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66–457 2011

HOW TAX COMPLEXITY HINDERS SMALL BUSINESS: THE IMPACT ON JOB CREATION AND 

ECONOMIC GROWTH 

HEARING 

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

HEARING HELD 

APRIL 13, 2011 

Small Business Committee Document Number 112–010 

Available via the GPO Website: http://www.fdsys.gov 


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HOUSE COMMITTEE ON SMALL BUSINESS 

SAM GRAVES, Missouri, Chairman 

ROSCOE BARTLETT, Maryland 

STEVE CHABOT, Ohio 

STEVE KING, Iowa 

MIKE COFFMAN, Colorado 

MICK MULVANEY, South Carolina 

SCOTT TIPTON, Colorado 

CHUCK FLEISCHMANN, Tennessee 

JEFF LANDRY, Louisiana 

JAIME HERRERA BEUTLER, Washington 

ALLEN WEST, Florida 

RENEE ELLMERS, North Carolina 

JOE WALSH, Illinois 

LOU BARLETTA, Pennsylvania 

RICHARD HANNA, New York 

NYDIA VELA ́ ZQUEZ, New York, Ranking Member 

KURT SCHRADER, Oregon 

MARK CRITZ, Pennsylvania 

JASON ALTMIRE, Pennsylvania 

YVETTE CLARKE, New York 

JUDY CHU, California 

DAVID CICILLINE, Rhode Island 

CEDRIC RICHMOND, Louisiana 

GARY PETERS, Michigan 

BILL OWENS, New York 

BILL KEATING, Massachusetts 

LORI SALLEY, Staff Director 

PAUL SASS, Deputy Staff Director 

BARRY PINELES, Chief Counsel 

MICHAEL DAY, Minority Staff Director 


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C O N T E N T S 

Page 

OPENING STATEMENTS 

Hon. Sam Graves ..................................................................................................... 1 

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

WITNESSES 

Ms. Nina E. Olson, National Taxpayer Advocate, Washington, DC .................... 3 

Steven J. Strobel, Executive Vice President and Chief Financial Officer, 

BlueStar Energy Solutions, Chicago, IL ............................................................ 5 

Robert Kulp, Founder, Co-owner and Business Development Director, Kulp’s 

of Stratford, Stratford, WI ................................................................................... 7 

Monty W. Walker, CPA, Walker Business Advisory Services, Wichita Falls, 

TX .......................................................................................................................... 8 

APPENDIX 

Prepared Statements: 

Hon. Yvette Clark .................................................................................................... 70 

Statements for the Record: 

The Corporation for Enterprise Development ....................................................... 77 


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HOW TAX COMPLEXITY HINDERS SMALL 

BUSINESS: THE IMPACT ON JOB CREATION 

AND ECONOMIC GROWTH 

WEDNESDAY, APRIL 13, 2011 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

Washington, DC. 

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

Rayburn House Office Building. Hon. Sam Graves (chairman of the 

Committee) presiding. 

Present: Representatives Graves, West, Walsh, Barletta, 

Vela ́zquez, Schrader, Altmire, Clarke, Chu, Cicilline, and Keating. 

Chairman GRAVES. Good afternoon. I call the hearing to order. 

I want to thank our witnesses all for being here today. I know 

some of you have come a long way and we appreciate it very much. 

The U.S. economy appears to be strengthening and the labor 

market appears to be improving slowly. But energy prices are volatile and months of rising food, clothing, and fuel has also caused 

wholesale prices to rise. Small businesses continue to be affected 

by the uncertainty of more mandates, higher taxes, and additional 

regulations. It is difficult for our nation’s job creators to do what 

we are expecting them to do and that is create jobs and spur investment. Against this backdrop and during the week prior to tax 

day, we meet to examine the federal tax code complexity and its 

impact on small businesses. 

In our 2010 Report to Congress, the National Taxpayer Advocate, 

who is with us today, identified tax complexity as the top problem 

facing taxpayers. She also reported that U.S. taxpayers and businesses spend about 6.1 billion hours per year to comply with filing 

requirements. The tax code continues to expand—it is now 3.8 million words and there have been over 4,428 changes to it in the past 

10 years, an average of more than 1 per day. 

It is no secret that tax complexity has a disproportionate impact 

on small firms. The Small Business Administration’s Office of Advocacy reported that small firms spend more per employee than 

large businesses to comply with the tax paperwork, recordkeeping, 

and reporting requirements. Surveys by the National Federation of 

Independent Business consistently rank federal taxes as one of the 

top five issues of concern to entrepreneurs. At a time when every 

added expense can mean the difference between a small entity’s 

success or failure, clearly tax simplification is needed. 

I am encouraged by Chairman Ryan’s budget proposal, which 

recommends lowering the top individual and corporate tax rates. 


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According to the NFIB, nearly 75 percent of small firms are organized as pass-through entities such as sole proprietorships, partnerships, or LLCs where business income is passed through and 

taxed at the individual rate. In other words, most small businesses 

file their taxes on an individual return. Consideration of corporate 

tax reform without also considering individual rates would leave 

many small business owners out of the debate. 

Again, I want to thank all of our witnesses for being here today 

and I will now turn to Ranking Member Vela ́zquez for her opening 

statement. 

Ms. VELA ́ ZQUEZ. Good afternoon, everyone. 

With tax day fast approaching, filing taxes is on the minds of 

many Americans, particularly small business owners. This Committee is well aware of the challenges created by the Internal Revenue Code. Over the past decade, businesses have repeatedly expressed to Committee members that tax complexity has become a 

major obstacle to job creation. While this issue has been recognized 

for some time, the problem seems to be getting worse, not better. 

As the Chairman stated, there has been approximately 4,428 

changes to the tax code, an average of 1 per day. These changes 

compound an already burdensome tax system creating confusion 

and higher compliance costs. In fact, individuals and businesses 

spend about 6.1 billion hours per year complying with the filing requirements. 

These burdens can hurt small businesses as they seek to compete 

both domestically and abroad. Small firms now spend up to 67 percent more on tax compliance than their corporate competitors. And 

on the global front, the U.S. ranks an embarrassing 65th worldwide 

for time spent complying with business tax filings. 

This hearing will hopefully offer insight, not only on the problem 

but also on potential solutions. After all, as we look at policies to 

promote growth, tax reform should be a top priority. A fairer and 

simpler tax code can encourage entrepreneurship, promote investment, and lead to job creation. One thing is clear as we talk about 

reform. The needs of small businesses must come first. We cannot 

move forward without their input, and we must fully recognize the 

impact of how any changes will affect them. At a time when the 

economy is starting to exhibit sustained job creation, small firms 

cannot have new obstacles to expansion. 

Fundamental tax reform obviously poses its own challenges. 

Back in 2005, this Committee heard testimony from the Tax Reform panel appointed by President Bush, but his recommendation, 

its recommendations went nowhere. The latest 2010 Deficit Commission similarly recommended a major overhaul to the tax code 

but the report did not gather enough support to force a vote in Congress. 

Today’s hearing will hopefully start the process of crafting solutions to our overly complex tax code. It is clear that small businesses and our economy can come out winners if reform is done 

right. Small businesses are the drivers of the nation’s economy and 

we cannot afford to put the cost of collecting taxes on them. Entrepreneurs do not want preferential treatment; they just want equal 

treatment. 


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I look forward to today’s testimony and I thank the witnesses for 

their participation. With that I yield back. 

Chairman GRAVES. If the other Committee members have statements for the record I would appreciate you submitting those. 

I would also like to take a real quick opportunity to explain the 

timing lights. Each of you has five minutes, and please try to stay 

within the five minutes. The light will be green and then it will 

turn yellow when we have one minute left and red when the time 

is up. 

STATEMENTS OF THE HONORABLE NINA E. OLSON, NATIONAL 

TAXPAYER ADVOCATE; STEVEN J. STROBEL, BLUESTAR ENERGY SOLUTIONS ON BEHALF OF THE NATIONAL SMALL 

BUSINESS ASSOCIATION; ROBERT KULP, KULP’S OF STRATFORD ON BEHALF OF THE NATIONAL ROOFING CONTRACTORS OF AMERICA; MONTY W. WALKER, WALKER BUSINESS 

ADVISORY SERVICES 

Chairman GRAVES. I will now introduce our first witness, Nina 

Olson. She is the National Taxpayer Advocate, an appointment she 

has had since 2001. She leads the Internal Revenue Service’s Taxpayer Advocate Service. The office is dedicated to assisting taxpayers with their IRS problems. And again, thank you for coming. 

STATEMENT OF NINA E. OLSON 

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

Vela ́zquez, and distinguished members of the Committee. Thank 

you for inviting me to testify today about the impact of tax complexity on small businesses. 

