[Senate Hearing 106-561] [From the U.S. Government Publishing Office] S. Hrg. 106-561 IRS RESTRUCTING: A NEW ERA FOR SMALL BUSINESS ======================================================================= HEARING BEFORE THE COMMITTEE ON SMALL BUSINESS UNITED STATES SENATE ONE HUNDRED SIXTH CONGRESS SECOND SESSION __________ MAY 23, 2000 Printed for the Committee on Small Business ______ U.S. GOVERNMENT PRINTING OFFICE 65-345 CC WASHINGTON : 2000 _______________________________________________________________________ For sale by the Superintendent of Documents, Congressional Office U.S. Government Printing Office, Washington, DC 20402 COMMITTEE ON SMALL BUSINESS ONE HUNDRED SIXTH CONGRESS ---------- CHRISTOPHER S. BOND, Missouri, Chairman CONRAD BURNS, Montana JOHN F. KERRY, Massachusetts PAUL COVERDELL, Georgia CARL LEVIN, Michigan ROBERT F. BENNETT, Utah TOM HARKIN, Iowa OLYMPIA J. SNOWE, Maine JOSEPH I. LIEBERMAN, Connecticut MICHAEL ENZI, Wyoming PAUL D. WELLSTONE, Minnesota PETER G. FITZGERALD, Illinois MAX CLELAND, Georgia MIKE CRAPO, Idaho MARY LANDRIEU, Louisiana GEORGE V. VOINOVICH, Ohio JOHN EDWARDS, North Carolina SPENCER ABRAHAM, Michigan Emilia DiSanto, Staff Director Paul Cooksey, Chief Counsel Patricia R. Forbes, Democratic Staff Director and Chief Counsel (ii) C O N T E N T S ---------- Opening Statements Page Bond, The Honorable Christopher S., Chairman, Committee on Small Business, and a United States Senator from Missouri............ 1 Witness Testimony Rossotti, The Honorable Charles O., Commissioner, Internal Revenue Service, Washington, D.C............................... 3 Ashby, Cornelia M., Associate Director, Tax Policy and Administration Issues, General Government Division, U.S. General Accounting Office, Washington, D.C., accompanied by Kirk R. Bayer, Senior Evaluator, Kansas City Field Office, and James A. Wozny, Assistant Director, Tax Policy and Administration Issues, General Government Division............. 34 Abalos, Sandra A., President, Abalos & Associates, P.C., Phoenix, Arizona........................................................ 77 Quick, Roy M., Jr., EA, Principal, Quick Tax & Accounting Service, St. Louis, Missouri................................... 84 Alphabetical Listing and Appendix Material Submitted Abalos, Sandra A. Testimony.................................................... 77 Prepared statement........................................... 79 Ashby, Cornelia M. Testimony.................................................... 34 Prepared statement and attachment............................ 37 Bond, The Honorable Christopher S. Opening statement............................................ 1 Post-hearing questions posed to Mr. Rossotti and subsequent responses.................................................. 101 Coverdell, The Honorable Paul Prepared statement........................................... 95 Kerry, The Honorable John F. Prepared statement........................................... 96 Quick, Roy M., Jr. Testimony.................................................... 84 Prepared statement........................................... 87 Rossotti, The Honorable Charles O. Testimony.................................................... 3 Prepared statement and attachment............................ 8 Responses to post-hearing questions posed by Senator Bond.... 101 Snowe, The Honorable Olympia J. Prepared statement........................................... 98 (iii) IRS RESTRUCTURING: A NEW ERA FOR SMALL BUSINESS ---------- TUESDAY, MAY 23, 2000 United States Senate, Committee on Small Business, Washington, D.C. The Committee met, pursuant to notice, at 10 a.m., in room SR-428A, Russell Senate Office Building, the Honorable Christopher S. Bond (Chairman of the Committee) presiding. Present: Senator Bond. OPENING STATEMENT OF THE HONORABLE CHRISTOPHER S. BOND, CHAIRMAN, SENATE COMMITTEE ON SMALL BUSINESS, AND A UNITED STATES SENATOR FROM MISSOURI Chairman Bond. Good morning, the Committee on Small Business is called to order. My colleague and Ranking Member, Senator Kerry, has another commitment. His staff informs me that he will be joining us shortly. But since we said we were going to start at 10, we will get on with it right now. As many of you know, this week is Small Business Week, and I believe it to be very important for the Committee to focus its attention today on one of the most pervasive and continuing issues confronting small-business owners, and that is their interaction with the Internal Revenue Service. Over the past 2 years, the IRS has been taking some major steps to streamline that interaction, which I hope will take some of the frustration and fear out of America's entrepreneurs. Today, the Committee will examine the progress that the IRS is making on its modernization efforts. In particular, we will be looking at the new IRS division dedicated to small-business and self-employed taxpayers in this country. To bring us up to date on the agency's work in this area, it is my pleasure to welcome IRS Commissioner Charles Rossotti back to the Committee this morning. Welcome, Mr. Commissioner. Nearly 2 years ago, Congress passed sweeping legislation, with strong support of the Administration and the IRS, to rebalance the focus of the Internal Revenue Service. Broadly speaking, the purpose of the 1998 Internal Revenue Service Restructuring and Reform Act was to transform one of the Nation's most feared enforcement agencies. Our goal was for the IRS to become an agency that balances the taxpayers' needs for outstanding service with the agency's duty to collect tax revenues in a fair and uniform manner. As a strong supporter of that legislation, I am pleased that it has allowed Commissioner Rossotti and his team of senior managers to begin the massive effort of transforming an agency that had become such a significant part of the lives of taxpayers, and especially small-business owners. A significant part of the IRS' transformation is expected to occur through the reorganization of the agency into four operating divisions, each dedicated to the particular needs of specific groups of taxpayers like small-business owners and the self-employed. I have asked Commissioner Rossotti to provide us with a progress report today on the new Small Business/Self- Employed (SB/SE) Division and the steps the IRS is taking to reduce the enormous tax filing and reporting burdens that small businesses face every day. I also see that the new Commissioner of the SB/SE Division, Mr. Joe Kehoe, is here with Commissioner Rossotti today. We welcome him as well. Having tried a little bit of retirement, he found that it was not nearly as rewarding as being actively in the fight, and he has got it. I admire a man who makes irrational decisions like that for the greater public good. A year ago I also asked the General Accounting Office to begin an examination of the IRS' plan for the new SB/SE Division. I am pleased that Cornelia Ashby, Associate Director of the GAO for Tax Policy and Administrative Issues, is here this morning to report on the GAO's findings. I appreciate the extensive work that the GAO has done on this project, and the periodic briefings that the Committee has received over the past year. I also appreciate the IRS' extraordinary cooperation with the GAO on this project. While the GAO has identified some challenges facing the IRS, I think the examination that Ms. Ashby and her team have now completed validates the IRS' plans for the SB/SE division and helps us to see some of the benefits that the Division will have for small- business taxpayers. It is my hope that the new SB/SE Division will contribute to the overall effort to swing the pendulum back from the heavy-handed enforcement mentality of yesteryear to one that recognizes the importance of prompt, courteous, and fair service by the IRS for America's small-business taxpayers. For too long, small-business owners and the self-employed have felt they have been treated like tax cheats simply because they run a small business. Commissioner Rossotti and Commissioner Kehoe, I urge you in the strongest possible terms to ensure that, as the new SB/SE Division ``stands up'' later this year, that historic bias of ``guilt by virtue of small business'' will have no place in the new Division's front-line employees or its top management. Small business owners bear incredible burdens when it comes to compliance with the overly complicated tax code, as the Committee saw in great detail at our hearing last April on tax filing and reporting burdens. With such complexity, honest mistakes will naturally occur, especially for small-business owners who often cannot afford professional tax assistance. Those taxpayers need help in avoiding mistakes and straightening them out when they occur, all in a manner that treats them as honest, upstanding citizens who are willing to pay their fair share of the taxes. Just as the IRS does not want to be judged by its worst employees, small-business owners do not want to be branded as criminals simply because of a few dishonest small enterprises. This is not to say that the IRS should look the other way when it comes to disreputable taxpayers who are trying to evade their tax liabilities. The IRS has a dual responsibility, part of which is to ensure that taxpayers who owe taxes, pay them. And I strongly support the IRS' efforts to collect taxes due in a fair and professional manner. We can hardly expect honest taxpayers to pay their fair share, if others are getting away with cheating the system. As one who just went through the annual ritual of paying my taxes, I sure do not want to see somebody else getting away with not paying the taxes they owe, when we pay the taxes we owe. Finally this morning, I have asked two