Lightening the Compliance Burden

Whether by design or coincidence, both the House and Senate held hearings on the same day in late July on the complexity of the tax code for small business owners.

The House Committee on Small Business titled its hearing, “How Tax Compliance Obligations Hinder Small Business Growth,” while the Senate Committee on Small Business and Entrepreneurship hearing was “Targeted Tax Reform: Solutions to Relieve the Tax Compliance Burdens for America’s Small Businesses.”

“Making the tax code simpler is particularly important for American small-business owners, as they are disproportionately affected by tax complexity — a finding that, unfortunately, has not changed with time,” said House Committee on Small Business Chairman Steve Chabot.

He cited a study by the Office of Advocacy at the Small Business Administration that found that small firms pay 67 percent more to comply with the tax code than large firms do. “A recent update to those studies found that firms with less than 50 employees pay, on average, $1,518 per employee in tax compliance costs, whereas firms with more than 100 pay $647,” Chabot said.

Likewise, Sen. David Vitter, chairman of the Committee on Small Business & Entrepreneurship, noted that the administrative burden of tax compliance is now a greater strain on small businesses than their actual tax liability. “I don’t need to tell the business owners here today about that burden because you all feel it every day and so does every other small business in America,” he said.

Small business has to accept a certain amount of burden, acknowledged Roger Harris, president of Padgett Business Services. “Business owners are willing to accept a certain amount of that burden,” he said. “But they really want to spend time on making the business better. Everything comes at a cost. If more burden is placed on them, the resources have to come from somewhere, so you shouldn’t do it unless it’s absolutely necessary.”

Representing Practitioners

Troy Lewis, chair of the AICPA’s Tax Executive Committee, and Jeffrey Porter, chair of the AICPA’s Tax Reform Task Force, represented the institute at the House hearing and the Senate hearing, respectively.

Lewis told the House Small Business Committee that compliance with federal tax laws can act as a road block in the growth of small businesses. “Unlike large multinational corporations, the time spent by small businesses in complying with tax laws is much more costly because small businesses do not have the luxury of critical mass and a large customer base with which to efficiently spread non-value-added compliance costs,” he said. “Time devoted to complying with tax laws has an impact on business creation, job growth and the economic prosperity of these small businesses.”

“The one thing I wanted to stress at the hearing was the need for IRS taxpayer services,” Lewis said. “To echo Commissioner Koskinen, the past filing season really was abysmal.”

He cited the average hold time for the Practitioner Priority Service telephone line, which reached 47 minutes: “There were some larger regional firms that hired lower-level people to queue up the phone calls.” After the calls were answered, they would switch the calls to the CPAs who needed to speak with the IRS.

“Many of our members also experienced what the IRS calls ‘courtesy disconnects,’” he said. “According to the IRS, they terminate telephone calls from small business and other callers, without taking a message or getting contact information, if the caller has been on hold for two hours. As of April 18 this year, approximately 8.8 million calls received by the IRS were subject to their ‘courtesy disconnect’ policy, which represents an increase from approximately 544,000 over last year.”

Lewis addressed the burden of tracking and complying with the many different state non-resident employee tax withholding and reporting rules for just a few days of work by an employee in a non-resident state. “The state personal income tax treatment of non-residents is inconsistent and often bewildering to multi-state employers and employees,” he said.

“Small businesses must understand each of the states’ treatments of non-resident employee withholding and assessment of taxes and the unique de minimis rules and definitions,” Lewis stated. “Currently, 43 states plus the District of Columbia impose a personal income tax on wages, and there are many different requirements for withholding income tax for non-residents among those states. There are seven states that currently do not assess a personal income tax. Employees traveling into all the other states are subject to the confusing myriad of withholding and tax rules for non-resident taxpayers.”

The AICPA endorses H.R. 2315, the Mobile Workforce State Income Tax Simplification Act of 2015, introduced on May 14, 2015. “Having a uniform national standard for non-resident income taxation, withholding, and filing requirements, as H.R. 2315 provides, will enhance compliance and significantly relieve these unnecessary administrative burdens on businesses and their employees,” he said. “Additionally, H.R. 2315 provides a needed 30-day de minimis exemption before an employee is obligated to pay taxes to a state in which they do not reside. Many small businesses need Congress to enact this legislation.”

