[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 102-000 deg.
IRS COMPLIANCE WITH THE REGULATORY FLEXIBILITY ACT
=======================================================================
HEARING
before the
COMMITTEE ON SMALL BUSINESS
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
WASHINGTON, DC, MAY 1, 2003
__________
Serial No. 108-10
__________
Printed for the use of the Committee on Small Business
Available via the World Wide Web: http://www.access.gpo.gov/congress/
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COMMITTEE ON SMALL BUSINESS
DONALD A. MANZULLO, Illinois, Chairman
ROSCOE BARTLETT, Maryland, Vice NYDIA VELAZQUEZ, New York
Chairman JUANITA MILLENDER-McDONALD,
SUE KELLY, New York California
STEVE CHABOT, Ohio TOM UDALL, New Mexico
PATRICK J. TOOMEY, Pennsylvania FRANK BALLANCE, North Carolina
JIM DeMINT, South Carolina DONNA CHRISTENSEN, Virgin Islands
SAM GRAVES, Missouri DANNY DAVIS, Illinois
EDWARD SCHROCK, Virginia CHARLES GONZALEZ, Texas
TODD AKIN, Missouri GRACE NAPOLITANO, California
SHELLEY MOORE CAPITO, West Virginia ANIBAL ACEVEDO-VILA, Puerto Rico
BILL SHUSTER, Pennsylvania ED CASE, Hawaii
MARILYN MUSGRAVE, Colorado MADELEINE BORDALLO, Guam
TRENT FRANKS, Arizona DENISE MAJETTE, Georgia
JIM GERLACH, Pennsylvania JIM MARSHALL, Georgia
JEB BRADLEY, New Hampshire MICHAEL MICHAUD, Maine
BOB BEAUPREZ, Colorado LINDA SANCHEZ, California
CHRIS CHOCOLA, Indiana ENI FALEOMAVAEGA, American Samoa
STEVE KING, Iowa BRAD MILLER, North Carolina
THADDEUS McCOTTER, Michigan
J. Matthew Szymanski, Chief of Staff and Chief Counsel
Phil Eskeland, Policy Director
Michael Day, Minority Staff Director
(ii)
?
C O N T E N T S
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Witnesses
Page
Olson, Hon. Pamela F., Department of the Treasury................ 3
Graham, John, Ph.D., Office of Management and Budget............. 8
Sullivan, Thomas, U.S. Small Business Administration............. 9
Ireland, Andy, Zeliff, Ireland & Associates...................... 11
Swain, Frank, Esq., Baker & Daniels.............................. 13
Mastromarco, Dan, Esq., The Argus Group.......................... 15
Appendix
Opening statements:
Manzullo, Hon. Donald A...................................... 29
Velazquez, Hon. Nydia........................................ 32
Millender-McDonald, Hon. Juanita............................. 32
Prepared statements:
Olson, Hon. Pamela F......................................... 40
Graham, John................................................. 48
Sullivan, Thomas............................................. 54
Ireland, Andy................................................ 55
Swain, Frank................................................. 62
Mastromarco, Dan............................................. 72
Conference of State Bank Supervisors......................... 82
(iii)
HEARING ON IRS COMPLIANCE WITH THE REGULATORY FLEXIBILITY ACT
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THURSDAY, MAY 1, 2003
House of Representatives,
Committee on Small Business
Washington, D.C.
The Committee met, pursuant to call, at 9:36 a.m. in Room
2360, Rayburn House Office Building, Hon. Donald Manzullo
[chairman of the Committee] presiding.
Present: Representatives Manzullo, Toomey, Graves,
Velazquez, Millender-McDonald, Napolitano, Majette.
Chairman Manzullo. I will call the Committee to order.
On March 19, 2002, the President stated that, ``Every
agency is required to analyze the impact of new regulations on
small businesses before issuing them. That is an important law.
The problem is it is often being ignored. The law is on the
books. The regulators do not care that the law is on the
books.'' This sounds like something I would say. ``From this
day forward, they will care that the law is on the books. We
want to enforce the law.''
