Hearing on Small Business Health Insurance Tax Credit
HEARING ON SMALL BUSINESS HEALTH INSURANCE TAX CREDIT
SUBCOMMITTEE ON OVERSIGHT
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
November 15, 2011
Printed for the use of the Committee on Ways and Means
COMMITTEE ON WAYS AND MEANS
Diane Black, Tennessee
Aaron Schock, Illinois
Lynn Jenkins, Kansas
Kenny Marchant, Texas
Tom Reed, New York
Erik Paulsen, Minnesota
|John Lewis, Georgia
Xavier Becerra, California
Ron Kind, Wisconsin
Jim McDermott, Washington
JON TRAUB, Staff Director
C O N T E N T S
The Honorable J. Russell George
Inspector General, Treasury Inspector General for Tax Administration
Ms. Sarah Hall Ingram
Commissioner of the Tax Exempt/Government Entities Division, Internal Revenue Service
Ms. Patricia Thompson
Chair, AICPA Tax Executive Committee, American Institute of Certified Public Accountants
Mr. Todd McCracken
President, National Small Business Association
Mr. Matthew Hisel
Co-Director, Home Resource
HEARING ON SMALL BUSINESS HEALTH INSURANCE TAX CREDIT
U.S. House of Representatives,
Committee on Ways and Means,
The subcommittee met, pursuant to notice, at 10:33 a.m., in Room 1100, Longworth House Office Building, Hon. Charles Boustany [chairman of the subcommittee] presiding.
[The advisory of the hearing follows:]
*Chairman Boustany. The subcommittee will come to order. Good morning, and welcome to this morning’s hearing on the implementation and effectiveness of the small business health insurance tax credit.
Small businesses are the backbone of our economy. They account for more than half of America’s private gross domestic product, and employ about half of its private‑sector workforce.
As our economy struggles to recover from the worst downturn since the Great Depression small businesses are bearing the brunt of the pain. Consumer demand is down, costs are rising, and too often Washington exacerbates the problem through new regulations, higher taxes, and burdensome red tape.
As a former small business owner running a small medical practice in Louisiana, I certainly know the challenges facing small businesses across this country. And so I take special interest in the subject of today’s hearing, because I know small business owners need real help when it comes to the rising cost of health care.
The problem is worse today than ever before. The cost of premiums for family policies have gone up by an average of nine percent in the past year, and I’ve heard complaints of premiums for small businesses going up by as much as 43 percent. A recent survey by the National Small Business Association found that 32 percent of small business owners have held off on hiring new employees, due to rising health care costs.
Today we’re here to consider how the small business health insurance tax credit has been implemented, whether it is effective in reducing health care costs for employers. When it was enacted as part of the President’s health care overhaul, supporters said the credit would provide access to affordable insurance, and help small employers insure their employees.
Two years later, we see that the results do not match up to the promises. Instead, it is a convoluted tax credit that temporarily subsidizes the cost of employee health insurance in a very small number of cases. Employers must undertake complicated calculations to determine whether they even qualify for the credit.
The instructions to the form are eight pages long and somewhat complex. And, in fact, we have a chart ‑‑ and I don’t know ‑‑ we have a chart on the screen here. This chart shows the complex analysis an employer has to undertake before knowing whether they can claim the credit, or how much it’s worth. If employers are able to navigate the calculations and confirm they are eligible, they must limit additional hiring and employee compensation in order to keep it, often times.
Although the credit does not appear to be providing meaningful assistance to small business owners, it is still the IRS’s job to implement it, and to do so in a way that protects taxpayer dollars from erroneous payments. So, we are here today to discuss two critical issues. Is the IRS administering the small business health insurance tax credit in a way that reduces the risk of erroneous payments and provides necessary information to taxpayers? And two, why is the credit then ineffective in helping many small employers reduce the cost of health insurance, or incentivizing employers not previously offering insurance to begin doing so?
These are important questions, and I look forward to today’s discussion. And I want to thank both of our witnesses for joining us here this morning.
Before I yield to Ranking Member Lewis, I ask unanimous consent that all Members’ written statements be included in the record.
*Chairman Boustany. And without objection, so ordered. Now I yield to the ranking member, Mr. Lewis.
*Mr. Lewis. Thank you, Mr. Chairman. Mr. Chairman, I want to thank you for holding this hearing on the small business health care tax credit. In these tough economic times, many Americans fear they are just one medical emergency away from losing their home, their businesses, or their savings. This tax credit is designed as a temporary measure to help small employers afford health insurance for their employees. It is the bridge to broader reforms that will help small businesses purchase affordable, high‑quality health insurance in 2014.
To date, more than 300,000 small businesses have claimed and benefitted from over $400 million in tax credits to help them provide health insurance to employees. Still, some question whether the credit is meaningful. Maybe I should repeat this. Still, some question whether the credit is meaningful.
It would be a mistake to draw conclusions from the early claim number currently available. Many small businesses request extensions and file their tax returns in September and October. Returns receive in October are still being processed. And, the agency does not expect to finish processing these returns until December of the end of this year. It is simply too early to tell how many businesses will claim the credit.
Finally, we must also remember that any serious discussion of the administration of tax credits must begin with fully funding the IRS.
Today’s hearing provides a real‑time example of how the $600 million in budget cuts proposed by the House Republicans may affect small businesses and employees. The Inspector General’s report states that the agency needs about $24 million to administer this credit next year.
I want to thank the witnesses for being here today, and look forward to hearing from each of you. As we have successfully done in the past, I would like to work with the Inspector General to provide the agency with any additional authority it needs to administer this tax credit.
Mr. Chairman, again I want to thank you, sir.
*Chairman Boustany. I thank the ranking member for his opening statement. And now I want to welcome our first panel of witnesses.
We have Mr. Russell George, who is Treasury inspector general for tax administration, and Ms. Sarah Hall Ingram, who is commissioner of the tax exempt and government entities operating division of the Internal Revenue Service. I want to thank you both for being here today, and to provide your testimony. You will each have the customary five minutes to present your testimony with your full written statement submitted for the record.
And, Mr. George, we will begin with you.
STATEMENT OF J. RUSSELL GEORGE, INSPECTOR GENERAL, TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION, WASHINGTON, D.C.
*Mr. George. Thank you, Mr. Chairman, Chairman Boustany, Ranking Member Lewis, members of the subcommittee. Thank you for the opportunity to testify on the Internal Revenue Service’s implementation of the Small Business Health Care Tax Credit.
The Patient Protection and Affordable Care Act amended the Internal Revenue Code to provide the Credit. As noted, the Credit was designed to encourage small employers and certain tax‑exempt organizations to offer health care insurance and receive a credit for the employee health insurance expenses that they have incurred. It took effect January 1, 2010. The Congressional Budget Office estimated the Credit would cost $37 billion over 10 years.
As it pertains to which taxpayers qualify for the credit and how to calculate the Credit amount, the law is very complex. To address this, the Internal Revenue Service issued two Notices which set forth detailed guidance on claiming the Credit, copies of which are included in my written testimony.
There are multiple steps to calculate the credit and seven worksheets that must be completed in order to claim it. These worksheets are required to determine the correct amounts to enter on 8 of the 25 lines on IRS Form 8941, which is the form used to claim the credit.
Despite IRS efforts to inform over four million taxpayers who could potentially qualify for the Credit, the volume of claims for the Credit has been low. Through mid‑October 2011, the IRS reported that just over 300,000 taxpayers, including tax‑exempt taxpayers, had claimed the Credit for a total amount of $416 million. This is substantially lower than the Congressional Budget Office estimate, that taxpayers would claim up to $2 billion of Credits for Tax Year 2010.
There is a risk of errors occurring when the Credit is claimed or processed. The Credit is new, and both taxpayers, as well as IRS employees, will need to educate themselves with the procedures for claiming the credit. Our review found that the complexity of the rules make them difficult for taxpayers to follow. The IRS also had to complete new computer systems’ programming to update the new Form 8941 and identify potential compliance risks.
While the Credit is specifically targeted to small business employers, some taxpayers may claim it even when they have not filed required employment tax returns. A lack of employment tax returns could indicate an erroneous claim and that the taxpayer is not an employer. However, it could also mean that the taxpayer is using the services of a professional employer organization, also known as a “PEO.”
PEOs, acting as the employer, file employment tax returns under their own Employer Identification Number, and the client businesses where the employees work, claim other employment‑related expenses, and the related deductions and credits that they paid. This presents a challenge to the IRS to determine whether a company which does not file employment tax returns qualifies for the credit without corresponding with or auditing the company.
We identified the issues by tracking the relationships between the PEOs and client companies in a previous review. In that report, TIGTA recommended that the IRS work with the Department of the Treasury to explore all options, including the use of the revised Form 2678, which is the Employer/Payer Appointment of Agent Form, to document the relationship between PEOs and their clients. The IRS agreed to establish such links between PEOs and their clients. However, their efforts were not successful.
To administer employment tax laws and to effectively use scarce compliance resources, the IRS needs to be able to identify businesses that begin using the services of a PEO, as well as when they terminate those services. Without this ability ‑‑ which, again, the service does not possess ‑‑ the IRS may not take appropriate actions against the businesses that do not pay employment taxes or improperly claim credits.
Some errors and omissions made by taxpayers when claiming the Credit were not identified by the IRS. Early in 2011 filing season, TIGTA auditors evaluated whether tax returns with errors were identified by the IRS. The types of errors we identified included errors in calculating Full‑Time Equivalent employees, incorrect application of percentage allowances or phase‑out rules, missing Form 3800, among others. The IRS was not identifying these errors, but has stated to us they are taking steps to address this as a result of our report.
Some errors that the taxpayers made could be addressed with the IRS’s existing authority to correct mathematical and clerical errors, which is known as “math error authority.” However, the lack of authority for other types of errors could hamper the IRS’s compliance efforts. This authority could allow the IRS to stop credit amounts claimed by taxpayers who do not appear to be qualified for these Credits.
Chairman Boustany, Ranking Member Lewis, members of the subcommittee, thank you for the opportunity to provide TIGTA’s assessment of the IRS’s administration of the Small Business Health Care Tax Credit.
[The statement of Mr. George follows: Testimony ]
*Chairman Boustany. Thank you, Mr. George.
Ms. Ingram, you may proceed.
STATEMENT OF SARAH HALL INGRAM, COMMISSIONER OF THE TAX EXEMPT/GOVERNMENT ENTITIES DIVISION, INTERNAL REVENUE SERVICE, WASHINGTON, D.C.
*Ms. Ingram. Chairman Boustany, Ranking Member Lewis, and members of the subcommittee, my name is Sarah Hall Ingram, and I am commissioner of the tax‑exempt and government entities operating division at the Internal Revenue Service. And I also serve as the executive lead for the IRS operational planning and implementation of the tax law provisions of the Affordable Care Act of 2010. I appreciate the opportunity to testify with you here today.
My purpose this morning is to discuss the credit and what actions the IRS has taken and plans to take to help insure that small employers that may be eligible for the credit are aware of it.
The small employer health care tax credit is designed to help small businesses and tax‑exempt organizations afford the cost of premiums for health coverage for their employees. In general, the credit is available to small employers that primarily employ low and moderate‑income workers and who pay at least half the cost of single coverage for their employees.
For tax years 2010 to 2013, the maximum credit is 35 percent of premiums paid by eligible small businesses, and 25 percent of premiums paid by eligible employers that are tax‑exempt organizations. After 2013, eligible employers will be able to take the credit for 2 additional years, and the maximum credit will increase to 50 percent for eligible small businesses, and 35 percent for eligible tax‑exempt organizations. I provided further details on how the credit works in my written testimony for the record.
Now, to claim the credit, a small business uses Form 8941 to calculate the credit amount, and then includes that amount as part of the general business credit that it takes on its income tax return. A tax‑exempt organization, which generally, by definition, has no income tax liability, uses the same Form 8941 to calculate its refundable amount, but then claims the credit on Form 990T.
Because the credit was enacted mid‑year in 2010 but was effective immediately ‑‑ in fact, back to January 1 ‑‑ the IRS was concerned that not all small employers that might qualify for the credit would know about it, and would claim it on their 2010 return. So the IRS launched a significant outreach campaign in the months following enactment.
In April, to increase awareness in the community, the IRS mailed postcards to more than four million small businesses and tax‑exempt organizations that were identified as potentially eligible for the credit, based on the limited payroll data maintained by the IRS, which gives a general indication of the number of employees and their wages.
