed individuals are required therefore to pay both sides 

of this tax, resulting in 15.3 percent tax on income, commonly referred to as the self-employment tax. 

Contrary to rules for C corporations, a provision of the Internal 

Revenue Code requires self-employed individuals to pay the 15.3 

percent self-employment tax on the cost of their healthcare premiums. No other worker is required to pay FICA taxes on any portion of their employer-sponsored healthcare benefits. With 

healthcare costs already sky high, our members find it unbelievable 

that the Federal Government would slap an extra tax on those who 

have the hardest time securing coverage in the first place. NSBA 

14

is encouraged to see that Chairman Manzullo included this important issue in the Small Business Tax Relief Act. 

Another issue from the tax equity report—and I am going to skip 

over that for time. We have created in the 104th Congress a SIMPLE plan allowance which is designed to be a simple tax plan. Unfortunately this legislation, even though it allowed for the fact that 

it cost more for small businesses to provide services only allows 

them to save up to $8,000, where the rest of the 401 traditional 

plans would allow for a savings of $12,000 a year. 

The Small Business Tax Relief Act of 2005 would also fix this inequity in the amount of pension funds that small business owners 

are able to put aside. 

The Small Business Tax Relief Act of 2005 includes many additional tax reforms that are important. I again thank the Committee 

for the opportunity to share my thoughts on how the Tax Code 

might be reformed to assist small business. 

As a final thought, we would appreciate the Tax Code being 

eliminated. As you know, NSBA supports the fair tax, but we commend the changes that are being made. 

Thank you. 

[Ms. Landis’ testimony may be found in the appendix.] 

Chairman MANZULLO. Thank you for your testimony. 

The next witness is Kristie Darien, Executive Director of the National Association of the Self-Employed. Ms. Darien operates out of 

NASE’s Washington office. NASE is a strong advocate on behalf of 

small businesses. I am delighted to have Ms. Darien here today before the Committee. I would also like to add that NASE has also 

endorsed the Small Business Tax Relief Act of 2005. 

Ms. Darien, we look forward to your testimony. 

STATEMENT OF KRISTIE DARIEN, NATIONAL ASSOCIATION 

FOR THE SELF-EMPLOYED 

Ms. DARIEN. Thank you very much. Thank you very much, 

Chairman Manzullo and Nydia Velazquez and members of the 

Committee, for having me here today to talk about important 

issues facing small business. 

As the Executive Director of the National Association for the 

Self-Employed, I am here to speak on behalf of our 250,000-member micro-businesses, all of which have 10 or fewer employees. 

The importance of micro-businesses to our economy cannot be 

overstated, and more than ever our Nation needs these businesses 

to marshal their resources and continue to advance the American 

economy by doing what they do best, create, innovate, produce, 

build and grow. 

The complexities and inequities within the Tax Code have long 

placed a significant burden on the self-employed and micro-business owners. Small business specific tax reform would assist in creating a favorable environment for the growth and success of small 

firms. The NASE strongly supports this Small Employer Tax Relief 

Act of 2005, and we feel that the provisions included in the bill 

would greatly assist the micro-business community. 

In particular, I would like to highlight two key provisions and 

their importance to the self-employed, the SETA tax deduction on 

15

health insurance premiums and the annual standard home owner 

deduction of $2,500. 

As many of you are aware, the state of healthcare among our Nation’s micro-businesses is critical. The number of uninsured Americans continue to rise, and many of these individuals are owners or 

workers in small businesses. We believe in removing current inequities within the Tax Code would make purchasing health coverage more affordable and also remove a disincentive for the selfemployed to insure. 

NASE member Scott Falnes is an owner of a carpentry and construction company located in Lake in the Hills, Illinois, in Chairman Manzullo’s district. He pays about $336 annually in self-employment tax and health insurance premiums. Scott calls this extra 

tax on sole proprietors unfair. He states, ′′Obviously the tax is not 

fair across the board. The general population is not affected. I have 

to fight to keep my prices competitive, pay the bills, and hopefully 

have enough to let my business grow. I don’t mind paying my ’fair’ 

share so long as it’s fair.′′

Mr. Falnes is of course referring to the fact that he and 16 million other sole proprietors and partnerships with earned income 

have to pay the equivalent of payroll taxes amounting to 15.3 percent on their health insurance premiums. 

