SB/SE Fair Compliance (Schedule C Non-filers) Committee Meeting Minutes

August 19, 2003 

Attendance

• Castleberry, Patrick
• Fish, Walter
• Forzano, Chris
• Greenberg, Richard
• Hanna, Ed
• Kerrigan, Karen
• Nagel, Paul, Chair
• Oatley, Owen
• Taylor, Charles
• Peterson O'Brien, Mary DFO

Program Owner

• Kinney, Margie

Note Taker

• Ofilas, Marla

Guest

• Gary Knott. Small Business Liaison, Business Systemic Advocacy, TAS

Welcome/Announcements/Review Agenda
Paul welcomed the members to the teleconference meeting. Paul reminded the committee of the October TAP Annual meeting in Washington D.C. at the Grand Hyatt Hotel. He explained it would be held on the first Thursday, Friday and Saturday of October and for the committee to mark their calendars.

Paul asked the committee if they received their meeting agenda. He also asked if there were any questions or changes that needed to be made to the agenda.

Paul wanted to note that Mike Sollitto is no longer the SBSE Schedule C Non-Filers program owner. His retirement date was August 1 st . The new program owner will be Susan Leatherman who is unable to attend today. Margie Kinney sat in on the call as the temporary program owner.

No changes were made to the agenda and Paul continued on to the next item.

Roll Call
Marla took a roll call and concluded that 10 members were present for an official quorum.

Guests
Gary Knott with the Taxpayer Advocate organization in business advocacy, acknowledged himself that he would be sitting in on the teleconference.

Review/Approve Minutes
Paul asked the committee if they were able to review the July teleconference minutes and if there were any changes that needed to be made. Committee members that had changes, emailed the corrections to Mary therefore no corrections were made during the teleconference.

Decision: The committee approved the meeting minutes from the previous teleconference.

Report on Joint Committee Meeting
Paul asked if any of the four-committee members that participated in the last joint committee teleconference were willing to give an update. Charles Taylor informed the committee that he was able to participate on the entire conference call but did say that the beginning of the call dealt with administrative issues. Ed Hanna replied that the important thing that was discussed was to get all the issues elevated and to be prepared for the meeting in October.

Paul reviewed that he would like to get all issues elevated to the joint committee for approval. Paul explained that an issue goes into a full report by the joint committee and a copy is sent to Nina Olson, National Taxpayer Advocate, Deryle Temple , the Taxpayer Advocacy Panel Director, the Commissioner of the IRS, and the Secretary of the Treasury. Ed asked if this report would be made prior to the October meeting. Paul clarified that the report needs to be voted on and approved during the October meeting. The joint committee is having a meeting the first week of September to review the contents and what will be included and approved with all the committees. Also, the joint committee will review and approve an agenda for the October meeting.

Issue Committee Changes
Paul moved on to the next item on the agenda and asked Mary if she had any comments. Mary explained that Sandra Ramirez, TAP manager, would be the new designated federal official and will attend the committee's next call in September.

Updates from Program Owner
Paul asked Margie Kinney if there was anything she wanted to share with the committee. At this time Margie had no updates to report.

Sub-committee Report Out
Paul asked if there was anyone from Teresa Smedley's subcommittee that was available to do a report out. Patrick Castleberry explained the subcommittee has had 3 or 4 teleconferences since the face-to-face meeting that was held in May. The subcommittee has been exploring the idea of an “EZ Pay” plan to make estimated tax payment compliance simpler and faster for lower and middle income self employed taxpayers. The subcommittee was able to have Mike Sollitto retrieve IRS research and give statistics. They are trying to determine whether, for example, a 15% flat rate would catch most of the taxpayers that are self-employed and who have $50,000 or less in self-employment income. Paul asked for an explanation on the 15% for those who do not understand. Patrick explained that the committee was trying to make a new safe harbor to avoid the estimated tax penalty for underpayments. The existing safe harbor provision requires taxpayers to go through difficult calculations for each quarterly payment that's due. The subcommittee is recommending that taxpayers who qualify send in a flat 15% of gross self employment income each month to avoid the penalty. The committee has analyzed pertinent IRS statistics to determine whether this flat percentage approach would be an effective means for getting most of the federal income tax and self employment tax paid prior to the regular filing date. IRS statistics indicate that many self employed taxpayers become non-filers because compliance with the estimated tax payment system is complex and confusing and, thus, many taxpayers ignore it. This in turn leads to an inability to pay what is owed at return filing time, leading directly to a decision not to file. Once that first return becomes “unfiled,” the subcommittee believes and IRS research confirms, subsequent returns become “unfiled”, and the taxpayer becomes a chronic non-filer, afraid to re-enter the tax system.