The IRS issued detailed guidelines in May. And based on our continuous engagement with the small business and practitioner communities, we have regularly added materials and tools to a dedicated webpage on IRS.gov, including frequently asked questions, multi‑language videos, practical tool kits, and even a recorded webinar.
Since the provision was enacted, the IRS has held or participated in more than 1,500 outreach events targeted at small businesses and the tax practitioners and business professionals who serve them, both to increase awareness and knowledge in the community, and also to obtain practical feedback on our outreach strategies and on our materials.
The IRS is now developing a new outreach campaign to ensure that small employers that are eligible for the credit in 2011 will know how to claim it on their returns filed for the 2012 filing season. Based on our experience to date, and feedback from the community, this campaign will focus on working with our partners and stakeholders, including the tax software industry, insurance agents and brokers that work with small businesses, and the tax practitioner community.
The IRS is working to enhance information available through IRS.gov, as well as through social media and other venues in order to better communicate information to the small business community and the professionals who advise them.
Mr. Chairman, this concludes my oral testimony, and I’d be happy to answer any questions.
[The statement of Ms. Ingram follows: Testimony ]
*Chairman Boustany. Thank you, Ms. Ingram, and I appreciate your testimony.
We’re talking about a relatively new tax credit that appears to be somewhat complex for the small business owner trying to navigate through it. And now we have preliminary figures that show that it’s not being utilized or claimed to the extent that was initially thought would be the case.
And so, Ms. Ingram, I know IRS has gone through great efforts, sending out 4.4 million postcards, holding numerous outreached programs, as you outlined, and it’s certainly detailed in your written testimony. Yet, as of mid‑October, the figure that we have is 309,000 taxpayers out of a potential 4 million have taken the credit. And while we recognize it’s early and we’re not finished with the season yet, do you have more recent numbers as to who has filed for the claim ‑‑ or for the credit?
*Ms. Ingram. No, Congressman. The 309 figure is the most recent.
*Chairman Boustany. The most recent. What’s the cost to date to the IRS for the outreach program and for the implementation efforts?
*Ms. Ingram. I don’t have figures broken out by this provision. We use many of the same people to work on a number of provisions. So we would have to reconstruct that carefully ‑‑
*Chairman Boustany. Okay.
*Ms. Ingram. ‑‑ and provide that follow‑up.
*Chairman Boustany. If you could provide that to the committee ‑‑
*Ms. Ingram. Yes, we will give you what we can.
*Chairman Boustany. I appreciate that. And, Mr. George, I think TIGTA estimated that it’s been about $29 million that’s been spent on this?
*Mr. George. Well, we know that the IRS has requested that amount. And to assist my colleague here, they’ve expended over $1 million in the effort to inform the potential eligible taxpayers about this tax Credit. But again, they have requested over $24 million to help implement this Credit.
*Chairman Boustany. Thank you. And, Ms. Ingram, TIGTA’s report noted that the IRS has asked industry groups and professional organizations to determine why businesses are not taking the credit. Does the IRS engage in similar outreach programs, and for other types of tax credits? For instance, an R&D tax credit?
*Ms. Ingram. We have a fairly continuous process of talking to the practitioner community or industry associations about how their understanding and implementation of provisions are that affect that particular group.
Whenever we have new provisions coming into the tax laws, we do take opportunities to try to get focused feedback, both about the level of awareness, and anything we can do to assist people in either understanding whatever the provision is, or improve our tools so that they can take advantage of them.
So, for example, in our summer tax forums, which is a practitioner ‑‑ gathering of tax professionals every summer across the country, we do focused feedback sessions with practitioners to get at that kind of information.
*Chairman Boustany. Thank you. And does the IRS want math error authority for this particular tax credit? And if not, why?
*Ms. Ingram. We engaged in some good conversations with the TIGTA audit team about how the current math error authority or augmented legislative math error authority could be used in this setting. And we have shared those conversations with the Treasury Department, who is looking at ways in which there might be some policy choices around this credit.
*Chairman Boustany. Thank you. And is there some concern at this stage ‑‑ this tax credit was proposed as a means of helping to mitigate the high cost and rising cost of health insurance premiums for small businesses, which are under tremendous pressure right now.
And my sense is, based on testimony I’ve read and other reports, that this tax credit is not achieving that goal of helping to bring down those costs, and helping, you know, small businesses to provide health insurance for their employees. Is there a concern right now at the IRS, or are you just focused now on purely the administration of this tax credit?
*Ms. Ingram. Well, the analysis about the policy and economic impact would be better addressed to the Treasury Department. My role is to take what we have and implement it as well as possible. And, as I mentioned, my two goals are to educate the community and get them what they need, and listen to them about what they need, and then to make sure that what gets filed is an appropriate claim for the credit.
*Chairman Boustany. Mr. George, in the TIGTA report on IRS efforts to implement this tax credit, you discuss problems with tracking employees when employers use professional employer organizations. I read your written testimony with great interest on this. And can you explain what the problem is with regards to this particular tax credit, and how the IRS could potentially fix this particular problem?
*Mr. George. Yes. Again, in effect, the IRS has ‑‑ or there are entities called, again, PEOs, which are outsourced to by small businesses and the like, so that certain aspects ‑‑ accounting, you know, leave, medical leave, what have you, these businesses will take over those responsibilities for a small or, you know, individual practitioner to help alleviate that burden from that person, and they will be paid a fee. The PEOs will be paid a fee.
And so, the problem is there is a disconnect between what the IRS knows and doesn’t know, as to who is actually paying the employee taxes and the various taxes, as they relate not only to this credit, but to other credits. And we recommended in a report over two years ago that the IRS, seek legislative help from the department ‑‑ because it is the department who has responsibility for developing tax policy ‑‑ and to address better ways in which the IRS could develop processes, internal processes, to match the various Employee Identification Numbers between the PEOs and the organizations with which they contract.
And for some reason, which ‑‑ I will defer to the IRS ‑‑ that hasn’t been done. And had that been done, it would assist not only in the implementation of this particular Credit, but in others.
*Chairman Boustany. Before I turn to the ranking member, Ms. Ingram, do you want to respond to that?
*Ms. Ingram. The issue of how to handle professional employee organizations has been a matter of discussion as we’ve tried to work through the extent to which what is needed is legislative change, and to the extent what is needed is changes in systems and forms.
I don’t think that we have any difference of philosophy about what would be advantageous. I think as we work through the logistics of what we can do administratively, in addition to sharing analyses with the Treasury Department, we continue to welcome all of the advice we get from TIGTA about ideas of how to do that.
There were some additional ideas in this report, and we’re working on those now, and I assume we will have further dialogue, in case we have questions about TIGTA’s advice.
*Chairman Boustany. So, are you confident that that can be fixed?
*Ms. Ingram. The ‑‑
*Chairman Boustany. Without legislation?
*Ms. Ingram. We could do some things. We have to make sure that we’re not burdening legitimate arrangements, and that we do it in a way that enables us to check what we need to check without being burdensome on people who are otherwise just following the rules just fine.
So I think those logistical issues we want to continue to work on internally.
*Chairman Boustany. Thank you. Mr. Lewis?
*Mr. Lewis. Thank your, Mr. Chairman. Commissioner Ingram, I believe it is too early to draw any conclusions about the credit. Commissioner, many businesses request extensions and file their returns in October and November. Is this correct?
*Ms. Ingram. Yes, they do.
*Mr. Lewis. When will the agency finish processing these and other tax returns?
*Ms. Ingram. As you stated earlier, sir, it’s towards the end of the year that we would finish processing and posting the returns all the way through the season. In fact, today is the last day that the exempt organizations could file and claim those credits. So, they would ‑‑ returns are still coming in for this credit. It will be the end of the year.
*Mr. Lewis. Commissioner, early data show less than 5 million business returns have been processed through mid‑October, and that over 10 million business tax returns were processed in 2010. Is this correct?
*Ms. Ingram. I don’t have the figures directly with me, but I believe ‑‑ the difficulty with those figures is that it depends on which returns you look at, if you look at 1120s and 1120S’s and 1065s, or whether you also include the 1040 returns that include schedule C’s and the other schedules that indicate business activity. So I would prefer to respond afterwards, with a full set of data.
*Mr. Lewis. Thank you. With respect to small corporations, the so‑called, I guess, S‑corporation, early data show that less than 2 million returns have been processed through mid‑October, and that about 4 and a half million returns were processed in 2010. Do you believe this to be correct?
*Ms. Ingram. Again, I’d like to make sure I can confirm that after the hearing.
I think what is true is that the partners in flow‑through ‑‑ the recipients of flow‑through adjustments like this credit, if they’re filing on extensions, would go to October 15th. And the data that we were able to pull for the request for this hearing would not include everybody who had filed on the October 15th date, for a variety of reasons, whether they came in on paper, or whether they were in the queue for posting and processing. So it is an incomplete data set at this point.
*Mr. Lewis. Commissioner, so with less than 50 percent of business returns processed through mid‑October, is it too early to know how many businesses will claim the tax credit this year?
*Ms. Ingram. It is definitely too early to know how many total claims we are going to get. And, as I mentioned, although the tax‑exempts are a very small portion of this picture, their deadline is not even until today. So, yes, we do not have final numbers.
*Mr. Lewis. Thank you very much. Mr. Inspector General, what grade would you give the Service on its outreach effort for the health credit? If you had to give a grade right now, this moment.
*Mr. George. Well, if I may, sir, answer the question in the following manner, the overall implementation of this credit by the IRS, we would give them a B to a B+. We think they have done an effective job implementing the Credit, reaching out to people, and changing the computer processes that are needed to be changed to help accommodate it.
Again, the challenge is the complexity of the law itself. And so that is a different issue. But overall, we would ‑‑ I would give them a B, B+.
*Mr. Lewis. Mr. Chairman, I am concerned that the proposed Republican budget cuts would hurt taxpayer service such as outreach efforts, compliance, and enforcement.
Without objection, I would like to enter into the record an October letter from the Commissioner that provides an example of how the budget cuts would hurt small businesses.
Without objection, I would also like to enter into the record the Commissioner’s November notice to employees announcing an early out, or buy‑out program.
*Chairman Boustany. Without objection, both will be entered into the record.
[The information follows: The Honorable John Lewis 1, The Honorable John Lewis 2]
*Mr. Lewis. Mr. Inspector General, in your testimony before this Subcommittee in September, you stated that the Service had limited resources to examine claims after energy tax credits had been paid. Does this statement apply to the health care tax credit?
*Mr. George. It does, sir. I mean the IRS ‑‑ one of the previous commissioners of the IRS used to use a formula of customer service plus enforcement equals compliance. And that theory still exists today. That concept, I believe, is still accurate now. For the IRS, it is almost a zero‑sum gain. They have limited resources. They have to make a determination as to whether they are going to focus on this aspect of their responsibilities or that aspect. So, whether it is customer service, or whether it is enforcement.
And so, yes. Unless there are additional resources, a cut in their appropriations would adversely impact their ability to do their job.
*Mr. Lewis. Thank you. Thank you, Mr. Chairman.
*Chairman Boustany. I thank the ranking member. Ms. Black?
*Ms. Black. Thank you, Mr. Chairman. And I want to go back to the issue of the supporting documents. The chairman started to explore the documentations with the PEOs. But while many credits do not require supporting documentation to be submitted to the IRS, the small business tax credit appears to be especially complicated. And despite the fact of this complication, what, I think 8 pages that they need to fill out since $435 million in credits have already been claimed, and the IRS does not require filers for the small business tax credit to provide documentation to support their claims.
Would additional documentations ‑‑ this question is for you, Ms. Ingram ‑‑ do you believe that additional documentation would help the IRS to administer the credit and prevent any erroneous payments?
*Ms. Ingram. Well, Congresswoman, we’re always looking for ways to prevent or reduce erroneous payments. It is important to remember about this credit that the credit that is available to small businesses is one of many credits that fall into the general business credit category. And those are not refundable credits. And we do not ask for attached documentation in most instances. And compliance is generally quite high.
Where we are worried, particularly on the refundable credit side, we sometimes do ask for additional documentation. We did that with the adoption credit this year, because of the timing of having ‑‑ when we could implement that.
On the refundable side of this credit, which is what the tax‑exempt organization small employer could get, we have not asked for additional documentation but we have put in additional filters that are particularly suitable for a refundable credit. So on the ‑‑ where the risks are higher with refundable credits. And we do freeze those refunds and correspond, as needed, with that taxpayer.