My office estimates that small businesses alone spend at least 

2.5 billion hours each year complying with income tax filing requirements. This is not a trifling matter because small businesses 

are the creators of most new jobs and the employers of about half 

the private sector workforce. To state the obvious, the more time 

and resources a small business spends on tax compliance, the less 

time it has to grow and hire employees. 

In my 2010 Annual Report to Congress, I identified the need for 

Tax Reform as the number one most serious problem facing taxpayers and the IRS. The tax code is filled with special breaks helping taxpayers who can afford tax advice and discriminating against 

those who cannot. This complexity confuses taxpayers and creates 

a sense of distance between taxpayers and the government, which 

undermines taxpayer morale and leads to lower levels of voluntary 

compliance. The complexity of the tax code is also burdensome for 

the IRS, making it more difficult for the agency to meet taxpayer 

needs and probably resulting in more audit and enforcement actions than a simpler code would require. 

My report advocates for comprehensive tax reform, which I believe is ultimately a necessity. But there are smaller steps we can 

take right now to ease the compliance burden of small businesses. 

I will briefly highlight several tax requirements that impose unnecessary compliance burdens on small business and require simplification or at the very least, more guidance. 

First, the home office business deduction is unnecessarily complex and requires time-consuming recordkeeping by many small 


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businesses. We recommend the creation of an optional standard 

home office business deduction. 

Second, the S corporation election process is confusing and 

causes many taxpayers to make inadvertent errors. As a result, 

some businesses inadvertently become classified as C corporations 

and their shareholders cannot deduct operating losses on their individual tax returns. 

To address these problems, we recommend simplifying the election process to allow small business corporations to make an S election by checking a box on a timely filed Form 1120S. 

Third, business owners need greater flexibility under the Trust 

Fund Recovery Penalty, which can apply against a person responsible for filing or paying over a business’s employment taxes. Currently, the strict application of the penalty’s willfulness component 

requires the responsible person to use all available funds to pay the 

delinquent tax and prohibits the use of any funds to pay operating 

expenses of the business even to keep the business going. We recommend the IRS not assess this penalty where there was an intervening bad act such as embezzlement and the taxpayer makes payment arrangements and remains current with payment and filing 

obligations. 

Fourth, the IRS has long acknowledged that taxpayer service and 

enforcement both play important roles in maximizing tax compliance, but the IRS’s compliance initiatives these days are rooted exclusively or primarily in enforcement measures. Particularly when 

it comes to small business taxpayers, I believe outreach initiatives 

that educate taxpayers about the bewildering array of income and 

employment tax requirements they face are critical. Several years 

ago the IRS conducted an extensive series of surveys and research 

studies to better understand the service needs and preferences of 

individual taxpayers. We have recommended the IRS replicate this 

process to better understand the service needs and preferences of 

small business taxpayers as well. 

Finally, I want to close with a word about IRS collection policies 

and procedures. The IRS does not do enough to work proactively 

with small business taxpayers that have emerging collection problems, particularly those who fall behind on their employment tax 

obligations. The IRS should provide early assistance, including calling the taxpayer and discussing and utilizing flexible collection 

tools, such as installment agreements, partial payment installment 

agreements, and offers in compromise. Further, the IRS should develop a better understanding of the reasons for noncompliance 

among small business taxpayers so it can apply appropriate collection techniques. Toward that goal, it should develop a definition of 

economic hardship for small businesses that balance tax collection 

and promotion of a level playing field on the one hand with the 

government’s and taxpayers’ interest in helping small businesses 

remain viable and contributing to the country’s economic growth on 

the other. 

I appreciate your interest in these issues and would be happy to 

respond to collections—questions. Thank you. Collections, too. 

[Laughter.] 

Chairman GRAVES. Thank you, Ms. Olson. 


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Our next witness, and I will be introducing on behalf of Mr. 

Walsh, but our next witness is Steven Strobel, the executive vice 

president and chief financial officer for BlueStar Energy Services, 

which is a retail energy supplier in Chicago, Illinois. He is testifying on behalf of the National Small Business Association. Mr. 

Strobel, we appreciate you being here. Thanks for coming. 

STATEMENT OF STEVEN J. STROBEL 

Mr. STROBEL. Thank you, Chairman Graves, Ranking Member 

Vela ́zquez, Committee members. Thanks for the opportunity to testify today. 

Although NSBA’s members operate a wide variety of businesses, 

they all consistently rank reducing the tax burden among their top 

issues Congress and the administration needs to address. While the 

actual out-of-pocket cost is a huge issue, the sheer complexity of 

the tax code has been an ever-increasing administrative burden on 

America’s small businesses, which unlike big corporations do not 

have large staffs of accountants, benefit coordinators, attorneys, 

personnel administrators, et cetera, at their disposal to deal with 

the regulatory and paperwork demands of the federal government. 

According to NSBA’s 2011 Small Business Taxation Survey, 87 

percent of small business owners hire outside help to handle their 

tax reporting and filing requirements. The complexity of the current tax system forces small businesses to spend valuable time and 

financial resources on tax compliance instead of using these resources to do what they do best—grow the business and hire people. When asked in the NSBA Taxation Survey how much time and 

money per year is spent just on the administration of taxes, 50 percent of small businesses said they spend more than $5,000, and 

more than a third spend more than 80 hours on tax filing preparation. At BlueStar, we spend about $25,000 annually on our tax 

preparation. 

As Congress and the administration grapple with a downturned 

economy, banking failures, and skyrocketing deficit, it is natural to 

look for ways to offset spending and raise revenues. However, it 

would be unwise for Congress to do so on the backs of small business owners, the very entrepreneurs who create jobs. To grow their 

businesses and hire new employees, small business owners need 

dependable and sufficient access to capital and public policies that 

boost investment and encourage entrepreneurship. 

Reducing the U.S. deficit has a real benefit to small business 

growth in the U.S. and is something America’s small business owners feel should be a national priority. Federal spending in 2010 

amounted to approximately 24 percent of GDP, a level not seen 

since World War II, and in part due to an economic downturn. 

Even with an economic recovery and the ensuing increase in tax 

revenues and decrease in spending, without major changes federal 

spending will continue to outpace revenues. If we continue to run 

high deficits, increase interest, and constrict credit, it will negatively impact small businesses’ ability to garner financing, and 80 

percent of small businesses use credit. 

Congress and the administration over the coming years must address the nation’s budget deficit and the associated long-term debt. 

In addition to reducing the size and pay of the government workVerDate Mar 15 2010 01:19 Jun 07, 2011 Jkt 066457 PO 00000 Frm 00009 Fmt 6633 Sfmt 6602 E:\HR\OC\A457.XXX A457

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force and overall entitlement spending, one way to do that is to implement real tax reform. Tax reform is one of the NSBA’s top 10 

priorities. Based on a 2011 NSBA Taxation Survey, small businesses express support for tax reform that simplifies the tax code, 

broadens the base, lowers all individual and corporate tax rates, 

and makes the corporate tax code more competitive for U.S. businesses. 

The current tax code is comprised of more than 10,000 pages of 

laws and regulations that, in their complexity and propensity for 

frequent change, serve as a disadvantage to small businesses. 

NSBA’s members believe it is imperative that the U.S. move toward a simpler, fairer tax system that is designed to tax only once, 

is stable and predictable, is visible to the taxpayer, is simple in its 

administration and compliance, and is comprehendible using commonly understood finance and accounting concepts. And finally, is 

fair in its treatment to all citizens. These reforms can spur economic growth. 

Another factor to consider is the international competitiveness of 

U.S. firms. Congress and the administration must ensure that our 

tax code does not impede our international competitiveness of U.S. 

companies, nor disincentivize domestic investment. One way to accomplish this is by enacting the fair tax. 

In the 112th Congress, legislation has been introduced into the 

House and Senate, the Fair Tax Act of 2011, which the NSBA 

proudly supports. But whether it is the fair tax or any of the other 

tax reform recommendations that are currently on the table, any 

reform must be built around internationally competitive tax rules 

that result in a simpler, more efficient and less costly tax system 

that provides powerful incentives for businesses to invest and 

produce in the U.S. The economics of small businesses in all sectors 

would be strengthened by their ability to save and invest in this 

country and thus hire additional workers. 

The NSBA believes efforts to reduce the regulatory and administrative burdens on small businesses must focus on overall simplification, eliminating inequities within the tax code, and enhancing taxpayer education and outreach. A simpler tax code that is 

more easily understood by taxpayers would have many benefits, 

not the least of which would be reduced cost of compliance and reduced unintentional errors. Accurate tax reporting and compliance 

is extremely important to small businesses but vague rules and 

poorly defined regulation understandably result in mistakes. 

