Mr. Chairman, Representative Shadegg, and Members of the Subcommittee: We are pleased to be here today to discuss with the Subcommittee the results of work done on the burden that business and individual taxpayers face in complying with federal tax requirements. Because of concerns about business taxpayer burden, we identified sources of compliance burden and examined the feasibility of obtaining reliable dollar estimates of the compliance costs borne by business taxpayers. We have defined burden as the time taxpayers spend, monetary costs they incur, and frustrations they experience in complying with tax requirements. Because individual taxpayers may also face compliance burdens, we are currently reviewing alternative tax filing procedures to identify possible benefits to taxpayers and challenges presented by such alternatives. Although that work is incomplete, we can share some information about individual tax burden issues. To provide a perspective on business taxpayer burden, we collected information on compliance burden from the management and tax staffs of selected businesses, tax accountants, tax lawyers, representatives of tax associations, and officials of the Internal Revenue Service (IRS). The corporate businesses we met with varied by geographical location, size, and industry type. There are several points we will discuss today. First, according to the businesses we interviewed, the complexity of the Internal Revenue Code, compounded by the frequent changes made to the code, is the driving force behind business tax compliance burden. Second, a reliable estimate of the overall costs of tax compliance would be costly and in itself burdensome on businesses to obtain. Finally, reducing the compliance burden on businesses and individual taxpayers will be a difficult undertaking because of the various policy trade-offs, such as revenue and taxpayer equity, that must be made. While discussing with us the many issues associated with compliance burden, the business officials and tax experts also acknowledged the legitimate purposes and requirements of the tax system. They said that filing tax returns and paying taxes were all part of doing business. But most firmly believed there must be easier ways to achieve the goals of the federal tax system. Business officials and tax experts told us that, overall, the federal tax code is complex, difficult to understand, and in some cases indecipherable. They also said it was burdensome to comply with the code because of the additional record-keeping and calculations that the code requires. More specifically, they said businesses have difficulty with the code because of numerous and unwieldy cross-references and overly broad, imprecise, and ambiguous language. Such language, they said, appears to be designed to cover every conceivable case but leads to much taxpayer confusion and frequent misinterpretation of the code. Frequent legislative changes, including the effects of these changes on other sections of the code, were also cited as problematic. Respondents said that the frequent and large number of legislative changes make it difficult for businesses to keep current on provisions that apply to their specific situations. For example, 1 year after the expansive Tax Reform Act of 1986, the Omnibus Budget Reconciliation Act of 1987 changed about 50 provisions that potentially affected business tax compliance. Business officials and tax experts said it was their perception that these frequent changes were designed to fix loopholes or perceived abuses; yet, in making these changes, Congress appeared not to have considered the impact they have on other sections of the code. These same parties expressed frustration about provisions with finite lives being left to expire but later reauthorized. These are tax provisions that may contain sunset clauses to encourage future reevaluation. And while recognizing the value of these provisions, business officials and tax experts said informed business decisions are difficult to make without knowing a provision’s fate. Each of these concerns about changes to the tax code added to the uncertainty businesses face in attempting to understand and comply with the tax code. The tax code also can create the need to establish and maintain numerous and sometimes duplicate sets of financial records. For example, all of the 17 businesses we spoke with said depreciation requirements caused them to maintain detailed records solely for tax purposes. For a given set of assets, some companies need to produce one set of computations and records for the regular federal tax and two additional sets for the federal Alternative Minimum Tax (AMT). Many businesses are also required to produce additional depreciation computations and records for state and local income and property tax purposes. Complexities in the code can also result in the need to complete time-consuming calculations. Among these, respondents frequently mentioned the calculations associated with the uniform capitalization rules, the AMT, and other provisions that force taxpayers to trace the many categories of interest expense and apply a separate tax treatment to each category. Our respondents also indicated that the compliance burden imposed by the federal tax system was made greater by the interplay of state and local tax requirements that at times were inconsistent with each other as well as with the federal code. Among the problems cited by businesses were different definitions of wages, income, and certain deductions; different methods for calculating depreciation; and inconsistent requirements for payroll reporting and timing of deposits. While the focus of our discussions was on the federal tax burden, some of the business respondents said that the compliance burden associated with state and local tax