At the Senate hearing, Porter likewise emphasized that tax compliance is particularly burdensome on small businesses.

“While our tax code has always had a tendency to change, in recent years the rate of change has accelerated,” he told the committee. “New regulations, revenue procedures and notices come out daily, providing guidance on enacted laws. Extender bills pass annually and then expire within a month, leaving businesses again unsure what the rules are. When a small-business client asks a simple question such as ‘What is my tax rate?’ you have to explain that it really is not that simple because you have the regular rate, the Alternative Minimum Tax, the net investment income tax and the variety of phase-ins and phase-outs of various provisions. America’s small businesses need a tax code that is certain, simple and transparent.”

Porter said that the AICPA endorsed the Small Business Tax Compliance Act of 2015. “We believe the act can ease compliance costs and improve the overall tax system for small businesses across the country,” Porter told the committee, which is chaired by Sen. David Vitter, R-La., who introduced the bill. Porter said that it encompasses recommendations proposed by the AICPA that would relieve burdens imposed on small businesses by the tax code.

Porter cited the tangible property regulations as an example of a tax compliance burden that the act would help correct. The regulations address how businesses should report the purchase and improvement of tangible property.

“We appreciate that the chairman’s bill includes a provision to increase the de minimis safe harbor threshold for most businesses from $500 to $2,500, and provides an opportunity for more small businesses to use the higher $5,000 threshold,” he said.

Stephen Mankowski, national executive vice president and national tax policy chair of the National Conference of CPA Practitioners, testified at the House hearing.

“The committee members on both sides of the aisle were in basic agreement that the tax code has gotten much too complicated and that something needs to be done,” Mankowski observed. “The problem is how to simplify it. Without doing a total rewrite, it’s not an easy fix.”

From 1099-K

Mankowski was asked to testify specifically about Form 1099-K and the use of payment card information for compliance efforts.

In recent years, there has been a change in the way that business is conducted, he observed. Businesses that formerly accepted only cash or checks now accept credit cards, “and the related fees have simply become yet another cost of doing business — and another element of taxpayer burden,” he said.

“Even after researching the processing firms to obtain the best processing rates, they learn that MasterCard and Visa have different merchant fees when compared to American Express and Discover,” he said. “If the consumer uses a credit card that includes member programs or ‘points,’ an even higher processing rate may be charged by the merchant bank.”

“Form 1099-K has been a new source of taxpayer burden for the small-business owner,” Mankowski maintained. “Trying to accurately track revenue in the same way as the 1099-K presents data would result in an accounting nightmare,” he said. “To further complicate the record-keeping, businesses receive a Form 1099-K for each specific payment processor.”

The IRS instituted a pilot matching program for the 2015 filing season called the Payment Mix Comparison Tool. The program compares payment data from payment settlement entities such as credit card companies with income reported by small businesses. However, the IRS has not clearly defined the stages of the pilot or measurable goals that it can use to determine when the pilot has moved from one state to the next, or if it should move, according to the Government Accountability Office.

“PMCT accesses the IRS database and compares various ratios for a business with a specific [Merchant Category Code] against Form 1099-K. The result tells the CPA if the results are within specifications of the database,” Mankowski said. He noted that if the payment processor applies an incorrect MCC code for a business, the PMCT results could be beyond the standard deviation, which may result in an IRS notice.

“Form 1099-K is an attempt by the IRS, as directed by Congress, to get some sort of third-party reporting on business income,” said Harris. “The theory behind credit card reporting is that if I know how much business you do in credit and debit cards, I can determine from that slice of the pie how big the entire pie is. The problem is, can you really determine from one piece how big the whole pie is? We’re not comfortable yet that what the IRS is getting is being determined properly to get the total. There are a number of issues that might skew the results.”

“For example, young customers near a college or university almost never use cash, while the same type of business a few blocks away might be nearly entirely conducted in cash,” Harris explained. “When a business receives a letter questioning their gross receipts, the business owner is faced with proving a negative.”

The tax compliance burden faced by small businesses can vary considerably depending upon a number of factors, according to the GAO, which submitted testimony at the hearing. “The IRS’s new payment card matching program has the potential to enhance the agency’s ability to identify non-compliant small business taxpayers while minimizing taxpayer burden,” the GAO stated. “However, the IRS has a long road ahead in determining whether, and how, the payment card pilot program and its many activities can be fully implemented.”