The more assistance offered to taxpayers and the simpler it is to 

understand and comply with tax laws, the more taxpayers will accurately meet their tax obligations, and with the complexity facing 

many taxpayers, NSBA believes that development and implementation of initiatives to improve IRS guidance and assistance is important. 

In conclusion, the NSBA is confident that fiscally responsible 

policies and entrepreneurially supportive tax simplification will 

lead to the long-term prosperity of the U.S. economy. It is critical 

that lawmakers avoid any move that would stymie the moderate 

economic growth we are starting to see in the U.S. economy and 

the growth in our small business community. 

Thank you. 


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Chairman GRAVES. Thank you, Mr. Strobel. 

Ms. Vela ́zquez. 

Ms. VELA ́ ZQUEZ. It is my pleasure to introduce Mr. Robert Kulp. 

He is the founder of Kulp’s of Stratford, Wisconsin. His firm is a 

roofing and insulation company that has been in business since 

1985 and employs over 40 people. Mr. Kulp is testifying on behalf 

of the National Roofing Contractors of America with over 4,000 

members worldwide. Welcome. 

STATEMENT OF ROBERT KULP 

Mr. KULP. Thank you. Chairman Graves, Ranking Member 

Vela ́zquez, and members of the Committee, thank you for the opportunity to testify today. 

I am Bob Kulp, co-owner of Kulp’s of Stratford. We are a small 

roofing and insulation company doing residential and commercial 

roofing. We have also moved into installing and building integrated 

solar photovoltaic roofing. We employ between 30 and 50 people 

and we do about $6 million in annual volume. 

I am testifying today on behalf of the National Roofing Contractors Association, and I serve as a director, as well as chairman of 

the Government Relations Committee. Established in 1886, the 

NRCA is one of the nation’s oldest trade associations and a voice 

of professional roofing contractors worldwide. 

As the national unemployment situation continues to slowly improve, unemployment in the construction industry remains at an 

alarming 20 percent. Clearly, it is time to take steps to improve 

this situation. Reducing complexity in the tax code is a good place 

to start. NRCA urges Congress to take immediate action to simplify 

taxes in order to help spur job growth within the construction industry. 

First, Congress should facilitate the creation of an estimated 

40,000 jobs by reforming tax depreciation for commercial roofs. Depreciation reform would also enhance the energy efficiency of our 

nation’s commercial buildings and simplify taxes for many small 

businesses. Depreciation reform is necessary because between 1981 

and 1993, the depreciation schedule for commercial roofs was increased from 15 to 39 years. However, the current 39 year depreciation schedule is not a realistic measure of how long commercial 

roofs last, which is about 17 years. The large disparity between 

that 39-year depreciation schedule and the 17-year average lifespan of a commercial roof is an incentive for building owners to 

delay the replacement of failing roofs. This slows economic activity 

in our industry because many building owners choose to just do 

piecemeal repairs rather than replacing a failing roof in its entirety. 

Several bills have been introduced in recent years to rectify this 

situation by reducing the depreciation schedule to a more realistic 

20 years. This would facilitate the creation of an estimated 40,000 

jobs in the roofing industry and add one billion dollars to the taxable annual revenue to the economy. Depreciation reform also 

would provide savings to small businesses of all types by simplifying their taxes and lowering energy costs. NRCA welcomes the 

opportunity to work with members of the Committee on legislation 

to create jobs by simplifying taxes through depreciation reform. 


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Second, the NRCA calls for the immediate repeal of the 3 percent 

withholding on government contracts. Repeal of this law, which 

adds a new layer of complexity to a contractor’s tax filing, is vital 

to job creation and economic growth in our industry. If the withholding law is not repealed, many roofing contractors will face serious repercussions. Cash flow and operating capital disruptions will 

be a tremendous burden particularly for small businesses. The 

bookkeeping systems of many small businesses simply are not set 

up to account for those large amounts that are withheld from invoices and withholding will complicate tax filings. Additionally, 

many roofing contractors will be simply forced to stop bidding government contracts in order to avoid those costly tax complexities. 

NRCA strongly urges Congress to quickly repeal this law that further complicates tax filings due to the 2012 implementation date 

that is fast approaching. 

Third, NRCA supports legislation to reduce tax complexity by reforming how construction contractors can utilize the completed contract method of accounting. Under current law, contractors cannot 

use the completed contract method if the annual average gross receipts exceed $10 million, a threshold that has not been adjusted 

for inflation since 1986. Contractors who cannot utilize a completed 

contract method must use a percentage of completion accounting 

method, which often does not accurately reflect results due to the 

required use of cost estimates. This is a major paperwork burden 

for many small and midsize contractors because of the need to estimate the percentage of a completed project and then retroactively 

amend those filings in subsequent years based on the actual numbers. This is another example of the complexity in the tax code that 

is an impediment to business growth and job creation, and increasingly more time and resources must be devoted to tax compliance 

rather than more productive forms of economic activity. 

To conclude, NRCA urges Congress to address the alarming 20 

percent unemployment rate in the construction industry by reducing tax complexity for contractors in our industry. Thank you for 

your consideration of the NRCA’s views and the opportunity to testify today. 

Chairman GRAVES. Our next witness is Monty Walker. Mr. Walker is a principal of Walker Business Advisory Services in Wichita 

Falls, Texas. He advises start-ups and established small firms on 

business transactions and tax matters. Mr. Walker, I appreciate 

you coming. 

STATEMENT OF MONTY W. WALKER 

Mr. WALKER. Chairman Graves, Ranking Member Vela ́zquez, 

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

appear before you today. 

My name is Monty Walker. I am a certified public accountant. 

I have a national advisory practice with a practice focus in the support of entrepreneurs, primarily in the area of business ownership 

transition planning and related support services. 

Small businesses face many obstacles. Buying or starting a small 

business is often one of the most significant financial events ever 

experienced by an entrepreneur. Entrepreneurs approach the process of owning a small business with a hope and desire of creating 


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something better for their future while often exposing themselves 

to a large investment and debt. For many entrepreneurs, their 

small business is the center of their family’s financial infrastructure providing the majority, if not all, of their family’s current and 

future income. 

Because of the importance small business plays in the life of a 

small business owner, the division between the small business and 

the small business owner often becomes blurred because every 

business decision has a direct and often significant impact on the 

small business owner and the small business owner’s family. Additionally, almost every decision made by a small business owner has 

some form of tax implication. 

Small business owners often start their business on a passionbased foundation doing something they enjoy, only to quickly learn 

that running a small business has many complex and confusing 

compliance requirements. Mail received from the various regulatory bodies becomes overwhelming. Unfortunately, many small 

business owners get out of compliance simply due to a failure to 

interpret correspondence being received from the IRS. This is especially true for small business owners who cannot afford the services 

of a tax professional. 

For most small business owners, understanding the tax compliance requirements is beyond their reach. The complexity of the tax 

system is as perplexing as a foreign language. Due to limited discretionary cash flow, many small business owners do not have the 

ability to retain the services of a tax professional on an ongoing 

basis. As a result, many small businesses are attempting to maintain a substantial amount of required compliance through the efforts of untrained and unknowledgeable tax advisors, these advisors being themselves. 

A lack of funds for ongoing professional assistance and a misinterpretation of the regulations often lead to failed compliance. 

The ever growing tax code, along with the temporary provisions 

and interpretations, make it increasingly difficult for small business owners to do any substantial long-term planning. This leads 

to small business owners being placed in the position to make decisions in a vacuum due to the unknown results which may occur. 

Since the tax system directly impacts so many decisions, small 

business owners will stand by on making business developments 

and new hire decisions when they have a lack of confidence in what 

will occur due to the unknowns in the tax system. This in part has 

added to and is currently adding to the soft business expansion and 

a lack of new hiring which is desperately needed as a part of the 

United States’ economic recovery. 

Small business ownership is wrought with risk and burdens. The 

burdens of owning a small business expand exponentially when the 

confusion and complexity of the tax system is introduced to the 

small business ownership equation. Maintaining compliance with 

the various governmental regulatory bodies is extremely time consuming and this is especially true for tax compliance. Additionally, 

maintaining tax compliance comes at a cost. The cost to properly 

maintain regulatory compliance is really the small business owner’s opportunity cost associated with expending the same resources 

on business operations and business development. These resources 


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include both money and time. Between the money spent on tax professionals and time focused on maintaining compliance as opposed 

to spending the same time running the business, a small business 

owner’s opportunity cost can be quite significant. Small business 

owners compliance time plus their compliance fees equals a small 

business owner’s total opportunity cost. 