But more than 95 percent of the credits claimed ‑‑ at least as far as we can tell at this point ‑‑ are being claimed by the taxable small employers, and that is one of the many credits that goes into the general business credit.
*Ms. Black. So you don’t feel that you need any legislative authority to go further with any additional documentation. You have all the authority you need right now, if you see that there is a need for additional documentation?
*Ms. Ingram. I think we have ‑‑ yes, I think we have the authority if we wanted to ask for more documentation. But we are also very mindful that additional documentation, in connection with the return itself, changes the dynamics around electronic filing, it can add burden to the compliant taxpayer.
And so we try to use that very carefully, particularly when we don’t have information that shows that we have a real compliance problem, or where it is the type of credit or the type of refundable credit that might indicate a higher risk, and the need to do that. So, we try to balance those, those things.
*Ms. Black. Mr. George, could you also weigh in?
*Mr. George. Yes, thank you. As you are well aware, refundable credits are available to people, even ‑‑ whether or not they have a tax obligation. And as Ms. Ingram indicated, it is the tax‑exempt community in this instance that has access to this credit on a refundable basis.
We have estimated that there are over $36.4 million in refundable Credits that have been requested thus far, using this credit, and that overall, the non‑business, so the non‑refundable credits, are at around $379 million.
I believe that additional information can be helpful, if it is used. The IRS requests a lot of information that it does not necessarily utilize. And so I share Ms. Ingram’s concern about overburdening taxpayers unnecessarily. But at the same time, again, any information that can help stem inappropriate requests, improper requests for the Credit, that ‑‑ will help the IRS better do their jobs.
*Ms. Black. Thank you. I yield back my time.
*Chairman Boustany. Mr. Becerra, you are recognized.
*Mr. Becerra. Thank you, Mr. Chairman. And to the two of you, thank you very much for the update on the information.
We could get very technical sometimes, and when you go into the weeds you lose a lot of folks. But at the end of the day, what we are talking about is trying to figure out how to make a tax credit that is going to small businesses who offer health care to the employees work. And we need to get the information out there, because it is a new tax credit. These small businesses that have been filing taxes didn’t have this before. Many small businesses are making decisions on whether or not to offer to their employees health insurance to begin with. And sometimes these small businesses are trying to file their taxes without a lot of professional help, because it is expensive to get professional help.
And so, it is good that we are doing a hearing. But Commissioner Ingram, as we have just heard, we can’t make ‑‑ or can’t reach — conclusions yet without all the information to know how it is working best, where we can make changes. And I think, Mr. George, you would agree that once we have the full set of data that help us understand how this credit has worked so far, you can then come back to us and really give us some concrete ideas of how to make it work best.
This, at the end, is a bridge. This tax credit is a bridge to get us to the point in 2014 when we have the full implementation of the historic health care reform, so that small businesses will be able to offer to their employees real health insurance.
Now, I just wanted to check on something. Small businesses are paying, on average, for health insurance for their employees, for an individual employee, something in the order of $5,300 a year. And if that employee has a family, and if the business offers an insurance policy for the family, it is about $14,000 a year. That is a chunk of money that a small business man or woman who is trying to survive a business is making, in terms of a commitment to his or her employees.
And I think all of us applaud a small business man or woman who figures out a way not only to make a profit, but at the same time to offer decent affordable health care to their employees. So this tax credit, which gives them some assistance to be able to offer that, or to keep offering that health insurance, is something we should try to really make work well. And so we thank you for your testimony.
But my concern is this. And, Commissioner Ingram, you know this directly, because you work in the IRS under the Commissioner. If the Commissioner is sending us a letter essentially saying, “The budgets you are sending us don’t give us a chance to do the outreach, don’t give us a chance to do the enforcement” ‑‑ sometimes the enforcement brings to the American taxpayer savings of $7 on every dollar of enforcement we spend, because we are able to go after the tax cheats and so forth ‑‑ that we do more harm for programs like this tax credit if we don’t give you the ability ‑‑ which I think Inspector General George would agree is necessary for you — to police the activity of this new tax credit.
And so, let me paraphrase what the Commissioner said in a letter recently to Congress. Cuts of the magnitude in their budget contemplated in the current appropriations bills would lead to noticeable degradation of both services and enforcement, and would have a serious detrimental impact on voluntary compliance for years to come. He goes on to give some specific examples of how this would hurt small businesses if we don’t provide the IRS the funding it needs to do its work properly.
And so, I hope what you will do is let us know what resources you need, one, to make the credit less complicated; two, to do effective outreach to make the credit work for those small business men and women; and three, let us know what resources you need to not have this impact the work that you have to do not just on this tax credit for small businesses, but for everything else you have to do to make sure that those who are willing to voluntarily comply with the tax code do so in a way that isn’t harmful to them.
It is hard for me to ask you a lot of questions, because the data you have is incomplete. But I do appreciate that you are willing to give us an update, and point out some of the areas where we can try to help you make this work. But I would hope that what we don’t do is make it harder for a business that right now is willing to offer health insurance to its employees at a time when times are so tough. We make it more difficult for them to take advantage of a tax credit that was meant to help them offer to American people who are working a chance to get decent, affordable health care.
And so, I appreciate your being here. I look forward to hearing from you again, once we have the complete data and can make some real judgements about the program.
So I thank you, Mr. Chairman, for holding this hearing, and I thank the witnesses for having been here.
*Chairman Boustany. Thank you, Mr. Becerra. Ms. Jenkins?
*Ms. Jenkins. Thank you, Mr. Chairman. Thank you for holding this hearing, and thank you both for being here.
Proponents of the tax credit claim that it has been designed to provide an incentive to small businesses to offer health insurance to their employees. However, according to the Small Business Administration report released in September, this credit will primarily benefit those businesses that already offer health insurance.
So, for both of you, from your experience with this credit, is there data available that could tell us whether the tax credit is being used by small businesses that otherwise have not offered health care? And do you have any data on the amount of small businesses ‑‑ those with 10 or fewer employees ‑‑ that offer health insurance coverage to their employees?
*Mr. George. Actually, I do not at this time, Ms. Jenkins, have that information.
*Ms. Ingram. At the IRS we don’t have a good way of knowing who already offers health insurance. So the data question isn’t one that we can really help you with at this point.
I think the key is when we go out and we ask people what their experience was in the first filing cycle, one of the things they mention is that because the act was passed in March, or towards the end of March, that many of them had already locked in to their health care decisions, because they tend to make ‑‑ in the industry they tend to have calendar‑year health packages for their employees if they have health care.
So, what we have been told by small businessmen is that even if they don’t have health coverage today they will consider it. But we don’t’ have any data that would be responsive to your question.
*Ms. Jenkins. Okay. Well, thank you. If data becomes available, I hope you will share it with us.
And Commissioner Ingram, the IRS agreed with TIGTA that the use of professional employer organizations pose a problem with regard to the small business tax credit, and it appears that this is a long‑standing problem for the IRS. How do you intend to address the problem with regards to this credit?
And, given that it is really not a new problem, are you confident you can resolve the issue so that the IRS can properly link employers and their employees?
*Ms. Ingram. Well, Congresswoman, I always get a little nervous about getting too specific about methodology of finding problems, because I don’t wish to give anybody any ideas. But in the conversations with the inspector general’s team, and in the suggestions made in some recent reports as well as in this one, we are looking closely at what we could do administratively to make the kind of connections and the kind of crosswalks that Mr. George has mentioned.
There are a lot of ideas, and we are working through the logistics of each one. I would say most of them cost money, and we need to do it efficiently. And we also, as I mentioned before, need to do it in a way that doesn’t throw taxpayers who have no problem into a filtering system that creates work for them.
So, I think there are some things we can do. We are working on the logistics and the ideas that we continue to throw back and forth between our teams.
*Ms. Jenkins. Okay, thank you. Inspector General George, this hearing was designed, I think, to highlight the complexity of the tax credit as a key factor as to why small businesses maybe have not raced to embrace the credit. This is despite TIGTA’s findings that the IRS made extensive efforts to implement the credit. And I think our next panel, we are going to hear from small business men and women about the burdens that they are dealing with.
But I am just curious, Mr. George. This tax credit also puts an administrative burden on already scarce resources for the IRS. So can you elaborate on the amount of time and effort the IRS has devoted to administrating this credit, and if you have any ideas on what we can do to simplify it?
*Mr. George. Yes. I would just simply elaborate on a point that I embraced earlier. When I made reference to the IRS expending $1 million trying to alert people as to the availability of the Credit, that $1 million was spent simply on sending 4.4 million postcards to taxpayers. So that was just the start of this.
Again, they have requested almost $25 million in the most recent appropriations to help implement this Credit. And I would simply note also again ‑‑ this goes back to an earlier point that you raised ‑‑ the IRS did a lot of focus groups. They did good outreach to people. And a lot of the responses that they received was that this is such a complicated credit in which to implement, that a lot of their customers were uncertain as to whether the cost benefit analysis really paid off for them.
*Ms. Jenkins. Just to clarify, so have we requested nearly $25 million to implement a credit that in 2010 was supposed to cost $2 billion?
*Mr. George. That is my understanding, but I think I would defer to Commissioner Ingram for the exact figure.
*Ms. Ingram. The President’s proposed budget had about $24 million ‑‑ something like that ‑‑ in it, which was requested in order to work on the examinations coming out of the first cycle, as well as to work with the second cycle of filings. It also was to cover the work around the adoption credit which, as I mentioned earlier to Congresswoman Black, was ‑‑ did involve additional documentation and a much different process.
*Ms. Jenkins. Okay, thank you. I yield back.
*Chairman Boustany. Dr. McDermott.
*Mr. McDermott. Thank you, Mr. Chairman. I am pleased that we are having a hearing, but I am not quite sure of the value of it, because I learned very early ‑‑ I think it was in geometry in about sixth grade — that with one point you can’t draw a line. You have got to have two points or three points or four points. And the only points we have are 228,000 and then 309,000, which looks like things are going up. So I think that it means that more people are taking advantage of this.
But what I am struggling with is trying to figure out how do you get a credit like this known by the small business people in this country. These are people with 25 or less employees and their employees are paid less than $50,000, on average. And they are struggling to keep it together in the worst economy in years. And so they get a card.
Now, I don’t know how many people have ever received a card from the Federal Government that they didn’t pay total attention to. Or, how many of you received a political brief from somebody on a card that you didn’t pay total attention to? But you send out four million cards.
Now, I understand that you sent them to businesses under 25 employees, and average salaries of less than 50,000. But you had no data about who had or who was offering health insurance. Is that correct?
*Ms. Ingram. That is correct.
*Mr. McDermott. So, a tax credit aimed at people who are offering a tax credit, and one that is in the middle of a year, they are going to get a card in July. People are saying, “What am I getting a card in the IRS in July about?” Because this says something about tax credits. “I am not filing until January,” or whatever.
Give me a better design to get it to the people who would benefit from it. Because it defies my understanding of why somebody wouldn’t want to figure it out if they could save money, if they could get 35 percent back of their premiums that they have paid, why wouldn’t they apply for that?
I mean what should have been done to make it better? How would you make it simpler — help us.
*Mr. George. Well, Mr. ‑‑ if I may?
*Ms. Ingram. Go ahead.
*Mr. George. Thank you. The community which, for the most part, would take advantage and be involved in this Credit is such that they most likely would use tax preparers. And so, it would have behooved the IRS to focus their efforts on reaching out to tax preparers, the tax preparer community, and they have done that.
But, that focus, whether it is through the national tax annual programs they put around the country, or through more directed mail to groups that represent tax practitioners ‑‑ the National Association of Tax Preparers and the like ‑‑ to help spread the word, there could have been much more of a targeted approach here, I think, that would have helped address the question you are raising.
*Ms. Ingram. Yes. I think that one reason we turn to the postcards, any time there is a new piece of legislation and ‑‑ that is immediately effective, and we are worrying about how do people, A, know about it in the first place, and then who is ‑‑ who needs to know detailed information about it and how to do it, and so forth, we have tended in the small business community to look at ‑‑ the small businesses need to be aware, but they tend to turn to their practitioners and advisors to solve it for them. So, we have received anecdotes of practitioners telling us, “Yes, my client brought me the postcard.”