On a national scale, according a recent Kaiser Family Foundation Study, the self-employed pay on average $10,880 for family 

health coverage. Because they cannot deduct these premiums as a 

business expense, they are required to pay approximately $1,655 in 

additional taxes that no other business entity must pay. This is 

money that our members tell us they would use to reinvest in their 

business, hire part-time assistance, or utilize to offset the rising 

premium costs they face each year and hold on to their health coverage a little longer. 

NASE member David Caffrey, an electrical contractor in New 

Mexico, pays an additional $715 annually in self-employment tax 

on his health insurance premiums. He says that this extra cost 

adds to the high burden for small businesses and increases his 

healthcare burden. If David didn’t have to pay this extra cost, he 

would use it to help pay his increase in gasoline costs. 

The issue is about fairness. Again, let me restate, the self-employed are the only segment of the business population that do not 

receive a full deduction for health insurance premiums. This inequity needs to be corrected, and we are pleased to see this issue 

addressed in the Small Employment Tax Relief Act of 2005. 

In addition to inequity within the Code, the self-employed struggle with the complexity of tax regulations. Increasingly, entrepreneurs are utilizing their home as a primary place of business. 

Over 50 percent of NASE’s membership are home-based businesses. According to SBA Office of Advocacy, home-based businesses represent 52 percent of all firms and provide 10 percent of 

total revenue to the economy, yet many home-based business owners do not make use of the home office deduction due to the complexity of the deduction and the stringent criteria that they must 

meet. The form for the home office deduction is very complicated. 

The taxpayer must differentiate between direct and indirect exVerDate 0ct 09 2002 13:54 Jan 04, 2006 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 G:\HEARINGS\24846.TXT MIKE
16

penses, as well as other complicated calculations. The words ′′see 

instructions′′ appear on this one-page form 16 different times. The option of a standard deduction of $2,500 for use of a home 

office is an excellent step towards tax simplification and would 

allow the myriad of home-based businesses in our Nation to utilize 

this important deduction. 

Overall, an overwhelming hardship faced by the self-employed 

and micro-businesses continues to be complexity, vagueness and at 

times unfairness of tax regulations. Understanding and then complying with the Tax Code is extremely difficult and time consuming 

for a self-employed business owner. The inequities within the Code 

are unfair and greatly hinder their ability to contribute to our economy. 

The introduction and hopefully eventual passage of the Small 

Employer Tax Relief Act would greatly assist in removing roadblocks to success and strengthening the competitiveness of our Nation’s micro-businesses. Again, the National Association For the 

Self-employed is pleased to support this important legislation, and 

we applaud the Committee’s leadership on these crucial issues 

faced by the self-employed. 

Thank you. 

[Ms. Darien’s testimony may be found in the appendix.] 

Chairman MANZULLO. Thank you. 

Our final witness is Dr. John Irons, who is Director of Tax and 

Budget Policy at the Center For American Progress. 

Dr. Irons, we look forward to your testimony. 

STATEMENT OF JOHN IRONS, CENTER FOR AMERICAN 

PROGRESS 

Mr. IRONS. Thank you, Mr. Chairman. I would like to thank you 

and Ranking Member Velazquez for inviting me to testify before 

this Committee. 

As you mentioned, my name is John Irons. I am a Ph.D. Economist by training, and I am currently the Director of Tax and Budget Policy at the Center for American Progress, which is a nonprofit 

think-tank here in Washington, D.C. 

As an economist, I am continually amazed by the resiliency of 

the American economy and the creativity of our Nation’s small 

business owners. While the title of this hearing is Reforming the 

Tax Code to Assist Small Businesses, I feel it is important to note 

at the outset that the small business community does quite well on 

its own, and the goal of tax policy in many ways should be to get 

out of the way of private activity while still raising adequate revenue for vital domestic and international priorities. 

Analysts often think about the following three basic principles in 

setting tax policy: Simplicity, fairness and economic growth. The 

Center For American Progress has developed a broad reform package based upon these principles. A copy of that proposal is included 

this my written testimony. 