In preparation for this hearing, I polled 20 small business owners 

with businesses ranging in revenue from 1 million to 5 million to 

determine their level of business opportunity cost. I learned that 

the average amount of time and fees expended by these business 

owners to maintain their tax compliance is time of 104 to 156 

hours per year and professional fees ranging from $5,000 to 

$15,000 per year. When considering penalties and interest associated with the failure to maintain compliance, business opportunity 

costs can grow extremely large. 

Understanding that this business opportunity cost exists is of utmost importance because the business opportunity cost correlates 

with the lost resources that could have been used for business development which in turn leads to the creation of new jobs. Thank 

you. 

Chairman GRAVES. Thank you very much, Mr. Walker. 

We will now move into questions. Ms. Olson, I have to say that 

it is refreshing to hear you talk about your position and the Office 

of Advocacy and that you are advocating for taxpayers. Do they listen to you? 

Ms. OLSON. I think that the IRS understands the complexity that 

taxpayers need to live with. They are doing some research now but 

they are not doing the kind of comprehensive research on taxpayer 

needs and preferences for small business taxpayers that I need to 

see. 

On the collection area, I think that they really feel the need to 

collect, collect, collect. They make very few phone calls out to taxpayers outbound to find out what is really going on in their situations. They often use levies as the calling card and get the call back 

in from the taxpayer saying what are you doing? I cannot make 

payroll. And there is generally a lack of sympathy in the employment tax area, which is why we are focusing so much on that area. 

One thing we learned was that for an account to get assigned to 

someone, an employment tax account get assigned to someone to 

actually make a face-to-face call with a taxpayer, there is usually 

two years of arrearages. And as I think the representative down 

there, Mr. Walker would say, the sooner you can get to the taxpayer when the dollars are low, you have a greater chance of solving the problem and keeping them in compliance in the future and 

keeping the business going. But when it gets so large, like two 

years’ worth of employment taxes, that is the kiss of death for a 

business. 

Chairman GRAVES. My next question is—and I will start with 

Mr. Walker. And you can answer it from, obviously from your client’s point of view; and Mr. Strobel, from your association’s point 

of view; your members, Mr. Kulp. I do not know if it will pertain 

to you and I would like to hear Ms. Olson at the end. The administration is proposing higher taxes for pass-through small businesses 

that file their income taxes on an individual tax return—higher 


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taxes for couples with incomes over $250,000 and individuals over 

$200,000. Can you tell me how that would affect your clients that 

fall into that area? 

Mr. WALKER. The area of practice I am in really shows the misnomer in this concept of excess of 250. Small business owners 

spend years developing a business, and many times they are developing it so that they can have it for retirement. They, on paper, are 

worth a lot of money but they may not make a lot during the time. 

So they are below 250 possibly while they are operating, then all 

of a sudden the economic event occurs and they may sell that business for a million dollars, which is designed to be their retirement. 

All of a sudden, now under the excess of 250, that is a wealthy individual. So it has a significant adverse impact on their willingness 

to even sell and they hold out. But it will be an adverse impact, 

especially on their ability to have retirement funds. It goes well beyond just normal operating taxes. This is a life event that can be 

adversely impacted by decision to increase above the 250. 

Chairman GRAVES. Mr. Kulp, does it pertain to you? 

Mr. KULP. I would agree with what he said but, no, it does not 

really directly. 

Chairman GRAVES. Mr. Strobel. 

Mr. STROBEL. I would talk about it in the context of BlueStar. 

We are a sub S corporation so all of our income goes straight 

through to our two owners. And so any increase in tax would be 

a direct impact on the resources available in our company to invest, 

do marketing, understand other investments that we could make to 

actually grow the company. So it would be a diminution in the resources available to grow the company. 

Chairman GRAVES. Ms. Olson. 

Ms. OLSON. Well, I get to pass on commenting about rates because that is really the, you know, the jurisdiction of the Office of 

Tax Policy in Treasury. But I would say, you know, our recommendation has been that you really simplify, you know, reduce 

the complexity of the code, really think long and hard about what 

is running through the code. And if you do that, you would have 

a broader base and be able to reduce rates for everyone involved. 

And that is sort of our position. We did it in 1986. I do not see why 

we cannot do it again. 

Chairman GRAVES. Mr. Kulp, you mentioned already some 

things, some specifics on simplification, which I appreciated, 3 percent withholding and some other stuff. Just out of curiosity, Mr. 

Strobel or Mr. Walker, do you have any specifics? You mentioned 

a few, too, Mr. Walker, but other specific things when it comes to 

complexity? Are you talking total overhaul? You know, changing, 

you know, it is obviously very complicated now but any other ideas 

and thoughts? You know, coupled onto what Mr. Kulp said, too, 

about depreciation? 

Mr. KULP. Depreciation is a significant problem. It is very complex. People do not know whether they should take a period expense or expense something immediately. So it is far beyond depreciation. If somebody is going to repair a vehicle, is that a depreciable event or is that a period expense? They spend—you can 

spend hours just trying to determine how that applies. So that is 

a great example. Capitalization versus expensing. The issues that 


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are a problem, especially when it comes to this depreciation matter, 

currently it does not matter if a business has been think long and 

hard about what is running through the code. And if you do that, 

you would have a broader base and be able to reduce rates for everyone involved. And that is sort of our position. We did it in 1986. 

I do not see why we cannot do it again. 

Chairman GRAVES. Mr. Kulp, you mentioned already some specifics on simplification, which I appreciated, 3 percent withholding 

and some other stuff. Just out of curiosity, Mr. Strobel or Mr. 

Walker, do you have any specifics? You mentioned a few, too, Mr. 

Walker, but other specifics when it comes to complexity? Are you 

talking about total overhaul? You know, the code is obviously very 

complicated now, but any other ideas and thoughts? You know, 

coupled onto what Mr. Kulp said, too, about depreciation? 

Mr. STROBEL. Depreciation is a significant problem. It is very 

complex. People do not know whether they should take a period expense or expense something immediately. So it is far beyond depreciation. If somebody is going to repair a vehicle, is that a depreciable event or is that a period expense? They spend—you can 

spend hours just trying to determine how that applies. So that is 

a great example. Capitalization versus expensing. The issues that 

are a problem, especially when it comes to this depreciation matter, 

currently it does not matter if a business has been in existence for 

50 years. You can recapture all this depreciation and it can all of 

a sudden create ordinary income passing out of a S corporation 

when they sell those assets. That makes very little sense to me 

why that would happen. So complexity added with something like 

that is significant. 

Mr. WALKER. I will ask the NSBA to follow up after the hearing 

with their specific recommendations. 

Chairman GRAVES. Please do. 

Ms. Vela ́zquez. 

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

Ms. Olson, there seems to be broad consensus that we should 

eliminate a number of deductions and credits and use those revenues to lower tax rates. However, when the recent deficit commission outlined a tax plan to accomplish this, it was blocked from 

being brought or considered in the House. 

So my question to you is how can comprehensive reform move 

forward if bipartisan recommendations like this never receive a 

vote? 

Ms. OLSON. Well, I am not going to comment on the procedures 

of the House or the Senate. I am wiser than doing that. But I will 

respond by saying we have believed for a long time that there 

needs to be a dialogue and leadership, both in the House and in 

the administration, and also from the taxpayers themselves, that 

there has to be tax reform. And to up a plan, such as the Bipartisan Commission or the 2005 Presidential Commission, all are a 

good start. There are lots of good ideas out there. And what we 

need is the political will to be willing to work through those ideas. 

And whether it is just slugging it out in the Ways and Means Committee and the Senate Finance Committee, and with the White 

House, we absolutely need this to go forward. 

Ms. VELA ́ ZQUEZ. Thank you. 


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Mr. Walker, we would like to hear specific areas that we could 

simplify the tax code so that we could help small businesses do 

what they do best. So firms, based on your own experience, firms 

generally fund their business operation by taking on debt or 

through equity financing. Both have advantages and disadvantages, but it is clear that the tax code favors debt financing since 

interest is deductible. 

So can you talk to us, when you advise firms, do you advise— 

and they finance their business—do you believe that we should address how the tax code treats debt versus equity financing as one 

area that maybe this Committee should be looking into? 

Mr. WALKER. If anything has changed in the area of debt so that 

a small business is incapable of deducting the interest expense, 

that would be an adverse blow. Small business owners do not have 

the benefit of getting equity players. I think we could all walk outside and say that we do not see a long line of people wanting to 

take risk in small business investment. That is why entrepreneurs 

become entrepreneurs. They risk their own investment in themselves. So anything to change the debt structure that would eliminate or lower the interest—the ability to take an interest deduction 

is an adverse. It should only be looked to enhance some benefit 

that they could get. 