So we tried to do a two‑prong track during 2010 to get both of those needs addressed, both awareness and the professional ability to assist their clients in figuring out what they wanted to do as a business. Because some of those decisions needed to happen during that year, we were anxious to do that outreach ahead of what we might normally do with the filing season cycles, and that is why we acted ‑‑
*Mr. McDermott. Okay. So in about a month or two months, we are going to start a new filing season. And all the filers, now all the preparers, will have had two years to know this exists. Is that correct?
*Ms. Ingram. They have been through one cycle and be starting their second cycle.
*Mr. McDermott. They will be starting their second cycle. And they will have had at least one notice from you. Have they had any further notices about the fact that this tax credit exists?
*Ms. Ingram. We haven’t done direct mailings of the same kind, but we have tried to be very visible out at conferences and programs. We have tried to do cost‑effective tools like webinars for busy practitioners and small business men who have trouble taking time away to go to a conference, and we have tried to increase the kinds of materials from alert flyers, all the way to how‑to kits that are available for practitioners to use themselves or with their clients.
This evolution of the materials that we have been developing and the outreach we have been doing is very much in response to the feedback discussions that we have had with small businesses themselves, as well as with the practitioner groups.
So the advice that we have received, consistent with what Mr. George said, was, having done the awareness to a certain point, to turn to the professional channels and focus on tax practitioners, those assisting businessmen in decisions around insurance products, and the software industry, to see if through tools like different software or different return filing mechanisms, things could be made more clear and easier for the businesses themselves.
So, that is our shift from the first filing cycle to the second filing cycle to try to reach the right people and leverage that.
*Mr. McDermott. So we need another hearing at another time to find out the results of your efforts.
*Ms. Ingram. Whenever you would like to ask me to come, sir.
*Mr. McDermott. Thank you, Mr. Chairman.
*Chairman Boustany. I thank the gentleman. Mr. Marchant?
*Mr. Marchant. Thank you, Mr. Chairman. We are all going through tough economic times now. We are trying to reduce the federal budget, the spending cuts. That is what we have been sent to Washington to do. In these hard economic times, all of the government has got to find a way to work more efficiently. And the IRS will be no exception.
What is the IRS doing on trying to stop fraud on this particular credit that is being requested? Mr. Ingram?
*Ms. Ingram. We have a two‑prong approach, sir, on this credit. One is designed around the non‑refundable credit, the one that is going to more than 95 percent of the people claiming the credit, the business side, and an augmented methodology that we are using on the refundable credit side with the small exempt organizations or employers.
All the returns go through certain kinds of checks that are the same for both groups. And these involve filters and checks that are a comprehensive set developed based on all of our experience with other kinds of credits, including advice that we received from people like TIGTA and GAO.
And then, on the refundable side, we add certain additional filters that might be particular to that type of community, that type of group, because those ‑‑ with the refundable side, we are pulling before payment is made.
*Mr. Marchant. Yes, sir.
*Mr. George. Mr. Marchant, if I may, again, while they are doing yeoman’s work in certain areas, this is an Achilles heel for the Internal Revenue Service. If they don’t address problems ‑‑ and especially in the refundable credit area ‑‑ at the outset, during the processing of it, the moment the Credit goes out the door it changes the dynamic of the situation entirely, in that it costs much more to try to recover dollars that have already been sent out the door than it would to prevent them from going out in the first place.
And so, again, while this is a tax policy issue, and we touched on this earlier, if they could buttress up their math error authority policies in both this area and elsewhere, that would allow them to prevent ‑‑ make corrections to tax forms before they go out, as opposed to having to subsequently audit and/or reach out to organizations and individuals who inadvertently received or erroneously received tax credits.
*Mr. Marchant. With the time I have left, the biggest concern I have about this tax credit was when the Administration was selling this affordable health care act to the public, millions of small businesses heard the message that they were going to get a tax credit, they were going to benefit if they provided health care for their employees. Yet when we are given an explanation of this tax credit and given this chart, I don’t know of a small business in my district that would look at this chart and say that this is a simple tax credit.
And my biggest concern is that the compliance, the cost that it would take for a small business to employ an accountant to simply navigate through this chart and navigate through the qualifications, in many cases, would far outstrip any savings that they would get from the credit. So I think it is a testament to the complexity of this, the code, to say that 4.4 million people were told, “You might qualify by it,” and 309,000 claimed it.
Do you ‑‑ have you figured out what the average tax credit issued to an applicant that takes advantage of it is, Ms. Ingram?
*Ms. Ingram. I tend to be somewhat allergic to raw data, but it is several thousand. And it depends very much on the situation of that small business. I have heard from small businesses that they received 5,000, and I have heard from small businesses that it has been smaller. So it very much depends on where they land, in terms of their size and the kinds of premiums that they pay.
*Mr. Marchant. Thank you very much.
*Chairman Boustany. Mr. Paulsen?
*Mr. Paulsen. Thank you, Mr. Chairman. And thanks for holding this hearing. It is pretty clear from some of the discussion testimony this morning that you have got a tax credit that small businesses were probably primarily hoping to take advantage of, and it is obviously the folks that are taking advantage of it or using it is substantially lower, or significantly lower ‑‑ surprisingly lower ‑‑ than was ever expected, about eight percent of those that are eligible.
I know we are going to hear from some folks in the next panel that will be able to talk a little bit about why that might be the case, but I want to dive a little bit deeper. And I assume a lot of it is about the complexity, but I do want to follow up a little bit and ask this question. Because it does seem that it is the burden perspective that is one of the reasons why companies are not participating in it.
And I just ‑‑ I remember I spoke to one small manufacturing company in my district about health care in particular, and to its credit this company does provide health insurance for its employees. And like many companies, this company is seeing its health insurance rates go up. But I think the reaction that I heard from the leaders that I talked with at the company when they say, “Look, we are covering our health care costs, we wish Congress would address the cost issue, but we are not going to participate in any of the potential benefits in the new health care law, because we are not convinced it is worth the time and the effort to participate in these potential benefits.”
And so, I mean that is of concern. I think it adds to the whole factor of uncertainty and how companies are investing in their people and in their equipment in the down economy.
But let me do this. Let me ask this question, because we talked a little bit about fraud and accuracy. I want to dive a little bit deeper. Mr. George, in the report on the IRS efforts to implement the small business tax credit, you discuss the problems with tracking employees when employers are using these professional employer organizations. Can you explain a little bit about exactly what the problem is in regard to the credit, and how the IRS can fix the problem for ‑‑ when these organizations are actually used?
*Mr. George. Yes. One of the points that I raised earlier was simply having the IRS have the ability to cross‑check the Employee Identification Number between the PEO, the Professional Employer Organization, and the entity which they are representing.
Now, I don’t know whether or not the commissioner thinks that the IRS needs legislation in order to accomplish that. But again, we recommended that over two years ago in a report that related to this.
Going back to your point about complexity, sir, what we have found in our study of this matter is that the taxpayer, in order to take advantage of this, has to determine which employees may be counted for Credit purposes, what constitutes a qualifying arrangement, determining the number of FTEs for the purposes of the Credit, determining the annual wages for purposes of the Credit. The premium payments for purposes of the credit are capped, so they have to make sure that they don’t exceed that. The phasing out of the Credit, if the number of FTEs exceeds 10, and the average amount of wages exceeds 25,000, as you pointed out, and then the effect that state and local credits have on the overall issue. I mean that is a factor that needs to be taken into consideration.
So, I know there ‑‑ this is an extraordinarily difficult Credit to implement. Very few people would be able to do it without the help of professional preparers. But I will, again, yield to the commissioner.
*Mr. Paulsen. Well, and let me just ‑‑ because it sounds like, okay, there is complexity, obviously. But if the math is correct on the form, the company could be complying from the math perspective but there could be erroneous ‑‑ not fraud, potentially, but erroneous reporting based on these professional service organizations that may be employing the individuals, rather than the true small business.
And so, I mean, how do you get away from doing an actual audit? You know, Ms. Ingram, Commissioner Ingram, how do you get away from doing an actual audit? Does the IRS plan to audit more companies, more businesses? And, in particular, now that tax‑exempt entities are eligible for this credit taken against income, which has not been a practice in the past, from what I understand, with other credits, I mean, does the IRS plan to audit and increase audits for tax‑exempt entities?
*Ms. Ingram. Well, one of the interesting things on the tax‑exempt entity side is, because that is a refundable credit and we have additional filters involved, we have been very interested in what kinds of folks are getting kicked out by those filters.
And so, learning from the profile, the demographics of which organizations seem to be hitting filters on that side has been important for us to monitor and to figure out how to tweak or cross‑check those filters to make sure that we are getting the folks who do appear to have a reason that we should correspond with them prior to payment, and those which are getting caught up, and which we could resolve without contact.
A good example would be ‑‑ is if you were going to check certain databases about an exempt organization, you might find that a church that has no requirement to apply to be exempt, nor a requirement under the statute to file an annual return, might get kicked out and yet is filing an employment tax return and has the right range of employees and wages.
So, that is a good example of kick‑outs where we want to look at what is getting kicked out, and make sure that we are calibrating it to fit what really needs to be pursued ‑‑
*Mr. Paulsen. And, Commissioner, I know my time is just out. But can you just tell me, so does the IRS intend to do increased audits of tax‑exempt entities as a part of this now?
*Ms. Ingram. If a tax‑exempt entity has claimed a credit that we can’t be comfortable with, we will correspond with them prior to payment.
*Chairman Boustany. Mr. Kind.
*Mr. Kind. Thank you, Mr. Chairman. I appreciate you holding this important hearing. Hopefully, we will have another opportunity at some point to reconvene and have another hearing and an update because I think, in a lot of respects, it is a little premature. Obviously, the credit didn’t take effect until last year. The Affordable Care Act didn’t pass until March of last year. We are still waiting to see all the small business filings coming in, and the impact, who is going to take the credit. So, in some respects, it is a little bit premature.
But let’s get to the complexity a little bit, because I think we all have a shared goal. When you take a look at the number of uninsured individuals in this country, the vast majority of them are working people in small businesses. In fact, for small businesses the size of three to nine employees, less than half of them are offering health care coverage for their employees today.
So, if we are going to be serious at all about trying to attack the number of uninsured, you have got to do something to deal with small businesses to make it more affordable. And that is why, in previous years, there has always been bipartisan support for providing tax relief to small businesses and providing health care coverage for their employees. That is what we are trying to attempt here.
Now, if there is a problem with complexity, let’s address that and come up with some recommendations on what we can do to tighten it up and make it less complex. That is what I hope we can try to accomplish at a hearing and the feedback that we are getting.
But, Mr. George, based on your study and analysis of the credit so far, have you offered any recommendations on how to simplify the tax credit to deal with the complexity that is out there right now?
*Mr. George. Again, it is the Secretary of the Treasury that has delegated substantive tax policy to the Office of Tax Policy. And so, I am not here to advocate any particular ‑‑
*Mr. Kind. Right.
*Mr. George. ‑‑ substantive tax policy. That said, something as simple, again, as math error authority, expanding it ‑‑
*Mr. Kind. Sure.
*Mr. George. ‑‑ so that ‑‑ to keep the IRS from having to send out money when they know there is a problem, and yet they don’t have the authority to keep that money from going out, which would be a simple solution to this.
*Mr. Kind. I am talking from the employer’s point of view, trying to simplify so that it is easier for them to take advantage of the tax credit.
*Mr. George. Well, when you ‑‑
*Mr. Kind. Are there any recommendations that you have there?
*Mr. George. Well ‑‑
*Mr. Kind. Ms. Ingram, has IRS been looking at this at all, as far as steps that we could take to try to simplify it, or can IRS do it on your own?
*Ms. Ingram. I think that what we have to do, from our perspective, is look at whether we can simplify forms, simplify instructions, get better how‑to kits in people’s hands, help them with decision trees to reduce the number of questions they need to ask themselves.
Many of the portions of the provision are getting at more complicated business arrangements, and not everybody needs to ‑‑
*Mr. Kind. Right. Well, Ms. Ingram, just for the sake of clarification now, it is not mandatory that a taxpayer complete the worksheets and the instructions in order to claim the tax credit. Is that right?
*Ms. Ingram. Absolutely.
*Mr. Kind. Now, just so I am clear ‑‑ and I have got my own calculator on my website for small businesses to plug in information to see what they could qualify for under the tax credit -‑ check me if I am wrong, but is it basically three pieces of information a small businesses owner is going to need or provide the accountant in order to take advantage of the tax credit? One, individuals considered as employees; two, employee hours of service; and three, employee wages paid. Are those basically the three criteria that they are going to need to plug in, in order to determine their tax credit under this?
