Proposed amendments to the Regulatory Fexibility Act concerning issuance of tax regulations.

October 13, 1999

On October 13, 1999, Tax Executives Institute submitted the following comments to the House of Representatives' Committee on Small Business concerning H.R. 1882, the Small Business Advocacy Review Panel Technical Amendments Act of 1999, which would mandate procedures for the Internal Revenue Service to follow before issuing tax rulings and regulations. The comments, which took the form of a letter from TEI President Charles W. Shewbridge, III to Representatives James M. Talent and Nydia M. Velazquez, respectively the Chairman and Ranking Minority Member of the Committee on Small Business, was prepared under the aegis of the Institute's IRS Administrative Affairs Committee, whose chair is Robert J. McDonough, Jr. of Wang Global, Inc.

Tax Executives Institute is the preeminent association of business tax executives in North America. On behalf of the Institute, I urge Congress to exempt the Internal Revenue Service from the provisions of H.R. 1882, the Small Business Advocacy Review Panel Technical Amendments Act of 1999. After analyzing the legislation, TEI reluctantly concludes that it would adversely affect the rights and interests of taxpayers, including those in the small business community whom the bill is intended to help. More specifically, including the IRS within the scope of H.R. 1882's proposed amendments to the Small Business Regulatory Enforcement Act of 1999 would make government not more but less responsive to the needs of the taxpaying public and hence be counterproductive. Because they would do more harm than good, neither H.R. 1882 nor its Senate counterpart, S. 1156, should be enacted.

Background

Tax Executives Institute was founded in 1944 to provide a voice for the business tax professional -- not the practitioner but the in-house employee who must deal with the intricacies of the tax law and with employees of the Internal Revenue Service on almost a day-to-day basis. Our approximately 5,000 members represent 2,800 of the leading corporations through 52 chapters in the United States, Canada, and Europe. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. To be sure, most members of the Institute work for companies that are too substantial to be referred to as "small business." Nevertheless, as a professional association, TEI is firmly committed to maintaining a tax system that works -- one that is administrable for all classes of taxpayers and that taxpayers can comply with in a cost-efficient manner.

Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the Internal Revenue Service and provisions of the tax law relating to the operation of business enterprises. We believe that the diversity and professional training of our members enable us to bring an important, balanced, and practical perspective to your attention concerning the Small Business Advocacy Review Panel Technical Amendments Act of 1999.

Discussion

The Small Business Regulatory Enforcement Fairness Act of 1996, Pub. L. No. 104-121 (hereinafter referred to as the "Regulatory Flexibility Act") sets forth rules intended to ensure that the interests of the small business community are taken into account before the federal government issues any significant rules and regulations. The law requires that each "covered agency" convene a panel of federal employees from (a) the Office of Information and Regulatory Affairs within the Office of Management and Budget, (b) the Chief Counsel for Advocacy of the Small Business Administration, and (c) the covered agency to receive input from small entities (or small business) and their representatives before promulgating proposed rules having a significant economic effect on a substantial number of small entities. Not later than 60 days after the panel is convened, it is to produce a report with comments from the small entities and the panel's own recommendations. The report is submitted to the head of the agency, who is to review it and, where appropriate, modify the proposed rule, the Initial Regulatory Flexibility Analysis (which the law requires accompany the proposed rule), or the decision on whether the rule significantly affects small entities. The panel's report becomes a part of the rulemaking record.

Under current law, the term "covered agency" includes only the Environmental Protection Agency and the Occupational Safety and Health Administration. The Internal Revenue Service, however, is required under the 1996 legislation to prepare an initial and final regulatory analysis "but only to the extent that such interpretative rules impose on small entities a collection of information requirement." 5 U.S.C. [sections] 603. H.R. 1882 and its Senate counterpart, S. 1156, were prompted in part by the limited effect this last provision has had on the promulgation of tax rules. See S. Rep. No. 106-153, 106th Cong., 1st Sess. (September 8, 1999) (Report of the Senate Small Business Committee).

H.R. 1882 would amend the Regulatory Flexibility Act to cover the rules and regulations promulgated by the IRS. In addition, the bill would lengthen by 30 days the time that small entity representatives, participating in the panel process, have to review the technical and voluminous materials to be considered during panel deliberations. The IRS, EPA, and OSHA would be required to prepare detailed summaries of background data and information whenever a small entity representative requests that they do so. In addition, the bill would require the panel report, including any written comments submitted by the small entity representatives, to be printed in the Federal Register concomitantly with the proposed rule or as soon as practicable, but not later than 180 days, after the date the head of the agency receives the report. Hearings were held on H.R. 1882 in May. S. 1156, the Senate counterpart to the House bill, passed the Senate on September 28, 1999.

TEI wholeheartedly agrees that tax rules and regulations should take into account the effect of such rules on small business and, indeed, on all classes of taxpayers. As stated above, TEI is dedicated to reducing the administrative burden posed by the tax laws and associated rules and regulations. Nevertheless, the Institute reluctantly concludes that bringing the IRS within the scope of the Regulatory Flexibility Act is ill advised. Enactment of the legislation could significantly delay the issuance of important guidance, thereby making it more difficult for all taxpayers -- small businesses included -- to meet their tax responsibilities.

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. Stated differently, the rules and regulations shine light on the burdens and responsibilities imposed by Congress. From this perspective, a delay in the issuance of rules will not improve the lot of taxpayers, because it can have the effect of leaving them in dark. This is why taxpayers -- and taxpayer groups such as TEI -- continually press the IRS and Treasury for more, not less, guidance. This is why the enactment of H.R. 1882 would be counterproductive. By our estimate, if the IRS were forced to convene a panel to review virtually every interpretative regulation, a regulatory package could be delayed by a minimum of three-to-six months. Under the legislation, then, the backlog of regulatory projects -- the dearth of guidance -- would grow. Thus, rather than relieving taxpayer burden and uncertainty, subjecting the IRS to the Regulatory Flexibility Act might actually exacerbate it. Moreover, the delay caused by the review process might impede the IRS from quickly responding to curb abusive transactions.

In addition, permitting some taxpayers (i.e., those invited to sit on the review panels to comment on regulations before their promulgation) to have advance knowledge of tax rules -- including effective dates, safe harbors, and anti-abuse rules triggered by the publication of the rules in the Federal Register -- is not in the country's best interests. Such an action would unfairly afford the select taxpayers a competitive advantage over others and hence could significantly undermine the integrity of the tax system. The majority of IRS rules are issued in proposed form and hearings are held before they become final. This process gives all taxpayers -- large and small -- an opportunity to be heard.

To be sure, TEI and its members frequently take issue with particular IRS rules or specific regulations issued by the Treasury Department. We know first hand that some rules and regulations may impose unfair or burdensome requirements. As previously stated, however, more often the rules and regulations simply elucidate the actions of Congress. TEI does not believe the Treasury Department and IRS should be excused when they "step over the line" and propose unreasonable rules. But if and when they overreach or pay inadequate heed to the legitimate concerns of the small business community, the situations can be effectively addressed on a case-by-case basis, without slowing down the entire tax guidance process. Expanding the definition of "covered agency" in the Regulatory Flexibility Act to include the IRS would, we believe, do substantially more harm than good.

Conclusion

For the foregoing reasons, Tax Executives Institute opposes the application of the Regulatory Flexibility Act to the Internal Revenue Service. We strongly urge that the House to exclude the IRS from the definition of "covered agency" in H.R. 1882. 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].