Ms. VELA ́ ZQUEZ. Mr. Kulp, you spoke about the depreciation 

schedule that is set at 39 years. If we look at our economy, one 

area where still it is very fragile is the housing construction area. 

Mr. KULP. Sure. 

Ms. VELA ́ ZQUEZ. And so you said that the depreciation schedule 

for commercial roofs will have a positive impact. How is that the 

case that it will benefit other small businesses? 

Mr. KULP. Great question. The NRCA did an extensive study a 

number of years ago that actually said that it would spur economic 

growth to the point where there would be 40,000 new jobs added 

to the roofing industry alone. And when you look at that along 

with, you know, that much more money flowing into the economy, 

one of my issues is static scoring versus dynamic scoring on the 

CBO. And I know I am not going to change that but it seems to 

me that if you look at how it plays out, enhancing owners’ ability 

to move with roofing will definitely spur jobs and reduce the unemployment rate. 

Ms. VELA ́ ZQUEZ. Thank you. Mr. Strobel, the Fair Tax Plan will 

impose a national sales tax and eliminate the income tax, as well 

as all current deductions and credits, yet this will mean that carrying tax incentives for renewable energy and energy efficient products will no longer exist. As someone in the energy industry, do you 

believe that these industries can remain viable without such policies? 

Mr. STROBEL. I think they can. Just to be clear, as an executive 

with BlueStar I am not advocating the fair tax that is an advocate 

position of the National Small Business Association. I think there 

is a place for some incentives. We see that with a lot of energy efficiency customers that there is an opportunity for them to take advantage of incentives. But there are real economic gains in our energy efficiency businesses where we go in and do a lighting retrofit, 

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able but more importantly, it is the economic benefits of actually 

using less energy. So in the grand scheme of things I think there 

are some incentives and some rationale to the incentives but we 

find that many of our customers are more driven by the overall economics whether or not there are incentives. 

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

Chairman GRAVES. Mr. West. 

Mr. WEST. Thank you, Mr. Chairman and Ranking Member. 

We sat here and the question to the panel, we have all agreed 

that the tax code as it stands now is pretty complex, onerous, and 

I guess there are many with a loophole in there. So my question 

would be there are two reform perspectives out there: one is a flat 

tax and one is a fair tax. I would like to get your assessments on 

how those two reform systems, would it benefit or hinder the small 

businesses? And then maybe your estimation on what would be 

good rates for those respective systems. So flat tax, fair tax. 

Ms. OLSON. Well, my office has written this past year or a year 

ago about a value-added tax and the administrative challenges for 

the Internal Revenue Service doing something like a sales tax that 

would be proposed in the fair tax. And we have concluded that it 

is doable. You would have to deal with the states, many of whom 

have their own and there are a lot of transition issues. Most of the 

countries around the world do not just have a sales tax alone because it would have to be so high. They have some kind of low level 

income tax and then a sales tax as well. So I think it is doable. 

It is just whether people will step up to that. 

I would note one thing. What some commentators have said is 

the sales tax sort of disappears how much tax you are really paying 

depending on how it is reported on your receipt. In some countries 

around the world you never see it broken out. It is in the broken 

price that shows up on your receipt at the end and you have to 

think do you really want that disappeared or do you want people 

conscious of what they are paying. 

Mr. STROBEL. Congressman, I would say I do not know if there 

is—it is a binary choice. There is probably going to be a mixture 

of some sort of rate reduction, hopefully, and I think that is the key 

as far as we are concerned. I think the lower the taxes, the better 

for the business. The more investment we can make in the business the faster we can grow and the more people we can hire. So 

I think the notion of reduced tax rate, which implies a reduced 

level of government expenditure, I think is the key to the long-term 

prosperity of our economy. 

Mr. KULP. As a small business owner I would say that anything 

that takes away the complexity and gives a long-term view is a 

good thing. It is so difficult with the complexity that we have now, 

you do not know really until the end of the year what we owe in 

taxes. I am an LLC. Money all flows through to me. I claim it on 

my personal income. The NRCA I do not know has taken a stance 

on this per se and I am here testifying on their behalf, but as a 

small business owner myself I would see that as an excellent alternative to a tax code that is miles thick. 

Mr. WALKER. I concur with Ms. Olson. I do not see how we can 

level off with one sales tax and I am also concerned that eliminating all tax levels and going to a single sales tax demotivates 


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capital improvement. You have got to provide some incentive for 

people to invest. And so this is a tough situation but I know we 

can minimize the impact to small businesses by lowering the complexity of the code, just removing it completely, and going to some 

single layer tax, that could be very tough. 

Ms. OLSON. If I might add, I think some advocates of a sales tax, 

forget how complex the state sales tax are with all of their exemptions and what constitutes a service versus a product and things 

like that. So you might find that you just have added a new volume 

of the International Revenue Code when you, you know, enact a 

sales tax. So it can be complex. 

Mr. WEST. And a follow-up question for Mr. Kulp and Mr. Strobel 

then. What type of incentives do you think could be provided as far 

as our tax code to, you know, help you to grow your businesses? 

Mr. KULP. That is a good question. 

Mr. WEST. Well, I try to think of good questions. 

Mr. KULP. Well, and that is a stalling tactic. Good question. 

Mr. STROBEL. At least for our business, clearly in the energy efficiency business I think there is some room for promoting more energy efficiency, more rationale allocation of resources, at least in 

the energy industry. And so I think there is room for that in our 

industry. There is no doubt about it. 

Mr. KULP. And probably more on a global level, I guess, from my 

own, the way I think is I do not like when the government chooses 

winners and losers so I have a hard time in articulating that well. 

But the NRCA staff I am sure would be delighted to work with you 

on that. 

Mr. WEST. Thank you very much. And I yield back, Mr. Chairman. 

Chairman GRAVES. Mr. Schrader. 

Mr. SCHRADER. Thank you, Mr. Chairman. 

Briefly, to Mr. Walker and Ms. Olson. Last Congress passed a 

small business health care tax deduction and we all do these wonderful things trying to help small business. But my question to you 

two is have you gotten any calls on that and how easy is that actually? 

Ms. OLSON. Well, it is a very complex deduction and my office 

has been working very hard to actually develop a calculator that 

we can roll out on, you know, we are going to test it internally with 

some fact patterns and then try to get it ready to roll out so that 

people can calculate how many full-time equivalents they have and 

how they meet that because it is a very complex provision. And if 

we do not do that, we will probably have a lot of inadvertent noncompliance. And more importantly, people not benefitting themselves, you know, achieving, receiving the benefits of a provision. 

Mr. SCHRADER. They will not take advantage. 

Ms. OLSON. They will not take it. Mr. Walker, do you concur? 

Mr. WALKER. I concur. I am glad Ms. Olson mentioned the calculator. In all of the calls that I have received on this I have been 

saying I hope somebody comes out with something to calculate this. 

So that is the answer we are all looking for. 

Mr. SCHRADER. All right. Very good. Very good. 

Pretty much everyone here has testified about the complexity of 

the tax code and there is a proposal out there. The only one I know 


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of has gotten great bipartisan support on a national level and that 

was put forward by the Fiscal Commission. It does not get much 

simpler than eliminating every single tax expenditure and lowering 

all the rates to a mythological figure that no one in America could 

ever believe possible again of 814 and I think it is, what 25 percent 

or something like that? And corporate tax rate drops down to 

where we are almost competitive with the rest of the world. If you 

talk about the global competitiveness piece, to me, and of course 

you could add back targeted things to encourage investment at certain points in time when this Congress or the next Congress feel 

it is warranted or to take, you know, some disadvantaged populations. 

To me, I think if we had the political courage to do anything that 

is simple that even I could understand in my veterinary practice, 

it would be to do that type of proposal. Could you comment on 

whether or not you are for that proposal and what you think your 

members might be interested in? 

Mr. WALKER. I believe moving down to a simpler tax structure 

will work. I will go back to a prior comment. When we removed all 

the barriers and create simplification, there still has to be something there to incentivize. And so what will occur inevitably is it 

will create—we will go down to a simple process and it will begin 

to re-expand itself with complexity because we have to provide incentives to invest. So I think that would happen. 

Chairman GRAVES. Mr. Kulp. 

Mr. KULP. The overall tax code is not a part of this thing but 

back to the 3 percent withholding for government contracts. To me 

that is something that is so easy to eliminate and it just does not 

make sense. I know it is one small step but, again, that is, I guess, 

the only input I have on that. 

Chairman GRAVES. Mr. Strobel. 