The principles that guide overall tax reform should also be followed when looking at taxation of small businesses. I think it is 

important to keep in mind that most small businesses are, indeed, 

small. The medium number of employees is fewer than four, and 

89 percent of firms employ less than 20 people. Recent estimates 

17

of IRS data from the Tax Policy Center, for example, show that in 

2004 only 1.3 percent of those that reported small business income 

on their tax returns were in the top marginal income tax bracket, 

and nearly half of those of small business incomes are in the 10 

and 15 percent tax brackets. 

Now let me return to the three principles of simplicity, fairness 

and growth. 

First, the Tax Code needs to be simple and predictable. I think 

we all know the Tax Code needs to be simplified, yet the Tax Code 

has been more complicated and less predictable over the last several years. In order for small businesses to make sound investment 

decisions, tax policy must also be stable so businesses can be confident in their business projections. To take one implication, the 

use of reconciliation in the budget process to enact tax policy 

should be avoided. 

Some would argue that making the President’s tax change permanent would solve some of this uncertainty, but doing so would 

simply lock in complicated policy and permanent deficits. I would 

argue that reform of the Tax Code is indeed necessary, but it 

should be reformed in a very different direction than current policy. 

Second, most small businesses are not at the top end of the income scale, thus any restructuring that cuts revenue from the top 

will either shift the Tax Code to the middle and low income small 

business owners or will increase the deficit, which can then harm 

small businesses through higher interest rates. Small business efficiency requires a fair, progressive rate structure, not a flat structure. 

Third, to be efficient and to have solid growth, incentives for investment in physical capital must also be balanced with incentives 

for investment in human capital. A tax cut that already favors 

wealth and investment in capital goods ignores the fact that it is 

human capital that is often the most important component of modern businesses. Also, Federal expenditures in other areas are vital 

for small businesses, and raising adequate revenue to fund our national priorities is essential. 

We need to resist the temptation to claim that the small business 

community needs a tax cut each year to survive. Massive budget 

deficits, which can increase the long-term interest rates, do far 

more damage to small businesses and investments than a few tax 

breaks here and there. 

Overall, the goal of small business policy should be to create the 

right environment for growth. The American small business community is vibrant, resilient and helps to make our country economically strong. The goal of tax reform should be to simplify the Tax 

Code, while keeping a progressive rate structure and preserving 

the incentive to add value to the economy. 

Thank you. 

[Mr. Irons’ testimony may be found in the appendix.] 

Chairman MANZULLO. Thank you, Dr. Irons. 

Mrs. Kelly. 

Mrs. KELLY. Thank you for calling on me. 

I would like to ask Mr. Sullivan about what he thinks we can 

do in terms of these IRS audit programs and problems that have 

been presented here today with regard to the audits and small 

18

firms. If you have got any answers or any ideas about that, I would 

like to hear them. 

Mr. SULLIVAN. I think the most simple answer, Congresswoman 

Kelly, to what can the Committee do about the NRP and other 

audit programs is to continue to hold vigorous oversight of the programs. 

I think in the last hearing that this Committee held in that regard, you got some very good commitments from Commissioner 

Everson that possible inaccuracies of draft data be corrected in between the draft and final stages. I think that we are expecting that 

the final data from the NRP be available in the fall, and I am optimistic that the Commissioner corrects some of the inaccuracies in 

that data. 

I think one of those inaccuracies was a problem that this Committee looked at, and that was the potential for oversampling the 

small business sector. I think that the message from this Committee was loud and clear. I think the commitment by the Commissioner to try to address those inaccuracies is something that deserves this Committee’s continued attention. 

So I think that that is primarily a good focus for this Committee, 

and you are making a difference as far as that oversight goes because the IRS heard the message that this Committee is looking 

over their auditors’ shoulders. 

I think one other emphasis by the Committee that other witnesses, in particular Thala Rolnick, emphasized was to encourage 

the IRS to look at existing data sets for the information that they 

are professing to need these audit programs for, and I think that 

that bears further investigation by this Committee. Are they conducting audits to get information that already exists within the 

master file and within the return file? 

Mrs. KELLY. So you are suggesting that perhaps a check with 

them on redundancies within their systems would be good, overlap 

redundancies, things like that? 

Mr. SULLIVAN. Yes, Congresswoman. 

Mrs. KELLY. Thank you. 