*Ms. Ingram. That is where most of the math questions are, yes. They do need to make sure that the insurance they are providing and the employer’s share of the contribution also meets the rules.
*Mr. Kind. And that is the 50 percent rule.
*Ms. Ingram. Yes.
*Mr. Kind. And most states, like Wisconsin, already require that at the state level. So, that is not a problem. I mean that is something that already applies.
But those are basically it. And I can’t think of a small business owner who wouldn’t know that data or those facts that they could just plug in. Otherwise, your business probably isn’t going to be open very much. If you don’t know how many employees you have, how much you are paying them, and how many hours they are working, there is a problem, I think.
Am I missing something here? Is it more complicated than that?
*Ms. Ingram. I think the thing that we have been trying to listen to when we talk to stakeholders and small businesses and advisors is to try to hear where they would like assistance, where we could make it simpler, where we could say, “Answer these couple of questions, and if the answer is yes for each of them, go straight to” ‑‑
*Mr. Kind. And the only reason you see a chart like this is just to score cheap political points and to confuse people. I mean realistically, this is what this is all about. But do you know, Ms. Ingram, how many small business owners that are filing taxes have a paid preparer, professional preparer, doing it for them?
*Ms. Ingram. I don’t have the exact statistic, but it is high.
*Mr. Kind. It is pretty ‑‑
*Ms. Ingram. It is high.
*Mr. Kind. ‑‑ pretty high number. Right.
*Ms. Ingram. Yes.
*Mr. Kind. And they are the ones who are supposed to have the expertise in being able to take advantage of all the credits, all the deductions that small business owners can claim anyway. Is that right?
*Ms. Ingram. Yes, it is why we are shifting our strategy for outreach for the next cycle, to include the ‑‑
*Mr. Kind. Professional preparers.
*Ms. Ingram. ‑‑ tax preparation industry, the electronic industry, to see what they can also do.
*Mr. Kind. Great. Thank you. Thank you, Mr. Chairman.
*Chairman Boustany. Mr. Reed?
*Mr. Reed. Thank you, Mr. Chairman. Mr. George, your point was very well taken about chasing the money once it is already out the door. That is a very practical point. Coming from a small business world, I know exactly what that issue relates to.
So, my question actually is to Ms. Ingram. You talk about the filters as being kind of a primary tool ‑‑ if I am hearing your testimony correctly ‑‑ the filters being the primary tool to prevent that from occurring. Can you just articulate what are you ‑‑ what kind of filters are you deploying? How are you determining those? What are you ‑‑ how does that process work?
*Ms. Ingram. I will try to be responsive, but again I am going to be a little cautious about specificity.
But the ‑‑ for all returns we do a certain number of layers of validating the return itself, of looking for basic indicators of fraud that might be, for example, of interest to our criminal investigation unit. So there is sort of the basic process that returns go through.
In addition, we have a set of filters that are designed around cross‑checking secondary information inside the service, information that we would not be able to use the ordinary type of math error to address. And, depending on whether it is refundable or non‑refundable ‑‑ because historically, the risks are quite different in our experience ‑‑ we either use the additional filters to kick out any real outliers immediately, but otherwise to identify cases in which we would like to correspond, even if the return is processed first. Whereas, on the refundable credit side, we do all of that before any dollars leave the house.
*Mr. Reed. Okay. And then, so what kind of success rate are you demonstrating with utilizing those filters, for example, on this credit? How are you ‑‑ what is the metric that you are using in the agency to determine whether the filters are working or not?
*Ms. Ingram. Well, we do that a couple of ways. And really telling how well they are working here is going to take a little bit of time.
One of the things we looked at in designing our program was the work that we had done around the COBRA issue a couple of years ago. And GAO actually came in and looked at our filters there, threw some fake test cases at us, which we caught all of. So we thought we had a pretty good methodology developed through that experience, thought we had gotten some good advice in that case from GAO. And so we took a similar approach here.
In the general business credit area, as I mentioned before, we are just not seeing the big issues in the early kick‑outs in this return, in this issue.
*Mr. Reed. Okay. So then, beyond filters, what other tools are being utilized to make sure that it is being monitored appropriately?
*Ms. Ingram. Well, the filters are particularly good for up‑front identification, and the trick always is to get the filters right, feedback from our own observations, as well as from our oversight bodies.
The other thing is to check on whether the filters are effective is also to sample and look at some returns, some of which went through filters and some of which did not kick out. There are various ways in which we try to look at sort of control groups ‑‑ I don’t know what you want to call that ‑‑ to see what is being caught and what didn’t get caught.
*Mr. Reed. Okay. Mr. George, did you have any additional information on that?
*Mr. George. Again, I am repeating from my oral statement ‑‑ the IRS does have a program to attempt to identify taxpayers who don’t file employment tax returns, and yet might still be able to have this legitimately paid by a PEO, the Professional Employer Organization. But the IRS truly can’t tell the difference between whether or not the PEO had the responsibility to comply with this, or that the employer does.
And so, when it is something that basic that they still can’t determine, it is troubling. It is problematic, and I think would lead to more difficultly.
*Mr. Reed. And that is a great point, because that would be ‑‑ that would seem to me to be a very simple check. If you are doing the payroll tax and you are filing that, that you would match that up with the provider. What is the barrier to that? What am I missing?
And that seems like a very simple ‑‑ Ms. Ingram, what am I missing, why that doesn’t match up with each other?
*Ms. Ingram. I think the issue is if one of our filters for the small business is to compare their information about this credit with their employment tax filings, and if they have hired a firm to do that for them, the information may be in the system under two different employer identification numbers, and it is the connection that Mr. George is referring to.
*Mr. Reed. So how do we fix that? How do we fix that, Mr. George?
*Mr. George. Their computer systems need to be updated. There is no question about that. That would seem like low‑hanging fruit, but it depends on the resources available to them, and their priorities.
*Mr. Reed. All right. My time is up. Thank you, Mr. Chairman. I yield back.
*Chairman Boustany. I thank the gentleman. Inspector General George and Commissioner Ingram, we thank you both for being here today and for testifying in front of the subcommittee. Please be advised that Members may have written questions they would like to submit to you, and we would ask that you respond to those, and they will be made part of the official hearing record.
And with that, we will conclude our first panel. Thank you.
*Mr. George. Thank you, Mr. Chairman.
*Ms. Ingram. Thank you, Mr. Chairman.
*Chairman Boustany. I will ask the second panel to come up and take their seats.
I would like to welcome our second panel. We have Ms. Patricia Thompson, who is with the American Institute of Certified Public Accountants, and is chair of its tax executive committee. We have Mr. Todd McCracken, who is the president of the National Small Business Association. And Mr. Hisel is co‑director of Home Resource. I want to thank you all for being here today to testify in front of the subcommittee.
You will each have five minutes to present your oral testimony, with your full written statement being made a part of the official record. And, Ms. Thompson, we will begin with you.
STATEMENT OF PATRICIA THOMPSON, CHAIR, AICPA TAX EXECUTIVE COMMITTEE, AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS, WASHINGTON, D.C.
*Ms. Thompson. Good morning, Chairman Boustany, Ranking Member Lewis, and members of the subcommittee. My name is Patricia Thompson, I am a CPA and chair of the AICPA tax executive committee. I am also the tax partner at a small CPA firm in Rhode Island. And I would like to thank the subcommittee for the opportunity to appear at today’s hearing.
This credit was designed to encourage small businesses and small tax‑exempt organizations to offer health insurance to their employees for the first time, or help them afford coverage they already have. The AICPA does not have a position supporting or opposing this incentive. My testimony today is based on our members’ experiences with working with small businesses, and will focus on the technical aspects of the credit, and address how they can be improved to make the exercise of the tax credit simpler and more transparent.
The AICPA has a long‑standing tradition of advocating for sound tax policy. The tax law should be simple, so that taxpayers can understand the rules and can comply with them correctly in a cost‑efficient manner.
Transparency is an important partner with tax simplification. Transparency is the basic notion that taxpayers should know, namely, that a tax or a tax incentive exists, and how and when the tax incentive applies to them.
Based on our members’ experiences working with small businesses, we believe there are a number of areas where the new code section 45‑R could be made simpler. We understand the challenges Congress faces as it tackles the complex issues inherent in drafting tax legislation, and appreciate your diligence in trying to do the right thing for taxpayers.
The IRS should be complimented on providing guidance on the application of the credit, and also on informing taxpayers and tax professionals on the availability of the credit.
Since most small employers did not know until the end of the year or later, when their tax returns were prepared, whether or not they qualified for the credit, there was less incentive for them to provide health insurance coverage. Also, many of the variables, such as the number of full‑time equivalents and the hours worked per employee are difficult to estimate early in the year. It was not very helpful for most employers with 10 or more employees to begin testing eligibility or potentially calculating the credit before the end of the year.
Many taxpayers found the credit to be quite complex, because the definitions of “eligible small employer,” “full‑time equivalent employees,” and “employee” are not straightforward or consistent with other definitions in the code. For example, the definition of “eligible small employer” was unique to this provision. The business was required to accumulate information sometimes not readily available, and perform several complex calculations before it knew whether or not the provision applied to them.
It is also necessary to evaluate each qualified health plan to determine if the employer makes sufficient non‑elective contribution on behalf of each employee, as well as determining the premiums eligible for the credit.
Other complexities include the calculation of the number of full‑time equivalent employees, and the phasing out of the credit, once an employer’s full‑time equivalent count exceeded 10, or its average annual wages exceeded 25,000. For small ‑‑ some small employers, it was not uncommon this year for tax preparers to have spent a significant amount of time necessary to prepare an entire small business return, just on the credit calculation, only to find that the client did not qualify for the credit.
The AICPA believes the tax credit should be simplified. We suggest that you consider changing the definition of a small business to either base the definition on gross receipts or employee count from the prior year, or the average of the prior two years. Prior‑year information would be readily available, allowing small businesses to calculate early in the year the tax savings for purchasing or continuing the health insurance.
We also suggest that the phase‑out calculations for the employee count and the annual salary be eliminated. Phase‑outs create difficulties in estimating an employer’s benefit from purchasing or continuing to provide health insurance coverage. We appreciate your efforts in examining some of the difficulties that businesses face in navigating through the rules of this credit.
Thank you again for the opportunity to testify, and I am happy to answer any of your questions.
[The statement of Ms. Thompson follows: Testimony]
*Chairman Boustany. Thank you, Ms. Thompson.
Mr. McCracken, you may proceed.
STATEMENT OF TODD MCCRACKEN, PRESIDENT, NATIONAL SMALL BUSINESS ASSOCIATION, WASHINGTON, D.C.
*Mr. McCracken. Thank you, Mr. Chairman. Chairman Boustany and Ranking Member Lewis, we appreciate the opportunity to be here today to speak to the subcommittee, and we appreciate your commitment to finding ways to find workable solutions to get affordable health coverage in the hands of small companies. Again, my name is Todd McCracken, I am the president of the National Small Business Association. And we are a national small business advocacy organization that has worked on these issues for many, many years.
Our sources indicate that there is still a very high level of confusion about the health care law among the small business community that extends, I think, to this tax credit. Part of the confusion, I believe, stems from the start date of the law, 2014. I think there are still some companies that don’t believe that some of these credits really begin until that time frame.
That said, I think the IRS actually has done a pretty good job of outreach to the small business community. I think that they have engaged a lot of small business organizations in creating awareness of the tax credit. We certainly try to get information to our members, so that if there is a credit that they are able to claim, they are making sure they are doing it.
But I think there is still a huge vacuum there, because it ‑‑ the overall complexity of the tax code plays a significant role, I think, in this as well, because there are so many aspects, so many credits, so many things we are trying to induce or incent companies to do or not do, that to a large extent it becomes sort of a white noise for them, and it becomes very difficult to get their attention on a particular provision to affect the way they do business.
And as my colleagues from the AICPA have pointed out I think very capably in their written statement, the calculation is relatively complex, especially for small companies that don’t have a stable workforce. They have employees that come in and out of service that work differing hourly schedules on a week‑to‑week basis, those that have seasonal and part‑time employees. It can be relatively complex for them to calculate. And that is a lot of companies. It is more standard for many small businesses to have that kind of workforce than to have a very stable, it’s pretty much the same all year kind of workforce. For those companies it would be relatively simple.
