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NASE Sends Letter to House Ways & Means Committee Regarding Harmful Provision Affecting Micro-Business

Thursday, June 19, 2008
The Honorable Charles Rangel
Chairman
Committee on Ways & Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, D.C. 20515
The Honorable Jim McCrery
Ranking Member
Committee on Ways & Means
U.S. House of Representatives
1139-E Longworth House Office Building
Washington, D.C. 20515

 

Dear Chairman Rangel and Ranking Member McCrery,

As you move forward with your legislative agenda, the National Association for the Self-Employed (NASE) understands that a looming factor in the debate on any issue in the 110th Congress is the budget. However, the NASE and our 250,000 members have become concerned that the zeal of Congress to find funding in our strict budget climate has shifted the delicate balance from what is reasonable to what is detrimental for small business.

As an offset for various legislation, you are considering a proposal to expand information reporting by requiring credit and debit card issuers to report business owners’ annual electronic payment transactions to the IRS. This recommendation is likely to have significant unintended consequences. It lacks clear details regarding its implementation which must be brought to light to accurately gauge its affect on both the micro-business community and our economy. Congress should require the IRS to prepare both a detailed implementation plan and a cost/benefit analysis to allow for a clear understanding of how the proposal will be administered and its effect on the self-employed. This analysis should occur before this recommendation is considered for use in legislation.

Please find below our top concerns with this proposal:

Use of Data
  • The IRS has suggested that the data could be utilized to create industry profiles, taking the total credit card receipts from a particular business sector and then extrapolating this information to create industry averages. These new profiles could then be used by the IRS to make judgments regarding other items on the tax return such as estimations on cash payments.
  • NASE Concern: If this is the intended use of the data, problems will arise. Differing demographics of individual businesses will

Verification and Withholding
  • Credit and debit card companies would be required to verify the TIN of a business. If this information is inaccurate they must backup withhold 28% of the gross transactions of that business.
  • No specifics have been released as to how the IRS plans to work with credit and debit card companies to effectively implement these components of the proposal. There are likely to be reporting errors through this process of verifying TINs yet there is confusion regarding whether a small business owner must contact their credit card company or the IRS to address the problem.
  • NASE Concern: Withholding on gross transactions will create a substantial cash flow problem for the self-employed and could also place a severe financial strain on their families. We do not support back up withholding for this proposal.

Cost to Consumers
  • Credit and debit card companies are likely to pass on the cost of compliance to their micro-business merchants in the form of higher user fees. Increased fees will have a negative impact on revenues and sales of micro-business owners, forcing them to either minimize their acceptance of credit cards or increase prices of their goods/services. This could have significant consequences on our weakening economy.
  • NASE Concern: Congress should reach out to credit/debit card companies, banks and other pertinent parties to determine the ultimate financial impact on consumers before moving forward with this proposal.

Effectiveness
  • The majority of NASE's members feel that this recommendation will not increase tax compliance. They are quick to point out that this proposal will be collecting information that is well documented, already likely reported and would be revealed easily upon review. Therefore, the taxpayer who willingly underreports would not knowingly choose to exclude credit card receipts since those items show up on bank statements and have a paper trail.
  • The NASE believes that it is highly unlikely this proposal will identify any additional taxable income that would not have already been reported. We feel that any revenue collected would stem from inaccuracies or mistakes made during the Taxpayer Identification Number (TIN) verification process which would trigger the backup withholding mechanism suggested in this proposal.

The National Association for the Self-Employed does not support this recommendation and strongly urges Congress to consider alternate, less burdensome solutions to increase tax compliance. This proposal may put the self-employed out of business and deter prospective entrepreneurs because it significantly adds to the cost of starting up and running a micro-business.

We understand the fiscal climate our government is facing. However, you are asking the segment of our economy which is experiencing the most discomfort from high health costs, high energy costs, and our current credit cost, to foot the bill. Congress should focus on ensuring passage of effective policy at a reasonable cost to ALL of our citizens before they rush to put the financial squeeze on the self-employed and micro business, which remain the foundation of both America’s economy and communities.

For more information on this issue, please contact Kristie Darien, Executive Director (Legislative Offices), at 202-466-2100 or via e-mail at kdarien@nase.org.

We thank you for your consideration.
Sincerely,
Robert Hughes
NASE President