The President was talking about the Regulatory Flexibility
Act or the RFA. The statement was categorical and applied to
all agencies. There was no exception for the Department of the
Treasury or the IRS in his statement.
Rather than viewing the RFA as a hurdle to be jumped or
avoided, we believe the Service should view the RFA as a place
where to explain in understandable terms the rationale and
economic consequences of its regulatory actions. Furthermore,
the President's tax relief package is seeking long-term
economic growth and must assist the manufacturing sector to
achieve that outcome. The IRS can help achieve that objective
by embracing the letter and spirit of the RFA to reduce
regulatory burdens on the already overburdened small
manufacturing sector.
Rather than embrace the changes in SBREFA, the IRS and the
Department adopted new interpretations to avoid compliance with
the RFA. President Bush stated, ``From that day forward the
regulators will care.'' Since then, this Committee has held a
number of hearings, and while improvement are being made there
are still too many regulators out there that do not care
despite the bold statement from President Bush and the superb
efforts of Dr. Graham and Tom Sullivan.
If problems persist and the President's call continues to
be ignored, this Committee is ready to work with the Committee
on the Judiciary to make the necessary changes in the RFA that
will close loopholes and empower the Office of Advocacy to
prevent non-compliance with the RFA.
[Mr. Manzullo's statement may be found in the appendix.]
Chairman Manzullo. I now recognize the Ranking Member of
our Committee, the distinguished gentlelady from New York, for
her opening statement.
Ms. Velazquez. Thank you, Mr. Chairman. Small businesses in
America today face many challenges to success. One of the
biggest is understanding and complying with the overwhelming
array and number of federal regulations. It is unfortunate that
the burden of the federal regulations weigh most heavily on
small businesses.
As the engine of the American economy, small businesses are
key to our economic recovery. It is now more critical than ever
that small businesses spend less time complying with
regulations and more time focusing on growing their business.
The federal compliance price tag for small firms is high.
It has reached nearly $7,000 per employee per year. That is 56
percent higher than large firms with 500 or more employees. In
terms of tax compliance, the difference between costs to large
and small firms is even more pronounced. The cost per employee
for small businesses topped the cost for large firms by 114
percent.
One of the greatest costs stems from complying with the
Internal Revenue Code and its myriad of rules and regulations.
The primary reason why small businesses have to use so much of
their resources to comply with the Tax Code is due to its sheer
complexity. Unlike larger businesses, small businesses are at a
real disadvantage. They often do not have the resources to
analyze and deal with the intricate issues and requirements.
Rather than try to correct this problem, the IRS has
instead passed more rules and regulations. As with many other
agencies, the IRS has continuously failed to address the impact
the rules and regulations have on small businesses. As a
result, small businesses are left to outsource their complex
tax work, which is extremely costly.
Today's hearing will address how the IRS has failed to meet
its obligations under the one statutory tool designed to
protect small businesses from departments and agencies that
unfairly burden them, the Regulatory Flexibility Act.
Reg Flex is designed to make sure the IRS and other federal
agencies address the needs of small business when they issue
rules and regulations. The Reg Flex Act requires federal
agencies to assess their proposed and final rules and determine
whether they will have a significant economic impact on small
businesses and examine less burdensome alternatives if that is
indeed the case.
Despite the fact that the IRS is the agency responsible for
the highest regulatory costs impacting small businesses, it has
been the worst violator of applying Reg Flex analysis. The IRS
systematically avoids the statutory requirements of Reg Flex by
using interpretive loopholes. In 1996, Congress sought to close
some of those loopholes, only to find the IRS created other
ways to bypass Reg Flex.
It appears we are going to have to close these loopholes
before the IRS finally addresses the needs of small businesses.
One way to make sure the IRS complies with Reg Flex is to amend
it so that the IRS is held to the same standards as the EPA and
OSHA. In 1996, we required that these two agencies have
representatives of small entities who may be affected by the
rules make statements through a review kind of process.
