[House Hearing, 109 Congress]
[From the U.S. Government Printing Office]





       LESS IS MORE: THE INCREASING BURDEN OF TAXPAYER PAPERWORK

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

                                HEARING

                               before the

                   SUBCOMMITTEE ON REGULATORY AFFAIRS

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 25, 2005

                               __________

                           Serial No. 109-35

                               __________

       Printed for the use of the Committee on Government Reform


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


                                 ______

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                     COMMITTEE ON GOVERNMENT REFORM

                     TOM DAVIS, Virginia, Chairman
CHRISTOPHER SHAYS, Connecticut       HENRY A. WAXMAN, California
DAN BURTON, Indiana                  TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida                PAUL E. KANJORSKI, Pennsylvania
GIL GUTKNECHT, Minnesota             CAROLYN B. MALONEY, New York
MARK E. SOUDER, Indiana              ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio           DENNIS J. KUCINICH, Ohio
TODD RUSSELL PLATTS, Pennsylvania    DANNY K. DAVIS, Illinois
CHRIS CANNON, Utah                   WM. LACY CLAY, Missouri
JOHN J. DUNCAN, Jr., Tennessee       DIANE E. WATSON, California
CANDICE S. MILLER, Michigan          STEPHEN F. LYNCH, Massachusetts
MICHAEL R. TURNER, Ohio              CHRIS VAN HOLLEN, Maryland
DARRELL E. ISSA, California          LINDA T. SANCHEZ, California
GINNY BROWN-WAITE, Florida           C.A. DUTCH RUPPERSBERGER, Maryland
JON C. PORTER, Nevada                BRIAN HIGGINS, New York
KENNY MARCHANT, Texas                ELEANOR HOLMES NORTON, District of 
LYNN A. WESTMORELAND, Georgia            Columbia
PATRICK T. McHENRY, North Carolina               ------
CHARLES W. DENT, Pennsylvania        BERNARD SANDERS, Vermont 
VIRGINIA FOXX, North Carolina            (Independent)
------ ------

                    Melissa Wojciak, Staff Director
       David Marin, Deputy Staff Director/Communications Director
                      Rob Borden, Parliamentarian
                       Teresa Austin, Chief Clerk
          Phil Barnett, Minority Chief of Staff/Chief Counsel

                   Subcommittee on Regulatory Affairs

                 CANDICE S. MILLER, Michigan, Chairman
GINNY BROWN-WAITE, Florida           STEPHEN F. LYNCH, Massachusetts
CHRIS CANNON, Utah                   WM. LACY CLAY, Missouri
MICHAEL R. TURNER, Ohio              CHRIS VAN HOLLEN, Maryland
LYNN A. WESTMORELAND, Georgia

                               Ex Officio

TOM DAVIS, Virginia                  HENRY A. WAXMAN, California
                       Ed Schrock, Staff Director
                         Dena Kozanas, Counsel
                          Lauren Jacobs, Clerk
                     Krista Boyd, Minority Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on May 25, 2005.....................................     1
Statement of:
    Everson, Mark W., Commissioner, Internal Revenue Service; and 
      John D. Graham, Ph.D, Administrator, Office of Information 
      and Regulatory Affairs, Office of Management and Budget....     9
        Everson, Mark W..........................................     9
        Graham, John D...........................................    36
    Steinberg, Leonard, the Steinberg Group; Keith Hall, Hall and 
      Hughes, PLLC; and Larry Gray, Alfermann, Gray and Co.......    58
        Gray, Larry..............................................    77
        Hall, Keith..............................................    68
        Steinberg, Leonard.......................................    58
Letters, statements, etc., submitted for the record by:
    Everson, Mark W., Commissioner, Internal Revenue Service, 
      prepared statement of......................................    12
    Graham, John D., Ph.D, Administrator, Office of Information 
      and Regulatory Affairs, Office of Management and Budget, 
      prepared statement of......................................    38
    Gray, Larry, Alfermann, Gray and Co., prepared statement of..    79
    Hall, Keith, Hall and Hughes, PLLC, prepared statement of....    70
    Miller, Hon. Candice S., a Representative in Congress from 
      the State of Michigan, prepared statement of...............     3
    Steinberg, Leonard, the Steinberg Group, prepared statement 
      of.........................................................    60

 
       LESS IS MORE: THE INCREASING BURDEN OF TAXPAYER PAPERWORK

                              ----------                              


                        WEDNESDAY, MAY 25, 2005

                  House of Representatives,
                Subcommittee on Regulatory Affairs,
                             Committee on Government Reform
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2 p.m., in 
room 2154, Rayburn House Office Building, Hon. Candice Miller 
(chairwoman of the committee) presiding.
    Present: Representatives Miller, Lynch, and Souder.
    Staff present: Ed Schrock, staff director; Dena Kozanas, 
counsel; Lauren Jacobs, clerk; Krista Boyd, minority counsel; 
Cecelia Morton, minority office manager.
    Ms. Miller. I would like to call the hearing to order. I 
welcome you all today.
    We are here today to discuss the ongoing oversight of the 
Internal Revenue Service in its taxpayer paperwork burden 
reduction efforts, particularly in relation to the provisions 
under the Paperwork Reduction Act. Like paying taxes, paperwork 
is an inevitable part of an American adult's responsibilities. 
Each year, Federal agencies collect a variety of information 
from individuals. This information might be helpful for the 
agencies, but it can also be a huge nuisance for individuals 
and businesses.
    For many individuals, tax paperwork is confusing and very 
time consuming. In 2001, the Joint Committee on Taxation 
released a study that stated individual taxpayers filing Form 
1040 could encounter 79 lines on their return, 144 pages of 
instructions, 19 separate worksheets, as well as the 
possibility of filing numerous other forms.
    For small businesses, the burden is equally troublesome. In 
2001, the Small Business Administration Office of Advocacy 
released a report on the regulatory costs of tax paperwork 
compliance faced by small firms. At that time, they found that 
a typical small business faced a burden of over $1,200 per 
employee, actually, to comply with tax paperwork, recordkeeping 
and reporting requirements.
    Small businesses, of course, make up 99 percent of all U.S. 
business and employ over one-half of our American work force. 
Yet the tax compliance burden for them is more than twice that 
which is faced by large firms.
    Paperwork burden is not a new problem. The desire to reduce 
it has long been recognized by this Congress and others before 
it. In fact, in 1980, the Congress enacted the Paperwork 
Reduction Act and established the Office of Information and 
Regulatory Affairs within the Office of Management and Budget, 
whose primary responsibility is paperwork reduction. In 1986 
and then again in 1995, Congress passed amendments to the PRA 
and set Government-wide paperwork reduction goals of 10 percent 
for fiscal years 1996 and 1997 and then a 5 percent reduction 
for each of the next 4 fiscal years, and annual paperwork goals 
thereafter that reduced burden to ``maximum practical 
opportunity.''
    Unfortunately, to this date, these goals have not been 
realized, and we certainly hope that today's hearing will help 
us understand how the Congress can assist the agencies in 
achieving these goals. By the end of fiscal year 2001, these 
reduction goals would have placed the Government-wide burden at 
4.5 billion hours. But these burden levels were a significant 
contrast to the mandated 35 percent reduction goal of 7.6 
billion hours.
    And now the burden is about 8 billion hours. Interestingly 
enough, one agency is accountable for 80 percent of this 
figure--of course, the Internal Revenue Service.
    Information collected as part of the tax system is a 
principal ingredient in a very overstuffed pot of paperwork 
burden imposed by the Federal Government. Present estimates 
show that nearly 6.5 billion hours of paperwork burden is a 
result of the IRS. Even though the IRS accounts for 80 percent 
of the burden, it does not account for 80 percent of the 
information collections. In fact, the current estimates show 
that out of nearly 8,000 information collections Government-
wide, IRS collections only account for approximately 800, which 
is roughly 10 percent. Of those 800 forms, only 10 are culpable 
for producing about 80 percent of the burden. Of course, the 
basic tax returns, Form 1040 and its associated schedules, 
measure at 1.6 billion hours or 24 percent of all IRS burden.
    Certainly to be fair, much of the IRS challenge in reducing 
taxpayer burden is a complex Internal Revenue Code passed by 
Congress. However, the Code's complexity also underscores the 
importance of creating tax forms and instructions that are as 
clear as possible and as understandable as possible. Moreover, 
even though a statute may require the IRS to take certain 
action, the agency does have the discretion in the manner and 
the frequency with which the information is collected, and even 
if it needs to be collected.
    The IRS has taken its own initiatives to curb the rise in 
its paperwork burden. In 2002, the IRS created the Office of 
Taxpayer Burden Reduction. And the IRS has also expanded the E-
government projects that it has by creating an interactive 
customer service link on the Web site, and increasing efforts 
for e-filing. Although the IRS administrative and E-government 
initiatives are a huge step in the right direction, it will 
certainly take much more to tackle this 6.5 billion hour 
goliath. So we're hoping that today's hearing will examine how 
Congress may need to make adjustments to the PRA to make 
significant changes to the burden.
    I certainly look forward to working with all of you today 
and hearing the testimony of our witnesses. And at this time, I 
would like to yield to the ranking member, Representative 
Lynch, for his opening statement.
    [The prepared statement of Hon. Candice S. Miller follows:]

