Application of Small Business Regulatory Enforcement Fairness Act to tax regulations.

On March 5, 1996, Tax Executives Institute submitted the following comments to Senator Christopher Bond, Chairman of the Senate Small Business Committee, on S. 943, the Small Business Regulatory Enforcement Fairness Act to Tax Regulations. The Institute's comments, which took the form of a letter from TEI President Jack R. Skinner, were prepared under the aegis of the Institute's IRS Administrative Affairs Committee, whose chair is Robert L. Ashby of Northern Telecom Inc. The comments complement testimony filed with Congress in 1995 regarding certain regulatory reform provisions of the so-called Contract with America. Those prior submissions were reprinted in the July-August 1995 and September-October 1995 issues of The Tax Executive.

On behalf of Tax Executives Institute, I am writing to urge that the Internal Revenue Service be exempted from the provisions of S. 942, the Small Business Regulatory Enforcement Fairness Act. For the reasons set forth below, the Institute believes that including the IRS within the scope of any small business regulatory reform act would make government less responsive to the needs of the taxpaying public and hence be counterproductive.

Background

Tax Executives Institute is a volunteer association of nearly 5,000 professionals who are responsible for managing the tax affairs of their companies. TEI represents more than 2,700 companies - a cross-section of the business community. Our members must contend daily with business tax laws, from both tax planning and tax compliance perspectives. The Institute is firmly committed to maintaining a tax system that works - both for taxpayers and the IRS. We believe the diversity and training of our members enable us to bring a uniquely balanced and practical perspective to your attention.

Discussion

The Senate Committee on Small Business is considering legislation that would implement certain recommendations of the White House Conference on Small Business affecting the development and enforcement of government regulations. An amendment in the nature of a substitute offered by Representative Hyde would require agencies - such as the Internal Revenue Service - that publish a "notice of interpretive rulemaking of general applicability' to comply with the Regulatory Flexibility Act by preparing an analysis that the final rule minimizes significant economic impact on "small entities" to the maximum extent possible. The amendment would also permit an adversely affected small entity to seek judicial review of the agency's action.

TEI is concerned that subjecting interpretative rules of the IRS to the Regulatory Flexibility Act could delay the issuance of important guidance. Tax obligations arise not under IRS regulations but under specific statutes that are enacted by Congress. Taxpayers are dependent upon regulations and other guidance to fill in the gaps, to explain the ambiguities, to finish the job often left undone by the statutory language. Indeed, taxpayers - and taxpayer groups such as TEI - continually press the IRS and Treasury for more, not less, guidance. If the IRS is forced to review every interpretative regulation for its effect on small businesses, the backlog of regulatory projects will undoubtedly grow. Thus, rather than relieving taxpayer burden, subjecting tax rules to the Regulatory Flexibility Act may actually exacerbate it. Moreover, judicial review of regulations may impair the even-handed enforcement of the tax laws and impede the IRS from quickly responding to curb abusive transactions.

TEI and its members frequently take issue with particular IRS rules, or with specific provisions in regulations issued by the Treasury Department. Experience teaches, however, that instances of regulatory overreaching can be most effectively addressed on a case-by-case basis. Subjecting the IRS to the Regulatory Flexibility Act would, we believe, do substantially more harm than good.

Conclusion

TEI opposes the application of the Regulatory Flexibility Act to the Internal Revenue Service. We strongly urge that the Senate exempt the IRS from the reach of S. 942. If you have any questions, please do not hesitate to call either me at [phone] or Timothy J. McCormally of the Institute's professional staff at [phone].