individuals who currently serve as informal advisors to the IRS to provide the Committee with their perspective on the agency's new SB/SE Division and the steps the IRS is taking to reduce the compliance burdens on small businesses and the self-employed. Sandra Abalos is the owner of Abalos & Associates, an accounting firm in Phoenix, Arizona. This morning, we will be testing the boundaries of the Senate's technological advancement by having Ms. Abalos join us from Phoenix via video conferencing. We look forward to her insights as a member of the IRS Electronic Tax Administration Advisory Committee on the new SB/SE Division and the efforts underway to encourage and improve electronic tax filing. I should also note that this morning's proceedings are being broadcast on the Internet via the Committee's web page at sbc.senate.gov. Last, but certainly not least, will be Roy Quick, Jr., a fellow Missourian, a good friend, and a principal in the Quick Tax & Accounting Services. Mr. Quick is also a member of the IRS Advisory Council, and he will give us his perspective on the new SB/SE Division, as well as some of the agency's efforts to provide taxpayer education in the pre-filing stage in order to reduce errors and provide better compliance by small- business taxpayers. With that, Mr. Commissioner, I know that you have a very full statement that we will accept for the record, and I ask now that you summarize your testimony and begin the proceedings. STATEMENT OF THE HONORABLE CHARLES O. ROSSOTTI, COMMISSIONER, INTERNAL REVENUE SERVICE, WASHINGTON, D.C. Mr. Rossotti. Thank you very much, Mr. Chairman, and thank you for having me here this morning. I think it is very helpful for you to have this hearing at this particular point in time, when we are really at the beginning of what I think is a whole new era in tax administration with respect to especially the small business community. Of course, we are following, we think, the Restructuring and Reform Act as our road map as we embark on this huge modernization. We think that as we look across all of the parts of the taxpayer base that we serve, we really believe that the opportunities we have to improve service to the small-business taxpayer are probably some of the best opportunities we have. Which is another way of saying we have some of the greatest room for improvement. We believe that we must help these taxpayers and I would stress especially almost 800,000 new businesses that startup every year, to understand what is expected of them and to stay in compliance from day one. Very much as you summarized in your opening statement, Mr. Chairman, we are stressing the balanced approach to doing this tax administration. We know that the vast majority of small- business taxpayers do want to comply with their tax obligations. And we have to help them do that every way we can, to make it as easy as possible, and especially to prevent problems before they even occur. Of course, for that small minority who do refuse to meet their obligations, they cannot be allowed to unfairly burden the remainder, and we need to take necessary steps to bring them into compliance. What we are trying to do is take a short-term and long-term approach to this. We know we cannot do everything at once. In the short term, we are working on new avenues of communication and new technologies to help provide quality service at convenient times. I think one of the important things we have done for hard-pressed small-business owners who do not have a lot of time, is to open our phone service 24 hours a day, 7 days a week, so that people can communicate with us when it is convenient for them. We have also created a CD-ROM that has a great deal of information that any small-business owner could benefit from. Chairman Bond. I imagine that is a best seller. Mr. Rossotti. It is actually a pretty good seller. I think your staff has copies of this and have been looking at it. Of course, we have all of this on the web site as well. Our small business corner on the web site, which I think is very helpful in terms of being able to assist small businesses since most small businesses now have some computer capability, gives them a chance to go to the web site and get what they need. We are also trying, of course, to make it easier to actually file and pay taxes. On the quarterly return side, which is some of the most frequent filings, small businesses can now do that either by touch tone phone or filing online directly from their own computer. Something new for the next filing season, which we think will be very popular with many self-employed taxpayers and small businesses, is a checkbox on the form 1040 which will basically allow people to, just by checking this box, allow their preparer or the person that prepared their return to communicate with us without having to file still another return--another form just to be able to authorize them to do that. This seems to have gotten a good response and we look forward to expanding that potentially to other forms after we test it the first time. We are also expanding our voluntary tip compliance program, so that people can now devise their own tip agreements, in addition to the standard ones that we provide. Any industry now, where tipping is a customary practice, we think this will expand what has been already a successful program, to use voluntary agreements to encourage compliance rather than having to go in and audit things after the fact. Those are some short-term things. We know that they only scratch the surface. We do not, in any way, claim that these are anywhere close to what we need to do to relieve the burden and to make ourselves more efficient with small-business taxpayers. But we think they are some steps. Now of course, the other big step that we are taking, which you mentioned in your opening statement as the key focus of this hearing, is the establishment of four operating divisions as the primary units of operation in the IRS. One of the most important of those will be the Small Business and Self-Employed Division. We are still targeting to get that division operational officially as of October 1. We have much to do to make that happen but we are definitely setting that as our goal. As you noted, Mr. Kehoe who is here with me today is the Division Commissioner. And Dale Hart, who is an experienced IRS executive, also has been sworn in as the Deputy Commissioner. Just briefly, to outline what we are going to have in this unit, we will have three major components that actually deal with taxpayers. I think that, right off the bat, is an important statement because it is an attempt to be balanced in the very structure of the division itself. The first one is our Taxpayer Education and Communication division, which will have not only a national office but a field staff that will operate in 86 territory offices throughout the United States. I will note that one of these will be in St. Louis, Mr. Chairman. I think that once this office is fully staffed, it will have about six times as many staff across the country as we currently have today devoted to this function. Of course, that is because we have very few devoted to this function right now. But in the future, we will have a fully staffed, across the country set of offices. For example, in St. Louis, we would expect that they will work very closely with some of the local offices, the State of Missouri for example, in order to generate one-stop shopping with the State. We would work closely with local small business association offices, and especially something that we are working very hard on, working with the Small Business Development Centers. They are very effective educational organizations that already offer many courses for small businesses, and we want to partner with them. In addition, the taxpayer education group will pick up the responsibility that is currently done on sort of a detail, part-time basis during our filing season to help taxpayers who have questions, either in our direct field offices or over the phone. That will also help both taxpayers and also help us avoid what is today a major problem in that we have our compliance people, our revenue agents, get off their cases in order to work on things during the filing season. So that is a very important and, I think, one of the most important new initiatives, our Taxpayer Education and Communications organization. The second major component will be our customer account services. Actually, it will be the part of the organization that probably most taxpayers will most interact with, because this will be the one to which you actually send in your returns, and get refunds and payments, and deal with the normal kinds of transactions that take place every day in any business operation. I think the key thing here is that once we get this fully established, we will then have account representatives who will be dedicated and specialized to deal with small-business and self-employed taxpayers. So they will be more capable, we hope, in fact I am certain, will be more specialized in understanding particular problems that occur with small businesses who interact with us more frequently, of course, than the individual taxpayer who sends in their return once a year. Their job will be to make that process, which is actually the most frequent interaction process, as smooth as possible. Of course, the third component will be our compliance organization, which will have a full field organization, as well as phone and other resources, to perform the traditional functions of examining returns and collecting overdue accounts, which is a very important function. But they will also assist in the overall strategy of developing voluntary compliance to its maximum. Finally, one of our goals