But I think the single biggest issue that this credit faces is that it is a credit chasing an audience that is just very, very small. If you look at the provision of health insurance in the smallest companies, most ‑‑ by quite a lot ‑‑ companies do not offer health insurance to their employees. If you look at the number of those very small companies ‑‑ ones who would be most eligible to receive the full 35 percent tax credit that are fewer than 10, have low‑wage workers, less than 25,000 a year, a very high percentage of those companies employ family members in the business. And those family members are specifically precluded from taking this tax credit if they are an employee in the business.
So, you may have a situation where a small business offers health insurance, and most of the low‑wage employees who are eligible decline the coverage, because they simply cannot afford to pay their half of the premium, which is clearly understandable in that labor market. And so there is really nothing left for that company, even though they technically offer health insurance, there is nothing left for them to take a tax credit against, because they don’t have that expense.
And when you look at the raw numbers that have been ‑‑ that the IRS and Treasury have provided, granted, they are preliminary and they need a thorough analysis when they are all in. But if you look at the numbers, there is about 300,000 companies that have claimed the credit for about $400 million, a little above that in both cases. That works out to an average of about $1,300 per business. And $1,300 is $1,300. But in the larger scheme of how much health insurance costs, that is not even 25 percent of one employee’s single coverage value.
So that leads me to believe it seems very likely that there is a whole bunch of companies who are taking it at the margins, who have more than 10 employees, have average wages more than 25,000 a year, and have ‑‑ did the whole calculation, and figured out they could get a very small sliver of the tax credit. But it winds up being a very small percentage of their overall health insurance costs, which could be 80, $100,000 a year. So I suspect that may be what is happening here.
But all this being said, we have always believed that the best way to subsidize health insurance is to look at individuals, look at their own personal situation, and not to do it through businesses. And to bring down the overall cost of health insurance is the fundamental issue I think this congress needs to grapple with.
Thank you for having me today.
[The statement of Mr. McCracken follows: Testimony ]
*Chairman Boustany. Thank you.
Mr. Hisel, you may proceed.
STATEMENT OF MATTHEW HISEL, CO‑DIRECTOR, HOME RESOURCE, MISSOULA, MONTANA
*Mr. Hisel. Chairman Boustany, Ranking Member Lewis, and subcommittee members, thank you for the invitation to testify today. I appreciate the opportunity to share my experiences as a small employer with the ACA health insurance tax credit. My name is Matthew Hisel. I co‑direct Home Resource, a building materials reuse center in Missoula, Montana.
We collect and sell reusable building materials to reduce waste and promote a more vibrant and sustainable local economy. We also partner with a range of work training programs and offer educational classes. Home Resource, Incorporated is a non‑profit under section 501(c)(3) under a special category for resource conservation. When we founded Home Resource in 2003, my co‑founder and I were the only people on payroll. Now we employ between 15 and 20 people.
At Home Resource we believe our employees work best when they are healthy. We also know our health care benefit is key to attracting and retaining great employees. We have offered health insurance to employees who work more than 30 hours a week since 2004, and we pay 100 percent of the premiums.
Skyrocketing costs have made this difficult to sustain. We face double‑digit increases practically every year, sometimes as high as 39 percent. We have had to shop around for a new plan almost every year, and we have had to increase our deductibles and reduce benefits. We now have a $5,200 deductible. It is the kind of insurance that works fine until something goes wrong, as I can attest to personally from an emergency hospital stay that left me with bills totaling around $4,000. I had just barely been able to achieve the American dream of home ownership a few years before, and these bills forced me to sell my home.
In the past year the ACA has changed our situation significantly, and for the better. This is thanks to both the tax credit and also other parts of the law. In 2010 we paid close to $11,000 for our employees’ health insurance. The tax credit cut our costs by over $2,000. For a small business struggling to keep health coverage, that makes all the difference. We were actually considering dropping our insurance in June of 2011, but knowing we would get the tax credit for 2010 tipped the balance and helped us maintain coverage.
I found the credit pretty straightforward. I prepared the worksheet to determine if we qualified myself. It took me less than 10 minutes. Our accountant spent a little over an hour preparing the final forms, at a cost of $195 to Home Resource. That is $195 to get more than $2,000 back. A small business like mine cannot ask for a better return on investment than that.
While I was aware of the credit from following the debate over health care reform, and my accountant was aware when I asked her about it, I do believe there would be value in a broader education effort to ensure that all small business owners and their accountants are aware of the opportunity to claim it. If utilization of the credit is lower than expected, I would encourage you to consider building on it to help more businesses benefit. This could be done by raising the thresholds for FTEs to 50 and wages to $75,000. Since the Congressional Budget Office scored the credit at 38 billion, I believe Congress should make sure all of these resources are getting to small businesses to help us with our health care costs.
The tax credit isn’t the only piece of the health law that is helping us. There is the requirement that insurers cover free preventative care. There is the end to denying coverage for kids with pre‑existing conditions. I lost one of my best employees before this provision went into effect, because our insurer wouldn’t cover his kid, who was a cancer survivor with Downs Syndrome.
And finally, after years of steep increases between 19 and 39 percent a year, this year’s increase was only 9 percent. Combine this with the tax credit, and we will see our effective health insurance costs go down by double digits this year.
There are other benefits we are looking forward to in the health care reform, as well: the state insurance exchange, which will give small businesses more transparency, better choices, and more bargaining power; stronger rate review to protect us from unreasonable rate hikes; the minimum medical loss ratio requirement, which will ensure a basic standard of value for premiums; and reduced cost shifting, as more people get health insurance and start paying into the system.
Based on the improvements we are already seeing, I believe it is critical that we keep moving forward on implementing the health law. You have an opportunity to build on the tax credit to help more businesses benefit. This credit is a bridge to a reformed insurance marketplace in 2014. If not enough businesses are making it across the bridge, let’s build the bridge wider, not blow it up.
Helping small businesses get affordable health coverage is one of the most important things you can do to help us succeed, grow, and create jobs. Thank you.
[The statement of Mr. Hisel follows: Testimony ]
*Chairman Boustany. Thank you, Mr. Hisel. We have heard a lot about the complexity of this tax credit this morning, both with the first panel and, Ms. Thompson and Mr. McCracken, your testimony both sort of corroborate that. And you know, we have heard about Form 8941 and the instructions, 8 pages, complex calculations that need to be done.
What kind of feedback have small businesses been giving you on the value of this credit?
*Ms. Thompson. For my clients that are able to take advantage of the credit, they find that it is very helpful, because it does reduce the health insurance costs. And so the complexities that we are going through, to them it is worth it.
*Chairman Boustany. Okay. Mr. McCracken?
*Mr. McCracken. I would say it is a mixed bag. I mean there certainly are companies that, as we just heard from the last example, that fit the definitions nicely, and can take a rather large share of the credit. My point is that there are very few of those companies in the larger scheme of the American economy. And so, you just have to factor that factor in.
So I do think there are some companies who have gone through the exercise ‑‑ and I have heard from some of these folks ‑‑ who went through the exercise of doing the calculation, having their outside CPA firm do a lot of work for them to figure out what the credit would be, and at the end of the day claiming the credit, yes, because they had done the work, but it being a relatively small credit. And there was a frustration that they had gone through all the trouble. And if they had known the outcome, they probably wouldn’t have paid the CPA and done all the hassle to figure out the credit, because they only got a few hundred dollars or a thousand or two, which, in the scheme of a company that might have 15, 20, 25 employees, would be a relatively small percentage of the credit.
So, it is ‑‑ it really depends very much on the specifics of the individual business. They really run the gamut between those two.
*Chairman Boustany. Mr. McCracken, do you have any information on the actual cost to a small business to get this credit?
*Mr. McCracken. I don’t. And again, that is going to also vary greatly, depending upon the type of workforce that company has, because it is going to be much more difficult for a small company to have a highly seasonal, highly ‑‑ lots of variations in its workforce over the course of the year, sort of week by week and month by month.
I should also point out that the smaller those companies are ‑‑ which are the ones that stand to get the biggest credit, potentially ‑‑ are the ones that have least automation in those processes, or the ones who are least likely ‑‑ most of them don’t use a payroll service, just for example, in the below 10 market.
So, for them to then go back and collect that data often is a time‑consuming manual process than to go back and figure out how many hours did each person work each week to figure out what the FTEs ‑‑ so ‑‑ but if you are a company that has a stable, 5‑person workforce and they all work 35 hours a week every week and that doesn’t change, it would be relatively simple. So ‑‑
*Chairman Boustany. Ms. Thompson, do you have information on cost, maybe average cost for a small business?
*Ms. Thompson. We don’t really have the information on the cost of preparing the credit, because it depends on the size of the firm that is preparing the credit. It could be a small CPA firm, it could be a large, or it could be mid‑sized. So you can’t really generalize on what the cost is going to be to prepare the credit calculations.
*Chairman Boustany. Ballpark?
*Ms. Thompson. You can’t really ballpark it.
*Chairman Boustany. Not even a ballpark figure?
*Ms. Thompson. Uh‑uh.
*Chairman Boustany. Okay. Well, the IRS has mentioned their outreach efforts. And Inspector General George gave them a B on it, not a bad mark. So it sounds as if they have really made significant efforts to move forward, to get the information out to tax preparers and ‑‑ as well as to small businesses about the ‑‑ their awareness of this credit. Yet, with all of this, participation still seems to be below what was predicted, and seems to be low, by most standards, even at this early stage.
Ms. Thompson, is that because of insufficient outreach, insufficient information being put out to small business? Or is it because the credit is just complex, and small businesses have not availed themselves of that because of the complexity and cost?
*Ms. Thompson. I think at this point it is really too early to make a conclusion as to the effectiveness of the credit. Because, as we had heard, the information is not in for all of the tax returns that were on extension, which was as late as October 15th. And for those that were located in disaster areas, it could have even been October 31st. And as someone had mentioned, the tax‑exempt organizations are due today. So, without having a full year of information, it is really too early to answer that question.
*Chairman Boustany. Okay. Fair enough. Mr. McCracken?
*Mr. McCracken. I think a big issue, as I said before, is that there is a relatively small population of these firms who can maximize the credit. Most companies that offer health insurance that are below 10 employees are not low‑wage firms. So they are limited on that end.
So, when you drill down to how many companies are truly low‑wage firms, have fewer than 10 employees, have been able to offer health insurance nevertheless, and have an uptake rate for their employees for the offer, you are just looking at a very small slice of the small business community. And I think a lot of the low uptake comes down from that fundamental point.
And a lot of the companies that do offer health insurance in that market that might have been assumed to be taking the credit, when you dig deeper you find out that they are often employing family members who are specifically precluded from using the credit.
*Chairman Boustany. And Ms. Thompson and Mr. McCracken, both of you mentioned that small businesses are often disproportionately hurt by the complexity of the tax code, because they are unable to hire or they don’t have the resources to hire the number of tax preparers and accountants, lawyers, and so forth, advisors to navigate through the code.
And I am concerned about these different definitions of a small business that are out there. I think it was your testimony that highlighted some of that, your written testimony. For example, the research credit defines “small business” as one with 500 or fewer employees. But for the purposes of an Archer Medical savings account, it could be a business with fewer than 51 employees. And then there are all these various definitions.
So, comment on how the tax code’s complexity affects these small employers, however they are defined, and hone in on the impact of this particular tax credit and its complexity, and the impact it is having.
*Ms. Thompson. Well, the AICPA is definitely in favor of simplifying the tax code. There is no such thing as a simple code, because the world is just very complex. So you really need to make it simpler than it is. And as you pointed out, something as basic as the definition of a small business, depending on which particular provision you are looking at, you are going to get a different answer.
But we also understand that there may be reasons why they are different, depending on what you are trying to accomplish as your goal in passing legislation.
So we can understand why it is different. We would like to see it a little bit more consistent, and for example, on this one, when we are talking about having to use current information, on all those other provisions that I had identified they were all using prior years, which is very helpful to that small business, because that is information that is going to be readily available to them, and it may not be as much of a stretch for them to go on the prior year, rather than the current year.
So, it is more challenging for a small business. But I would have to say that the small businesses do need a professional to prepare their tax returns. And we do find that if they do hire the professional, they are going to be done correctly, and they may find that they are going to be saving more in taxes than they would otherwise, because they are going to be aware of these incentives.