Mr. Irons, you talked about a progressive structure. Given the 

problem that we have had with Hurricane Katrina and possibly 

with another one following close on its heels today, if you were to 

put in place a progressive structure, what would it look like? 

Mr. IRONS. Well, I think for the overall tax cut, I think the first 

thing to keep in mind is the right frame that you raise, which is 

Katrina. We have a $300 billion deficit. With Katrina, it is going 

even higher than that, exactly how much about that, you know 

more about that than I do. But that is the context and we have to 

realize that we are going to need for revenue and in the tax plan 

which has been included in the testimony, we have a progressive 

rate structure which has three tax brackets which is down from the 

current 5 or 6 brackets and we set the rates at 15 percent, 25 and 

39.6 percent which initially sounds high. But we also balance that 

out by eliminating the employee’s side of the payroll tax. 

So actually, in the plan that we submit, we reduce taxes on 70 

percent of the population so essentially make the entire tax system 

more progressive and make people or ask people at the high end 

of the income scale to pay a bit more. 

19

Actually what we do is we reverse some of the tax cuts at the 

high end for people who have benefited the most. 

Ms. KING. Thank you, Mr. Chairman, for letting me go. 

Chairman MANZULLO. Thank you. 

Mrs. Velazquez. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. Mr. Irons, Congress 

has passed nearly $2 trillion in tax cuts in the past 4 years. But 

the lack of relief for small businesses is outstanding. In 2001, we 

passed a $1.35 trillion tax cut, a $42 billion tax cut in 2002, and 

$350 billion tax bill in 2003, and $137 billion tax cut in 2004. 

Yet despite all of this cutting, small businesses have never seen 

a more complex Tax Code and the amount of relief has been minimal. 

Mr. Irons, you talk about how small firms are reluctant to invest 

because of the use of the sunsets in these tax bills. Why do you 

think that some of the targeted provisions aimed at small businesses have been sunset when we have nearly $2.2 trillion in budgetary cuts to work with? 

Mr. IRONS. I am reminded of the statement, I believe the statement was cast in terms of millions, but I will talk about billions. 

A few billion here and a few billion there and you are talking about 

real money pretty soon. 

We have spent quite a bit on tax cuts, $2 trillion. Last year if 

you look at the percentage of revenue as share of the economy, it 

was down to 16.3 percent, which is the lowest level in 50 years. So 

we are realizing very, very low levels of revenue. When you look 

at what could have been done with that money, immense strides 

could have been made simplifying the Tax Code. You have less revenue, and I think what is needed is a simplification as much as 

providing relief to targeted people. 

I don’t think small businesses, I don’t think the American public 

was well served by having a Tax Code that I believe is moving in 

the wrong direction. So some reversal of what we have already 

done coupled with some simplification, I believe, is the way to go. 

Ms. VELAZQUEZ. Thank you. Mr. Sullivan, in your testimony, you 

also talk about the importance of predictability and certainty for 

small businesses. Would you agree that providing permanent relief 

for some of these targeted small business measures should be a priority as opposed to extending provisions such as the diffident tax 

cut? 

Mr. SULLIVAN. I actually consider extending and making permanent very similar for the predictability in the use of small business 

planning with regards to the tax cut. 

Ms. VELAZQUEZ. Ms. Olson, I know your organization works with 

the IRS assisting small businesses to properly file their taxes. I 

would like for you to expand on your comments on some of the restructuring efforts at the IRS. Do you believe that the reduction in 

staff at the IRS Small Business Self-Employed Division will lead to 

small businesses spending more on tax professionals? 

And I am also concerned about the impact on the self-employed. 

Do you believe that the IRS and the changes that they have will 

lead these micro entrepreneurs to hire accountants and lawyers 

that they would not otherwise? 

20

Ms. OLSON. I am concerned about whether the IRS is achieving 

the right balance between, as the commissioner is want to say, 

service and enforcement. The recent changes with the outreach in 

education functions in the small business component concerns me. 

I think that my colleague to my left is right when we say that 

we should have an education contact perhaps before an audit contact, particularly for start-up businesses. And I am concerned that 

the IRS is walking away from a physical presence, a face-to-face 

presence with business owners and relying on more passive interaction like Internet, which may be cheaper for the IRS but more 

expensive for all taxpayers in the long run because people make 

mistakes. 