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    Mr. Lynch. Thank you, Madam Chairwoman.
    First of all, I want to begin by thanking you for your 
willingness to look at this issue. I want to thank Dr. Graham 
and Commissioner Everson for your willingness to come before 
the committee and help us out.
    I do share in the spirit of this hearing in terms of the 
overarching goal of reducing the paperwork for U.S. taxpayers 
in this process. I do understand that sometimes the actions 
that we take as Members of Congress, we actually make that 
problem worse rather than help it. So I do not see it as your 
responsibility alone, I think it is a shared responsibility 
between we in the Congress and yourselves. You have just been 
given a more specific role in this, I think. I understand I'm 
not holding anyone here to blame for what we have been unable 
to do in the Congress, which is to sort of simplify the whole 
process on our end.
    I am concerned, however, that while we go at this goal, and 
it is a laudable goal and we should stay at it, of reducing the 
paperwork and the time burdens on Americans who just want to 
file their tax returns and pay their tax obligations, while 
we're in this process, it seems that the progress is slow. 
Again, that is not your fault, it is our shared responsibility.
    However, I do see across the country in various IRS 
offices, and because 80 percent of this, of the paperwork 
instituted by Government activity is the responsibility of the 
IRS or in their jurisdiction, that seems to be where we can 
realize the greatest gains, I guess, in our mission. I see that 
across the country we are reducing staff would who otherwise be 
available to help taxpayers either in call centers or in walk-
in centers to help them with the process, which remains fairly 
complicated for the average taxpayer.
    Until we can reduce this to a level where hopefully people 
can handle it on their own without professional help, I would 
like to express my concern about sort of a premature reduction 
in work force for those who would help taxpayers within the IRS 
grapple with the forms and with the whole process.
    But I do appreciate both of you coming before us and 
working on this problem. I think this is a bipartisan effort. 
That is the way we approach it here in terms of a mutual goal, 
shared by both Republicans and Democrats here in the Congress.
    Thank you, Madam Chairwoman.
    Ms. Miller. Thank you. If I could just remind the 
witnesses, in the interest of time here, we try to keep your 
oral comments to about 5 minutes. In fact, you've got these 
little boxes in front of you, when you see the yellow light it 
shows you have 1 minute remaining, then the red light of 
course, says that 5 minutes is up. If you are still speaking at 
that time, just try to wrap it up if you could.
    It's the process of our committee here that we swear in all 
of our witnesses, so if you could rise, please, and raise your 
right hands.
    [Witnesses sworn.]
    Ms. Miller. Thank you very much.
    Our first panelist today is Commissioner Mark W. Everson. 
He is the Commissioner for the Internal Revenue Service, of 
course. Commissioner Everson was actually confirmed in May 
2003. Prior to coming to the IRS, Commissioner Everson served 
as the Deputy Director of Management for the Office of 
Management and Budget. He is the 46th Commissioner of the IRS.
    Commissioner Everson, we want to thank you very much for 
attending the hearing today. We look forward to your comments, 
sir.

 STATEMENTS OF MARK W. EVERSON, COMMISSIONER, INTERNAL REVENUE 
  SERVICE; AND JOHN D. GRAHAM, PH.D, ADMINISTRATOR, OFFICE OF 
 INFORMATION AND REGULATORY AFFAIRS, OFFICE OF MANAGEMENT AND 
                             BUDGET

                  STATEMENT OF MARK W. EVERSON

    Mr. Everson. Madam Chairwoman, Mr. Lynch and members of the 
subcommittee. Thank you for the opportunity to testify on the 
Internal Revenue Service's continuing efforts to reduce 
unnecessary paperwork burdens on the taxpayer.
    As this committee well knows, individuals and businesses 
spend more than 6 billion hours a year on tax paperwork and 
other tax challenges. Together, the Internal Revenue Code and 
regulations run for millions of words. In terms of pages, that 
is twice as many pages as 20 years ago.
    Burden is a direct result of the complexity of the Code. 
Not only does complexity cause economic burden, it also 
obscures understanding. Complexity in the Tax Code compromises 
both our service and enforcement missions. Taxpayers who seek 
to comply but cannot understand their tax obligations may make 
inadvertent errors or may ultimately throw up their hands and 
say, why bother?
    In the enforcement context, complexity facilitates 
behaviors at variance with those intended by Congress. Our goal 
is to impose the least amount of burden necessary for taxpayers 
to meet their tax responsibilities.
    A certain amount of paperwork, of course, is essential to 
tax collection. Taxpayers must report what they make to the 
IRS. Their incomes and businesses can be complex. Their 
deductions and credits can be complex. So the paperwork can be 
complex. That having been said, we seek to reduce unnecessary 
paperwork and make the filing process as simple and convenient 
as possible.
    The Office of Taxpayer Burden Reduction at the IRS has 
aggressively pursued burden reduction initiatives. Since the 
Office was launched in January 2002, we have reduced taxpayer 
burden by over 200 million hours. One area of our initiatives 
involves filing thresholds. We recently increased the Federal 
unemployment tax deposit threshold from $100 to $500, reducing 
burden for over 2.6 million employers.
    We also increased the threshold for filing Form 1040EZ and 
Form 1040A from $50,000 to $100,000, decreasing taxpayer burden 
by more than 5 million hours. And for small businesses, we 
increased the threshold for business expenses reported on Form 
1040CEZ from $2,500 to $5,000. This enabled about 500,000 more 
taxpayers to file this simpler form.
    We are also working to reduce burden through other means. 
For example, we are simplifying forms and instructions. We 
simplified the Schedules K-1 for partnerships and S 
Corporations, reducing burden by an estimated 95 million hours 
for the 20 million taxpayers who file these forms. In addition, 
we are actively considering allowing very small employers to 
file their employment taxes returns annually instead of 
quarterly. We estimate that this action alone could reduce 
burden on approximately 1 million businesses by some 50 million 
hours.
    The revolution in electronic filing also helps to reduce 
the paperwork burden. Electronic filing of taxes requires less 
paper and is more accurate. Computers catch mistakes that would 
have been made on paper and required more time to correct. This 
year for the first time more than half of all individual 
taxpayers have filed electronically. Starting next year, we 
have mandated that all larger corporations file electronically. 
This will reduce significant amounts of paperwork and speed up 
audits.
    Congress has a key role to play in reducing the paperwork 
burden. Dealing with complexity and paperwork is easier if the 
Tax Code is stable. But tax laws change quite frequently. I'm 
sure you saw this last week, but take for example the Jobs Act 
that you passed last year. It brings important benefits to the 
economy and does much to strengthen the Government's hand in 
combating abusive shelters. But it also adds complexity to the 
Code. The Jobs Act has 193 provisions, 178 of these require IRS 
actions like the issuance of guidance, and the creation of new 
forms.
    Before I close, let me briefly discuss tax reform, the real 
opportunity for significant simplification and burden 
reduction. Earlier this year, the President created a 
bipartisan panel to examine ways to ``simplify Federal tax laws 
to reduce the costs and administrative burdens of compliance 
with such laws.'' In March, I appeared before the panel and 
made five suggestions concerning tax reform.
    First, our economy is constantly evolving with change 
seemingly ever-accelerating. Examples of change include 
transformation of the work force to more self-employed 
individuals, businesses contracting out activities they had 
previously done themselves, the relatively greater portion of 
economic growth generated through smaller, non-manufacturing 
businesses and increasing globalization. It is vital to 
construct a tax system that recognizes this dynamic and is 
built for the 21st century, not the 1960's.
    Second, policy options should be carefully assessed for 
their potential impact on attitudes toward compliance. Fairness 
and a perception of fairness are essential, as the President 
has recognized in his charge that the reform proposals be 
``appropriately progressive.''
    Third, administerability is also an important 
consideration. Bolting on new programs to the Tax Code without 
significantly simplifying or eliminating existing elements may 
in fact make it more difficult to collect the $2 trillion we 
need to fund the Government. Fourth, there needs to be an 
apples to apples comparison. We should not compare a sub-
optimized existing system to a perfect theoretical system. I 
can assure you from my conversations with counterpart tax 
administrators that there are administrative and compliance 
issues in all systems.
    Finally, we must recognize the transitions issues 
associated with migration to a new system or systems merit 
close attention. If the transition is not properly planned and 
managed, the new system will get off to a rocky start. After 
such a start, it may take decades to recover.
    I wish to emphasize that these points are not offered to 
suggest inaction. That would be perhaps the worst option. I 
strongly support the President's call for simplification. 
Simplification is essential to burden reduction. Thank you.
    [The prepared statement of Mr. Everson follows:]

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    Ms. Miller. Thank you very much.
    Our next witness is Dr. John Graham. He is the 
Administrator of OMB's Office of Information and Regulatory 
Affairs. Born and raised in Pittsburgh, Dr. Graham found and 
led the Harvard Center for Risk Analysis from 1990 to 2001. He 
was confirmed in July 2001. He is on leave from the faculty at 
Harvard School of Public Health, where he taught graduate 
students the method of risk analysis and cost-benefit analysis.
    Dr. Graham, we certainly appreciate your coming today as 
well, and look forward to your testimony, sir.