By putting the IRS under the same review panel process, it
will better ensure that small businesses have a voice in the
creation and execution of federal regulations that might harm
them. It will force the IRS to account for the huge burden they
have placed on small businesses. There is clearly an
institutional and maybe cultural problem within the IRS that
requires fixing.
Since the IRS has failed to comply with Reg Flex in the
past, adding them to the list of agencies that must go through
the panel process is one way to make sure that they do so in
the future. Only then can we begin to help free small
businesses from the burdensome and heavy costs associated with
IRS regulations.
Thank you, Mr. Chairman.
[Ms. Velazquez's statement may be found in the appendix.]
Chairman Manzullo. Thank you. Let me add a footnote to my
opening statement.
This Committee has had an extremely close relationship with
former Commissioner Rossotti. On three occasions I think he
went beyond what Reg Flex did, especially on working with us on
the regulations on the Hope Scholarship. Those of you from the
IRS may recall the extraordinary efforts of his finessing those
regulations over a period of four years until we could work out
legislation.
As a result of Mr. Rossotti's direct intervention and
concern, a congressionally mandated reporting form, which would
have cost the 6,000 colleges, universities, technical training
schools and community colleges in excess of $100 million a
year, because of his personal intervention that amount of money
is saved.
I know that was congressionally mandated. It was the words
that came from us. It was given to him, and he and I agreed
that if the full effect of those words had been put into effect
it would have cost that much more money for reporting, but,
because he was very sensitive to the problem, we worked with
him to a tremendous conclusion, and also the same with the
accrual basis for small business people. There has been no
greater advocate than Charles Rossotti to increase dramatically
the limits for accrual.
Our purpose here is to continue this very close
relationship with the IRS and to work on a formal basis with
the RFA and obviously continue our informal basis.
With that segue, I look forward to our first witness,
Pamela Olson from the IRS. Mrs. Olson?
STATEMENT OF THE HONORABLE PAMELA F. OLSON, ASSISTANT SECRETARY
FOR TAX POLICY, DEPARTMENT OF THE TREASURY
Ms. Olson. I am actually from the Treasury Department.
Chairman Manzullo. I am sorry. Forgive me.
Ms. Olson. Mr. Chairman, Ranking Member Velazquez and
Members of the Committee, I am pleased to be here today to
discuss the efforts of the IRS to reduce the burdens of tax
compliance on small businesses and the Regulatory Flexibility
Act.
I did submit formal testimony, which is a little bit longer
than the statement that I am going to make. I would ask that
that be included in the record. Thank you.
The entire administration, including the IRS and the
Department of the Treasury, is committed to working closely
with the small business community and its representatives to
help small businesses and the self-employed understand their
tax obligations and reduce their compliance burdens. We believe
our record bears out this commitment.
Nevertheless, there is always room for improvement. We
appreciate the efforts of this Committee and the Small Business
Administration, particularly the advocate, Tom Sullivan, who is
here with us today, to keep the burdens of complying with the
laws at the forefront of our consideration as we write the
regulations that carry out the laws of Congress.
The newly restructured IRS is built around four
organizational units with end-to-end responsibility for serving
specific groups of taxpayers. One of these units is the Small
Business and Self-Employed Operating Division, which serves the
approximately 7,000,000 taxpayers that are small businesses.
This division exists because the IRS recognizes that small
businesses have unique issues that could be given short shrift
unless a specific operating division was devoted to them.
In addition, because the IRS recognizes that these
taxpayers may lack the financial resources to understand and
address these unique issues, one of the primary focuses of the
Small Business Division is to work with small businesses to
teach them about their federal tax responsibilities and to
develop less burdensome and more practical means of compliance.
The Small Business Division has also assumed an important
role in reviewing IRS regulations to ensure that they minimize,
consistent with the requirements of the laws enacted by
Congress and sound principles of tax administration, the
burdens placed on small businesses.