My office is very much watching that and we are finding more 

and more that my local taxpayer advocates around the country are 

the first point of contact that small business owners and their practitioners and preparers make. 

Ms. VELAZQUEZ. Thank you. Ms. Rolnick, Congress has tried to 

pass some measures such as bonus depreciation and increased expensing to spur investment through reduced tax liability for entrepreneurs. However for these measures to work, we need for small 

businesses not to worry about taking advantage of these changes. 

Do you think some small businesses will be reluctant to use 

these tax breaks out of concern that they might be red flagged by 

the IRS and subject to an audit? 

Ms. ROLNICK. I have never had that experience. Of course, they 

are working with me, not working on their own, so they come to 

me for my expertise. And when I say to them we can take this and 

that is fine, I have never had one say no, I am afraid that is going 

to raise a flag. I have had clients say I really have some more expenses, but that is going to put in a loss situation, so I am not 

going to give them to you. 

Chairman MANZULLO. We are going to have a series of votes. I 

would like to give everyone a chance to ask a question. Ms. 

Bordallo, please give us your best one or two questions. 

Ms. BORDALLO. Thank you, Mr. Chairman. I guess the one that 

is most pressing is the one for Attorney Sullivan. What are the tax 

relief provisions available to small businesses following disaster situations as in the aftermath of Hurricane Katrina? I ask this because Guam is located in what is commonly known as ′′typhoon 

alley.′′ typhoons can have devastating effects and small businesses 

have limited resources to respond to the catastrophe. Tax relief at 

time of crisis is essential— 

Chairman MANZULLO. I need your question, otherwise I cannot 

get everybody else time before the next votes. 

Ms. BORDALLO. Okay. What, in your opinion, should we do to 

cover all future national disasters and should this be in the tax relief package? 

Mr. SULLIVAN. Actually, I don’t know. I know that Congress is 

focused on that type of stimulus. 

Ms. BORDALLO. Talking about the future. 

Mr. SULLIVAN. I don’t know. 

Ms. BORDALLO. Can anybody answer? Should it be in that package? 

21

Ms. OLSON. I think both Houses of Congress are looking at provisions that include things like re-employing people who are victims 

in a disaster area, making them eligible for the work opportunity 

credit for employers. Looking at even more stimulation for rebuilding in the area, education incentives for retraining when people 

have to move around. Incentives for employers to rehire people 

when they have to be retrained and moved around. Those sorts of 

things. 

Chairman MANZULLO. Mr. Faleomavaega, we will keep going 

with questions until the bells ring. 

Mr. FALEOMAVAEGA. A question, I gather, from some of the recommendations that members of panel have made have all been incorporated in the chairman’s proposed bill for 2005? Some of them? 

So it is not enough yet. How do you tell an independent agency like 

the IRS not to conduct these audits? Does this require a presidential mandate? 

Mr. SULLIVAN. Very carefully. 

Ms. OLSON. When I heard the audit stories, my first thought was 

my colleague should have come to the taxpayer advocate service. I 

think that the IRS is trying to conduct audits and do a balanced 

approach to making sure everybody pays the fair taxes. 

I think that right now, we have to be careful about the messages 

that we are sending to the front line IRS employees, and sometimes I think the IRS employees get a little bit too vigorous in their 

requests. And your continuing oversight will help. If you hear from 

your constituents, I would like to hear about it as well because we 

will look at each individual case. 

Ms. ROLNICK. And I do believe that IRS should have audit functions that is important but there need to be better choice of who 

they audit. 

Chairman MANZULLO. Mr. Lipinski, do you have a question for 

the witnesses? 

Mr. LIPINSKI. I have a more specific question. I was just in Chicago on Monday with the chairman and we were speaking with 

manufacturers. Manufacturers, Chamber of Commerce people, local 

leaders, officials, speaking specifically about problems with American manufacturers. One of the ideas that was thrown out there is 

we have an industry, manufacturing, that is facing some really significant immediate problems right now. And one of the ideas that 

they gave to us was giving them a temporary tax break to allow 

them to deal with what they are facing in terms of foreign competition. 

Is this something that—does anyone have any comments on 

that? It is something we have seen done in the past to good ends? 

Or do you think that this is not something that would be useful 

or good? 