                  STATEMENT OF JOHN D. GRAHAM

    Mr. Graham. Good afternoon, Chairwoman Miller and 
Congressman Lynch. I am pleased to be here this afternoon to 
summarize for you our recent report to Congress on the 
paperwork burden of the Federal Government on the American 
people. This report we have shared with you has some good news 
and it has some bad news. And I will summarize a little bit of 
both of that.
    On the good news side, in fiscal year 2004, we saw Federal 
agencies take steps to slash paperwork burden by 96.8 million 
hours. While that roughly 100 million hour reduction is small 
compared to the billions of hours of total burden, for those 
people who have less burden that they have experienced as a 
result of these actions, we owe them, the agencies, applause 
and an encouragement to do more.
    The bad news I must share with you is that new statutory 
requirements passed by Congress, and I'm sure some of them were 
supported by the administration, caused an increase in the 
burden of 119 million burden hours. The result of these two 
program changes, reductions in discretionary paperwork, 
increase in congressionally mandated paperwork, is that the net 
change in paperwork burden has been up in fiscal year 2004.
    However, lurking behind these numbers, and we focus on the 
agency of concern here, the Internal Revenue Service, is some 
more good news. That is, much of the Government-wide reduction 
in paperwork burden due to agency actions is attributable to 
the agency that Commissioner Everson runs. Program changes at 
IRS reduced burden by 137 million hours, a significant fraction 
of that from a simplified individual income tax return. In this 
particular area of IRS paperwork, there were adverse trends 
from statutory changes from Congress which increased burden by 
101 million hours.
    But notice, for IRS the success of Commissioner Everson's 
people in reducing paperwork burden has overwhelmed the 
increases passed in the Tax Code. This net accomplishment is 36 
million fewer hours of paperwork burden for the American 
taxpayer.
    Now, I don't mean to criticize necessarily these statutory 
changes passed by Congress and supported by the administration. 
But I want to explain to you how well-intentioned legislation 
may increase paperwork burden. An example is the recent tax 
benefit provided to school teachers. The Tax Code now allows 
teachers to subtract up to $250 from their taxable income for 
the purchase of classroom supplies. To implement this tax 
benefit, IRS had to provide a new explanation on the 1040 about 
their eligibility. That is additional paperwork.
    They also had to provide a separate worksheet which is 
needed to be provided so school teachers seeking to claim this 
benefit can document their eligibility and their need. This 
separate worksheet increases paperwork burden.
    So the illustration I'm giving you is just one concrete 
example why, if we go provision by provision in the Tax Code 
and try to reduce burden, we're going to have a long haul ahead 
of us. That is of course why the President is deeply interested 
in a substantially simplified Tax Code.
    Our role at OMB in this area is an oversight one. Our desk 
officers at OIRA review over 3,200 information collections from 
Federal agencies each year. As you can imagine, with a couple 
dozen staff, we focus our energies on some key areas. We look 
at new information collections or revised information 
collections with particular priority.
    During my tenure, we have devoted a specific attention and 
priority to slashing agency violations of the Paperwork 
Reduction Act. A typical agency violation is when they impose 
on citizens or taxpayers a requirement to fill out paperwork 
when they don't have approval from OMB to engage in that 
activity. We have adopted, in this administration, a zero 
tolerance policy toward these paperwork violations. I am proud 
to say that since 1998, the number of these violations has gone 
from 325 to zero in 2004, our most recent report to this 
subcommittee.
    Of course, we have a lot of work ahead of us. We now need 
to work with agencies to prevent these violations from 
occurring in the first place rather than fixing them after the 
fact, and much work remains to be done in this subject.
    So in conclusion, we're making progress. But at the same 
time, we are creating more paperwork burden with the laws we 
pass, sometimes well-intentioned and constructive laws. It is a 
complex problem and does not lend itself to easy solution.
    Thank you very much.
    [The prepared statement of Mr. Graham follows:]