The statistics have been encouraging for a 15% rate for $50,000 or less in total self-employment income for the year. A challenge the subcommittee has been facing is wondering if the IRS would be able to make a regulatory change. For example, the subcommittee is researching whether the IRS has authority to amend the regulation under the estimated tax penalty section, and to adopt a new safe harbor, or must Congress make a legislative change. Pat's preliminary opinion is that inasmuch as the existing safe harbor is a statutory safe harbor, the IRS may not adopt an additional safe harbor through regulation, but must seek a Congressional amendment to the statute. In that event, the subcommittee will propose new statutory language for the IRS to propose to Congress for adoption of the new safe harbor.

Ed Hanna asked whether the subcommittee plans to handle taxpayers that first look like they are going to make the $50,000 mark in the 1st and 2nd quarter but in the 3rd and 4th quarter exceed. Would they go back under the old rule? Patrick explained that the subcommittee plan is proposing monthly payments rather then quarterly. This is to get the taxpayer in the habit of sending the money as soon as they get it, so they get the benefit of the new safe harbor. Also, once it seems they are exceeding the $50,000 mark, they must rely on the old safe harbor, that is, the more complicated one. Paul asked if the criteria for $50,000 are too low. Should it be moved up to $100,000 or $150,000 to get a majority of Schedule C's? Paul explained that $50,000 may be a lot of money in some areas of the United States but in places like New York it is considered poverty. Patrick explained that IRS statistics show if it's at $50,000 that we will catch over 70% of the people that are self-employed in the United States that have to pay estimated taxes. Patrick expressed that at $50,000 this would be effective but agreed that there would be geographical anomalies because of disparities in the cost of living. This isn't designed to supplant the existing safe harbor but to add a new one for the middle and low-income self employed taxpayers who seem to be the predominant non-filers.

Ed wanted to know about taxpayers that have income from other sources. Patrick explained that statistically taxpayers with other income, e.g., those who have spouses with wage income, do not seem to be the non-filer problem. Also, as long as your self-employment income does not exceed $50,000, you may take advantage of the safe harbor even though you may have other income that will allow you to exceed the $50,000 mark.

Paul asked Ed if he wanted to discuss the issue his subcommittee is working on. Ed discussed his work on social security benefits to the committee. He explained to the committee that he received a brochure via email. He felt it looked good; however, it overlooked the multitude of benefits that are available besides retirement. He feels the brochure is too condensed, and that the other benefits are not brought out very clearly. He would like to keep it simple, but expanded so the other benefits don't get lost. The committee continued to discuss Ed's work and all felt it was a good piece that he is working on. Paul asked if anyone had further comments regarding Ed's subcommittee work. He also explained that if anyone was interested in learning more about social security that they could go to www.ssa.gov.

Karen Kerrigan gave a report out on her subcommittee work. She sent 8 documents to the full committee, which she recommended go to the joint committee for review and perhaps elevation. The first document was a general memorandum reviewing the charge of the subcommittee and its general work and accomplishments over the past eight months. The memorandum walked through several of the projects that the subcommittee is currently working, and where they were with respect to their stages of research and development. The other documents are the recommendations that are requested be sent to the joint committee. One of the recommendations, under the leadership of Owen Oatley, is an W&I FYI Box. It is proposed that the W-9 form be used to inform and educate taxpayers about their tax responsibilities, i.e., if they receive non-employee compensation they most likely will be subject to self-employment tax and income tax. Sample text of what this “FYI Box” would look like was included in the documents. The subcommittee felt that using the W-9 form as an information and education venue about their obligation to report and file on non-employee compensation made sense. The form is widely used and it would be a cost efficient way to reach taxpayers. The concept and recommendation is simple, and Karen reminded committee members that sometimes the simple ideas work the best. Owen added that the subcommittee is open to any and all ideas that would help get peoples' attention with respect to making the FYI piece stand out and deliver its intended message.