in the compliance area, which will take some new technology to enable, but which over time I think has tremendous potential. When we do intervene with the taxpayer we want to do it as quickly as possible after we find a problem. Oftentimes, in collection from small businesses, the problem is not that the customer will not pay, it is that they cannot pay because we have gotten to them so late, by that time the money is gone or they have just gotten into an intractable problem. So one of our key goals in compliance is to speed everything up, so that if we are going to talk to a taxpayer about a problem, let us do it as quickly as possible, get it resolved, and get in and out. That is what we hear as one of the main things that our taxpayers tell us, and it is just common sense. Those are kind of the main outlines of where we are going. I believe that if we can sustain this program, Mr. Chairman, we really can, I think, be more effective on both of the missions that you have mentioned in your statement, to provide quality service to all of the compliant taxpayers, which are the majority of them, and also to ensure fairness in the system by enforcing compliance where that is required. We do need some resources, and I have to mention that our fiscal year 2001 budget is still up for consideration. Frankly, it is very important that we get that budget so that we will have the resources to staff some of these things that I have mentioned, and also to invest in the technology that we think is really critical in order to improve service, especially in the account area, which is where most of our small-business taxpayers really interact with us most of the time. So with the support of Congress, in committees like your Committee and our other committees, which I am very happy to say so far has been very positive, at least so far this year, I think we can continue this tremendous transformation. And I think in the next year to 2 years really begin to seriously deliver on our commitments to improving the way tax administration works for all taxpayers, but especially for small-business and self-employed taxpayers. Thank you very much, Mr. Chairman. [The prepared statement of Mr. Rossotti follows:] [GRAPHIC] [TIFF OMITTED]66223.001 [GRAPHIC] [TIFF OMITTED]66223.002 [GRAPHIC] [TIFF OMITTED]66223.003 [GRAPHIC] [TIFF OMITTED]66223.004 [GRAPHIC] [TIFF OMITTED]66223.005 [GRAPHIC] [TIFF OMITTED]66223.006 [GRAPHIC] [TIFF OMITTED]66223.007 [GRAPHIC] [TIFF OMITTED]66223.008 [GRAPHIC] [TIFF OMITTED]66223.009 [GRAPHIC] [TIFF OMITTED]66223.010 [GRAPHIC] [TIFF OMITTED]66223.011 [GRAPHIC] [TIFF OMITTED]66223.012 [GRAPHIC] [TIFF OMITTED]66223.013 [GRAPHIC] [TIFF OMITTED]66223.014 [GRAPHIC] [TIFF OMITTED]66223.015 [GRAPHIC] [TIFF OMITTED]66223.016 [GRAPHIC] [TIFF OMITTED]66223.017 [GRAPHIC] [TIFF OMITTED]66223.018 [GRAPHIC] [TIFF OMITTED]66223.019 [GRAPHIC] [TIFF OMITTED]66223.020 [GRAPHIC] [TIFF OMITTED]66223.021 Chairman Bond. Thank you very much, Mr. Commissioner. Those are very encouraging words, and we commend you for the direction you are taking. Before I turn to questions, though, I want to close the loop on a project that you were kind enough to help us initiate at the Committee's hearing last April on small business tax filing and recordkeeping burdens. After that hearing, as you recall, we posted on the Committee's web page the ``IRS Paperwork Unpopularity Poll.'' For the past year, we have collected input from small-business owners on the IRS forms, instructions, and publications, letters and notices most in need of revision. This morning, I am pleased to present you with the results of that poll. May I have the envelope, please? I always wanted to do that. Mr. Rossotti. I cannot wait to see what is coming out of that envelope. Chairman Bond. We have preserved the anonymity of each participant. We are providing you with the complete documents and the votes cast on each type. Without reviewing the entire report, let me announce the winners. The five most unpopular IRS forms are: No. 1, Form 1040, the U.S. Individual Income Tax Return. No surprise. No. 2, Form 941, the Employer's Quarterly Federal Tax Return. No. 3, Form 4562, Depreciation and Amortization. No. 4, Form 940, the Employer's Annual Federal Unemployment Tax Return. And No. 5, Form 1065, U.S. Partnership Return of Income. To give you a flavor of how candid the comments were, let me just quote from two of our participants regarding the depreciation and amortization, Form 4562. One participant wrote: I have a degree in accounting with honors from the University of Texas . . . and I have to read the rules on depreciation at least three times every year, and then just pray that I'm interpreting them correctly. And on Form 941, the Employer's Quarterly Federal Tax Return, a participant noted: Way too confusing for anyone without a degree or a CPA. Trying to figure out if I have a credit or owe money is difficult. My monthly liability and my quarterly liability is always just a few cents different. It's a lot of useless paperwork to find I've overpaid by 12 cents. He has the same problem I have with my checkbook. Commissioner, your willingness to examine these forms and documents is a testament to the IRS' overall efforts to provide greater service to America's taxpayers. It is an important step forward in reducing tax filing and recordkeeping burdens that small business and the self-employed encounter every day. I look forward to working with you to reduce the filing and compliance burdens. I thank you very much for participating with us in that poll. Mr. Rossotti. Thank you very much, Mr. Chairman. We have it right here and we will be looking at these comments very carefully. Of course, I think getting rid of the 1040 may be a little beyond our capacity. Chairman Bond. I do not think anybody asked to get rid of it, but perhaps some of the comments can help translate it into readily understandable language. Let me turn now to a series of questions. First, in your testimony you described the SB/SE Division's Taxpayer Education and Communication component. How will you assess whether these efforts are getting to the taxpayers, as opposed to the tax preparer, and whether they are effective? Mr. Rossotti. I think that one of the techniques that we have begun to use on evaluating all of our programs, and we will most definitely use it for these programs, the simplest way is just to ask the customer. In other words, survey the taxpayers on a regular basis. We are already doing this on many of our programs, and we are actually not only serving them but we are actually building this into the performance measures for our managers in our whole organization. Although we have not gotten this unit established yet, I feel sure that we will do that. We have some pilot projects that have been very interesting in different parts of the country that we are going to build on, and we have already been doing some surveying of the participants. A lot of times what you find, especially with the new business owners, is that they have a trade or a skill. I was out in California last week, and we have a program out there that is a good prototype I think of what we want to do for home-health care providers. There is quite a booming industry, people using people to come into their homes to provide help or health care for elderly people and others who need care. These people do have to get licensing, but many times they do not know anything at all about business or taxes. Both we and the State of California, in this case, found out that they were getting behind. We were going in and auditing them or finding they had not paid something and shutting down and that was not benefiting anybody. So we developed this program in the State of California, as part of the process where they get their licensing to give them basically a fairly simple 2-hour kind of primer on what needs to be done to file and pay their taxes. Then we went back and surveyed them and got very good responses from the participants in that kind of a program that say this is really helpful, I did not know anything about this. It really is a way to keep them where they need to be. So a very simple method of just simply asking them and seeing if they have gotten something out of it. In the longer term, we want to actually measure the effect on compliance of these activities, which is a more difficult thing to do, but we will definitely have that as part of our longer term plan. Chairman Bond. This Committee has taken a real interest in the plight of home-health care agencies. Last year we held hearings on it. The question is whether the Health Care Financing Administration will eliminate them, execute them before they can get around to paying their taxes. So I would say that, in this one area, you are probably not the least favorite agency of the Federal Government with which the home- health care providers have to deal. I am sure, as you talk to home-health care people, you will encounter some of those questions. I guess, fortunately or unfortunately, that is not your problem. It is ours, and a great concern of many members of this Committee and mine. With respect to the customer account service of the new SB/ SE Division, do you have some problems with the aging technological capabilities? You mentioned in your comments the need for technology. Will it be a hurdle to overcome the technological gap to provide the kind of customer service improvements you envision? Mr. Rossotti. Unfortunately, Mr. Chairman, I have to say it is a major hurdle, especially in that area. Let me put it this way, it is an obstacle or a barrier. By that, we do not mean that we are going to just wait and do nothing until we have replaced all our technology, because that is not a good approach. We