We are extremely pleased that last December the Small
Business Administration presented the IRS with its 2002 Agency
of the Year award. SBA recognized Small Business' Taxpayer
Education and Communication organization for its outstanding
progress in creating an effective education and compliance
assistance program for small businesses and the self-employed.
We are committed to continuing this record of achievement in
serving the small business community.
The IRS continues to expand the ways it communicates with
small businesses. For example, in 1999 the IRS initiated the
Small Business Corner on the IRS Internet site. The goal of
this type of convenient, one-stop shopping is to provide
virtually all of the products and services that a small
business needs to meet its tax compliance responsibilities.
The IRS has also initiated a comprehensive taxpayer burden
reduction initiative. The Service wide Taxpayer Burden
Reduction Council develops, coordinates and champions cross-
functional or Service-wide burden reduction projects. Small
business taxpayers participate in the IRS Industry Issue
Resolution Program, which includes taxpayer burden reduction as
a program criterion.
Recently implemented burden reduction projects benefiting
small businesses include exempting 2.6 million small
corporations from filing Schedules L, M-1 and M-2, reducing
burden by 61,000,000 hours annually. The IRS has also
streamlined many of its procedures to make compliance less
burdensome for small business taxpayers.
It is the long-term and continuing goal of the IRS and the
Treasury to ease the burden of small businesses to the greatest
extent practical, consistent with the laws as enacted by
Congress. We look forward to working with this Committee as we
continue those efforts.
Minimizing taxpayer burdens, whether for small businesses
or other taxpayers, is a paramount objective of the regulations
and other guidance issued by the IRS. Unfortunately, our tax
laws have become devastatingly complex in recent years. That
complexity threatens to undermine taxpayer confidence in the
system as people come to view the system as one that encourages
aggressive tax planning by those with the resources to hire
sophisticated planners.
We view a system that puts people to the choice of being a
cheat or a chump as inherently unstable. It is essential that
we simplify the tax laws wherever and whenever we can. Just as
importantly, we must refrain from making the system any more
complicated than it already is.
It is important to emphasize that tax regulations and other
guidance are themselves means by which taxpayer burdens are
reduced. Regulations, rulings and notices serve to make clear
how the tax laws enacted by Congress apply in real life
situations faced by businesses, including small businesses, as
they plan their affairs and file their tax returns.
The business community desires and needs such guidance.
Without it, the law would remain unclear, and businesses would
be forced to make their best guess with the consequence being
an IRS audit and additional taxes if the guess is wrong. With
regulations in place, the guesswork and the potential for an
audit is significantly reduced. Certainty--knowing how the IRS
will interpret and apply a law written by Congress--is the most
efficient and effective way to reduce the burden of small
businesses complying with the tax law.
In developing tax guidance, Treasury and the IRS actively
seek input from interested parties, including small business,
and endeavor to offer as many opportunities as possible for
interested parties to participate in this process. In almost
all situations, the IRS issues proposed rules for public
comment. The same is often done for draft revenue procedures.
When public comments raise new issues, we often issue a
second notice of proposed rule making. Treasury and IRS
carefully consider all comments received from the public, and
we revise proposed rules to minimize burdens and simplify
compliance whenever possible, consistent with principles of
sound policy and tax administration.
In this context, it is important to remember that IRS
regulations do not make the laws that apply to small businesses
or any other taxpayer. Congress does that by amendments to the
Internal Revenue Code. The role of IRS and Treasury is to
interpret and apply those laws. In that way, tax regulations
differ greatly from regulations issued by other regulatory
agencies. We provide taxpayers with the guidance they need to
comply with their obligations under the Internal Revenue Code
as enacted by Congress.
Providing timely, comprehensive and understandable guidance
to taxpayers reduces controversy, eliminates disputes and
provides taxpayers with certainty concerning their obligations
under the Tax Code. Just as important, clear IRS regulations
and guidance minimize the likelihood that there will be contact
between IRS and taxpayers. Without this guidance, compliance
obligations would be established through burdensome taxpayer
audits and costly litigation.