Karen provided an overview on the second subcommittee recommendation, which proposed an IRS notice response study. The subcommittee discussed in detail what it might be that gets notice recipients to respond to IRS notices. Mike provided the subcommittee with data showing that 75% of people getting notices respond to these notices. Mike felt the study concept was a good idea. He originally stated in May that he was going to make a recommendation to the IRS that they undertake such a response study. Mike, of course, is no longer the program owner and the subcommittee felt a formal recommendation should still come from them so this idea does not “fall through the cracks.” Essentially Karen explained that by learning why people respond to notices and what triggers compliance, the IRS may be able to better develop effective outreach initiatives to increase the number of people who respond to notices. The subcommittee felt that it's an issue worth elevating to the joint committee. Owen also explained that the subcommittee wanted to better understand who makes up the population of non-filers. Mike provided a 1996 study that was very helpful but the subcommittee expressed an interest in seeing if things have changed since then. According to the 1996 study, 86% of the non-filers have previously filed. In reviewing income, middle to low income individuals seemed to make up the bulk of nonfilers. The subcommittee again reiterated the need for them to understand (and perhaps the IRS) their target population so they could best craft messages and outreach mechanisms that target these particular populations.

Karen continued with other recommendations submitted by the subcommittee. The subcommittee worked on a simple message campaign that would enable IRS to reach taxpayers directly and better educate them about the benefits of filing a schedule C tax return. Given that the IRS communicates with these taxpayers generally, the subcommittee felt the IRS should consider communicating to prospective schedule C non-filers in notices. For example, it made sense to either include in the notice a separate brochure or communications mailer about the “benefits of filing”, or even include “benefits of filing” messages in the text of notice letters. This is just another simple, cost-effective way of encourage compliance and encouraging taxpayers to think about the long-term consequences of not filing.

The last recommendation reviewed a project that subcommittee member Dick Greenberg has been working on. Dick has been reaching out to the public school system to let them know about an IRS curriculum called Understanding Taxes.

While his efforts with the Chicago public schools was a positive experience, the school system has other priorities and could not consider making the curriculum part of a “financial literacy” initiative for the year. Karen continued to discuss the recommendation and concluded that the subcommittee felt it was important that all TAP members be aware of the IRS curriculum as they interact with the public during their outreach activities. She also indicated on the recommendation that this is a “to be continued” exercise. The committee, and specifically Dick, is pursuing leads and meeting with other public school systems with the goal of having them incorporate the Understanding Taxes materials as part of their curriculum. The committee wants more people to know about this curriculum and its availability.

Paul thanked Karen for the job that the subcommittee did and asked if any one had comments to add. Mary wanted to clarify the procedure on how an issue gets elevated to the joint committee. She explained that it could go one of two ways. An issue could be sent through the Ad Hoc committee or it could go through your monthly report. Mary suggested that since many of the recommendations have attachments, that we should send hard copies as well.

The committee continued discussing ways an issue is elevated as well as the format for presenting the issue.

Agreement: The committee agreed to have Mary send on the recommendations to the joint committee that she receives between now and September 1st.

Development of New Sub-Committees
Paul explained that there would be two subcommittees that will roll over to next year. He asked the committee if there were any other issues that the committee would like to bring up or any they could think of. Karen explained that she has one in mind but it may not fall under this committee and could be for the joint committee to consider. She would like to propose that a committee work on opportunities for reduction or consolidation of paperwork . The IRS generates, from a regulatory perspective, the most paperwork for businesses and the public and felt TAP could be instrumental in helping the IRS streamline and reduce paperwork requirements.

Mary explained that the committee works in partnership with the IRS and with Susan Leatherman. This means that this may not be a committee that would be able to work this issue unless this issue is relevant to Schedule C business. This could be an issue worked in your area committee or ad hoc.

Next Steps
Paul reviewed what the next steps are for each subcommittee.

Action: Mary will arrange for Susan Leatherman to meet with the subcommittee chairs to review sub-committee work.

Public Input
Paul introduced Gary Knott to the committee. Gary informed the committee that he is the small business liaison for systemic business advocacy for the Taxpayer Advocate organization. He was interested and joined the call because he was working on Nina Olson's annual report to Congress. He wanted to see if his committee and the SBSE schedule C committee are working on the same issues. He also informed the committee that they are looking at the issue of independent contractors and are trying to figure out what to do around this area. The work on safe harbor that the committee is discussing sounds like a good idea to Gary.

Gary extended his appreciation to the committee for letting him sit in on the call and also expressed to the committee that he was glad they are working on the same issues.

Closing/Assessment
Paul asked if there were any comments from the committee before he closed the meeting. The committee felt it was it was a very productive meeting and was very pleased with the outcome. Paul adjourned the meeting.