Mr. SULLIVAN. Actually, I would like to take a stab at it. First 

of all, any complexity in the Tax Code disproportionately impacts 

small manufacturers more than any other sector of the economy. 

That was really the stark findings from the research issued by my 

office 2 days ago. We are talking about three times the compliance 

cost for small manufacturers versus their larger business counterparts. So when you look at any part of the Code and simplify it, 

22

you have three times the benefit to small manufacturers than any 

other part of the sector. 

I think the one part of this bill that you get the twofer on, lowering rates and simplicity and gaining more attention and purchasing from the manufacturing perspective in section 179 expensing. The idea of encouraging folks to take 179 expensing and actually purchase products from their neighbors their friends and other 

manufacturers. Not only do you get greater predictability that you 

make a provision, you remove a sunset provision so you get greater 

predictability. It is a simplicity dream for small businesses to have 

179. And you are encouraging folks to purchase other products 

throughout the United States. So you really—that provision stands 

out as a win, win, win, provision within this legislation. 

Ms. OLSON. If I might make a point about the depreciation, 

which I made in my testimony. Every time someone takes a large 

deduction for section 179, there is the possibility that is—it is 

added back in in one’s alternative minimum taxable income and it 

may pull you into the AMT. So you give them the deduction on the 

one hand and then you tax them again on the AMT under the 

other. You have to really watch out for that. 

Chairman MANZULLO. Mr. Bordallo, second question. 

Ms. BORDALLO. Thank you, Mr. Chairman. To Director John 

Irons, tax reform can be used to guide— 

Chairman MANZULLO. I believe Mr. Irons’ title is ′′Doctor.′′ Ms. BORDALLO. It says ′′director.′′ Chairman MANZULLO. Sorry about that. Please proceed. 

Mr. IRONS. I wish I was the director of the organization. I am 

only the director of tax and budget policy inform. 

Ms. BORDALLO. All right. In your opinion, how effective have recent tax cuts been for providing incentives for small businesses to 

grow and also in your opinion what is the most pressing important 

reform that is needed currently to assist small business? 

Mr. IRONS. On the growth front, I think if you look at growth of 

the overall economy over the past several years, you have seen reasonably robust growth or the past 2 or 3 years, but you really saw 

very slow poor recovery to the 2001 recession. And so I think when 

you look at small businesses, you see the same general pattern. 

You see relatively reasonable growth, nothing spectacular over the 

past several years. 

I think the economy should be doing stronger than it is, which 

leads to second part of your question about what we can do. 

And there, I think let me come back to my testimony, it is important to realize that most small businesses are small and when your 

talking about spurring small business growth, you are talking 

about really helping out people lower in the middle of the income 

distribution, not people at the high end. So the tax plan that we 

have put forward as I put in my testimony actually lower tax burden on people at the lower and middle end of the income distribution and that should be good for growth, good for small businesses 

to preserve the incentives, and it should really help out the economy by looking at where the bulk of small businesses are. 

The second component of that is it is important to realize that 

it is really the human capital, it is education, training, skills, that 

drive most of the economy. So that is true of small businesses as 

23

well. So I think incentives, not just for capital equipment, but also 

incentives for school and incentives for training. I believe that is 

a really important part of how we should think about the Tax 

Code. And to not just focus solely on wealth and capital as the end 

all and be all of tax policy, but there is this whole other component 

that is really what the modern economy relies on. 

Chairman MANZULLO. Mr. Faleomavaega, second question? Mr. 

Lipinski, second question? If we have no additional questions, I will 

ask a question. We have been concerned that the IRS is too energetic in going after small business people in audits. I have talked 

to Commissioner Everson about it, and Tom Sullivan has mentioned the flawed NRP study. But this is a new situation, where, 

I think, Ms. Olson, you testified that the IRS is going to start auditing S corporations during their first and second years. Were you 

the one that testified to that? Or was it Ms. Rolnick? 

Ms. ROLNICK. I was the one. 

Chairman MANZULLO. Where did you learn that information? 

Ms. ROLNICK. My first audit. I had a client audited. It was her 

first year as a corporation, and the auditor came in and said why 

are you auditing this client? Why do you audit first year businesses? They never make a profit? And she said this is a program 

and we want to make sure they do it right at the beginning. I am 

still in the process of that audit. I think we started the audit about 

2 months ago. 