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    Ms. Miller. Thank you both, very, very much.
    Commissioner Everson, every time you hold that book up, I 
want to dive under the desk, since I did vote yes for the ETI.
    Mr. Everson. I can tell you, I have not read it all myself.
    Ms. Miller. A little evening reading there. [Laughter.]
    I think certainly a way that, in part your testimony 
articulated this, how we are ever going to get away from some 
of this paperwork burden is by using newer technologies. So I 
certainly applaud you with the e-filing and some of these kinds 
of things. In fact, actually before I got this job, I was the 
Michigan secretary of state where we have all the DMV there. We 
had gone in a couple of years period actually from having 
almost a 2-hour average wait time in our branch offices to 
about 5 minutes after we started initiating registration 
renewal by using technologies, fax, phone, Internet, etc. It's 
somewhat of an analogy to what you are trying to do there with 
e-technology, or e-filing.
    Maybe you could flesh this out a little bit, some of the 
different efforts. You did talk about that a bit, but some of 
the efforts your agency has made to encourage that and how you 
can educate, I think particularly various demographics of our 
society. I sometimes say perhaps senior citizens are a little 
hesitant, although some of these studies say they are more on 
the Internet than anybody.
    Mr. Everson. Yes.
    Ms. Miller. I think people who perhaps have a language 
barrier or some of these kinds of things might be hesitant to 
use the Internet or e-filing. How can we assist them?
    Mr. Everson. I would make a couple of points here. Last 
year, a little shy of 62 million individuals filed returns 
electronically. That was something like 47 percent. This year, 
the filing season is not quite finished, we get something like 
8 or 9 million returns that come in after the 15th for 
extensions. But we are well over 50 percent, we expect as time 
goes on we will still be over 50 percent, I think it's 66 or 67 
million returns already filed electronically.
    There are a couple of pieces of that. There are the pieces 
that come in, the portion that comes in from paid preparers. 
The fastest growth is the portions coming in from software 
where people are doing the returns themselves. They buy a 
product and bring it home and do it. The other thing that is 
grown very rapidly is something called the Free File Alliance. 
This is an initiative that John and I both worked on from OMB 
earlier, when the President's management agenda was launched to 
work on electronic government. Over 5 million returns have been 
sent in through a consortium of some 20 companies that provide 
free access to the Internet. You go to IRS.gov and then you 
pick a product and you can actually file your Federal return 
for free.
    So that was set up to help middle income and disadvantaged 
folks and it's grown like a weed this is the third and final 
year of the initial launch on it. We are now going to 
renegotiate with these companies and I hope that it will stick 
around and continue to grow.
    I have been surprised at the growth of the electronic 
filing. I thought it might peter out. It's just the opposite. 
It's become the way of doing business. There are beta sites, we 
have 14,000 beta sites around the country, they are using it. 
Lots of different players, all interact with communities. So we 
are not going to get everybody over time, but we are doing more 
and more this way. It is good. The refunds come in half the 
time. It cuts down on the need for these RALs, the refund 
anticipation loans that are a predatory practice by the 
preparers and others. This is all good for taxpayers.
    Ms. Miller. Just following up on that, you mentioned, I 
think, that there was a decrease in 5 million hours, I wrote 
that down, a reduction when you went from a threshold of 
$50,000 to $100,000. How do you determine even $100,000, a sort 
of arbitrary number? Why not a million? How do you get to that 
number?
    Mr. Everson. I think that what our folks do is they 
analyze, we have some pretty good data from our research people 
about who qualifies for what kinds of deductions or what is 
typical of a taxpayer that has $100,000 of income or $200,000 
of income. Then you make a straight-out comparison as to who is 
more likely to qualify or not. And it's professional judgment 
that goes into that kind of a decision.
    Ms. Miller. Let me just ask you one more question here. 
Also, you were mentioning that you were looking at a pilot 
program or initiative where you would allow small businesses to 
file annually rather than quarterly. In one of my former lives, 
I also did the books in a family marina business. It was always 
such a pain to be doing that on a quarterly basis. We always 
said, well, the Government wants us to do this so they can get 
the float on our money rather than us having it.
    So I really like the idea of going to an annual filing for 
some of the small businesses. In fact, you could even make an 
argument, I think, it's a tax cut for small businesses, besides 
the paperwork reduction burden and all these kinds of things. 
Where are you in the process with that?
    Mr. Everson. I think it's 2 years away. Next year, pardon 
me, I'm corrected. We expect to get it in by next year. It's 
exactly the kind of thing that we like to do. And again, let me 
make the argument, for whatever we had with the new system, 
stability really helps you in an instance like this. Because 
the same people who have to design new forms are the ones who 
come up with the best ideas about simplifying things. If our 
teams of people are working on implementing the 173 provisions 
from this, they can only worry to a certain degree about where 
else they might simplify things.
    So if we can get some stability in the system, maybe we can 
mine some more ideas like that. I know you have another panel, 
we get a lot of good ideas from small business groups and 
others about where to head with these. We're very receptive to 
that. We work with OMB, they provide a good frame of reference 
and hold us accountable as we do these efforts, as do you.
    But give us a little breathing room here and I think we can 
do better.
    Ms. Miller. Great.
    I'd like to recognize the ranking member, Representative 
Lynch, for his questions.
    Mr. Lynch. Thank you, Madam Chairwoman.
    Commissioner, I realize that the electronic filing is on 
the increase. Are there certain areas where we have made it 
less likely that people would file electronically? Are there 
certain types of returns that don't lend themselves to the way 
we have things set up right now, such as amended returns? Are 
those all non-electronic, and are we doing anything to increase 
the simplicity for people who have maybe there in that outlier 
group that is not currently coming into the electronic filing 
process?
    Mr. Everson. I would say that the tear line is not within 
the family of individual returns. It is more importantly, the 
issue of corporations and non-individual filers. We are, as I 
indicated in my statement, we have mandated for corporations to 
file electronically next year, the larger corporations and the 
larger tax-exempts. Tax-exempts are a different animal, because 
there is total transparency there, as you know. Their annual 
returns are actually public. That is not the truth for 
corporations or individuals.
    There is a tremendous savings in time, particularly for us, 
and the help of processing everything as you go that way. With 
individuals, what's happening now is as I indicated, 
practitioners more and more, they get on this bandwagon, you 
have somebody who prepares 50 or 100 returns, if they haven't 
done it, once they do it they never go back. I talk to 
practitioners, and the whole office goes electronic, they don't 
have as much paper any more in their offices.
    But there are still some individuals who prefer to file by 
paper. I get letters, you mentioned the elderly, I get several 
letters a week from the elderly that share with me about some 
question and someone's been doing his or her return for decades 
and they still do it by hand. Usually it's a simple return. The 
more complex you get, the more complicated sources of income or 
rental income, the harder it is for people to do it by hand now 
of course.
    Mr. Lynch. I'm just wondering, the other part of this, and 
the Chair has already mentioned small businesses.
    Mr. Everson. Yes.
    Mr. Lynch. And the burden, No. 1, on small businesses right 
now is significant.
    Mr. Everson. Yes.
    Mr. Lynch. What have we done, it was already suggested 
about the time period for filing, but what are we doing now to 
help small businesses deal with their burden in filing?
    Mr. Everson. This is a part of our--as you indicate, this 
is the bulk of the burden issue, if you will. We are constantly 
looking at things. We simplified the mileage deduction in the 
past year, where people could just take a standard rate for a 
higher number of vehicles than was the case before. We are 
always looking for opportunities here to increase the 
thresholds, if we have the latitude. Sometimes we don't. Or I 
would say we take ideas from the various groups, NFIB and 
others who represent small businesses.
    What the IRS did 7 years ago, in 1998, was it reorganized 
under the new statute so that it is organized around four 
taxpayer groupings. One is small business and self-employed 
individuals. So we have a group within that organization that 
is constantly interacting with them and working to get these 
ideas and to make changes where we can. So it is an active part 
of the program that we run, the Burden Reduction Office is a 
part of that unit. It reports directly to the Commissioner of 
the Small Business unit so it gets his personal attention, as 
it does mine from time to time.
    Mr. Lynch. OK. Thank you, Commissioner. Thank you, Madam 
Chairwoman.
    Mr. Everson. If I could respond to one point that the 
ranking member made in your opening statement, we are committed 
to service. We believe strongly that we have a balanced program 
on services. We are doing some belt tightening here in line 
with the President's budget request.
    But we believe particularly with the much higher level of 
services that we have on the phones that has been recovered 
over the years in terms of both access to our people and also 
an improvement in tax law accuracy, answering questions about 
the code, the complexities of the code, that we are getting a 
better result here.
    I think you are referring to the closing of some of our 
walk-in centers. Those are the highest cost facilities that we 
have. You are also less likely to get the best answer there, 
because when you call on the phone, sir, you get routed to 
someone who knows about home office deductions or charitable 
contributions or whatever the issue may be. The subject matter 
expert, as opposed to when you walk into an office, you're 
dealing with an individual who then has to use more general 
knowledge and go to certain scripts as well.
    But that is why we are doing this. GAO in fact has 
suggested that if you have to take cuts and balance your 
services, that the walk-in centers are a place to look, and 
that is what we have done.
    Mr. Lynch. Just in response to your statement, how was that 
determination made in terms of what offices get cut? I have 
heard them all over the country. So I know it is fairly 
widespread.
    Mr. Everson. Yes.
    Mr. Lynch. I just want to know what the criteria were.
    Mr. Everson. We expect to make this announcement, in fact, 
later this week. We used five broad categories, a couple were 
costs, employee costs, facilities costs. One was demographics, 
one was geography and workload was another. So we weigh things 
like how many EITC returns are there in the region serviced by 
the TAC, how close is the TAC to a beta center. As I mentioned, 
we have 14,000 beta centers around the country.
    It is a whole variety of factors weighted more heavily 
toward taxpayer issues, if you will, in terms of volumes of the 
services, are there forms being asked for or is it tax law 
questions. It is actually 32 factors.
    Mr. Lynch. Madam Chairwoman, if I may, are we outsourcing 
any of this prep work? Is the IRS off-shoring it?
    Mr. Everson. No. None of our work is off-shore. If you mean 
to other countries. That issue comes, it has been raised by 
Representative Markey. There are some preparers of returns that 
have had some of their work done overseas. That is not 
something we regulate directly. But we have said that we think 
in terms of transparency, anybody who is buying that service 
ought to understand, ought to know that is being done. But none 
of the work being done by the IRS under law can be done 
overseas. That is all done here.
    Mr. Lynch. Thank you.
    Ms. Miller. Closing these offices is your version of the 
BRAC, I suppose? Not looking for a comment there.
    Mr. Everson. We would be lucky to get an up or down vote, a 
yes or no vote on this, I think. [Laughter.]
    Ms. Miller. Representative Souder.
    Mr. Souder. Certainly Thomas Freedman's new book is going 
to raise this outsourcing outside the country question. Many of 
us strongly favor the ability to go to the private sector for 
collection and other types of things. But as it goes overseas, 
it becomes a little more complicated on privacy questions and 
legal questions.
    I want to address, I brought a question. First off, and 
then narrow it in, as a case in my district, that you can get 
back to me on.
    Mr. Everson. Yes, sir.
    Mr. Souder. First off, I think there has been tremendous 
progress since I came in in 1994. I can tell over the last few 
years our case work, which many of our offices do, if it is not 
immigration, many of the others are either Social Security or 
IRS.
    Mr. Everson. Right.
    Mr. Souder. The ability to get back more rapidly on more 
cases and in a satisfactory way has been a pleasing change. In 
the first couple of years, it was hard. We have seen it more 
frequently. It does not mean everybody is always happy with it. 
But we have seen that improvement.
    I use e-filing myself now. But it illustrates several of 
the problems, I know a witness on our next panel is going to 
talk about the home office. In many cases, like mine, my 
sisters and I have a partnership, so that is running through 
our personal returns, so we have to have that. My wife has a 