are trying to do what we can. But just to give you a couple of examples, one of the problems we have is with just simply the timing of updating our files. Somebody calls us in and says I have paid such and such an amount, and it takes anywhere from--it could take as long as 16 days, because of the way our systems work, to actually get that transaction updated on what we call our master file. So in the meantime, it is possible that the person could get another notice or could call in again. You get this kind of cycle that is very, very bad. A lot of the times when people, you probably get complaints from your constituents, every member virtually does, about this kind of thing. From the taxpayer's point of view, it seems inexplicable. I have already called up. I have paid. I have settled this. And then they get another letter, and then they call up again. It is simply the fact that we have a 35-year-old system that takes up to 2\1/2\ weeks. That is a major problem. Another problem is with the notices. We send out 180 million notices a year. Many of them go to small businesses. Many of those people complain that they cannot understand what it is. I got a complaint recently from one of your colleagues, Senator Domenici, from one of his constituents, where he said the taxpayer was furious. I got a notice that said he had not paid by 1 cent and he got a penalty for $286. It looked very much like that, if you read this notice, like that is exactly what happened. Of course, we looked into this, and the reality was the penalty was not for the 1 cent. The 1 cent had nothing to do with it. It had to do with some late payments on a previous filing that just carried over to this notice. But the notice did not tell him anything about this. So it just looked to him like that is what the problem was. And yet, although we are trying to fix some of these notices, we do not have, in all cases, the data in our system, in our data base, to be able to actually carry it forward, to be able to explain fully to the taxpayer what is in these notices. So it is not just a matter of rewriting them, it is the underlying computer systems. These are just two examples. But fundamentally, we have a tax system, Mr. Chairman, that depends on computer systems that were, many of the key parts of it, actually designed and built in the 1960's and 1970's, and we are now in the 21st century. So we cannot really deliver what is expected appropriately by the taxpayers. That, of course, is why we have our whole technology modernization program which has begun, but which is a long-term program and which, of course, will require continued funding in order to be successful. Chairman Bond. I can sympathize with the fellow that had the notice. One of my first encounters with the IRS some 35 years ago when I was called in to the office because they claimed I had not paid the quarterly taxes I owed. I brought in the canceled check stubs, and I sat down with a gentleman who had not had his coffee that morning, he was not really awake. And I said here is our problem. You say I have not paid, but here is the canceled check that you deposited. He said let me go talk to my supervisor. So he came back after 10 minutes, and he said, ``Well, we are willing to compromise this.'' That is when I lost it. I said, ``No, no, no, I paid it. We are not compromising anything.'' I hope that that is long gone, but I know that my first experience set my teeth on edge a bit, so I think that is important, as well. In the testimony, you note that the third component of the SB/SE Division will be a traditional compliance function. As I indicated, I support that in order to ensure that the system is fair, the taxes owed are collected. Because of the complexity of the tax code, however, would you consider implementing a program under which penalties for first time taxpayer errors in mitigating circumstances are waived? Mr. Rossotti. As a matter of fact we do have, of course, the authority to abate penalties. The most common case where that occurs is the first time somebody has had to make, for example, a tax deposit. We actually have a program in effect right now, which we just fairly recently implemented within the last couple of years, where we automatically waive the penalties. I did find out that we were not, however, until very recently, notifying the taxpayer that they had this problem and that we had waived the penalty. So therefore, they were in the position where they could have done it a second time and gotten the penalty. This was an interesting finding. So we have got a system now where we at least send the taxpayer a letter when that happens to tell them look, you did not do this and we waived the penalty because obviously it was your first time, just to let them know what they are supposed to do the second time. I think that is a better system. So I agree with you, in many cases, we should do that. As a matter of fact, we have that program in the case of the tax deposits program. We certainly would look at that as a key criteria for abating penalties in any other situation where it was a first-time filer. We are not really trying to use penalties to penalize people, except where it is really a legitimate issue. It is just part of the tax system. We do have, fortunately, the authority in most cases to waive the penalties if it is justified. Chairman Bond. When can we tell small businesses they could expect to start seeing some substantive changes in the kind of assistance the IRS provides and/or the way it provides the information, as you describe in your testimony? Mr. Rossotti. Well, I think we could claim that, at a limited level, it has already begun, it has already happened. We have not waited until we have the new division started up. I mention some of the things, that is why I mentioned them in my testimony. I will not repeat them again, but the 24-hour phone service, the web site, the other forms of communication. And I think more generally, just our whole mission, our more balanced focus of how we want to administer the tax system, I think has had considerable effect in the way our employees--which have responded to this very well--deal with taxpayers. We have had a considerable focus on training and balance measurement of performance, for example. So those things have already happened. I think that there are some other things in the pipeline for next season, next filing season. I mentioned the checkbox. And we will begin, we hope, to specialize some of the phone service a little bit more. So I think that we have already done some things. We will have more things next year. I think over the following 2 years, 2001 and 2002, we will have then at least a major part of our organization in place. Assuming we can get the funding we requested for the staffing and the technology, we can then put in place some of these new initiatives that we have requested. So I think we have seen some improvement already, and I think there has been some feedback from our taxpayers to that effect. I hope it will accelerate over the next 2 years. Chairman Bond. Mr. Commissioner, as I said, there are several of my fellow Committee members who wanted to come. Obviously, they have been held up. We will leave the record open for questions that I have, which we will submit in writing. We will ask staff to prepare, by the end of this week, any questions that they have for you. We very much appreciate your willingness to come and be with us today. We will be hearing from the GAO next, and others, but I know your time is very busy so we appreciate your being with us. Commissioner Kehoe thank you for joining us, as well as the rest of your staff. We look forward to continuing to work with you and expect very good things from the SB/SE Division. Thank you very much for being with us today. Mr. Rossotti. Thank you very much, Mr. Chairman. Chairman Bond. Our next panel is Ms. Cornelia Ashby, Associate Director for Tax Policy and Administration Issues at the General Accounting Office. Ms. Ashby, it is a real pleasure to have you with us. I am also pleased this morning to release the study that the GAO undertook at my request on the IRS' efforts to construct a model that will estimate the tax burdens imposed on America's taxpayers. This first stage of this model focuses on taxpayers with wage and investment income and is expected to assess the pre-filing, filing, and post-filing burdens that taxpayers encounter. While this part of the model does not directly affect small-business owners and the self-employed, it will be the basis for what we anticipate will be the next stage, a burden model covering small-business taxpayers. I applaud the IRS for attempting to update its antiquated burden-estimation process, and I greatly appreciate the GAO's review and evaluation of the IRS' efforts as the agency works toward a model that will accurately assess the enormous tax compliance burdens borne by small-business owners in America. With that, Ms. Ashby, we will make your full statement and this other information part of the record. We thank you for your excellent assistance, and welcome you here today. STATEMENT OF CORNELIA M. ASHBY, ASSOCIATE DIRECTOR, TAX POLICY AND ADMINISTRATION ISSUES, GENERAL GOVERNMENT DIVISION, U.S. GENERAL ACCOUNTING OFFICE, WASHINGTON, D.C.; ACCOMPAINED BY KIRK R. BOYER, SENIOR EVALUATOR, KANSAS CITY FIELD OFFICE, AND JAMES A. WOZNY, ASSISTANT DIRECTOR, TAX POLICY AND ADMINISTRATION ISSUES, GENERAL GOVERNMENT DIVISION Ms. Ashby. Thank you, Mr. Chairman. We are pleased to be here today to discuss factors that have complicated small businesses' efforts to comply with Federal tax laws and IRS' efforts to provide better service to this important group of taxpayers. James Wozny and Kirk Boyer are accompanying