Audits and litigation are an ineffective and inefficient
means of interpreting the law. For example, several years ago
the IRS was devoting significant audit resources to examining
the use of the cash method of accounting. This was an issue on
which I last appeared before this Committee as a private sector
participant, an officer of the ABA section of taxation to talk
about the burden and the Treasury's authority to change those
rules by regulation. This is one of the most heavily litigated
tax issues.
I am pleased to say that a year ago we issued a final
revenue procedure that expressly permits certain businesses
with gross receipts of less than $10 million to use the cash
method of accounting. We provided tremendous clarity and wiped
an issue off the table for the small business community. We
expect that the revenue procedure will eliminate most disputes
concerning the use of the cash method by small business
taxpayers.
This example illustrates what may be a unique feature of
tax regulations in that they interpret statutory tax
obligations, but do not impose tax obligations. That is, the
statutory requirements take effect, taxpayers must comply with
them, and the IRS must enforce them.
In the absence of regulations, the IRS must still enforce
the law, and it will do so without the benefit of the
interpretive guidance that the regulations provide. The result
is likely to be increased cost and burden for taxpayers if
regulations are not issued or are not issued on a timely basis.
The Department of the Treasury and the IRS fully support
the objectives of the Regulatory Flexibility Act. In 1996, when
Congress amended the RFA to make it applicable to interpretive
regulations, the IRS took those into account to the extent that
those regulations impose a collection of information on small
entities consistent with the language of the statutory
amendment.
This amendment, which Treasury worked with the Congress to
develop, recognizes two important elements of tax regulations.
The first is that provisions of the Internal Revenue Code as
enacted by Congress must be applied equally to all businesses
regardless of whether they are a large, multi-national
corporation or the small business down the street. The second
is that paperwork burdens imposed by regulations that effect
small businesses must be carefully considered by the IRS and
minimized to the maximum extent the laws written by Congress
allow.
The 1996 amendment made the RFA applicable to an
interpretive regulation when that regulation is subject to
review and approval by OMB under the Paperwork Reduction Act of
1995. That means the IRS must prepare a regulatory flexibility
analysis for any rule that imposes a collection of information
on small businesses unless the IRS certifies that the
collection of information will not have a significant economic
impact on a substantial number of small businesses.
Treasury and IRS take their responsibilities under the RFA
very seriously. Indeed, every IRS regulation is reviewed by
three different offices for compliance with RFA, as well as the
other laws in Executive Orders that govern the regulatory
process.
Chairman Manzullo. How are you doing on time?
Ms. Olson. Not well, so I am going to turn to mobile
machinery.
Chairman Manzullo. I gave you a double dose there because
the IRS usually gets a double dose in the press.
Ms. Olson. And I have used it up anyway.
Chairman Manzullo. That is correct.
Ms. Olson. I apologize.
The two regulations which you specifically cited in your
letter relate to mobile machinery and interest reporting by
banks. The first concerns excise taxes on certain motor
vehicles, which was issued in June 2002.
Under current law, various excise taxes are imposed to
provide revenues to fund the Highway Trust Fund. Those
statutory provisions are broadly written, applying to virtually
all vehicles and fuels for those vehicles that are capable of
traveling on highways. The IRS defines a highway vehicle as any
self-propelled vehicle, trailer or semitrailer designed to
perform a function of transporting a load over public highways,
whether or not it is also designed to perform other functions.
The regulations, and not the statute, exempt from those
taxes vehicles that are in essence mobile machinery mounts. The
exception was apparently based on the assumption that vehicles
that transport mobile machinery would make minimal use of
public highways and, thus, would receive only minimal benefit
from highway construction and maintenance.
This broadly written exception, however, was the source of
much dispute between taxpayers and the IRS. These factual and
definitional disputes are draining on taxpayer and IRS
resources. We concluded that the issue was better resolved
through specific guidance in order to reduce the number of
disputes and provide certainty.