job at the house, so we go through this difficulty of how much 
of the desk can be deducted and how much of this section, how 
much of the energy bill, because she only works part-time at 
this job and it is only in one room of the house.
    Clearly, one of the challenges that you face as is even 
pointed out in these regs, and yesterday in meeting with CPA 
people as they were up on the Hill, that complexity versus 
vagueness, the more complex the Code, the less vague it is, the 
more simple the Code is, the more vague it is and the more 
regulations you have to have to enforce it. That is part of our 
dilemma here. If we micro-manage and make huge, complex codes, 
then theoretically it is less vague.
    But in the case that I have been dealing with for a couple 
of years, and it is important to my district, Napanee Ford, if 
you could have your staff look at the materials we gave you, 
because it illustrates a number of problems. It is clear on 
trucks, it is clear on trailers. I have the No. 1 RV 
manufacturing district in the United States, close to three-
quarters of them are made there. There are vehicles that are 
used to pull smaller trailers. In fact, if you think in terms 
of elephant ears at fairs or people selling you lemonade at a 
fair or a hot dog, if you think in terms of gardeners who have 
these little white things that they pull behind them when they 
work on a lawn, the top 17 manufacturers of those are in my 
district, in addition to the RVs.
    Many of the dealers around the country sell kind of in 
between not a Kenworth truck and not a pickup that haul these 
types of equipment around. I have one dealer in my district 
that is being hammered and being treated like a Kenworth truck, 
but his competitors are not. Part of the question is, how do 
you reconcile interpretation where you have a zone where 
Congress in fact is not necessarily clear in the law, and that 
different IRS agents interpret this differently, which gives a 
competitive advantage to one dealer over another, not to 
mention I do not think, and if there is a clear change in 
policy, where all of a sudden this law is enforced at a given 
point, how we in Congress can then look at that as to whether 
we intended this to be addressed in that fashion.
    Mr. Everson. You have covered a fair amount of ground 
there. First, I agree with what you said in terms of the 
general situation on the Code. It is a delicate balance between 
setting general principles or bright lines, bright lines are 
always helpful, but the more bright lines you set actually 
gives greater opportunity for the attorneys and accountants to 
find the little tear lines. It is a complicated question.
    Returning to excise taxes, and I was briefed on this a 
little bit this morning, if you look at excise taxes generally 
they account for something like 3\1/2\ percent of the total 
revenue stream of the Government that it is the $2.52 trillion 
we expect to take in this year, some $70 odd billion. The 
excise taxes associated with trucks, I gather, are just a 
little over $2 billion.
    We did issue a new ruling that we felt clarified the 
standard here. It really relates to some of the vehicles that 
are now being used, as you say, to tow other vehicles. I guess 
this grew out of changes in recreational vehicles where they 
got larger and larger and then you had to basically have, I am 
told it is called a fifth wheel. I said what was that, and they 
gave me a picture of it.
    So this is a change to a vehicle. The question is, is this 
a tractor or not. We have said that yes, this is.
    Now, we issued those rulings, I gather this is a fairly new 
one last year, 2004, I think it is, in terms of enforcement, 
which is the second piece of your question. We select our 
audits based on either a generalized criteria, what we see on 
returns, or we do get leads. If your people in your district 
feel that somebody is getting away with something they should 
not get away with, please tell us that. We respond to leads 
like that.
    The one part of your statement that I found distressing was 
the assertion that two different revenue agents would be 
interpreting the same set of facts differently. I am very 
concerned to hear that. We have trained people working on 
excise taxes. It is a relatively small group of people and I 
would imagine within Indiana it would be the same person or 
persons who are calling around here.
    So I will raise that when I go back. We will followup on 
the cases you have raised. We do try to be consistent.
    Mr. Souder. We will followup on how in effect a small 
vehicle got turned into a truck. But the second thing is, these 
vehicles are sold all over the United States.
    Mr. Everson. Yes.
    Mr. Souder. And the competition is all over the United 
States, and this particular dealer is right in the heart of the 
center, and may have been picked as an example to test the 
enforcement. What I believe is there ought to not be selective 
enforcement. It ought to be universal. We also need to know 
when there is a significant policy change that can affect a 
whole industry. Because this changes the nature of the cost of 
the vehicles that people purchase, to know there are going to 
be sudden excise taxes on hauling something home that they did 
not believe was covered by the law previously. That is pretty 
much a policy change, to just having it be a simple reg change.
    Mr. Everson. I think you could go back and forth as to 
whether it is a policy change or it is something that is 
reflecting a change in the industry where Detroit or your 
people who fabricate changes here make a very real change, 
because they are dragging along these much bigger recreational 
trailers and needed to redesign the vehicles. I am told here 
the question gets down to, do you disadvantage trucks 
ultimately of a certain size who may be paying the tax, and 
then if you exempt others, if you view the two operating 
together.
    There is a lot of complexity here. I will check on the 
circumstances here. You are entirely right, if we are doing 
something that is specialized, we need to communicate it. 
People need to understand why we are doing it. I agree with 
that point as well.
    Mr. Souder. It illustrates the danger in paperwork here, 
because I think it was 80 percent of the cases wind up, even as 
you reduce the paperwork, into these few cases that then drag 
on for years. In this case, yes, they have altered it, but we 
are talking 17,000 pounds versus 34,000 pounds on a Kenworth. 
It is more of a pickup on steroids, so to speak, although we 
are going to ban steroids. [Laughter.]
    But an oversized pickup, and yes, there may be a few up 
here, and it is how do you distinguish between pulling a 
trailer for lemonade and elephant ears and a gardener from a 
huge almost full-size RV. That is what we are trying to work 
through.
    I thank you for your indulgence with this. I thank the 
Chairwoman. It is a dilemma, clearly, in how you get tons of 
paperwork, because this has been generating a pile. This dealer 
is going around saying, I have all this paperwork with IRS. 
What happens is, when there is this type of change and how it 
is implemented is exactly how we get into these situations.
    Mr. Everson. Sure. I appreciate your raising it. I have 
already told you more than I know. I will take it up when I get 
back to the office.
    Ms. Miller. Before we excuse you both, I have one question 
for Dr. Graham, I think, but perhaps both of you could answer 
it. I have been trying to understand the methodology that the 
IRS used, I think you used something called the A.D. Little. I 
am not quite sure if that is the right term, but the 
methodology that you use.
    Dr. Graham, in your written statement, you were saying that 
there would be a one-time shift in estimated burden to the 
taxpayers when the IRS goes to a different kind of methodology. 
Perhaps you could enlighten me a little bit about what your 
thoughts are on that. One-time shift, which direction is the 
burden going to be going in, and hopefully in a positive trend 
line then, and then what is the timeframe for implementing that 
kind of analysis with the new methodology utilization?
    Mr. Graham. Thank you very much for that question.
    We have been meeting quarterly with IRS on the development 
of their new model for estimating paperwork burden. I do not 
really know the answer to your question about what the overall 
direction of the effect will be. But one of the things that is 
very valuable about the new modeling effort that they have put 
together is they will be able to look at paperwork burden and 
estimate by sub-groups within both individuals and the business 
sector, so you can estimate changes due to regulation or policy 
on different segments of the tax-paying public.
    This modeling investment they have made over several years 
is going to bring the measurement of paperwork burden at IRS in 
terms of quality considerably beyond what we have in all the 
other Federal agencies. I think that makes sense, given the 80 
percent figure that you noted at the beginning of the hearing, 
80 percent of this burden is at Treasury, mostly IRS.
    Mr. Everson. I will just add one or two points on this. The 
old model, it really, I do not think it held water, because 
what it did, it just counted up the number of words and lines 
on a form. The new methodology, what it does is it looks at 
that, but then it also looks at the various attributes, is this 
going to result in more recordkeeping, is it going to result in 
calculations, it has something like 21 different attributes 
that are collected so that you make an overall calculation.
    We have done that, it does show a spike up, a one-time 
adjustment. I think the piece for individuals went from 2.5 
billion hours to 3 billion hours or something of that 
magnitude. So it is not insignificant. But it will really help 
us, as Dr. Graham has indicated, going forward, to have a much 
better calibration of impacts. It will take a while as we work. 
We have not used this on a form yet. As we go to work with OMB, 
there is some sort of indication that each form takes a certain 
amount of time. We have to now go through that process of 
updating those forms. So while we have an overall estimate, we 
will roll it through at greater levels of detail over the next, 
I think, 1 to 2 years.
    Ms. Miller. I will ask the ranking member if he has any 
additional questions.
    Mr. Lynch. Just one last one, it might be a loaded 
question. You mentioned earlier, Commissioner, about the real 
elephant in the room, so to speak, is the issue of tax reform. 
We continue in this exercise, and we are doing our best here, 
but at the end, ultimately maybe a better approach would be 
toward fundamental tax reform.
    Excluding the whole issue of equity and all that, from a 
paperwork and efficiency standpoint, what in general terms 
would be the best approach to tax reform in terms of just 
addressing the narrow issue that we are talking about here 
today in terms of paperwork reduction and the simplicity of 
filing? Is it more of a consumption type arrangement or what 
are your thoughts on that?
    Mr. Everson. That is a great question. One of the 
President's charges to the tax panel is to make sure that they 
look not just at the VAT or sales taxes, but that they look at 
the existing income tax scheme and reach a proposal there, 
along the lines of addressing just what you suggested.
    When I testified before the tax panel in March, I mentioned 
a couple of things. There are numerous credits now. There is 
something like seven different educational credits. Really 
tough for somebody to figure out where they qualify for or 
where they do not qualify for. That is a reduction in 
complexity and burden.
    There is the AMT that has received a lot of discussion. I 
think that is a burden. Somebody goes through a whole 
calculation, you get down to the bottom and we go, aha, we've 
got you. That is not your real tax, it is actually $2,200 more. 
That is a form of complexity that breeds confusion, and I would 
suggest ultimately erodes respect for the law. Those are two 
areas.
    I look particularly at corporate income tax. I do not think 
that is something that you worry about per se. I think you are 
thinking more of small businesses, the majority of which are 
organized, they are not incorporated, they are not C-corps. I 
am thinking about that in terms of the large corporations where 
complexity is now in this increasingly global world, it works 
against compliance for the IRS, people hide behind it.
    I would like to see us reconcile this dynamic, this tension 
between the desire to increase book earnings, which drives 
shareholder valuations and decreased taxable earnings, because 
you get some incongruities there that are a function of 
complexity, which hurt compliance. Those are three areas I 
would mention.
    Mr. Lynch. Dr. Graham.
    Mr. Graham. Your question runs to the heart of one of the 
charges of the President's tax panel. It is going to be 
fascinating to see when they rank those various systems how 
they stack up, just as you say, in this narrow area but then 
weighing that against the other requirements.
    Just to give a feel for the complexity of that, as I 
mentioned the tax benefit for school teachers in my oral 
statement, some simplified versions of the tax system will not 
have that benefit. So simplification may reduce paperwork, but 
it is going to draw some attention when those proposals come 
out.
    Mr. Lynch. Thank you. Thank you, Madam Chairwoman.
    Ms. Miller. I certainly want to thank both the witnesses 
today. We appreciate your time and consideration and your very 
thoughtful testimony as well. We will excuse our first panel 
and take a few minutes recess while our second panel gets 
themselves situated there. Thank you both very much.
    [Recess.]
    Ms. Miller. We will call the hearing back to order. Next, 
the subcommittee will hear from Leonard Steinberg. Mr. 
Steinberg is the president of the Steinberg Group, which is a 
consulting practice that concentrates in the area of 
accounting, financial and administrative operations and 
taxpayer representation. He is also a member of the Small 
Business and Entrepreneurship Council. Mr. Steinberg is a 
former member of the Taxpayer Advocacy Panel, which is an 
organization created by the IRS that provides a forum for 
citizens to make suggestions regarding IRS decisionmaking.
    Mr. Steinberg, we appreciate your coming today. We look 
forward to your testimony, sir.