Chairman MANZULLO. Would you send me a letter on your letterhead? I will send that letter to Mark Everson and ask him if this 

is another program that the IRS has started. I think that is terrible. It is something that we did not know about the last time that 

we had a hearing on this. 

All right. Does anybody else have any more questions or comments? Ms. Velazquez? Please proceed. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. Mr. Irons, going 

back to a possible Katrina tax bill, I would like to hear your 

thoughts on some of the proposals that are out there. There has 

been talk about allowing small businesses to deduct more of their 

income through a higher section 179 expensing level. Given that 

many of these small firms would have little or no profit, this would 

be more attractive to offer a refundable tax credit aimed at the 

small firms? 

Mr. IRONS. Obviously, a deduction that you do not get to take is 

not worth anything. So for a lot of small businesses having something that is refundable putting money in your pocket is probably 

a very good idea. 

Ms. VELAZQUEZ. Thank you. Thank you, Mr. Chairman. 

Mr. FALEOMAVAEGA. If the chairman would yield. I would like to 

offer a humble recommendation if there were other recommendations offered by members of the panel that we would seriously look 

at it and make it a part of our proposed bill and not be lost in the 

cracks, so to speak, and maybe the majority and minority staffs 

would seriously consider those recommendations, Mr. Chairman. 

Chairman MANZULLO. Okay. We have completed all of the questioning. Thank you for your patience in this sort of a roulette way 

of asking questions. I want to thank each of you for coming here 

and spending time with us and sharing your thoughts. 

24

Ms. Landis, please take 30 seconds. You had raised your hand, 

and I caught you in the corner of my eye after I recognized another 

Member. Do you remember what you wanted to say? 

Ms. LANDIS. I do. Just in general, when you were talking about 

ways to benefit small business. The point you had made is that a 

tax deduction is a benefit if you have a profit to deduct it against. 

When small businesses are struggling whether it is Katrina or the 

economy or whatever it is, simplifying the Tax Code so that their 

energy can be spent on growing the business instead of hours with 

professionals on how to deal with their taxes. And any savings, because most business owners that I know and I work with hundreds 

of them, any dollar saved they invest in their business and employees and benefits to their employees. 

So any way that you can enable the business owner to keep more 

money on the table for his company he will invest—he or she—in 

their business. I appreciate deductions they are wonderful when I 

have a profit to take them against. But anything that can be done 

to simplify the Tax Code or enable me to save tax dollars I can 

pass on to my employees, like the things in your plan with the selfemployment tax or the pension benefits are important. 

Chairman MANZULLO. Thank you. Ms. Rolnick? 

Ms. ROLNICK. You commented that there was something else 

that was left out of the bill that I thought might be a good aid to 

small business. What I see on a regular basis is when we have 

somebody buying into a new business, somebody is retiring and the 

new person is buying in. We have covenants to not compete, and 

they are paid over 5 years and they are amortized over 15 years. 

That means the taxpayer has to pay out the money in 2 to 5 years 

and does not get the benefit except for over 15. 

Chairman MANZULLO. Thank you. Again, thank you for coming. 

This hearing is adjourned. 

[Whereupon, at 3:37 p.m., the committee was adjourned.]

25


24846.001
26


24846.002
27


24846.003
28


24846.004
29


24846.005
30


24846.006
31


24846.007
32


24846.008
33


24846.009
34


24846.010
35


24846.011
36


24846.012
37


24846.013
38


24846.014
39


24846.015
40


24846.016
41


24846.017
42


24846.018
43


24846.019
44


24846.020
45


24846.021
46


24846.022
47


24846.023
48


24846.024
49


24846.025
50


24846.026
51


24846.027
52


24846.028
53


24846.029
54


24846.030
55


24846.031
56


24846.032
57


24846.033
58


24846.034
59


24846.035
60


24846.036
61


24846.037
62


24846.038
63


24846.039
64


24846.040
65


24846.041
66


24846.042
67


24846.043
68


24846.044
69


24846.045
70


24846.046
71


24846.047
72


24846.048
73


24846.049
74


24846.050
75


24846.051
76


24846.052
77


24846.053
78


24846.054
79


24846.055
80


24846.056
81


24846.057
82

Æ


24846.058