Bond Letter to Rossotti on IRS Responses to Small Business Tax Questions

UNITED STATES SENATE

[2] The study, prepared by the Treasury Inspector General for Tax Administration (TIGTA), also compared the accuracy of the ETLA to commercial web-sites providing tax guidance and found that the IRS system outperformed the private sector competition by a few percentage points. Nonetheless, Bond said the fact that nearly half of the questions submitted to the IRS system were answered incorrectly is "extremely worrisome" and "undermines small business taxpayers' confidence in the IRS."

[3] "A 54-percent accuracy rate for small business tax questions poses a grave risk to small business taxpayers who turn to the IRS for help and who rely on the accuracy of the agency's answers at their peril," Bond said. "Moreover, this disparity re-confirms the urgent need for improved service to small business owners on America's Main Street. These results leave little doubt that small businesses are fighting an uphill battle figuring out what they owe the IRS."

[4] The study found that out of a sample of 50 questions concerning small business tax issues, the IRS provided the small business taxpayer with the correct answer only 54 percent of the time, which is in stark contrast to the 76 percent and 80 percent accuracy rates reported by the IRS in Fiscal Years 1999 and 2000, respectively, for ALL TYPES of inquiries made through the ETLA program.

[5] In Fiscal Year 2000, the ETLA is projected to answer nearly 350,000 tax law questions. In its review of three commercial Internet web sites, TIGTA gauged only a 47 percent accuracy rate.

[6] The results came as the IRS prepares to open its new Small Business/Self-Employed Division (SB/SE) on October 1 as part of a reorganization of the agency into four operating divisions, each dedicated to the particular needs of specific groups of taxpayers such as small businesses and the self-employed.

[7] In a letter today to IRS Commissioner Charles O. Rossotti, Bond said he believes the first order of business for the SB/SE should be to take steps to improve the IRS' accuracy rate. "I urgently request that you take steps to improve the IRS' accuracy rate with respect to tax questions submitted by small businesses and self-employed individuals," Bond wrote.

[8] Bond has been a stronger advocate for the reorganization, calling it an opportunity to "swing the pendulum back from the heavy- handed enforcement mentality of yesteryear to a new era of prompt, courteous, and fair service for America's small-business taxpayers."

[9] According to the IRS, small businesses are more likely than other segments of the taxpayer population to have problems complying with tax laws. In fact, IRS data show that small businesses tend to have more collection cases involving employment-tax withholdings than large and mid-sized businesses, and that self- employed persons and supplemental-income earners make up about 40 percent of the examination and collection cases involving individual taxpayers.

[10] A separate GAO study, prepared for Bond and released last month, found that small businesses account for about 44 percent, or $915 billion, of all money collected by IRS in recent years.

[11] Historically, the IRS has allocated most of its resources to correcting problems after they occur rather than preventing problems from occurring at the outset. The resulting focus on back- end correction can be especially problematic for small businesses since, in many cases, by the time the IRS identifies a problem, the resulting interest and penalties can be large enough to push a small company out of business.

[12] "Clearly, small businesses are caught between a rock and a hard place, with limited resources to help them comply with the law," Bond concluded.

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The Honorable Charles O. Rossotti

[14] Much to my surprise and alarm, the TIGTA review found that out of the sample of 50 questions concerning small business tax issues, the IRS provided the small business taxpayer with the correct answer only 54% of the time. While that accuracy rate is slightly higher than that of the three commercial Internet web sites (which achieved a 47% accuracy rate), these findings are extremely worrisome and undermine small business taxpayers' confidence in the IRS.

[15] The TIGTA findings are also in stark contrast to the 76% and 80% accuracy rates that the IRS reported in Fiscal Years 1999 and 2000, respectively, for ALL TYPES of inquiries that taxpayers posed through the ETLA program. In Fiscal Year 2000, the ETLA program is projected to answer nearly 350,000 tax law questions. A 54% accuracy rate for the small businesses tax questions poses a grave risk to small business owners and the self-employed who turn to the IRS for help and rely on the accuracy of the agency's answers at their peril.

[16] With the IRS' new Small Business/Self-Employed Division set to "stand up" next week, I urgently request that you take steps to improve the IRS' accuracy rate with respect to tax questions submitted by small businesses and self-employed individuals. I understand that Congress has much work to do when it comes to simplifying the tax laws, and as the Chairman of the Senate Committee on Small Business, I will continue my efforts to enact a simpler, fairer, and flatter tax code. In the interim, however, the IRS must administer the current system in an accurate, consistent, and timely manner. A significant part of that responsibility includes giving accurate, consistent, and timely manner. A significant part of that taxpayers correct answers to their questions.

[17] You both have made considerable progress in modernizing the IRS to meet its dual mission of collecting taxes and providing top-quality customer service, and I applaud your efforts. I hope the TIGTA's review will serve as a guide to areas in the new SB/SE Division where additional attention is greatly needed.

[18] Thank you for looking into the matter and taking appropriate action to ensure that small business taxpayers can confidently rely on the IRS when seeking assistance with their taxes. If you have any questions or would like to discuss this matter in greater detail, please do not hesitate to contact me or have your staff contact Mark Warren, the Committee's Tax Counsel, at 202/224- 5175.

Sincerely,