  STATEMENTS OF LEONARD STEINBERG, THE STEINBERG GROUP; KEITH 
 HALL, HALL AND HUGHES, PLLC; AND LARRY GRAY, ALFERMANN, GRAY 
                            AND CO.

                 STATEMENT OF LEONARD STEINBERG

    Mr. Steinberg. Thank you, Madam Chairwoman, Mr. Lynch and I 
am sorry the other members of the subcommittee are not here. I 
thank you for the invitation to participate in today's hearing.
    My testimony is based on my work with the Taxpayer Advocacy 
Panel and also my work, my professional work in my consulting 
and tax practices. Basically taxpayer burden really begins with 
enactment. Congressman Lynch, you had stated this very early in 
your remarks.
    In my previous testimony to the Small Business Committee, 
chaired by Congressman Don Manzullo, I discussed the 
implications of tax law complexity and its associated 
disproportionate burden on small business. I look at this 
opportunity as to expand upon that testimony.
    As an example, the revised W-4 form, which was put out for 
2005, the information regarding the Paperwork Reduction Act is 
printed in extremely small print on page 2 of the form. The 
form states that the time needed to complete this form will 
vary depending upon individual circumstances. The estimated 
average time is recordkeeping, 45 minutes, learning about the 
law, 12 minutes, preparing the form, 58 minutes. For 2004, the 
estimated times for all of these were only about a minute 
longer for 2005, and yet all of this information is printed on 
the form for a minute more.
    The total time for this form is 115 minutes, almost 2 
hours. This form is a prime example of how burden is not 
reduced. From experience, both as a tax professional and 
someone who does consulting to small businesses, I know that 
learning about the tax laws associated with this form takes a 
great deal longer than the estimated 12 minutes.
    In addition, there are many employees who require multiple 
W-4 forms due to changes in their personal circumstances and 
more often, when they work at second or even third jobs. The 
Government does not employ a measurement tool to determine the 
cost to small business employers in lost productivity. This 
lost productivity can only be made up by additional hours spent 
by the employer or passing the costs on to the consumer. This 
additional time affects the employer's quality of life and 
associated family issues as well, especially for the small 
business entrepreneur.
    The Paperwork Reduction Act language on these forms states 
an average amount of time to correctly complete the forms. But 
these times are arbitrary, in my opinion, and based on the 
ability of the preparer. Once again, many small businesses must 
rely on paid professionals and their assistance in order to 
comply with the tax laws.
    Now you have the issue of errors. When errors occur, the 
IRS must spend the resources to notify the small business that 
a correction is necessary. These additional communications add 
significant burdens to small business owners, since the letters 
sent by the IRS are difficult to understand. Once again, the 
business owner is required to pay for professional assistance 
in order to comply with the notices.
    In measuring burden, the Congressional Joint Committee on 
Taxation scores tax law changes only for dollars and not for 
complexity on burden. This is a critical issue that Members of 
Congress must understand.
    One issue that neither the Commissioner nor Dr. Graham 
mentioned which is in my written testimony is the burden the 
tax code puts on individuals in their State compliance. There 
is no connectivity or communication, satisfactory 
communication, between the IRS forms and the States. Therefore 
every State has developed its own system of taxation, whether 
it is for income tax or Federal unemployment. This only 
increases the burden on the small business taxpayer.
    In my testimony I have given many additional examples of 
where the Taxpayer Advocacy Panel worked on issues directly 
related to paperwork reduction, and Michael Chessman is here 
from the office from which our committee worked on, and I am 
very appreciative of the work and support that Michael and his 
office gave us. But we analyzed issues of the payroll deposit 
penalties, the revised K-1, the Schedule D, the 940, and I 
listed in my written testimony approximately another 10 issues 
for which we were involved in.
    In conclusion, I would like to say that the issue of burden 
on small business falls squarely with the domain of Congress. 
The IRS can only implement the will of Congress. The Paperwork 
Reduction Act, if it is not going to be done away with, it 
really should be modified to ease the burden on small 
businesses tax compliance. Remember, good intentions do not 
always lead to the expected outcomes. Thus we have the reality 
of unintended consequences. That is what the small business 
community is experiencing--the unintended consequences of the 
burden of all of this additional work that has to do in order 
to maintain compliance.
    Thank you.
    [The prepared statement of Mr. Steinberg follows:]

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    Ms. Miller. Thank you very much. The subcommittee is going 
to hear now from Mr. Keith Hall. Mr. Hall is a member of Hall 
and Hughes. He is a CPA and also a member of the National 
Association for the Self-Employed, which is the Nation's 
leading resources for the self-employed and micro-businesses. 
Mr. Hall also participates in the NASE Tax Talk Service, where 
he answers specific personal questions for thousands of small 
business owners every year.
    Mr. Hall, we appreciate your attendance at today's hearing 
and look forward to your testimony, sir.

                    STATEMENT OF KEITH HALL

    Mr. Hall. Thank you very much, Chairwoman Miller, Ranking 
Member Lynch. I appreciate the opportunity to be here today, 
both as a small business owner and as a member of the National 
Association for the Self-Employed.
    As such, I represent the over 250,000 NASE members and more 
broadly, the 18 million micro-business owners which are those 
that employ less than 10 people. In 1980, lawmakers much like 
yourselves recognized the increasing burden of Government 
regulations and paperwork on all businesses and passed the 
Paperwork Reduction Act of 1980. This act, and its expansion in 
1995, have had a positive impact on what we are discussing here 
today. But I don't think the job is finished, especially for 
small business owners.
    Even after the efforts of the last 25 years, the Small 
Business Administration estimates that a small business owner 
incurs about $7,000 per employee per year just to keep up with 
taxes, paperwork, reporting requirements. For many, this is 
like paying for another employee that never shows up for work.
    Further, the IRS estimates that taxpayers will spend about 
19 hours completing their 2004 tax return. For a small business 
owner with a Schedule C, they will spend more time than that.
    There are certainly a lot of numbers that we can throw 
around. But the key point is that regulatory compliance and 
excess paperwork is still an issue for small business owners 
like me. Now, I know we're here to talk about paperwork 
reduction and not paperwork elimination, so hopefully there is 
a medium somewhere that we can find. In fact, during the last 5 
years, the IRS has made a tremendous effort and had success in 
helping small business owners like me in managing the nightmare 
that is called the Internal Revenue Code.
    Their education and outreach efforts and their work within 
their Office of Burden Reduction has been very good. Their 
commitment to their Web site and availability of forms and 
information online has been exceptional. The changes that Mr. 
Everson mentioned on threshold requirements, of the ability to 
file a 1040A up to $100,000, those things are a tremendous help 
to small business. And I wanted to make it clear to the IRS 
that small business does appreciate their efforts, especially 
since I haven't gotten my refund yet. [Laughter.]
    Really, they have done a great job. But again, I don't 
think the work is done. It is very easy to generalize about the 
problem and then kind of sit back and hope somebody else can 
fix it. So please allow me to be specific, both to issue and to 
solution.
    Many small business owners operate out of their home and 
most likely qualify for home office deduction. But many lose 
that deduction just because they can't handle the form. They 
have to know the difference between indirect expenses and 
direct expenses, what type of mortgage interest they have, 
there are two different lines for casualty losses, and as I 
mentioned in my written testimony, on the one-page form, the 
words ``see instructions'' appear 16 times, just on the form.
    A solution would be to provide a standard deduction for the 
use of a home office. The form could be two yes or no questions 
and then pick a number from a chart. The net deduction would be 
about the same, the net tax impact would be about the same, but 
the taxpayer would save 2 hours and probably two Advil.
    Another example is the current confusion related to worker 
classification. The small business owner knows they use an 
individual to help in the business, but they don't know if it 
is an employee or an independent contractor. The IRS has a 20 
point checklist to help, but many of those items are 
subjective, and it is difficult to get to a yes or no answer.
    The solution is to simplify the process for identifying who 
is an employee and who is not an employee. Developing a clear 
set of rules will help all employers make the right decision on 
who is an employee and who is not.
    There are a lot of other examples to talk about, but again, 
the common thread is the overall complexity of both the 
Internal Revenue Code and the paperwork required to maintain 
compliance with that Code. The sheer volume of the forms and 
related calculations can be overwhelming. This is particularly 
true for the small business owner, since they do not typically 
have the same access to accountants, attorneys and other 
professionals that big businesses do.
    I believe that the most immediate solution is to continue 
to strengthen the Paperwork Reduction Act and the Office of 
Information and Regulatory Affairs. Expanding OIRA with more 
funding and more staff would make sure that the efforts 
continue. Expanding the oversight authority of OIRA is also 
critical. Currently the IRS is not subject to the review 
process of OIRA, so that the biggest paper eater of all does 
not have the same rules that other agencies do.
    Additionally, the IRS Office of Burden Reduction should 
have more funding and staff as well. This office has done a 
very good job, as I mentioned, in helping redesign and simplify 
many tax forms, but the job is bigger than they are.
    On behalf of the NASE and for me personally, it is my 
request that this subcommittee continue in the spirit of the 
Paperwork Reduction Act and in promoting the efforts of OIRA to 
reduce the burdens of regulatory compliance on small business. 
Every hour that is not spent filling out a form can be spent 
creating a new job. And I believe that's what small business is 
all about.
    Thank you very much.
    [The prepared statement of Mr. Hall follows:]

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    Ms. Miller. Thank you very much.
    Our next panelist this afternoon is Larry Gray. Mr. Gray is 
the managing partner for Alfermann, Gray and Co. He served on 
the IRS Commissioner's Advisory Group from 1992 to 1994 and 
various subcommittees as well, including compliance and small 
business. Mr. Gray is also a member of the National Association 
of Tax Preparers.
    Mr. Gray, we appreciate your coming to Washington. We 
certainly look forward to your testimony as well, sir.