me today. The IRS Restructuring and Reform Act of 1998 required IRS to place greater emphasis on meeting taxpayers' needs and to establish new operating units to serve groups of taxpayers with similar needs. In response, IRS is reorganizing into four operating divisions. No. 1, the Small Business/Self-Employed Operating Division will serve small corporations, partnerships, farmers and other self-employed individuals, a group that we will refer to as ``small businesses.'' Our remarks are based on results of the two studies that have been mentioned this morning that the Committee asked us to do, one on the extent to which the IRS' plans for SB/SE address factors that have complicated past interactions between small businesses and the IRS; and another on the IRS' new taxpayer burden estimation models. The first study is ongoing and our remarks today are based on preliminary results. We have completed the second study and you have just released our report. In summary, factors that have complicated interactions between small businesses and the IRS relate to the potential for non-compliance among small businesses, the way the IRS has structured its organization and allocated its resources, and the reluctance of small businesses to go to the IRS for help. Although the IRS' plans for SB/SE address these complicating factors, the IRS will face several challenges as it implements those plans. First, I will discuss the complicating factors. According to the IRS, small businesses are more likely than other taxpayers to have compliance problems. IRS data show, for example, that small businesses tend to have more collection cases involving withheld employment taxes than do larger businesses. Complexity, in combination with the resources available for dealing with that complexity, may account for some small business non-compliance. While small businesses, like larger ones, encounter complex tax issues and are subject to multiple layers of filing, reporting, and deposit requirements, they do not always have the kinds of resources on a continual basis that they need to understand and deal with those issues and requirements. Other factors that may contribute to a small business's potential for non-compliance are cash-flow limitations and the fact that business income, unlike wage and investment income, is generally not subject to withholding or some form of third party reporting. Because the IRS is organized and allocates its resources along geographic and functional lines, it is designed to handle a wide range of issues pertaining to all taxpayers with little or no focus on specific taxpayer segments, such as small businesses. As a result, the IRS does not have any easy means of accessing comprehensive information about small-business taxpayer accounts. This can inhibit its ability to identify and resolve tax-compliance problems of small businesses. Further, the IRS has historically allocated most of its resources to correcting problems rather than preventing them. This emphasis is especially problematic for small businesses that need assistance up front and that, absent help, are at a high risk of going out of business if problems arise. The results of our survey of a stratified random sample of 1,000 small businesses representing a study population of 398,105 small businesses nationwide showed that many small businesses were unaware of key IRS services or knew of the services but did not use them. Many expressed negative feelings about their past interactions with the IRS. Small business owners participating in IRS focus groups indicated that they had limited familiarity with or use for IRS' products and services because they relied on tax practitioners. Small business representatives told us that small businesses would rather rely on tax practitioners because they are too busy, they do not trust the IRS, or the IRS' services are not conveniently offered. IRS' plans for SB/SE indicate that it will address the factors we identified as complicating interactions between the IRS and small businesses by dedicating an operating division to small businesses, determining the characteristics and needs of that population, shifting more resources to prevention, partnering with tax practitioners and other organizations from which small businesses are likely to seek help, and by customizing its products and services to meet the needs of small businesses. The IRS should be in a better position to provide small businesses improved customer service. However, it will not be easy for the IRS to implement its plans for SB/SE. The IRS and the new division must confront several challenges. First, SB/SE will serve a large and diverse population, the members of which can migrate between operating divisions as their circumstances change from year to year. The diversity of the small business population will require the SB/SE staff to specialize in a wide range of tax issues and deal with a wide range of taxpayer needs. In addition, SB/SE is expected to do examination and collection work for other operating divisions. These responsibilities could stretch the capabilities of management and staff of SB/SE and dilute its taxpayer focus. Taxpayer migration also poses a challenge to the taxpayer focus intended by the reorganization. Antiquated information systems and a shortage of staff with needed skills will also challenge SB/SE. Antiquated computer systems have long hindered the IRS' efforts to manage operations and serve taxpayers, and improvements are critical to SB/SE's overall success. A shortage of staff with needed skills can also adversely affect SB/SE's ability to deliver new programs and services. For example, SB/SE intends to improve taxpayer education and assistance through research and analysis of taxpayer characteristics and behavior. However, according to the IRS, it does not have enough employees who possess the requisite skills such as market research, forecasting, and trend analysis. SB/SE, like the rest of the IRS, is challenged to develop an integrated performance management system that creates incentives for employee behavior that support organizational goals. Although the IRS has clearly made progress in implementing new performance measures, it does not have a measure for voluntary compliance. The absence of such a measure could hinder SB/SE more than other operating divisions because the SB/SE population generally has a greater potential for non- compliance. A second critical aspect of performance management is an employee evaluation system that reflects the organization's mission. The IRS recognizes that, with respect to SB/SE, a successful blend of customer service and compliance activities will require not only a substantial shift in employees' skills and abilities but also a significant change in employees' attitudes and behavior. A change that is dependent on employees being able to see a clearer connection between their day-to-day activities, their performance evaluations, and the overall organization's goals. Finally, in closing, let me briefly address another area of interest to the Committee, the IRS' efforts to estimate compliance burden on taxpayers. Besides measuring voluntary compliance, it is also important that the IRS be able to measure compliance burden. To do that, the IRS is pursuing a multi-phase strategy. Initially, the IRS is focusing on the design and implementation of models for estimating the Federal income tax compliance burden on taxpayers who are served by the new Wage and Investment Income Operating Division. The conceptual definition of compliance burden developed for that group, and the theoretical framework for measuring that burden are supposed to build the foundation for developing burden estimates for other taxpayer groups, including small businesses. The IRS has begun to implement its strategy by contracting for the development of two models that, when combined, should provide more reliable estimates of W&I taxpayers' Federal income tax compliance burden than current methodology. The models are also designed to provide the IRS with a greater capacity to analyze the impact of tax law and administrative changes on that burden. As with all such modeling, the specific capabilities and precision of the new models will depend on the quality of the underlying data. Mr. Chairman, this concludes my statement. We would be glad to answer any questions you have. [The prepared statement of Ms. Ashby follows:] [GRAPHIC] [TIFF OMITTED]66223.022 [GRAPHIC] [TIFF OMITTED]66223.023 [GRAPHIC] [TIFF OMITTED]66223.024 [GRAPHIC] [TIFF OMITTED]66223.025 [GRAPHIC] [TIFF OMITTED]66223.026 [GRAPHIC] [TIFF OMITTED]66223.027 [GRAPHIC] [TIFF OMITTED]66223.028 [GRAPHIC] [TIFF OMITTED]66223.029 [GRAPHIC] [TIFF OMITTED]66223.030 [GRAPHIC] [TIFF OMITTED]66223.031 [GRAPHIC] [TIFF OMITTED]66223.032 [GRAPHIC] [TIFF OMITTED]66223.033 [GRAPHIC] [TIFF OMITTED]66223.034 [GRAPHIC] [TIFF OMITTED]66223.035 [GRAPHIC] [TIFF OMITTED]66223.036 [GRAPHIC] [TIFF OMITTED]66223.037 [GRAPHIC] [TIFF OMITTED]66223.038 [GRAPHIC] [TIFF OMITTED]66223.039 [GRAPHIC] [TIFF OMITTED]66223.040 [GRAPHIC] [TIFF OMITTED]66223.041 [GRAPHIC] [TIFF OMITTED]66223.042 [GRAPHIC] [TIFF OMITTED]66223.043 [GRAPHIC] [TIFF OMITTED]66223.044 [GRAPHIC] [TIFF OMITTED]66223.045 [GRAPHIC] [TIFF OMITTED]66223.046 [GRAPHIC] [TIFF OMITTED]66223.047 [GRAPHIC] [TIFF OMITTED]66223.048 [GRAPHIC] [TIFF OMITTED]66223.049 [GRAPHIC] [TIFF OMITTED]66223.050 [GRAPHIC] [TIFF OMITTED]66223.051 [GRAPHIC] [TIFF OMITTED]66223.052 [GRAPHIC] [TIFF OMITTED]66223.053 [GRAPHIC] [TIFF OMITTED]66223.054 [GRAPHIC] [TIFF OMITTED]66223.055 [GRAPHIC] [TIFF OMITTED]66223.056 [GRAPHIC] [TIFF OMITTED]66223.057 [GRAPHIC] [TIFF OMITTED]66223.058 [GRAPHIC] [TIFF OMITTED]66223.059 Chairman Bond. Thank you very much, Ms. Ashby. Recognizing