The proposed regulations were developed with that goal in
mind. We are aware that the proposed regulations were
controversial and have advised that they will not be finalized
until the Congress completes its work on the Highway Trust Fund
reauthorization. We have been advised that we will be provided
guidance through the legislative process.
I think I better conclude with that since I am already a
minute over time.
Chairman Manzullo. Actually, you are six minutes over time,
but that is okay.
Ms. Olson. I am sorry. I thought I had 10 minutes.
Chairman Manzullo. We try to keep it to five.
Ms. Olson. I am sorry.
Chairman Manzullo. That is okay. It was interesting.
[Ms. Olson's statement may be found in the appendix.]
Our next guest is Dr. John Graham with the OMB, the head of
OIRA.
Doctor, you may not realize it, but there are numerous
travel agencies in this country that owe the ability to get the
emergency loans as a result of 9/11 as a result of a hearing
that we had here with you and Hector Baretto on increasing the
size standards for that.
I want to thank you for personally intervening in that
situation on something that had been stuck in the bureaucracy.
You and Mr. Baretto I think cleared the whole thing up in about
10 days, so I appreciate that very much.
We look forward to your testimony.
STATEMENT OF JOHN GRAHAM, PH.D., ADMINISTRATOR, OIRA, OFFICE OF
MANAGEMENT AND BUDGET, WASHINGTON, DC
Mr. Graham. Thank you, Mr. Chairman and Members of the
Committee.
On the travel agent issue, although I would like to take
some credit for it, I think we know this Committee had a pretty
substantial role in that effort.
I would like to keep my oral remarks very brief. I just
want to lay out a few points about OMB's responsibilities in
the area of protecting small businesses from unnecessary
paperwork burdens and, in particular, explain the role of the
Paperwork Reduction Act as it works in sync with the Regulatory
Flexibility Act.
The Paperwork Reduction Act defines a key term called a
collection of information. People have in their mind when they
hear `collection of information' that that might be a paperwork
burden, and that it does cover all reports that people, the
public and businesses, have to give to the government, but it
is a broader term than that in the Paperwork Reduction Act.
Collection of information also includes record-keeping
requirements, even if you do not have to give that information
to the government, and third-party reporting requirements when
the government says business, for example, must give
information to this other person over here; for example, a food
label for consumer benefit. All of these are covered in a broad
definition of an information collection.
Now, why am I boring you with this notion of an information
collection? I have a feeling that there may be some questions
and answers on this subject. I want to make sure we all are
grounded in what is meant in the Paperwork Reduction Act.
The reason it is important is the Paperwork Reduction Act
says the federal government is not allowed to collect
information from people, without going through a very specific
process that involves agency deliberation and OMB review. The
OMB review process requires ultimately an OMB Control Number on
every one of these collections. This is an attempt to manage in
some sense what we all know is an extremely difficult thing to
manage, the total overall amount of information being collected
from the American people and businesses.
The Paperwork Reduction Act requires an initial approval
from OMB for every one of these collections, but also requires
OMB approval every three years if the agency wants to continue
these collections. The test in the Paperwork Reduction Act does
not require that we eliminate all paperwork. It requires that
we eliminate unnecessary paperwork.
Since a lot of the functions of government, whether it be
in the administration of the Food Stamp Program or whether it
be in a grant application at a university, requires paperwork,
so the effort is to balance the need for the information
against the burden that it imposes on the public.
The Paperwork Reduction Act, particularly the 1995
amendments, are very cognizant of the unique burdens on small
businesses, and it specifies specifically that, to the extent
practicable and appropriate, the burden on small businesses
shall be reduced.
O.M.B. recently reported to Congress our fiscal year 2003
annual report on this information collection problem. We
analyzed how well the agencies are doing. We devoted a specific
chapter to the work of Treasury and particularly IRS, and I
urge you to take a peek at that because there actually is a lot
of good news happening within Treasury in reducing these
unnecessary paperwork burdens.
We have also tried to develop progress in reducing what are
called paperwork violations. This is when agencies ignore the
process I just described to you, and impose burdens and collect
information without OMB approval. We are trying to have a zero
tolerance policy on these violations, and a recent GAO
testimony before the House Government Reform Committee
documented some of the progress we are making there.