                    STATEMENT OF LARRY GRAY

    Mr. Gray. Thank you, Madam Chairwoman, and Ranking Member 
Lynch.
    As I go into my remarks, my remarks are based on being a 
practitioner in the field. But also currently, I am on the 
Electronic Tax Administration Advisory Council. Then on a 
monthly basis, as the Commissioner referred to earlier, we are 
one of the groups that meets in Washington with the Small 
Business, Self-Employed, National Public Liaison. So my views 
today, as my two predecessors, they spoke more on specifics and 
looking at paper. What I would like to do is do a little 
different twist. I do get the opportunity to look at the burden 
reduction through Michael Chessman's office, and I believe 
that's doing a very good job.
    But I want to put a flavor on more of the technology, where 
we need to move to. With that, my first comment is on the 
Paperwork Reduction Act. I believe it has failed its purpose. 
In my written report, I cite some of the same numbers that you 
started out today with, Madam Chairwoman. So in order to not 
take time there, I want to move on and look at some of the 
failures.
    The first one I would like to look at is that the failure 
of the Paperwork Reduction Act can be attributed in large part 
to the law changes in the recent years and because of the 
additional forms, instructions, administrative pronouncements, 
rulings that are required to implement that new law. Also if 
you look in my written report, you can see that the 
implementation of the last two major law changes in 2001 and 
2003 resulted in additional burden hours of 330 million and 113 
million respectively.
    Now, I would like to describe areas that need reform. I am 
going to look specifically at e-file, form management, 
documentation requirement, IRS communications and record 
retention. The e-filing allows taxpayers to file taxes 
electronically instead of by paper. The system not only saves 
paper but is more efficient for both the taxpayer and the IRS. 
It is estimated that if the e-filing system accommodated all 
taxpayers, the paperwork caused by tax preparation would be 
slashed by a third.
    But the current e-filing system has flaws that decrease its 
usage. For example, a taxpayer with an amended tax return, a 
taxpayer with more than one form 2106 to report unreimbursed 
employee expenses, cannot e-file. Moving all return types to 
one platform, XML platform, would resolve many of the e-file 
issues. Along with that, the continued development of e-pay, e-
services, would move us more to a transparent e-system.
    Another area that needs improvement is form management. The 
sheer volume of forms is startling. The National Taxpayer Union 
policy paper 110 states that the IRS now prints over 1,100 
publications, forms and instructions that total over 16,300 
pages in length. Taxpayers and tax professionals are hindered 
by the vast amount of time required for forms, spending 
considerable amounts of time reading instructions and 
publications to determine the proper way to complete the 
required form.
    Form management could be accomplished by eliminating forms 
that are not necessary for the effective administrative of the 
tax laws. An example includes the forms that require taxpayers 
who wish to get an automatic extension of time to file their 
tax return. Currently, form 7004 is required for corporations, 
the 4868 for individuals and form 8736 for partnerships and 
trusts. Why are these forms required when these extensions are 
automatic and require no IRS approval?
    Another area for improvement would be the reduction in 
documentation required to be filed when the IRS already has the 
information that is being submitted. To illustrate, when an 
amended tax return is filed, the taxpayer submits not only form 
1040X, but a copy of the original, which is wasteful.
    The IRS communications with taxpayers need to be changed. 
Taxpayers receive notices that are triggered automatically and 
result in a taxpayer receiving a notice just after they have 
responded to a notice sent earlier. The automatically triggered 
notice requires a taxpayer to respond again, and results in 
more paper and time wasted for the taxpayer.
    Taxpayers who participate in offering compromises are often 
asked to submit the same information multiple times. IRS 
communication could be vastly improved if a two-way system of 
communications via e-mail were implemented as a communication 
channel. And I really stress the two-way. If you have it 
electronically, then don't put it back to paper. E-file would 
facilitate faster responses to the taxpayer inquiries and would 
be an effective method for the taxpayers to contact the IRS.
    Another area of change is in the area of record retention. 
Currently, taxpayers are advised to keep copies of original tax 
returns for 6 years. Practitioners are required to keep them 
for 3 years. And then when we go and look at audits in order to 
support documentation there, it can be many years. A more 
practical approach would be to place the burden of storage on 
the IRS, since they already retain the information anyway.
    Paper burden has also been a cause for the sheer complexity 
of the Tax Code. While the hope is that the Presidential tax 
force will make proposals for simplification, there is much to 
be done in the interim.
    While the time I have to speak is limited, there is much 
more that could be communicated on this topic. I have only been 
able to speak to a few of the more pressing issues. I thank you 
for the time and consideration of my comments, Chairwoman 
Miller and Ranking Member Lynch. I look forward to our dialog 
and to your questions on this issue. Thank you.
    [The prepared statement of Mr. Gray follows:]

