Small Business Committee Democratic Site

STATEMENT
of the
Honorable Nydia M. Velázquez, Ranking Democratic Member
House Committee on Small Business
Hearing on "The Tax Gap"
April 27, 2005

Thank you, Mr. Chairman.

With April 15 only a few days behind us, the challenges of filing taxes is still fresh in the minds of all U.S. taxpayers - particularly small businesses. However there is clearly an emerging problem with our tax system - the tax gap in this country is now estimated to be around $350 billion a year - and growing.

This is an issue that impacts every taxpayer, and the reality is that there is simply no room for such a gap to exist. With a budget deficit nearing $427 billion, ensuring that everyone is paying their fair share of taxes is a good thing. To allow someone to avoid paying punishes honest taxpayers - especially this nation's entrepreneurs who are having to work extra hard to keep their businesses afloat.

Closing this massive tax gap could be the difference between cutting this country's growing budget deficit in half. In 1981 it was reported by the IRS commissioner that the tax gap had risen from $29 billion in 1973 to $87 billion in 1981.

Clearly, today's $350 billion tax gap is reason for alarm. This is a gap that we cannot afford to let grow any further. IRS statistics show the shortfall is largely due to unpaid or unreported income. The IRS reports also indicate that a significant number of those who underreported are this nation's small businesses and self-employed.

The Bush administration has taken the approach that the best way to deal with this issue is enforcement and more enforcement. The IRS has spent a lot of their efforts on stricter enforcement through audits while cutting funding for assistance that may allow taxpayers to pay their fair share. The latest IRS budget requests even more money for enforcement to address this problem.

I am concerned that there is a lack of balance with the actions that have been taken. The increased enforcement efforts do not come without a cost to the private sector. It increases the administrative costs for entrepreneurs who are honest taxpayers. I am also troubled that some of the enforcement efforts are overly focused on small businesses. There are a large number of small firms who have not been underreporting - and they should not be overly burdened by these enforcement efforts.

The small business community knows very well just how complex the tax code already is. In fact, witnesses will testify today about how the complexity of the tax code has led to increased non-compliance. It is not a matter of avoiding taxes; it is that entrepreneurs cannot decipher the tax code.

The last two tax bills in 2003 and 2004 provided little small business relief and only exacerbated the problem when it comes to complexity. The FSC/ETI legislation passed in 2004 provided for 561 changes and added 250 pages of tax law changes.

The burdens of compliance have long been an issue for this nation's entrepreneurs who simply do not have the same types of resources that their corporate counterparts do in order to comply. According to an Office of Advocacy report, for small businesses with less than 20 employees, the cost of tax compliance is nearly double that of their larger counterparts. The costs of compliance are staggering - taxpayers now spend over $100 billion per year in accounting fees to complete their returns. Something is not right here.

Many small businesses who have been trying to pay their taxes have been subjected to an audit and have had to hire outside accountants. Further compounding this problem is the fact that largely used resources for small businesses - the local taxpayer assistance offices - are being shutdown due to budget shifts from assistance to enforcement by the IRS.

It makes little sense to work to close the gap by increasing compliance, while at the same time ridding entrepreneurs of the tools they rely on in order to comply.

There is no question that there should be negative consequences for failing to play by the rules. However, in doing so - and in implementing stricter enforcements - we need to ensure that this nation's main job creators are not once again overly burdened. With the IRS already contributing to 80 percent of the regulatory burdens small businesses face - these additional enforcements only continue to add on.

Today's hearing is an opportunity for us to evaluate solutions on ways to reduce the existing skyrocketing tax gap. It is also a time for us to ensure that small businesses will not be unfairly burdened in the process. As the drivers of this nation's economy - we cannot afford to put the costs of collecting taxes on small businesses. We need balanced solution to close the tax gap.