The urgent need for interest netting.

On April 8, 1997, TEI President James R. Murray sent the following letter to the Honorable Robert E. Rubin, Secretary of the Treasury.

As part of the Taxpayer Bill of Rights 2, Congress mandated that the Department of the Treasury and the Internal Revenue Service prepare and submit a report on the so-called interest netting problem, pursuant to which taxpayers who simultaneously owe and are owed money by the federal government are financially penalized. The legislation required that the Treasury-IRS study be filed with Congress by January 31, 1997, and although Treasury representatives made numerous promises in late 1996 and early 1997 about meeting that deadline, the report has not yet been released -- more than two months after the deadline. As President of Tax Executives Institute, I call upon the Treasury Department to satisfy the legislative mandate and promptly issue its interest netting report.

Tax Executives Institute is the professional association of corporate tax executives in North America. The Institute's 5,000 members handle the tax affairs of the top 2,700 companies in the United States and Canada, and deal with the tax laws on a daily basis. As a broad-based organization dedicated to fair and efficient tax administration, TEI has long been concerned about the harsh effects of the "interest rate differential," pursuant to which the interest rate imposed on tax underpayments (or deficiencies) is higher than the rate paid on tax overpayments (or refunds). Many TEI members have been disadvantaged by the differential's harsh effects.

Mr. Secretary, as taxpayers sit down to complete their 1996 federal tax returns and to file them before the April 15 statutory deadline, they need to know that the tax system is fair and even-handed. The IRS and Treasury Department's complying with the mandate to file their interest netting study would be a step in the right direction.

In late December, I wrote you to urge the Clinton Administration to move expeditiously to end the inequitable treatment of taxpayers caused by the Internal Revenue Code's differential interest rate provisions. Specifically, I recommended the Treasury Department promptly issue regulations calling for the netting of interest where a taxpayer simultaneously owes and is owed interest by the federal government. In the alternative, I stated that, if the Treasury Department concluded that it did not possess sufficient legal authority to promulgate such regulations, then the Administration should call for legislation authorizing interest netting as part of the President's fiscal year 1998 budget. Regrettably, the Administration has yet to adopt either recommendation.

TEI earnestly believes that the prompt resolution of the interest netting controversy is essential to the fair and orderly operation of the tax system. We remain convinced that the Treasury Department has ample authority to issue regulations ameliorating the harshness of the interest rate differential. Even if the Department itself disagrees, it owes it to the American people to comply with the deadline imposed by Congress and to file its interest netting report. If taxpayers refuse to abide by the requirement that they file their returns by April 15 (or request an extension), they would be rightly subject to sanctions for violating the law. That a lesser standard might apply to the IRS and Treasury Department is troubling and cannot help but contribute to the widespread cynicism that exists about government in general and the tax system in particular. TEI believes it is unfair to blame the IRS for all the flaws of the current system. Where the IRS and Treasury have the authority to fix problems and refuse to do so, however -- or where they fail to abide by a legal requirement to file a report detailing the problems and possible solutions -- then a full measure of responsibility rests on their shoulders.

Accordingly, TEI calls upon the Treasury Department and IRS to complete their interest netting study without delay and to propound specific recommendations for how interest netting should be accomplished.

Tax Executives Institute appreciates this opportunity to comment on the very important subject of interest netting. If you should have any questions about this matter, please do not hesitate to call either Timothy J. McCormally, the Institute's General Counsel and Director of Tax Affairs, at [phone] or me at [phone].