requirements exceeded the burden of the federal system. Some business officials and tax experts also cited IRS’ administration of the federal tax code as contributing to business compliance burden, although to a lesser extent than the complexity of and frequent changes to the code. Of those who cited difficulties with IRS, problems identified were with the tax knowledge of IRS auditors, the clarity of IRS’ correspondence and notices, and the amount of time IRS takes to issue regulations. The complexity of the code has a direct impact on IRS’ ability to administer the code. The volume and complexity of information in the code make it difficult for IRS to ensure that its tax auditors are knowledgeable about the tax code and that their knowledge is current. Some business officials and tax experts said that IRS auditors lack sufficient knowledge about federal tax requirements, and in their opinion this deficiency has caused IRS audits to take more time than they otherwise might. However, other respondents said that IRS auditors were reasonable to work with. IRS recognizes the difficulty of maintaining a workforce of auditors who fully understand all tax requirements. IRS is developing a program to encourage auditors to become industry specialists so that they can increase their understanding of industry environments, accounting practices, and tax issues. experts said that the complexity of the forms and publications and the lack of clarity of correspondence and notices resulted in frustrating and burdensome experiences for the taxpayers. They said that business compliance burden is increased as businesses attempt to understand and respond to those notices and letters. Our last detailed examinations of IRS notices, forms, and publications, in December 1994, revealed continuing problems with these documents. IRS has been making efforts to resolve some of those problems. Respondents also identified difficulties in complying with the code because regulations were not always available from IRS in a timely manner. IRS officials said that the amount of time that passes before a final regulation is issued varies, but it can take several years or longer. According to the officials, the amount of time is a product of the complexity of the particular tax provision, the process of obtaining and analyzing public comment on proposed regulations, and the priority IRS assigns to issuing the regulation. For many tax provisions businesses depend upon IRS regulations for guidance in complying with the code and correspondingly reducing their burden. Without timely regulations, according to some respondents, businesses must guess at the proper application of the law and then at times amend their decisions when the regulations are finally issued. Moving next, Mr. Chairman, to the overall cost to businesses of complying with the tax code, we did not identify a readily available, reliable estimate of such costs. While there was a general consensus that compliance is burdensome and some businesses offered anecdotal examples of their costs, our discussions with businesses and review of available studies indicate that developing a reliable estimate would require that several practical and severe problems be overcome. These problems include working with a broad spectrum of businesses to accurately separate tax costs from other costs and obtaining accurate and consistent responses from businesses on tax burden questions. This kind of inquiry would be an expensive and burdensome process in itself. primarily for tax reasons. More often, tax considerations affected the timing or structure of a business action not whether the action would occur. For example, in acquiring a business equipment would consider tax implications in terms of whether to buy or lease the equipment. Few of the businesses we spoke with could readily separate tax compliance costs from other costs of doing business. The integration of the tax compliance activities with other business activities makes it difficult and time-consuming to collect the information necessary from businesses to generate reliable cost estimates. For example, businesses said it would be difficult to take payroll expenditures and isolate those associated with tax compliance. Further, business respondents said that they do not routinely need, thus it does not make sense for them to collect, information on compliance costs. And, to separate tax compliance costs from other costs of doing business would be burdensome and of questionable usefulness to them. A few business officials provided estimates of some compliance costs, such as legal fees, payroll management fees, and tax software expenditures, but expressed limited confidence in their ability to provide accurate, comprehensive cost data. In addition, those few businesses that said they could isolate some of their tax compliance costs indicated that even in their cases, it would be difficult to separate federal compliance costs from state and local compliance costs. While we did not identify existing reliable business tax burden cost estimates, there was consensus among the business respondents, tax experts, and the literature that tax compliance burden is significant and that it can be reduced. Although some gains can be made by reducing administrative burden imposed by IRS, the greatest potential for reducing the compliance burden of business taxpayers is by dealing with the complexity of the tax code. provisions has the potential for reducing the compliance burden of many businesses. Another approach that has been proposed is to completely overhaul the tax code by replacing the current income tax with some form of consumption tax. In considering changes to the tax code, whether they be limited in nature or comprehensive, legislators need to weigh several sometimes competing concerns.