Mr. STROBEL. There is a lot of attractiveness in the simplicity of 

what you have just described. I like that a lot. I think that as far 

as targeted incentives for investment, I think the fact that companies would have more capital available to let them figure out what 

they would invest in. 

Chairman GRAVES. Good point. 

Mr. STROBEL. I mentioned before, we talked a little bit about potential targeted investment in energy efficiency. I think that has a 

larger policy aspect to it, an energy self-sufficiency, energy independence, element to it that is attractive to us as a company and 

to me personally. 

Chairman GRAVES. Ms. Olson. 

Ms. OLSON. I think that, you know, we have recommended that 

we start with zero-based budgeting, that you just eliminate everything and then go piece by piece and say does this need to come 

in through the code? And that goes to the compelling public policy. 

Is there a public policy reason for putting something in the code? 

And then you ask what would it do to taxpayers who are the target 

of this public policy? Will they be able to comply with it? What will 

it do to the IRS? Will they torment taxpayers? Will the IRS not be 

able to administer it? 

If I could talk for a minute about the withholding requirement, 

one thing that we have recommended instead of the 3 percent is 


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to require federal contractors, you know, the federal agency that is 

contracting, to get a response from the IRS whether that contractor 

is in compliance with their federal tax obligations before the contract is awarded? And in that way you are doing it in a proactive 

way as part of a qualification process, a procurement process, rather than doing withholding. And you get to the same results. You 

are only giving contracts to contractors who are compliant with 

their federal taxes. 

Mr. SCHRADER. I think that is a good idea but simplicity is the 

key. I mean, the reason why we have all these gyrations with 3 

percent is the government is trying to make money off of us at the 

bottom line and you pick winners and losers to your gentleman’s 

comments and I think the beauty of what is being proposed by the 

Fiscal Commission allows us to do targeted or specific periods of 

time that I think Congress should review. And when that has outlived its usefulness and we moved to something else. It is energy 

maybe right right now. Maybe it is something else later on. I think 

I have a lot of confidence, believe it or not, in this Congress and 

in the Congress that is coming down the line but we have got to 

get small business some relief right now. 

Thank you. And I yield back. 

Mr. BARLETTA. Thank you, Mr. Chairman. 

My wife and I, we are small business owners and we were a subchapter S corporation so I understand how raising taxes on businesses and people earning over $250,000 will affect—have a direct 

effect on small business. Since I am here, I am a freshman, you 

know, all we have talked about was jobs and how we create jobs. 

And there is not a better committee than this Committee right 

here. When we talk about putting Americans back to work, seven 

out of ten jobs created are created by small business. So I understated how regulation and uncertainty affects small business. 

My question is to Mr. Walker. Can you please provide more details about the impact of Congress constantly reauthorizing expiring provisions of the tax code on your small business? 

Mr. WALKER. It was evident in this last session when it was unknown whether the current regulations were going to be extended. 

Many small business owners sat on the sideline and many budding 

entrepreneurs sat on the sideline simply waiting to see what was 

going to happen. We saw a downturn in any movements, pretty 

much any movements of businesses transitioning ownership, new 

ones coming in. So when the regulations are constantly changing, 

long-term planning becomes essentially impossible and a small 

business owner, if they cannot get their hands around it, they will 

sit idle. And it happens. So it is a negative to the economy when 

that goes on. 

Mr. BARLETTA. So you would agree that, you know, passing a tax 

code for one year, two years, an extension of one or two years is 

not really doing anything to remove the uncertainty that small 

businesses are looking for to be able to invest and create jobs. And 

I am going to follow that up with the environment that we have 

created here in Washington with the overregulation and the uncertainty and government-run health care. All the obstacles that small 

businesses look at. Do you believe that we are stopping the entreVerDate Mar 15 2010 01:19 Jun 07, 2011 Jkt 066457 PO 00000 Frm 00021 Fmt 6633 Sfmt 6602 E:\HR\OC\A457.XXX A457

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preneurial spirit of American right now by our own doing here in 

Washington? 

Mr. WALKER. I know for a fact that buying—not allowing extensions or regulations to be for periods of 8 years and 10 years. By 

not having that it does not motivate people to be willing to expose 

themselves to the kinds of debt and the risks it takes to really spur 

small business. I know that for a fact. So yes, doing these one- or 

two-year things are good for short-term savings tax deductions but 

they do not serve long-term planning needs. 

Mr. BARLETTA. Thank you. I yield back, Mr. Chairman. 

Chairman GRAVES. Ms. Chu. 

Ms. CHU. Thank you, Mr. Chair. 

I would like to ask a question about the issue of classifying an 

employee as an employee or as an independent contractor. The IRS 

has a 20-factor test to determine classification and it’s confusing 

and unclear from what I read from the testimony that you have 

submitted. And there are small businesses that fear the penalties 

that will ensue if a worker is misclassified. In addition, of course, 

workers can be cheated if they are misclassified because they do 

not receive benefits and could lose the protection of employment 

and labor laws. So it is to the benefit of everybody to be accurately 

classified as either an independent contractor or an employee. I 

know Mr. Walker and Ms. Olson, you both addressed this? 

Mr. Walker, what would we have to do to simplify the classifications so that both workers and employers could benefit? 

Mr. WALKER. It would be a very definitive break to say the least. 

An employee falls into a particular category or a contractor falls 

into a particular category. Unfortunately, that is not the case right 

now. You simply have to make a decision based on what you think 

is applicable to that person. At present, if somebody is going to step 

up and be a contractor, if they were providing services to three or 

four other people doing similar type work, you can get comfortable 

with their contractor. But if they are only working for that one entrepreneur, then they may be an employee. 

Now, unfortunately, that puts the onus on the employer, the entrepreneur, to have to figure out what is going on in that person’s 

life. And that is difficult. So there needs to be some very definite 

definitions put in place as to what is an employee versus a contractor. 

Ms. CHU. Do you have any suggestions? 

Mr. WALKER. The type of work that they will be rendering. I 

think they have done a great job right now in saying does this person provide their own equipment? Are they controlled by the entrepreneur? That is a good way of doing it. But when you come in and 

look at the type of services that are being delivered, that is one 

way of breaking it down. It could be broken down into an industry. 

Make it very clear that the contractor, if they are going to place 

it with a contractor, has to submit something to the employer giving information about their background. Right now that is not required and it is simply a service agent uncovering something they 

find was not compliant and the entrepreneur is in trouble. So there 

has to be a bridge between the people who are being hired and the 

entrepreneur. 


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But the code does need to come up somehow. The only thing that 

is there is the 20-point test and it is just designed to say is there 

much control. That is the only thing that is in the code right now, 

how much control is there? That needs to be somehow expanded. 

Ms. CHU. Ms. Olson. 

Ms. OLSON. We have had lots of discussions with the business 

and small business community and their concerns are where we 

are with the status quo, that the IRS is not allowed to issue guidance other than what we have got out there. It is that they do not 

trust the IRS and what kind of guidance it is going to issue. So 

what we have proposed to break the logjam is that the IRS be instructed to engage with the business community and talk through 

just the very issues that Mr. Walker is raising, come up with some 

proposed guidance to submit to the tax writing committees, and 

that would form a basis. And then Congress could react to that if 

they felt that the IRS had not listened sufficiently to small business, et cetera. 

I think that, you know, where we are is that there does need to 

be change for all the reasons that you have mentioned. And I will 

say once we come up with the clear sense of where we want to go 

with this, I had visited the United Kingdom and they actually have 

on their website a question and answer process for the employer 

to go through and answer these questions and it will get an answer 

back. If they do not—if you are an employer or, you know, you have 

independent contractors, if you do not like the answer it is not 

binding you of appeal rights. But if you like the answer, then unless you have misrepresented, you can rely on that as a safe harbor. And I think that is what businesses need. You know, a safe 

harbor. They need certainty. They need to know one way or another so they can proceed and plan. 

Ms. CHU. Thank you. And could you also just say a few words 

about the business tax forms? You recommended two changes to 

business tax forms to improve reporting and tax compliance, just 

simply adding a line to Schedule C and adding check boxes to business tax returns. Could you elaborate on this? 

Ms. OLSON. Well, actually, the IRS is actually going forward with 

this. One thing we had suggested was just that businesses be required to break out, you know, here are our receipts from 1099s 

that have been reported to the IRS. And here are our receipts other 

than what is being reported. And good accounting systems you just 

back out what your 1099s are. And we thought that would help 

drive some people who are in the cash economy to sort of report 

a little bit more. 

And then the other question was a lot of people do not know that 

they have to do this information reporting so we really wanted to 

jog people’s memories and say, you know, if you are a small business person and you have paid people over $600 for services provided in the course of business, you know, have you filed your 

1099s? And both of those are little behavioral reminders but would 

generate some additional income. 