that most small businesses use tax preparers and that there seems to be a reluctance on the part of small business to go to the IRS for help, what do you think the IRS' role should be in providing help to small-business taxpayers? Ms. Ashby. We think, and the IRS in its plans seems to recognize this, that one avenue to help small businesses is to go to tax preparers, to use them as a resource, by first of all making sure the tax preparers understand what the requirements are and using them and partnering with them in getting the word to small-business owners and managers. Chairman Bond. I can see some happy tax preparers. I know they will be glad for that. To what extent are there small businesses these days who still try to do it on their own, and do not use tax preparers? Ms. Ashby. I will let my colleague, Mr. Boyer, who is more familiar with the results of our survey, answer, but overwhelmingly I think we found that most small businesses do use tax preparers. Mr. Boyer. Yes, sir. Based on our survey results, we found that 94 percent of small businesses use tax preparers of one sort or another. That does lead, as Ms. Ashby said, to a great challenge of communicating or providing up-front input for the taxpayers, when so many of them go through tax preparers. Chairman Bond. I would say that 6 percent is either very brave and very well-informed, or brave and . . . anyhow. Ms. Ashby. I wanted to make the point that while there is a higher-percentage usage of tax preparers to prepare tax returns, small businesses really need advice at other times during the year. They lack the availability of continual resources as they are planning their activities to put themselves in the best position tax-wise, and as they are doing the things they need to do during the course of a year to be prepared for that year-end filing. That is where small businesses have difficulty. Chairman Bond. Your testimony mentions several challenges facing the IRS as it implements its new operating division. Which of these challenges do you think will be most difficult to overcome? And how do you see them dealing with those challenges? Ms. Ashby. I think the most difficult challenge will be the computer systems. Chairman Bond. Getting back to the technology side of it. Ms. Ashby. Yes, as the Commissioner explained to us. He is right, the IRS cannot wait until those systems are sufficiently improved in order to do something. The IRS has to operate with what it currently has. But the difficulties involve, for one thing, identifying who small businesses are in order to be able to look at their characteristics and assess their needs. Right now, with the two master files, the individual master file and the business master file, some small businesses are in one, some are in another. They are intermingled with other types of taxpayers. So that, in and of itself, provides difficulty in terms of doing some of the things that the IRS would like to do in the future. And then, as the Commissioner stated, the problem with delays in posting transactions, and inaccuracies in the records themselves are a problem throughout the IRS and for anything it encounters or anything it tries to do. Chairman Bond. That is very helpful to know. I do not happen to serve on the Treasury Postal Subcommittee anymore, but we will be communicating to Chairman Campbell the information that both you and the Commissioner provided us. A final question, sort of a broader goal, what do you see, in addition to the computer issue, as being the principal risk to the success of the IRS efforts to develop the improved burden estimation models? Is there anything that they could be doing that they are not, that could minimize those risks? Ms. Ashby. I am going to let Mr. Wozny answer that, and I will just say, as I mentioned in my short statement and as we state further in our longer official statement, the underlying data that is the basis for the statistical equations that are used in the model are the most problematic. But I will let Mr. Wozny say more. Mr. Wozny. Right, and the most difficult data to come by are the information on the burden itself. The IRS, and its contractor, have decided to try to obtain that data through a survey. Past efforts have indicated that taxpayers have limited ability to recall the burdens very precisely. But the contractor is expert in conducting mail surveys and they will be trying to increase the response rate and to provide guidance to taxpayers in order to prompt their memory on the burdens. Chairman Bond. I would have to say they probably have the fisherman's veracity problem, because that 12-inch bass that you release today is 16 inches long by tomorrow. And next week you are telling everybody how you threw a 20-inch bass back. So I can imagine that there are some difficulties in concluding that. As I said earlier, we will keep the record open. We may have some further questions, and I invite my fellow Committee members and their staffs to submit their questions for the record by the end of this week. We thank you very much for your good work. As always, the General Accounting Office is most helpful to us in obtaining an independent review in order to confirm or amplify the information that we have received. Ms. Ashby, Mr. Wozny, Mr. Boyer, thank you very much for being with us today. Ms. Ashby. Thank you, Mr. Chairman. Chairman Bond. Now, Ms. Abalos, can you hear me? Ms. Abalos. Yes, I can. Can you hear me? Chairman Bond. Yes, the wonders of modern technology come through, and we are very pleased that you can be with us today. We also will have, at the table, Mr. Roy Quick. We thank you both very much for joining us today, for taking the time to come and be with us through the means of modern technology. As I indicated before, we will invite Ms. Abalos to summarize her testimony, and we will include the full written testimony in the record. Ms. Abalos, we invite you to make your comments. STATEMENT OF SANDRA A. ABALOS, CPA, PRESIDENT, ABALOS & ASSOCIATES, P.C., PHOENIX, ARIZONA Ms. Abalos. Thank you so much for providing the opportunity to give testimony via the teleconference. I did not hear the opening remarks, but the sound seems to be fine now. Taxation and all the issues surrounding tax compliance is one of the difficult aspects of running a small business. Compliance becomes not an issue of intent, but it becomes an issue of education, awareness and resources. Historically, the relationship between the Internal Revenue Service and the small business community could be likened to ``swimming with the sharks''. This fear factor approach, however, fosters an ``us against them'' mentality that has produced really less than desirable results. I have reviewed the mission and organizational structure of the Small Business/Self-Employed Operating Division of the IRS and I must say that I am very encouraged by the concentrated customer service focus of the SB/SE Operating Division. I think the IRS is to be commended for their efforts in identifying the distinct market segments of the taxpaying community and then developing an organizational structure that will provide meaningful customer service and support. I am particularly interested in the organizational segment named, Taxpayer Education and Communication Organization, the TEC. This is described as a ``customer-focused organization that routinely solicits information concerning the needs and characteristics of its customers and implements programs based on the information received.'' Within the TEC structure is the TEC Partnership Management arm that will interface with certain user groups. The TEC Partnership Management will proactively partner with Government agencies, small business organizations, practitioner groups, and other professional and volunteer organizations. The ETAAC, Electronic Tax Administration Advisory Committee, prepares an annual report to Congress, which is forthcoming. It is due at the end of June. In considering a strategy to increasing electronic filing participation within the business community, we included ``Community Alliance Initiatives'' within the report. I happened to author this section of the ETAAC report and I included it in full in my written testimony. The report describes a formal working relationship between the IRS and the respective user groups very similar to what is envisioned in the TEC partnership management initiative. I had envisioned this working relationship between the small business community and the IRS before really reviewing the express directives of the IRS SB/SE Operating Division. Thus, I was really excited to see this concept in the structure. The community alliance initiatives of the ETAAC report reads in part: The electronic filing goals established by Congress require considerable participation from a broad spectrum of taxpayers and tax practitioners. The simple wage and interest type of returns account for the majority of electronically filed returns to date. The future growth and success of electronic filing will largely depend on the increased participation of the tax preparer community and the sanction of the small business community. The tax preparer community is extremely diverse in tax practice procedures and in client profiles. For some preparers, electronic filing provides efficiencies and incentives. For other preparers, electronic filing presents a burden. There are tremendous opportunities for tax preparer associations to provide constructive input, opinion, and direction into electronic filing process and procedures as they specifically relate to divergent preparer practices and taxpayer profiles. The small business community, on the other hand, is very sensitive to the change, complexity and cost. A seemingly simple initiative will emerge