And the tax professional is doing these calculations all the time. So if it was a one‑off, where one person was just preparing it, yes, it is going to sound very complicated. But if a CPA firm is doing it, they are doing it multiple times for multiple employers, and it is going to become a lot less complex for them.
*Chairman Boustany. Mr. McCracken, briefly, would you like to respond?
*Mr. McCracken. Yes. Your basic question was about the definition of small companies. And there aren’t very many other instances for the tax law ‑‑ usually there is other ways of defining smaller entities, rather than necessarily employee size.
But I also would warn against creating sort of a cliff effect by, for all purposes, defining small business exactly the same way. Because if you sort of define it at 25 employees, or wherever you pick that number, whether it is for good things below that or bad things above that, you are going to create a significant disincentive. So there does need to be some variation, to some degree, so that you don’t wind up with one place where people don’t want to cross.
*Chairman Boustany. Thank you. Ranking Member Lewis?
*Mr. Lewis. Thank you very much, Mr. Chairman. I want to thank each of you for being here this morning.
I would like for each one of you to respond to this question by saying yes or no. Do you support repeal of the small business health care tax credit in the Affordable Care Act?
*Ms. Thompson. I know you said that was supposed to be a yes or no answer.
*Mr. Lewis. Yes?
*Ms. Thompson. Except the AICPA doesn’t have a position either for or against, so I can’t really answer that question.
*Mr. Lewis. Yes, would you want to speak for yourself as individual? You don’t want to get in trouble?
*Ms. Thompson. I am not going to get in trouble today.
*Mr. Lewis. Oh, just take a chance.
*Ms. Thompson. No, I think I am going to pass.
*Mr. Lewis. Oh, you will pass?
*Ms. Thompson. Yes, sorry.
*Mr. Lewis. That is all right.
*Mr. McCracken. I would say no.
*Mr. Hisel. No.
*Mr. Lewis. Thank you. Mr. Hisel, what role did the health care credit play in your decision to provide health insurance for your employees? Did it play any role?
*Mr. Hisel. We were already providing health insurance. But as I said, we were considering dropping it at the beginning of this year, 2011. I spent a lot of time trying to balance my budget for a year, looking a year in advance. And you know, this year we were really struggling with a challenging economy through the winter, and I was working very hard to get the number at the end of the day to remain positive.
And it ultimately made a big difference to us, because I really was looking at health insurance this year. And ultimately, knowing that we would get the credit for 2010, and then again in 2011, that tipped the balance. It was a deciding factor, and we decided to keep our health insurance.
*Mr. Lewis. So you would be a strong supporter of the health care tax credit?
*Mr. Hisel. Absolutely.
*Mr. Lewis. So you are saying as for my house, for your house, could you say to other small business people, “You should take a look at it?”
*Mr. Hisel. Absolutely. And I know a lot of people have. And I do agree that it should be expanded to include more small businesses. Those thresholds should be increased and perhaps brought in line with other definitions, 50 FTEs and wages.
I would also like to say that we are a very seasonal business. We fluctuate with the construction season quite a bit. And I completed this qualifying worksheet myself. It is six simple fill‑in‑the‑blanks. I had all the information in QuickBooks. It was not that challenging. I don’t quite understand what the problem was. And then, you know, to just hand it over to our accounting service, they did not seem to have a huge problem with it.
And I think it just needs to be expanded.
*Mr. Lewis. Well, you traveled a great distance to be here today.
*Mr. Hisel. Yes.
*Mr. Lewis. Further than anyone.
*Mr. Hisel. I am sorry?
*Mr. Lewis. I said you traveled a great distance to come and testify today. And I just want to thank you for coming.
*Mr. Hisel. You are welcome, thank you for having me.
*Mr. Lewis. Thank you. Mr. Chairman?
*Chairman Boustany. I thank the gentleman. Ms. Black?
*Ms. Black. Thank you, Mr. Chairman. Again, thank you, panelists, for being here today. It is very helpful.
It has been suggested that what we see here was just a political stunt. And yet I continue to hear that there is complexity. And the complexity includes things like definitions that are confusing, that it is also confusing with the other parts of the tax code. And yet, there ‑‑ has been suggested that it could be done in three simple steps.
I would like to hear ‑‑ and Mr. Hisel, I probably want to come back to you, but I would like to hear, first of all, from Ms. Thompson and Mr. McCracken about what they are hearing and what their experience are with dealing with the small businesses. If it is just three simple steps, then why is it that there are folks that are saying that it is more complex than that? So help me understand that.
*Ms. Thompson. I think that the provision does require a lot of questions to be answered. And the first one is starting off with whether or not they do qualify as a small business. And it is not as easy as just looking to the prior year’s gross receipts, or the prior year’s employee count. It is really based on the current year information.
And when you look at the definition of “employee,” as one of the other panels had mentioned, it is not just your employee count on the W‑2s that were issued during the year, it needs a little bit more analysis to look at those employees, to see whether or not there is any family members that have to be excluded. If you have seasonal workers, how many ‑‑ whether those seasonal workers can be included or not. And so, there is a lot of definitions or analysis that goes into whether or not that person is an employee that is going to be eligible for that credit.
And then, if you talk about the hours, the hours are going to be based on the payroll records, again. But you do have to look at it, because if somebody went over 2,080 hours, you don’t include the excess over that level, so you would include only that amount. If the people aren’t being compensated on an hourly basis, then they may have other methods of determining what ‑‑ the hours works.
So, it is those type of definitions and analysis each step of the way that adds to the amount of work that is being done for that credit. And so that is why we were suggesting that if you change the definition away from the way it is right now, and base it on something like the prior year, it does away with a lot of the complexity that is there.
*Ms. Black. Mr. McCracken?
*Mr. McCracken. Actually, I don’t have a lot to add to that. But I would also point out that, you know, for a lot of these companies, they will see that and realize they need to go through lots of steps, and they have to change their procedures to simplify how they can gather that data in order to claim the credit. And if the credit they are able to claim they think will be at a relatively low level, and it is temporary, they might not want to go through that trouble of change the way they do it.
Again, that is more likely for the companies that have more than 10 or 15 employees, that are sort of reaching the upper size of the availability of the credit. But my sense is those are the companies that are far more likely to be offering health insurance to the employees. So it is going to affect a greater variety of actual ‑‑ of people.
*Ms. Black. So I think what I hear you saying is that it is all across the board. And maybe Mr. Hisel has a little bit more stability there, where he is not having to figure quite as many of these different categories that I am seeing to not be well defined, or that there is a lot of variations in the employees, the number of employees, the hours worked, and that kind of thing.
Obviously, we all want to get to the same point, where we can let small businesses take advantage of something that is there to incentivize them to provide insurance for their employees. So I appreciate your recommendations there.
The next question I wanted to ask is the piece on the family members. Is there a reason why you believe that ‑‑ and I wasn’t here when this was passed, so I don’t know ‑‑ why family members would be excluded? Because it seems that that is very typical in small businesses, that small businesses are very family‑oriented. And to exclude family members doesn’t seem like it is really going to be beneficial. Is there a reason, Ms. Thompson or Mr. McCracken, that you could enlighten me on that piece?
*Ms. Thompson. I really didn’t look into the committee reports as to why the family members were excluded from the definition of “employee,” so I can’t really answer that question.
*Ms. Black. Okay. Okay. Mr. McCracken, any idea ‑‑
*Mr. McCracken. I don’t ‑‑ wasn’t privy to those conversations, of course, but I have to believe it is because the congress at the time was concerned about, you know, potential abuse, that you might hire an employee ‑‑ a family member who is not really an employee, that kind of thing, and so they sought to prevent that.
*Ms. Black. Well ‑‑
*Mr. McCracken. I should also point out, though, that it does work both ways. Because in companies where you have family members who are working in the company, more often than not they are in a kind of a management position. So not only are they not eligible for the tax credit, but they also aren’t counted in the calculation of whether you are low wage.
And so, if you added them back in to that calculation, probably the average wage of the company would go up, but your tax credit would go down for the employees you can claim it for.
So, if you are going to think about a system that allows the business owner who works as an employee and the family members who work as employees to participate, you might need to sort of think through the levels, because you will wind up allowing some businesses to claim a credit for some of the individuals’ health insurance, but you might actually reduce the credit available to other companies.
*Ms. Black. Good point. And I just think that it is something we need to take a look at, Mr. Chairman, in particular. I don’t know the reason for it initially, but my experience with small businesses, of which our family is a small business, and that many of those that we know do have a lot of family members that are involved in the business. Thank you.
*Chairman Boustany. Dr. McDermott?
*Mr. McDermott. Thank you, Mr. Chairman. Mr. Hisel, I feel an affinity for you. I worked for a gypo logger one summer. I see that you have been to the University of Montana and got a master’s degree and then you took an entrepreneurship course in the Montana Community Development Corporation. Did they have a course in there to figure out how to fill out government forms, in the master’s degree program or in the entrepreneurship?
*Mr. Hisel. I do not recall such a course, specifically.
*Mr. McDermott. So, the skills that you used were skills that you learned in maybe common public schools and eighth grade, where you learned to multiply fractions and add and subtract?
*Mr. Hisel. And divide, yes. That is correct. In fact, there is an addition symbol right here, and a division symbol. It is pretty basic.
*Mr. McDermott. And so, my feeling then is ‑‑ why do you think people are complaining about this form? I mean did you get that card in the mail? Is that how you figured out about this?
*Mr. Hisel. No. I was aware of it from following the health care debate, that it would be coming. And I was quite anxious to be aware of it. But my accountant did know about it from receiving some type of communication from the IRS, I believe. So ‑‑
*Mr. McDermott. And so why are we hearing all these complaints? I mean you are just an ordinary guy who learned eighth grade math and figured out this thing, and figured it out, and handed it to your accountant and said, “I think this will work for us,” and your accountant said, “Yep, you’re right,” and it cost you $195. Why are other people finding it so complicated?
*Mr. Hisel. I don’t know.
*Mr. McDermott. All your people work every day, 8 hours a day, 50 weeks a year?
*Mr. Hisel. No, we have ‑‑ in fact, we have three full‑time employees ‑‑ that is one of the blanks ‑‑ and then the full‑time equivalent of part‑time employees is simply a matter of finding the total number of hours worked by part‑time employees, which is reporting QuickBooks, and you divide by 2,080, and you get the number of full‑time equivalents.
*Mr. McDermott. So, it is not that complicated.
*Mr. Hisel. Doesn’t seem to be, to me.
*Mr. McDermott. And why, then, Ms. Thompson ‑‑ I mean you got these accountants. I mean I got an accountant. Everybody here on the dais has an accountant, I will bet. Bet there is nobody up here that doesn’t use one. They fill out a million forms every year. Months of February, March, and April are absolutely crazy at Bader Martin in Seattle.
So, when they have done 100 of these, or 1,000 of them, what is the complexity then?
*Ms. Thompson. You made a very good point. It is the tax professional that is preparing the form. And to them, it is not complex. But it is to the individual small business owner that is accumulating that information that it may not be as straightforward for everybody as it is for my fellow panelist here.
And so, that is where the complexity comes in. The complexity is when the small business owner has to accumulate the information that they don’t readily have available. Yes, they have it available, but it is not just picking up one number from here and dropping it there. They have to analyze it in a little bit more detail. But you are absolutely right ‑‑
*Mr. McDermott. If you are running a business ‑‑ if I could interrupt you just a second ‑‑ if you are running a business, how can you run it without knowing how many people you are paying how much per hour times hours to give them a paycheck at the end of the week? How could you not know that information, to just hand it to your accountant and say, “Here is what I do”?
*Ms. Thompson. You are absolutely right. There are payroll records that have annual amounts on them. But it is not as easy as just picking up that annual amount, because you have to know if the person had more than 2,080 hours because that person ‑‑ you are not picking up the total hours. Maybe they worked 3,000 hours. But in your calculations you are not picking up 3,000, you are picking up 2,080. And then you have to look at whether or not you have part‑time employees. And so those have to get special attention. If you have seasonal workers that work less than 120 days, they are handled one way. But if you have seasonal workers that are more than ‑‑ you handle them a different way.
So, it is every situation for the small business owners themself that is where the complexity is. But you are absolutely right. For the tax professional that is preparing that form, it is not complex for them at all.