As a former preparer, I have seen what my taxpayers have done, 

my clients did, you know. They would add up their 1099s and then 

they would add a couple thousand dollars and say that is the addiVerDate Mar 15 2010 01:19 Jun 07, 2011 Jkt 066457 PO 00000 Frm 00023 Fmt 6633 Sfmt 6602 E:\HR\OC\A457.XXX A457

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tional amount we made. But maybe they add up and say more than 

a couple thousand dollars if that question were there. 

Ms. CHU. And this is being implemented? 

Ms. OLSON. The IRS is implementing a version of this now. 

Ms. CHU. Thank you. I yield back. 

Chairman GRAVES. Mr. Walsh. 

Mr. WALSH. Thank you, Mr. Chairman, and thank you to each 

and every witness for coming in today, especially you, Mr. Strobel, 

from close to home in Chicago. Thank you. 

Let me throw maybe a couple softballs your way. Expensing. 

Right now you have got to calculate depreciation and deduct that 

from your taxes. Would it be a heck of a lot easier if you could just 

write off the full cost of expenses in the first year? What would 

that do? What would that do, good or bad? 

Mr. STROBEL. Well, from a tax perspective you would be better. 

I mean, there would be less tax to pay, more money available for 

investment. 

Mr. WALSH. And what would that lead to? Less tax to pay would 

lead to what? 

Mr. STROBEL. More money to invest in the business. More money 

to grow the business. More money to market. More money to understand our customers. It should lead to growth. It should lead to 

us be more competitive, help us be more differentiated and be more 

profitable. But also be able to employ more people. We need people 

to grow the business. 

Mr. WALSH. Mr. Kulp. 

Mr. KULP. I would agree with that. If the Section 179 I think it 

is called. I am not an accountant myself but my accountant tells 

me this, it is obviously put there for a reason by Congress because 

it does exactly what you are thinking it should do. It simply makes 

sense to be able to expense as much as possible. It makes you invest in the business, hire people, and buy goods and services that 

you otherwise would not. 

Mr. WALSH. Mr. Walker. 

Mr. WALKER. I concur. If you are able to write off 100 percent 

of your equipment costs, you lower income, lower tax, increase discretionary income. That is what allows somebody to actually make 

an investment and bring in people. I know on one occasion that I 

can think of right off the top of my head, a new business owner 

was coming in, had plans to hire five people, had to cut that down 

to three because they could not deduct a number of the items that 

they had projected they could once their accountant told them what 

they were actually going to be able to take as a deduction. A lot 

of it was equipment investment. So I know that that happens. 

Mr. WALSH. Ms. Olson, would that be a good thing? 

Ms. OLSON. Well, I think you would also have to address the 

issue of recapture that Mr. Walker spoke about because in our office that is where we see problems for taxpayers. It is a gotcha. You 

know, they do not know it exists and then suddenly they have disposed of an asset that they depreciated fully under 179 and then 

the liability is all back to them. So you have to deal with that. 

Mr. WALSH. You know, thankfully, it looks like Congress is repealing the 1099 that was part of the health care legislation from 

last year. 1099s, though, are still an issue, even prior to this ediVerDate Mar 15 2010 01:19 Jun 07, 2011 Jkt 066457 PO 00000 Frm 00024 Fmt 6633 Sfmt 6602 E:\HR\OC\A457.XXX A457

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tion with the health care legislation. You still have to fill out 1099s 

and I am guessing that costs money and that is still a headache. 

Any sense as currently constituted they are an undue burden? Mr. 

Strobel? Mr. Kulp? 

Mr. STROBEL. I guess I would say: Is it an undue burden? Filling 

out 1099s for us is not an undue burden. 

Mr. WALSH. Mr. Kulp. 

Mr. KULP. For us I guess we have gotten used to it to the point 

where, you know, it is like a frog thrown into the frying pan. You 

do not really know. But I believe the repeal of the 1099 within the 

health care provision is absolutely necessary because that would 

just proliferate them and make it very, very onerous and complex. 

Mr. WALSH. Mr. Walker. 

Mr. WALKER. The 1099 reporting as it currently is without the 

additional, it needs to be there. And I happen to come across many 

people who believe that if they have been paid less than $600, they 

are not even supposed to pay income tax on that. So they even misunderstand the regs. But without having a 1099 reporting, absolutely income tax collections would go down. People would find 

ways to hide that money because they would believe nobody knows 

they made it. So it is necessary with our current structure. 

Mr. WALSH. Ms. Olson, quick question. Is the IRS planning at all 

on implementing any sort of substantive e-filing system for business taxes? 

Ms. OLSON. You know, I have not seen those plans and we have 

advocated for that for years. Even they used to have a system just 

for employment tax where you could use your telephone and they 

eliminated that. We did a study last year that said you need to reinstitute that. That is the only free electronic method for employment, you know, businesses to file. 

Mr. WALSH. Why do not you think there has been movement on 

that? 

Ms. OLSON. I think it is a combination of both the concern on the 

part of the software developers, that the IRS is intruding on their 

environment, as well as it is not going to be a capital investment 

on the part of the IRS. You will need to fund the IRS to be able 

to do that. 

I just, I feel it really is a necessity. We have an obligation to do 

that, particularly for small businesses. 

Mr. WALSH. Thank you, all. Thank you, Mr. Chairman. I yield 

back. 

Chairman GRAVES. Mr. Altmire. 

Mr. ALTMIRE. Thank you, Mr. Chairman. 

Mr. Walker, I want to follow up on the 1099 question. If the 

President signs as expected the repeal that the Congress sent him 

for the health care $600 1099s, what would the law then revert to? 

What is the threshold for filling out 1099 forms? 

Mr. WALKER. Six hundred dollars. It is right now $600 and greater. Now, there are different levels of 1099s but we are talking 

about just a general miscellaneous 1099 is a $600 amount. And 

that is an appropriate amount. That should not go away. 

Mr. ALTMIRE. Above that. 

Mr. WALKER. Anything at that or above. 


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Mr. ALTMIRE. Thank you. Mr. Strobel, regarding the fair tax, I 

am glad you are here because I wanted to catch you with some 

questions on this or have a conversation. Is it your understanding 

under the Fair Tax proposal, what happens to the FICA tax, the 

Medicare and Social Security? 

Mr. STROBEL. We are going to have to follow up with you and the 

National Small Business Association. We will follow up on that 

question. All right? 

Mr. ALTMIRE. Okay. My concern on that would be what happens 

to the way we fund Social Security and Medicare under that. 

Where did that number come from, the 23 percent with regard to 

the fair tax proposal? It is budget neutral according to the proponents of the Fair Tax? Who is the determinant of that? Who 

scores it? 

Mr. STROBEL. The NSBA will follow up with you on that. 

Mr. ALTMIRE. Okay. What about the percentage—do you generally know as a small business what is the percentage of small 

businesses that comply with sales tax currently? 

Mr. STROBEL. I do not know. That is another—we can follow up 

with you. 

Mr. ALTMIRE. That would be a concern that I believe the number 

assumes 100 percent compliance and under current law there is 

certainly nothing close to 100 percent compliance on the sales tax. 

So if you could have somebody from the association follow up with 

us. 

Mr. STROBEL. Yes, we will. 

Mr. ALTMIRE. Ms. Olson, the IRS Commissioner recently stated 

that he would like to overhaul the tax, as you know, administration 

process by focusing on third party reporting, and namely he wants 

to move to a system where the IRS would already have third party 

information when taxpayers file their returns. And as we were discussing, the 1099 reporting is an example of third party reporting. 

Do you believe that there is a way to implement such a program 

without creating the same sort of situation that we had with the 

1099 regulations under the health care bill? 

Ms. OLSON. Well, first, a couple of years ago we recommended 

that Congress force the IRS to look at the issue of getting income 

data in real-time during the filing season so taxpayers could 

download it into their software programs or the IRS could make it 

available to taxpayers in another way. So I welcomed, you know, 

the Commissioner’s, you know, remarks in that regard. 

I am concerned with the recent love of 1099 reporting. As much 

as I recognize and am an advocate for appropriate 1099 reporting 

because it does change taxpayer behavior. Once they know that we 

know the information, 96 percent of the time they report it on their 

returns. But there is a point of diminishing returns where the IRS 

gets so much information or the burden is being imposed on taxpayers who do not normally keep track of that information that you 

just create a real headache, which is what we saw with the expansion of information reporting. 