as a compliance nightmare within the small business community. The advance input and endorsement of the small business community will ensure a successful program. When I am sitting in the ETAAC meetings, just as an example, one of the Committee members said, ``Gosh, the small business community had a cow with EFTPS. We do not get it.'' Well, had I been on the Committee at that time, I could have told you exactly what the cow was going to be about and perhaps prevented some of that from happening. The TEC Partnership Management Division is the vehicle to produce such results. The IRS needs to identify and resolve the barriers to electronic filing during the process development phase, rather than reacting to an outcry after the program rolls out. In our ETAAC meeting of March 1, 2000 we heard from Sherill Fields regarding the current State of business e-file. The issues and barriers impeding business e-file, as she presented, are substantial and material. One of the issues was limited research has been conducted on business products and customers. In listening to the well structured presentation on the business e-file program, I could not help but feel like the IRS is building a bad field of dreams. I even said that at the meeting. I told her, you can build it, but they will not come. Electronic filing will be a success if it is embraced voluntarily due to ease of use and appropriate user incentives. Congress established an e-filing goal of 80 percent by the year 2007. My single request, on behalf of the small business community, is that the electronic filing be successful as a viable option and not be made into another Government mandate. The IRS SB/SE Operating Division mission statement talks the talk of a new partnership and relationship building with the small business community. Now they need to walk the walk. Because done right, electronic filing will flourish. I sincerely appreciate the opportunity to testify and I would welcome any questions that you may have. [The prepared statement of Ms. Abalos follows:] [GRAPHIC] [TIFF OMITTED]66223.060 [GRAPHIC] [TIFF OMITTED]66223.061 [GRAPHIC] [TIFF OMITTED]66223.062 [GRAPHIC] [TIFF OMITTED]66223.063 [GRAPHIC] [TIFF OMITTED]66223.064 Chairman Bond. Thank you very much, Ms. Abalos. You already answered the first question I was going to ask, whether the 80 percent should be a goal or a mandate. I have long taken the position that if this electronic filing is the best thing since sliced bread, then we ought to be able to sell it to small business as sliced bread and not make it a mandate. I will come back to you with questions, but first I want to have the testimony of our other witness, and we will have an opportunity for you to listen to his testimony. If you wish to make any comments on each other's testimony, that always makes it fun. Now I will turn to our good friend Roy Quick, EA, Principal, Quick Tax and Accounting Service of St. Louis, Missouri. Roy, welcome, glad to have you back STATEMENT OF ROY M. QUICK, JR., EA, PRINCIPAL, QUICK TAX & ACCOUNTING SERVICE, ST. LOUIS, MISSOURI Mr. Quick. Thank you very much, Mr. Chairman. My name is Roy Quick, I am an enrolled agent and a principal in Quick Tax & Accounting Service, a private, home- based tax and accounting service located in St. Louis County, Missouri. I am also a member of the IRS Commissioner's advisory Council, or IRSAC, since November of last year. I am pleased to present this testimony on the IRS modernization effort. First of all, let me say that I am very glad to see a change in the way the IRS does business by way of involving ``outsiders'' in the strategic planning process. A few examples of this are the consulting firm of Booz-Allen & Hamilton, a contractor to the IRS, invited the White House Conference on Small Business tax chairs to review the strategic planning process in the initial phases of the design and modernization. Commissioner Rossotti has selected seven members of his 15 member advisory council who have small business experience. In addition to the IRSAC, other specialized advisory councils with interested stakeholders have been formed, for example the ETAAC that Sandy serves on. Two other initiatives that are a sign of the ``new IRS'' are the establishment of ``problem solving days'' and the Electronic Tax Administration road shows. The problem solving days bring together representatives from the IRS and taxpayers with unresolved problems to try and find common solutions. Also, a representative from the Taxpayer's Advocates Office is available at these locations to assist taxpayers with still unresolved problems. At a recent problem solving day in St. Louis, which was held on a Saturday, the IRS and the Missouri Department of Revenue joined forces for a one-stop shop. Electronic Tax Administration road shows that I mentioned are designed to educate and encourage the practitioner community to embrace electronic filing. Key elements of these shows are the availability of national office personnel to speak on topics of interest to the practitioner community and also the vendor displays on products that the practitioners would be able to use. You have heard from previous witnesses regarding the different operating divisions, so I will not go into detail here, except to say that this diverse group of small-business and self-employed taxpayers will have interaction with the service during the pre-filing, filing, and post-filing phases. It is estimated they will have between 4 and 60 contacts per year. Taxpayer Education and Communication, or the TEC, will handle the pre-filing function. The three key functions within TEC are research and product development, partnership outreach, and taxpayer education. The strategy behind the establishment of TEC, which I think is excellent, is to assist taxpayers initially to avoid or reduce problems and burden in the filing and post-filing phases. Basically, if you solve a problem on the front or educate the taxpayer on the front end, you will not have problems later on. If this strategy is successful, it should reduce the overall costs of tax administration. Therefore, it is critical to the reorganization effort that the TEC be fully staffed and fully funded as soon as possible. The IRS has developed two products that should be key in the delivery of taxpayer education. The first product is the IRS web site. Taxpayers are able to obtain up to date information and forms by accessing www.irs.gov on a 24/7 basis. According to Commissioner Rossotti, there have been over 1 billion hits to this web site. The Service has done a good job in developing this web site, but the addition of a hypertext search engine would make it far more useful. With the addition of this tool, one could search for information on regulations and forms of a particular topic of interest. The second product of interest in the taxpayer education is the small business resource CD that was mentioned earlier. This computer program covers the life cycle of a small business from pre-startup to closing a business. The product was developed jointly by the IRS and the SBA. I understand that it is being distributed to all the Small Business Development Centers across the country. The contents of this CD, however, should be on the IRS web site, as well as in all the public libraries for access. This type of partnership or strategic alliance is another function of TEC. I am encouraged by the effort to work with the various stakeholder groups. The IRS, practitioner groups, trade organizations, educational institutions, and other Government agencies have so much to gain by being partners in tax administration. At the same time, the Service is looking to provide taxpayer education to the small business community, this same community may not be looking to the Service as the best source of information. The figure I had was over 80 percent of small business tax returns are prepared by a tax professional. I was interested to hear Mr. Boyer's figure this morning, as well. Chairman Bond. Even better news. Mr. Quick. For the same reason that I do not fix my own car, a lot of people do not prepare their own taxes. It is not the highest and best use of my time. Therefore, outreach to the professional community and trade groups is essential. One area of concern in taxpayer education is the ability of the IRS to educate taxpayers. The Service has many technically proficient employees, well versed on tax law and procedures, but these same employees may not possess the necessary skills to be a good teacher. I would suggest the possibility of pairing knowledgeable IRS personnel with trained educators to develop suitable training materials. It may be necessary to look outside the Service for adjunct faculty. Sufficient funding needs to be available to accommodate this reality. Another area of concern is the ability of the Service to retrain some of its examination and collection personnel and their perception of small business. Most earners are very hard working and law-abiding taxpayers willing to pay their fair share of taxes but not a penny more. In light of today's complex tax code, there is a big difference between an honest mistake and tax fraud. This trust building will take time on both sides of the table. In talking with other IRSAC members, there are some concerns about the intradivisional and cross-divisional communications. This was a valid complaint in the old IRS. The design teams are trying to address this issue and I will be interested to see their results. It is important to remember that this reorganization is a work in progress and no doubt there will be a few glitches, as there are in any private sector corporate reorganization. The ability of the Service to correct these problems in a timely manner, and the success