*Mr. McDermott. So, if I want a deduction, I bring into my tax preparer the information about my contributions, and about my business expenses, and all that kind of stuff. If I don’t give it to him or her, I don’t get the deduction, right? So it is up to me?
*Ms. Thompson. No, it would be up to the tax professional to make sure you, as a small business owner, were aware of the credit. And if you didn’t provide it to the tax professional, the tax professional should be asking you the questions to get the information in.
*Mr. McDermott. So in the second year we will have some better data.
*Ms. Thompson. Second year it is going to be a lot better than the first year. And I think that is true of any tax law, the first year is always a little bit more challenging than the second year.
*Mr. McDermott. Exactly. Thank you.
*Chairman Boustany. Ms. Jenkins?
*Ms. Jenkins. Thank you, Mr. Chairman. Thank you all for being here.
Ms. Thompson, in your written testimony you explained how small business ‑‑ the small business tax credit did not provide an incentive for small business to provide health insurance. If the employer is even aware of the credit, you said they are not likely to know whether their business is eligible for the credit ‑‑ and if so, the size of the credit ‑‑ until after the end of the year.
I would be curious for both you and Mr. McCracken to comment or elaborate on the challenges that a small business faces when planning its expenses, including health benefits for employees, and perhaps elaborate specifically on the effects of the temporary nature of this tax credit, which will expire after 2015, and how this affects a business owner’s calculations when they are deciding whether to offer insurance, given that the health insurance law has not reduced the cost to provide the health insurance.
*Ms. Thompson. I think I was answering the question from the perspective that the small business owner didn’t know at any point during the year whether or not they were going to be eligible for the credit. There are those situations that they would absolutely be aware of it.
If there are less than 10 employees, and they know their compensation is ‑‑ average compensation is less than 25,000, that is really very clear, very straightforward. They know they are going to be eligible for the credit. And so they would be able to calculate the credit, or the professional would be able to calculate the credit, and let them know how much they would be able to save, if they did have or purchase the insurance for those employees.
So, that is the perspective I was coming from. It is that they didn’t ‑‑ weren’t able to plan for it during the current year to know whether or not they were going to be eligible for the credit. And that is why we say, okay, it would be so much better for them to do that look‑back to the prior year, because then they can plan and make a really good business decision as to whether or not to purchase that insurance.
When you talk about the temporary nature of it, I don’t think a small business owner is going to be that concerned with something that is going to be happening seven years from now. If it is going to be very helpful for them in the short term to be able to pick up this insurance and be able to take advantage of the credit, that is probably what they are looking for.
As you know, tax laws change all the time. So maybe by the time this credit is scheduled to be repealed, maybe it won’t be. And so there is a lot of things that go on when people are talking about whether or not to take advantage of the credit.
But our answer was perspective from planning for the current year, and whether or not to buy the insurance.
*Ms. Jenkins. Okay. Mr. McCracken?
*Mr. McCracken. I agree with part of that. I think that the temporary nature of the tax credit doesn’t have ‑‑ play a significant role in determining whether someone is going to use the tax credit. But I do think it plays a significant role if you are trying to incent a company that doesn’t currently offer health insurance to begin offering health insurance.
Because small business owners are very reluctant to start doing something ‑‑ an employee benefit ‑‑ that they don’t feel confident that they are going to be able to sustain. That is one of the biggest issues, I think, that played into health care reform for small companies, is newer companies simply were not starting to offer health insurance the way companies had in the past. And as older companies have gone away, newer small businesses are much less likely to offer health insurance, because they have seen this cost trajectory, and they are very concerned that they won’t be able to keep offering it.
And it is a very different conversation with your employees if they came into your company because you offered health insurance, and now you have got to get rid of it. That is a much more difficult conversation than if they came into your company knowing that you didn’t provide health insurance, and being able to deal with that.
So it is just a really different situation. So I do think the temporary nature makes it very difficult to incent different behavior on the part of the small business.
*Ms. Jenkins. Thank you. I yield back.
*Chairman Boustany. Mr. Paulsen?
*Mr. Paulsen. Thank you, Mr. Chairman. And, you know, the last panel, as well, talked about some of the complexity issues that are obviously out there when you have less than an eight percent compliance rate, or an eight percent participation rate, I should say, as a part of this tax credit. And it goes back to a little bit of that definition perspective of what is a small business, right? It is 25 employees, 15 employees.
I just remember in the health care debate and when that law was being first debated, I talked to one small business owner. I said, “Well, how many small ‑‑ employees do you have, as a small business?” He said, “Under 50, and I am going to stay that way.” And to me, that really sort of struck home. And now we are talking about a certain tax credit to help small businesses like Mr. Hisel’s and others, where you have a 25‑employee limit.
And Mr. McCracken, let me ask you this, because you testified about the difficulties that a small business faces in figuring out whether they are eligible for the credit, and if so, then calculating the amount of what that credit is. But moving beyond just those two hurdles, what effect do the employee and average wage limitations have on hiring or wage increases?
So you got seasonal employees, you got family members, you have got wage restrictions, you have got FTE restrictions. I mean do you believe that this complexity ‑‑ this could actually prevent small businesses from hiring additional employees, or increasing wages?
*Mr. McCracken. Do you mean the tax credit itself?
*Mr. Paulsen. Just in terms of the complexity component of it, yes.
*Mr. McCracken. It could. I mean that is one of our concerns about having a long‑term policy that provides incentives to small companies directly to provide health insurance. Because while the temporary doesn’t have much effect on their behavior, a long‑term tax credit or incentive could have effects on their behavior. But they might not be what you expect.
So, for instance, if you offer low‑wage companies a significant tax credit for offering health insurance, you are essentially encouraging low wages. You are subsidizing low wages for the long term. And I think you would have a very real effect, in that regard.
If you are going to ‑‑ and there are other ways you could define. If you subsidize small companies exclusively and have a cliff, you are giving them significant incentives to stay small, and to think about that growth, as you point out.
I think on the ‑‑ with this credit being a temporary credit, those kind of effects are more muted than they would be if this was a permanent policy, going forward.
*Mr. Paulsen. Yes. And, Ms. Thompson, want to expand at all? Any comment?
*Ms. Thompson. [No response.]
*Mr. Paulsen. I will just mention this, too, is I think that is fairly accurate, from the perspective of Congress is always thinking in short‑term cycles. Is this certain tax credit going to get renewed for another six months? I mean this is actually a fairly unique credit. It is out there for a few years, and then it is going to be set to expire.
And so at some point Congress is going to be asked to come back and say, “Well, do we want to keep it going? Do we want to renew it? Do we want to extend it to other categories, for instance?” And it does create the uncertainty out there from those in the business community that want to allocate capital as a part of just the overall tax code. I mean that is a factor.
And I hope that, Mr. Chairman, we are going to continue to have these conversations. This is just one credit we are talking about, but it is an issue across the board, large companies and small. So I yield back.
*Chairman Boustany. And next we will go to Mr. Reed.
*Mr. Reed. Mr. Chairman, I am going to yield back. I am all set today. Thank you.
*Chairman Boustany. Mr. Crowley?
*Mr. Crowley. Thank you, Doctor. Thank you for letting me participate today. I am pleased you are having this hearing today. And, my colleagues, if the worst thing you can say today about the health care law that we passed, also known as the Affordable Care Act, is that it only provided 228,000 small businesses with a tax cut, averaging $1,220, then it is clear to me that we have much larger problems on our hands. Because, in my book, tax cuts for 228,000 small businesses is a pretty good start. Furthermore, even more small businesses will receive this small business tax cut. That is clear from the testimony that you have offered.
But I am happy to use this hearing as an opportunity to spread the good word about this tax cut, and ensure we educate even more small businesses about the range of benefits available to them through health reform, so they can afford health coverage for their employees.
So I am thrilled to have this hearing today to allow us to trumpet the health care law, and reiterate that we are all in agreement on two points today: the Democratic health care law expands private health insurance coverage, and cuts taxes on job creators, small business men and women.
So welcome, Mr. Hisel, to the Ways and Means Committee, and please give my regards back to Montana when you go. My wife is from Billings, Montana, and her brother lives just outside Missoula in Clinton, Montana. So, maybe a neighbor of yours? So welcome here today.
So, you are a small businessman who employs 17 folks, correct?
*Mr. Hisel. We are at ‑‑
*Mr. Crowley. Or less?
*Mr. Hisel. ‑‑ 19 right now.
*Mr. Crowley. Nineteen? Good for you. Was this tax credit for small businesses in the Democratic health care law helpful to you? And I know you may have already answered this question, but I don’t think we can hear it enough. Was it helpful to you?
*Mr. Hisel. Yes. It continues to be helpful to us.
*Mr. Crowley. So how much did you see refunded from your taxes because of the small business tax cut in the Affordable Care Act?
*Mr. Hisel. Over $2,000.
*Mr. Crowley. Over $2,000. So is it safe to say that this tax credit made it more affordable for you to provide health insurance to your workers, and without it you might have had to give it up, or give up on providing the private health coverage you give your employees today?
*Mr. Hisel. Yes. It was on the chopping block this year.
*Mr. Crowley. So we are hearing from a few people that not enough qualified small businesses are applying for this tax credit, and that it may not be worth it as it may be too complicated. What do you think, again? Is this tax credit worth it or not?
*Mr. Hisel. It is absolutely worth it. Not too complicated, in our experience.
*Mr. Crowley. There is a charge in the House of Representatives to repeal the health care law as we know it, known as the Affordable Care Act, to eliminate all future benefits, such as this small business tax break, and to reclaim all past benefits.
And I would allude to H.R. 2, which ‑‑ I would think that Mr. Cain would have no difficulty reading this bill ‑‑ it is on the second page where it says the act ‑‑ “Such act is repealed, and the revisions of law amended or repealed by such act are restored or revived, as if such act had not been enacted.” An entire repeal to reclaim all past benefits provided, such as the money you got to keep with this tax credit for job creators like yourselves, small businesses.
How would you feel if Congress repealed the health care law? And, once again, let me quote again ‑‑ “as if it never was enacted,” — which experts have said could be used to force people to repay any benefits they have received like this tax cut or the $250 check that the seniors in our country received to close the doughnut hole in 2010. How would that make you feel, if you had to pay back that $2,000?
*Mr. Hisel. I would be absolutely livid. It would be ‑‑
*Mr. Crowley. How would it affect your business and your employees’ well‑being, having to write a much larger check to the IRS to deal with the small business tax cut that my colleagues on the other side of the aisle vehemently oppose?
*Mr. Hisel. That would be absolutely infuriating. It is going in absolutely the wrong direction. I believe that the ACA is an actual stimulus to small businesses. It has helped me. It has reduced my premiums. And I would be absolutely infuriated if we went backwards.
*Mr. Crowley. I thank the witness for his testimony. I am pleased we got the opportunity to hear from a hard‑working small businessman like yourself.
Let me just for the record really point out other benefits. No mandates on any employer with under 50 employees to comply with this. No more health care decisions will be made by HMO employees on the phone, but rather by patients and their doctors. Children can no longer be denied coverage on their parents’ private health insurance because of a previously existing condition, like asthma. Children can stay on their parents’ private health insurance until 26. And the list of benefits goes on and on and on.
I thank you all for your testimony today.
*Chairman Boustany. I want to remind the gentleman that he did raise prospective legislation, which has been under consideration, and that is not the purview of the Oversight Subcommittee. And at the same time, I would also remind the gentleman that the ‑‑ Mr. Hisel has a non‑profit entity, so that some of the tax considerations you proposed would not apply.
*Mr. Crowley. If the chairman would just yield for a moment?
*Chairman Boustany. I will yield.
*Mr. Crowley. I was just taking the opportunity to point out the benefits of the law that we passed. So I thank the chairman for yielding.
*Chairman Boustany. And we have better proposals going down the line.
So I want to thank the witnesses for being here today, for your testimony, and I want to remind you all that ‑‑ please be advised that Members may have written questions that they will submit, and your answers to those would be made part of the official hearing record.
Again, thank you. And this hearing is now adjourned.
[Whereupon, at 12:45 p.m., the subcommittee was adjourned.]
MEMBER SUBMISSION FOR THE RECORD
The Honorable John Lewis 1
The Honorable John Lewis 2
MEMBER QUESTIONS FOR THE RECORD
The Honorable Charles Boustany
PUBLIC SUBMISSION FOR THE RECORD
National Association of Professional Employer Organizations
National Federation of Independent Business
Small Business Majority
The Center for Fiscal Equity