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    Ms. Miller. Thank you very much. I appreciate that. I 
actually was going to ask you all whether or not you thought 
the PRA was actually working, and in your comments you said it 
had failed its purpose. So I assume, Mr. Gray, you do not think 
it is working well. I would ask you to talk about that a little 
bit more, and to the other two panelists as well, what is your 
thought about the practical reality.
    Mr. Steinberg. As a practitioner, the PRA is not working at 
all. When people come in to have their taxes done, they have no 
idea really what the tax law is. I know that the Commissioner 
spoke about the increase in electronic filing. I will tell you 
that as someone who does electronic filing for my clients, the 
issue is not electronic filing. The issue is understanding the 
tax law.
    I had three cases this past tax season where people were 
using off-the-shelf software to try to do their own taxes. And 
because of the complexity of the tax law, they were not able to 
complete their taxes using this off-the-shelf software and 
therefore, they came to my office and asked for help.
    So here again, even though they went to the literature, 
such as in the cases involved, the incentive stock options that 
were cashed in, which is a major problem, because of the 
taxability of the incentive stock options, the tax law was so 
confusing to them, they did not know how to correctly place it 
on the form. What happened was that they wound up, or they 
thought they were going to wind up paying a great deal of tax. 
While in understanding the tax law as I do, they wound up not 
paying any tax, because tax had already been taken out of their 
compensation for the incentive stock options.
    There was another one where an individual did not 
understand the laws regarding depreciating or amortizing a 
franchise fee. So he wanted to deduct the entire franchise fee, 
and all of a sudden he was getting back this huge refund. He 
came to me and said, no, this can't be right. I said, you're 
correct, you have to amortize the franchise fee. And here 
again, this is something where the complexity of the tax law, 
even though there is off-the-shelf software, that's not the 
panacea. That is only a tool. It is the understanding of the 
tax law that actually helps the taxpayer. From my perspective, 
every time Congress passes a new tax law, it's called the Tax 
Preparer Full Employment Act. [Laughter.]
    Only for the simple reason that the complexity gets greater 
and greater. And the Commissioner had the volume of the new 
Jobs Act for 2004, one of the major problems that happened with 
that was that the law was passed in October. Tax season begins, 
for all intents and purposes, not in January, but February 1st, 
and we have until April 15th, unless we file extensions, to get 
all the information in.
    In many cases, the IRS was incapable of answering some of 
the questions that we had. They said, well, we'll deal with it 
later, because of the amount of time between the passage of the 
tax law to get the new forms ready as of January 1st. A very 
inconsiderate move, in my opinion, by Congress to force the IRS 
into this untenable situation.
    So the Paperwork Reduction Act, Madam Chairwoman, to answer 
your question specifically, is not working.
    Ms. Miller. Mr. Hall, do you have any better news than 
that?
    Mr. Hall. Thank you. Well, I think I do. We will see. I 
believe the PRA has had a beneficial impact. I think back 
originally, the goal set by the OMB for the act was a 5 percent 
to 10 percent reduction in the burden on taxpayers. I think 
from a scorekeeping standpoint, if that is the standard, you 
have to conclude that the act has failed. I do not think that 
level of reduction has occurred.
    But I think a lot of times, we like to talk in terms of 
reducing the rate of increase. I think looking backward, which 
is also easy to do, where we would be today without the 
Paperwork Reduction Act might be a very scary thing. I think 
one of the issues is that perhaps the IRS in its ability to 
forego some of the review requirements of OIRA, such as OSHA 
and EPA has, and that the OIRA reviews draft legislation, draft 
changes to make sure it meets cost benefit analysis, make sure 
it meets Paperwork Reduction Act, those things kind of help 
keep those in check. The IRS is not subject to those rules.
    So in evaluating just the impact on the IRS of PRA, it is 
probably more devastating of a failure or of a lack to reach 
that original goal than looking at the act as a whole. Because 
in some of the other agencies, again, such as OSHA and EPA, I 
think there has been a tremendous benefit.
    A few changes, perhaps even if possible having the IRS come 
under that advance review process. Five years from now we might 
have a different answer as to the success of that act. But I do 
believe the act has had a positive impact over the last 25 
years.
    Ms. Miller. Thank you. Mr. Gray.
    Mr. Gray. Actually, I will go back and try to divide into 
two areas. I think to show how the act is not working, first is 
in the paper side. For example, I actually work with Michael 
Chessman's office for burden reduction on the K-1s that the 
Commissioner mentioned. That was effective, but that was in one 
area.
    But when you go global and look at all the laws and all the 
changes, it is not just Congress, not just the IRS, but it is 
also our court system. Because I go across the country 
teaching, and I have to watch because in one circuit the case 
is one way and it's different in another.
    Well, if you go to prepare the return it has to be prepared 
differently. So we really have to look at the big rule.
    But the other thing I would like to talk about on burden 
reduction I think could be very effective, dollars spent. Mr. 
Lynch, your questions on the closing of the walk-ins and so on, 
sometimes you have to do what you have to do in a budget. But I 
think there is a real opportunity with the IRS working with 
outreach groups. I am not talking about offshoring, I am 
talking about practitioner groups. For example, in our area, I 
have a staff person that has worked with VIDA locally.
    So I think what you have to do is look at people-wise. You 
look at these outside groups to say, how can we partner. But it 
has to be a coordinated effort from the national, so we can be 
communicating the same information.
    The other thing you have to look at is when we get over in 
technology. We are in a new world. I mentioned it briefly in my 
talk, but to really have an impact, I believe, it is one thing 
to criticize, but a critique has, I believe, some good 
comments, maybe ideas that work. I think what we have to look 
at is once an item or an event goes electronic, then if we are 
going to say, let's e-file, and we e-file everything we can in 
our office, if we are going to e-file that, then to reduce 
burden, it should be to the point where we have an electronic 
option communication back. It's not for all taxpayers, but you 
have to start somewhere. Cell phones at one point in time 
nobody had, and it is amazing how if it is easy and 
transparent, it becomes just another tool you do not think 
about.
    So I think it is really important to have a business plan 
or a business model to look at the e-systems, the e-world, 
whatever you want to call it. But it is a two-way street. I 
think that is how we can reduce it greatly.
    Ms. Miller. Thank you, gentlemen. I will recognize the 
Ranking Member, Representative Lynch.
    Mr. Lynch. Thank you.
    Just a couple of things. It is sort of counter-intuitive, 
but I heard the American Jobs Creation Act of 2004 referred to 
here, and I believe the Commissioner mentioned it in the 
earlier panel. Ironically, that was a bill that was supported 
very strongly and initiated by President Bush, who is, I think, 
probably the high priest of paper reduction in terms of trying 
to reduce the burden on taxpayers. He is really out there in 
front.
    So here is the President, and the impetus for a lot of the 
Job Creation Act support was within the business community, 
quite frankly. That is who I heard from in my district. So we 
have people who are on the one hand complaining about the 
increases in complexity and the additions of, in this one act, 
174 revisions or additions to tax products by the time that act 
is fully implemented. So they are asking for the changes and 
then complaining about the changes.
    So it is counter-intuitive that not everything is just 
being self-generated by Congress. We are responding to the 
small business community and the larger business community as 
well, and this is something that we are working with, with the 
Republicans and Democrats together. But the bottom line is to 
create those exceptions and to create that relief, it requires 
additions to the Tax Code.
    I am just wondering if, as I said to the other panelists, 
is it the model itself that we need to move away from? Can we 
realistically accomplish what we are trying to do here, 
notwithstanding the great improvements that have come in terms 
of technology? Do we have to look at a more simplified, 
although perhaps more blunt, instrument of taxation, the whole 
model? I would like to hear from all three, please.
    Mr. Hall. Well, I think that as has been heard several 
times today, I think there is a magic bullet out there which is 
overall simplification of the Tax Code. I think that will 
answer a lot of the questions. Obviously there are a bunch of 
levels of compromise involved in that.
    I think the thing from a small business standpoint that is 
very encouraging for me is to see the IRS making changes such 
as those Mr. Everson mentioned today, changing the threshold 
for 941 payroll tax limits, changing the reporting requirement 
from quarterly reporting requirement to annual reporting, 
simplification of the K-1 form. Those are all steps that do not 
require an act of Congress to change the Tax Code, but have a 
tremendous impact on small business.
    At some point, though, you get to the point to where each 
time you do a simplification, then you do have a period of time 
where small business taxpayers have to get up to speed on the 
change. So in the first year of change, it can even be more 
cumbersome for them because it is something that they are not 
used to. So they have to go back to instruction forms, go back 
to literature, go back to an online research vehicle to figure 
out how to use this new tax break or this new reporting form.
    But over time, I think those changes have a tremendous 
positive impact. I think that goes back to my comments about 
the positive impact of the PRA in general. If you look at a 
specific point in time, do we have a system now that is 
manageable, that is not difficult, that is not cumbersome, I 
think the answer is no. But without the efforts that have been 
expended, would it be much worse today? I think the answer to 
that is yes.
    I certainly am in favor of a more simplified and less 
complex Tax Code. But again, that is very easy to stand up and 
say, let's just simplify things. There are many steps involved 
in that.
    Mr. Steinberg. I would like to just add to what Mr. Hall 
has stated. Tax simplification is really the answer. If you 
want compliance, which is the goal of the Internal Revenue 
Service, to bring in revenue, by simplifying the Tax Code 
structure, you will reduce the burden. Since small business, 
Madam Chairwoman, as you stated in your opening remarks, shares 
disproportionately in the burden of compliance and since small 
business makes up 90 percent or more of all the businesses in 
this country, you will have economic growth the likes of which 
this country has not seen, because the resources can be 
reallocated to job growth and entrepreneurship. What better way 
to grow the economy, which the intended effect would be greater 
income to the Government?
    So why not go for simplification where the intended 
consequence will be a fairer tax system, greater compliance and 
everyone paying their proper amount to the Government to help 
run the $2 trillion economy?
    Mr. Lynch. The question was not whether or not we should 
have simplification, just whether this process, where the 
business community comes and asks us to make revisions and then 
there is an increase, as you saw, in that one bill, one bill 
alone, 174 revisions and additions.
    Mr. Steinberg. Congressman Lynch, any time there is a 
dialog between the public and Congress, it is only beneficial. 
Because you hear from us that are actually out there with the 
taxpayers, with the small business people, actually doing the 
work day to day. Therefore, as I stated, any communication 
which you receive from us, whether it be written or whether it 
be oral or whether it be just coming into your office as a 
member of a particular group. It is important that Members of 
Congress understand the depth and breadth of the issue of this 
and therefore the more communication, the better it is.
    Mr. Lynch. OK. All I'm saying is that act, the Job Creation 
Act of 2004 was us listening and us responding to the business 
community. Now, because we responded in the way that we did, we 
are hearing complaints from the same business community that 
the tax laws have become more complex, which they requested 
several months ago. That's all I'm saying, it's a conundrum.
    Mr. Steinberg. Right. But Congressman Lynch, in 1986, when 
President Reagan had signed the Tax Reform Bill at that point 
in time, that drastically reduced burden and it simplified the 
Tax Code structure. From 1986 through 2004, it has grown 
disproportionately burdensome----
    Mr. Lynch. I agree.
    Mr. Steinberg [continuing]. Both to the individual and to 
small business.
    Mr. Lynch. I agree.
    Mr. Gray. I think that simplification itself, as we all 
know, is the Achilles heel to the complication. I think that 
when small business comes and says, we need this and this, 
maybe you step back and look and say, well, instead of throwing 
the whole thing out the window, why don't we take an activity 
like passive activities, which again 20 years ago was very 
critical, it stopped what was a big problem, but now it's 
filtered over into middle class America, people making under 
$100,000. AMT started out to say, these corporations are going 
to pay something. And now it gets to a person making into 
$100,000 with a family can end up in AMT.
    So maybe you step back and say, yes, it is OK for us to 
come forward, small business, here are the ideas. But maybe 
there are some areas of law, credits is another one, it is 
called, maybe there needs to be a step-back and say, let's just 
take this whole area, yank it and put something else back in. 
Because if you change everything, then what happens, my theory 
a minute ago about the cell phone, everybody using them now, if 
you changed the technology and they had to do something 
different, what happens is the learning curve goes extremely 
high, non-compliance goes right with it.
    So I think in the best interests of the tax system, maybe 
instead of fine tuning, you need to do some retuning. Throw 
some of those keys out and say we need something different. 
This was good for a time, but it has outgrown its need.
    Mr. Lynch. Thank you. Thank you, Madam Chairwoman.
    Ms. Miller. Thank you very much. I think we are all 
anxiously awaiting, the entire Nation anxiously awaiting the 
end of July when the President's tax simplification committee, 
we use that term, we cannot use the term reform, if we talk 
about tax reform we are going to get another one of those 5 
pound books. But tax simplification, when they actually do make 
the recommendations, I think there will be a great amount of 
interest in that, particularly when you contemplate the fact 
that people estimate, guesstimate, whatever benchmark they are 
using, that the cost of compliance annually for taxpayers in 
our Nation, just to fill their forms out, is about $225 
billion. It really is rather staggering.
    But I think sometimes in Government, things really never 
change. I often think, I was thinking about this actually when 
we were putting this hearing together, about paperwork 
reduction. My dad is an aeronautical engineer. He is in his 
80's now, but he worked down at Redstone with Werner von Braun, 
which he said were very exciting times, they used to set off 
the rockets. He said once the Government got involved, they 
never would let them set up a rocket until the weight of the 
paperwork equaled the weight of the rocket. [Laughter.]
    So there has been, as they say, some things never change.
    I certainly appreciate all of you attending today. You have 
given us some extremely specific recommendations about the 
kinds of changes that we need to look at here and I am certain 
that the committee staff has taken very good notes about many 
of these things. We certainly will be working with the Internal 
Revenue Service and some of the other agencies as well, but 
particularly with the Internal Revenue Service, with your 
recommendations to see about legislative changes, if that is 
necessary. Certainly I think we could promulgate some rules and 
the kinds of tools we need to give them to help our entire 
Nation comply with the existing Code as we look forward.
    We appreciate all of your time and your traveling to 
Washington for our committee hearing. It has been very, very 
interesting. Thank you so much.
    [Whereupon, at 3:30, the subcommittee was adjourned.]
    [Additional information submitted for the hearing record 
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