of the TEC function, will greatly enhance the success of the entire process. One final message that I would like to suggest to Congress is that they ensure adequate funding is available for this reorganization effort, specifically in the information systems area. While admittedly, the Service has not always spent technology dollars wisely in the past, I believe the IRS is on the right track in upgrading their--for lack of a better word-- mature systems and technology. The installation of new equipment and the establishment of integrated real-time information systems will take several years to accomplish. However, once in place, these systems should enable the IRS to deliver timely and accurate customer service that the American people deserve. Thank you for the opportunity to present this testimony, and I would be pleased to answer any questions. [The prepared statement of Mr. Quick follows:] [GRAPHIC] [TIFF OMITTED]66223.065 [GRAPHIC] [TIFF OMITTED]66223.066 [GRAPHIC] [TIFF OMITTED]66223.067 [GRAPHIC] [TIFF OMITTED]66223.068 Chairman Bond. Thank you very much, Roy. You answered my second question, about how they can improve the education and outreach effort by saying they need to get somebody who knows how to be an educator. Let me turn back to Ms. Abalos. Ms. Abalos, are there any barriers that will prevent small business from electronically filing their taxes? Can you explain how this electronic filing could be a burden on small businesses? Ms. Abalos. This year was the first year that our practice offered electronic filing for customers. They had two questions, every time they came around, two questions regarding electronic filing. What does it cost? And how does it benefit me? The answer was it costs more because it takes us more time to file the return electronically. This year, just to get some familiarity with the process, I provided that service to my clients free of additional charge. But then honestly, for our practice profile, there was no benefit. A CPA practice does not do the run-of-the-mill H&R Block type returns where somebody comes in and presents their information and they sit there and have a return done, sign the 8453 and be off and it is finished. We gather information. Sometimes there is additional information that comes in. And when we finish that return and send it out, we want to be completed with it. So there was even additional time and correspondence back and forth with the client and the practitioner in getting the signed signature forms and so forth. With the business community, there is even an additional barrier. This is just an example of where I cannot imagine that the Internal Revenue Service would understand these kinds of barriers or identify them because they are not practicing in the mode we are. I will give you a perfect example. In filing most of the business returns, depreciation is a big component of the tax return, and it is very, very complex. We do not use the depreciation part of our software. The software package that would file the returns electronically has a depreciation component. We do not use that in computing the depreciation for our business clients. We have a separate package that is a full-blown depreciation package that we can use year-round in doing planning or preparing financial statements and so forth. And that is how we do the depreciation part or component of the return. That prints a physical paper, 4562, which we include with the paper business return. So just as an example, how would that work in electronic filing? How would you capture this data that is on a separate, independent, software package into the e-file return when we do not do it that way? So it is just an example of it taking more time and there not being an offsetting benefit to either the small business community or the practitioner community. Does that answer the question? Chairman Bond. That is a very good point. If it takes longer and costs more, that is a problem. I can certainly understand how your clients need to use this information throughout the year. And unless technologically we can figure out a way to move from one program into the other, it does sound like a real burden. One other question I have, Ms. Abalos. In the Commissioner's testimony, he notes the IRS has expanded the online filing program for Form 941, the Employer's Quarterly Federal Tax Return. Have you had any experience with this program and its potential benefits or downsides for a small firm? Ms. Abalos. Most small businesses do not prepare their own payroll tax reports. I will tell you that as a CPA practitioner, and I have probably 200 small business accounts. I represent a wide array of the small business community. We do not prepare them anymore, either. I do not even do my own payroll tax reports. We have out-sourced that function to a payroll service provider. No. 1, they do it faster. And again, they do it at less cost and that provides us with a real benefit. So the electronic filing of the 941s, I see that as a real benefit for the payroll service providers like Paychex or ADP, those are two of the bigger ones here in Arizona. I really do not see the small business community benefiting from a direct 941 e-file because they are not preparing their 941s to begin with. Chairman Bond. Thank you, Ms. Abalos. Mr. Quick, would you like to comment on any of those items before we move on to questions? Mr. Quick. Certainly, Mr. Chairman. We do electronic filing for all of our clients. The only impediment we have found with electronic filing is that not all the forms are acceptable. There are certain forms that some of our clients have that cannot be filed electronically. One advantage that we have with the electronic filing is that returns go in error free. There is an error checking mechanism to make sure that the returns go in without any errors. It cross-checks Social Security numbers, which is one of the prime errors on paper filed returns. It eliminates all math errors. The Service gets the return error free and the taxpayer gets an acknowledgement or a receipt that the Service got their return and they know that it has been accepted. Our clients, even the ones with balances due, have been filed electronically and they seem to enjoy it. It does create some additional data entry for us but we feel that it is worth it. Chairman Bond. How would you assess the IRS efforts to include the Taxpayer Advocate in the new SB/SE Division? And what has been your experience as a practitioner with the Advocate? Mr. Quick. My experience with the Advocate's office has been excellent. I cannot say enough for Val Oveson and his staff. The Taxpayer Advocate will have, or there will be a Taxpayer Advocate's representative in each of the SB/SE territories. The one experience we had, which I cannot go into great detail due to client privacy, but they were able to solve a long-standing problem in a matter of a day with the service center. Chairman Bond. That probably sets a record. In closing the formal questions, first Mr. Quick, if you could tell the IRS one thing to do in the new SB/SE Division, what would be the most important one? Mr. Quick. My feeling on this, Senator, is that most small- business owners are law-abiding tax paying citizens and willing to pay their fair share. I would ask that they be not presumed guilty by virtue of being small-business owners, and that the IRS live up to its mission statement. Chairman Bond. Thank you very much, Mr. Quick. Ms. Abalos. Ms. Abalos. I would ask that they formally activate that TEC Partnership arm and let us help you. We are doing the work here in the trenches and we can provide constructive input that will help this process. So before you develop something and roll it out, take our comments, consider them, and act on them, just like this directive says. Chairman Bond. Those are all very worthwhile, very useful comments. We sincerely appreciate your testimony. We are delighted to have the practical view from the tax preparers for small business on how this is working, can work, and should work. Before I conclude, once again I want to express my thanks to Commissioner Rossotti as well as, to Ms. Ashby and her team at the GAO, and especially our witnesses serving small business. Your insights and efforts on behalf of small business are greatly appreciated, and we urge everybody to continue their hard work for small business and the self-employed. As we have heard this morning, the IRS' new Small Business/ Self-Employed Division is expected to stand up on October 1 of this year. I extend my support, encouragement, good wishes, and sympathy to Joe Kehoe and his deputy, Dale Hart, as they undertake the enormous task of getting this critically important division off the ground. While I think there have been great efforts that have gone into planning, the real work will begin when the new division becomes operational. To ensure the IRS improvements in small business service do not stop in the planning stages, I will be asking the GAO to undertake a new evaluation of the SB/SE Division and report back to the Committee next year on the changes, and I am confident improvements, that the agency has made for taxpayers in this incredibly important sector of our economy. I thank all of our participants. The record will remain open for 2 weeks for those of you who are watching this, either here in the room or by means of our web site, we do invite further comments. I think there have been many good ideas that have been aired today and we would welcome comments, either supportive or adding a different perspective, that will enable us to share with the IRS suggestions that may be most helpful. With that, I thank all participants. The hearing is adjourned. 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