So I think as we go out with information reporting we really 

have to think about that point of diminishing returns. I do not 

think the IRS should ask for information that it cannot do anything about or that the information itself is not really going to give 


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us a clear picture of what is going on with taxpayers. Having said 

that, you know, we can tell the taxpayer a lot. We can tell them 

what their wages are. We can tell them what their interest is. We 

can now tell them what their capital gains or losses are because 

we have basis reporting. And all of those are really beneficial 

things for the taxpayers and will minimize errors. 

Mr. ALTMIRE. Great. Thank you. Thank you, Mr. Chairman. 

Chairman GRAVES. Mr. Owens. 

Mr. OWENS. Thank you, Mr. Chairman. 

Mr. Walker, there is some information that we have gotten that says there is about $160 billion a year that is spent in tax compliance work. Now, if we simplified the code, would we not put folks 

like you out of business in large numbers? 

Mr. WALKER. It very well could be. Because I am here advocating 

that I will probably get some phone calls. 

Mr. OWENS. From your colleagues I suspect. 

Mr. WALKER. From my colleagues. It will not eliminate the profession; it will just change the dynamic of the services delivered. 

Mr. OWENS. But certainly it will shrink it if we see a decrease 

in those kinds of dollars diverted, right? 

Mr. WALKER. It would need to. Right. 

Mr. OWENS. I just always am curious about the unintended consequences of what we do here. 

I want to raise one other question. We talked a little bit about 

the 179 deduction and there was some discussion about recapture 

issues, but there is also another issue that creates tax consequences and that is not matching up the amortization of the debt 

used to acquire the piece of capital equipment and the loss of the 

deduction because you have taken it in one year. Does that create 

any issues and do you see any way around that issue that we could 

implement? 

Mr. WALKER. Is that for me? 

Mr. OWENS. For you, yes. 

Mr. WALKER. So your question is to the deduction on the 179 

that is compared to the actual cash outlay that has occurred? 

Mr. OWENS. Correct. Well, not cash—if you do a cash outlay I 

agree it is not an issue. 

Mr. WALKER. Okay. 

Mr. OWENS. Because then it is a wash. But if you finance, which 

most small businesses do, capital acquisitions, then you are in a 

situation where unless you can repeat the process every year you 

are in a position where you are creating a tax where there is no 

income. 

Mr. WALKER. You have got a deduction where there is no income? 

Mr. OWENS. Right. 

Mr. WALKER. Well, the deduction then can be moved. So once you 

have taken the deduction, the deduction goes up to zeroing out 

your income and then it flows over into the next year. So the carry 

forward could allow that to happen. I do not see a problem with 

people getting a full deduction. The problem I have is limiting the 

benefit that they can get from that deduction. Under current 179 

regulations, if somebody owns five different S corporations and 

they all take advantage of the deduction, you will—that deduction 


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goes to the individual tax return. And if the same person owns all 

businesses that person can only have one 179 deduction. So right 

now that is 500,000. But if you had 5 businesses maxing that out, 

there is 2.5 million. That business owner could lose $2 million 

worth of deductions the way the code is written right now. So allowing the deductions is not the problem; it is making sure that 

you can benefit from that and moving it forward if you lose the 

ability to take a deduction in the year that you have actually done 

the 179 election. 

Mr. OWENS. And we have also had a lot of conversation today 

about the issue of tax expenditures and whether or not we should 

eliminate all of those or whether, as you are suggesting, we should 

be doing targeting or targeted either tax deductions or tax credits. 

Does not that put Congress in the position of selecting winners? 

Mr. WALKER. I do not know if it puts them in the position of selecting winners because it would apply across the spectrum of all 

the business owners. It is a targeting effect. Even if we simplify, 

just completely simplify, we will still have some targeting that will 

need to be done within the system over time. So it is the people 

who can take advantage of it and all these small business owners 

and the things at least we have talked about today, it applies to 

all of them. So it is not going to be one particular person or one 

particular sector. 

Mr. OWENS. But it will be a particular—potentially a particular 

industry. Like, if you created an R&D credit for solar energy you 

would be solely focused on that particular industry. 

Mr. WALKER. That would be accurate. But a 179 issue—— 

Mr. OWENS. Oh, I am sorry. I may have confused you because I 

was not just talking about 179. I was talking about the panoply of 

various credits we have in the tax code now. 

Mr. WALKER. Right. 

Mr. OWENS. If we eliminated all of those, and then you are suggesting we build them back up over time, you would be selecting 

winners to some degree, like we have now. 

Mr. WALKER. Like we have now. Correct. 

Mr. OWENS. Mr. Chairman, I yield back. Thank you. 

Chairman GRAVES. Ms. Clarke. 

Ms. CLARKE. Thank you very much, Mr. Chairman, Chairman 

Graves, and Ranking Member Vela ́zquez. And I want to thank the 

panel for testifying before us today. 

I would first like to just say that over the course of this Congress 

much has been said about our nation’s deficit as it should be. I 

agree that we must aggressively tackle the debt. Unfortunately, I 

do not believe that we have been having an honest conversation 

with the American people about why we are in this deficit and how 

we can get out of it. 

Again, while I agree that we must address our deficit, it must 

be done responsibly. However, I disagree with the constant refrain 

of the majority that says that we do not have a revenue problem 

and I think that is at the heart of what small business is trying 

to address here today is the complexity of our tax system. The refrain is that we have a spending problem. The fact of the matter 

is that we have both. 


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And at the beginning of the last decade we were operating with 

budget surpluses. Now we are operating at staggering deficits. And 

while we have two undeclared wars and an economic downturn 

have played a considerable role in increasing our debt, it is crystal 

clear that we began our sprint down this road due to what I believe 

were irresponsible tax cuts for those who could have most afforded 

them and robbing the Treasury of that much-needed revenue. 

The majority is now using this lack of revenue as a justification 

to cut programs for the most vulnerable Americans. And many of 

my colleagues on the other side have sort of echoed Mr. Strobel’s 

testimony lamenting the 35 percent corporate tax rate as the 

world’s most expensive and it limits our global competitiveness, yet 

on March 24th of this year The New York Times published a story 

on how General Electric, one of our nation’s largest corporations 

paid absolutely 0 in taxes after posting 14.2 billion in profits, 5.1 

billion which was made right here in the United States of America. 

So while I agree that we need to work hard to limit the burdens 

on our small businesses, and I agree in principle with President 

Obama about the need to reform the tax code, it seems to me that 

through our panel’s testimony the goal here is to apply a tax code 

to our extraordinarily complex global economy that reflects little to 

no nuance or complexity. The attainment of the American dream 

is what makes our country and its civil society one of the greatest 

in the world. Our nation offers an opportunity for financial success 

and prosperity that cannot be found anywhere else on the planet. 

However, unfortunately, due to a number of factors, the attainment 

of the American dream has become elusive, so much so that many 

people, many small entrepreneurs are finding it hard to gain footing, access to capital, access to lending. 

So my question to the panel is what do you believe is the responsibility of those who have been successful to this country that has 

made their success possible? It is for the entire panel. 

Ms. OLSON. I do not know how to answer that question other 

than to say that every person and entity owes an obligation to the 

United States to pay their fair share of taxes under our laws. And 

if our laws are structured in a way so that as Congress has enacted 

them so that those with the assets and the ability to retain advisors who can find ways to structure their affairs so they pay less 

tax than the person or the entity that cannot afford that, then we 

have a tax system that is out of whack. And our testimony has 

been—my testimony has been, and my writing have been to that 

point. I think that it is not possible to get pure simplicity in a code. 

We are human beings, and as you say, we live in a very complex 

world. But we can do a much better job than the environment that 

we have today. 

Ms. CLARKE. What I find ironic is that we do not hear anyone 

speak out when, for instance, GE pays no taxes. I have not heard 

from all of the business councils, all of the small business councils. 

And it would seem to me that if we are talking about fair tax and 

fair share, that it should go both ways. 

And so I just wanted to put that on the table, Mr. Chairman, because I think we need to look at what is happening in its entirety. 

And I yield back. 


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Chairman GRAVES. Any more questions? Well, I want to say, as 

this Committee continues to focus on job creation we certainly appreciate hearing from all of you on the complexity that small businesses deal with when it comes to following the tax code and the 

problems that creates when it comes to job creation. 

I wanted to let everybody know following today’s hearing we are 

going to be sending a letter to the chairman and ranking member 

of the House Ways and Means Committee to share with them what 

we heard today. We want to make sure that small business’s voice 

is being heard loud and clear when they are dealing with fundamental tax reform. 

So with that I would ask unanimous consent that members have 

five legislative days to submit their statements and supporting materials for the record. And again, I appreciate all of you coming out 

today and sharing with us your thoughts and ideas and concerns. 

The hearing is adjourned. 

[Whereupon, at 2:20 p.m., the hearing was adjourned.] 


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