STATEMENT
of the
Honorable Nydia M. Velázquez, Chairwoman
House Committee on Small Business
Hearing on Closing the Tax Gap Without Creating Burdens for Small Businesses
April 26, 2007

One of the focuses of this committee is to ensure small businesses are given every tool to comply with regulations and reduce paperwork burdens.  No place is this more true than when it comes to their taxes.  Right now, it is estimated that small businesses spend 6 billion hours complying, at a cost of $260 billion.

While the vast majority of taxpayers comply with their obligations, the Internal Revenue Service has estimated that a significant percentage of taxes due are not paid.  This problem, known as the tax gap, is the subject of today’s hearing.  The IRS estimated the tax gap to be $345 billion for 2001 alone. 

It seems the administration is seeking for new ways to make up for the current deficit.  As made clear in the fiscal year 2008 revenue plan, they have wrongly determined that the best course of action is to escalate IRS enforcement efforts on small businesses.

I believe there are several proposals in the plan that will impose severe hardships on the small business community, yet only narrow the tax gap by a fraction of one percent.

Before imposing additional reporting requirements, the IRS needs to assess whether their internal procedures can achieve this without creating excessive burdens.  Small businesses are facing a number of challenges, including an overly complex tax code.  Now, they are being hit with a disproportionate share of IRS enforcement efforts.  Of the $100 million in enforcement initiatives in the FY 2008 budget, nearly 75 percent is directed towards small businesses. 

It is a sad fact that in our present system of taxation, many of our most profitable large corporations avoid paying taxes by shifting income to offshore tax havens.  In fact, the IRS website cites one authority that the annual loss to offshore tax shelters to be at least $70 billion.  Yet, enforcement efforts remain on small businesses.  I find it puzzling when the IRS projects it will generate 50 percent more revenue for each dollar spent on enforcement for large multinationals.

It is also troubling to know that the figures estimating the tax gap do not include recent data on the compliance levels of large corporations.  That information has not been updated since 1988.  Before deciding on a course of action that may harm small businesses, it is necessary to have an accurate picture of the tax gap.

Congress also needs to work together to make it easier for small businesses to comply and harder for bad actors to evade their obligations by simplifying the tax code.  A good first step will be made with passage of a measure to expand and extend Section 179 expensing.

The commissioner is right when he says that it is unfair for honest small business taxpayers to have to compete against these tax cheats.  My advice to the IRS in crafting a tax gap plan is to consider the private costs and burdens of your proposals and to not simply focus on the revenue figures. 

As this country celebrates Small Business Week, we need to ensure our government is not creating unnecessary obstacles for the small business owners who are doing the right thing.   Closing the tax gap is critical, but we must not simply replace one problem with another by burdening our small businesses.