I think sooner or later we are going to have a dialogue
here on the subject of whether the Regulatory Flexibility Act
applies in certain circumstance, and I hope in my oral
testimony I have just given you a little background on how the
Paperwork Reduction Act works. Then we can combine that with
later testimony on the Regulatory Flexibility Act.
Thank you very much.
[Mr. Graham's statement may be found in the appendix.]
Chairman Manzullo. Thank you, Dr. Graham.
Our next witness is Tom Sullivan, Chief Counsel for
Advocacy for the U.S. Small Business Administration.
Mr. Sullivan, I look forward to your testimony.
STATEMENT OF THOMAS SULLIVAN, CHIEF COUNSEL FOR ADVOCACY,
UNITED STATES SMALL BUSINESS ADMINISTRATION, WASHINGTON, DC
Mr. Sullivan. Good morning, Mr. Chairman, Congresswoman
Velazquez, Members of the Small Business Committee. Thank you
for the opportunity to testify this morning.
I do have a somewhat lengthy written statement, but I would
like to summarize it orally.
Chairman Manzullo. All of the written statements of the
witnesses and any Members of Congress will be made part of the
total record without objection.
Mr. Sullivan. Thank you, Mr. Chairman.
Congress established the Office of Advocacy to represent
the views of small entities before federal agencies and
Congress. The Office of Advocacy is an independent entity
within the SBA, so the views expressed in this statement may
not reflect the views of the administration or the SBA. My
statement was not circulated within the administration for
comment or clearance.
Before I address IRS compliance with the RFA, I want to
give credit for the accessibility and responsiveness of the
administration officials testifying here this morning. I
believe Small Business has a friend in both Dr. Graham and
Assistant Secretary Olson. My office works with Dr. Graham and
the desk officers in the Office of Information and Regulatory
Affairs every day.
Since Assistant Secretary Olson assumed her present role,
she has gone out of her way to seek out and listen to the
concerns of small business. In addition to her schedule as the
President's lead tax adviser, Pam Olson reaches out to small
business groups and maintains an open door policy for
stakeholder involvement.
Even in the midst of finalizing the President's Jobs and
Economic Growth Plan, working to confirm and then acclimate a
new Treasury Secretary and working with a new IRS commissioner,
Assistant Secretary Pam Olson has been responsive to me and to
my office.
The premise of the Regulatory Flexibility Act is that an
agency must undertake a transparent and careful analysis of its
proposed regulations with specific attention to the small
business community to identify their impact on small businesses
and develop alternatives to reduce or eliminate the small
business burdens without compromising the public policy
objectives of the proposal.
In our view, Treasury and IRS have drawn the requirements
of the Reg Flex Act too narrowly, thereby limiting meaningful
open analysis intended by Congress in the Reg Flex Act and its
amendments which are the Small Business Regulatory Enforcement
Fairness Act, SBREFA.
The Office of Advocacy believes that the collection of
information standard was established to trigger the
requirements of the RFA, not to limit the scope of the analysis
to be performed.
The Chairman of the Judiciary Committee, when SBREFA was
passed, said, ``The intent of this phrase, `collection of
information', in the context of the RFA is to include all IRS
interpretative rules of general applicability that lead to or
result in small entities keeping records, filing reports or
otherwise providing information to IRS or third parties.
``One of the primary purposes of the RFA is to reduce the
compliance burdens on small entities whenever possible under
the statute. To accomplish this purpose, the IRS should take an
expansive approach to interpreting the phrase `collection of
information` when considering whether to conduct a regulatory
flexibility analysis.'' End of the quote from Chairman Hyde.
As the Office of Advocacy stated in our annual report to
Congress this past January, IRS has often taken the view that
unless a form is required, no record keeping requirement is
imposed by the rule. We believe that this approach is a root
problem in two rule makings last year.
In one of those rulemakings on the excise tax's definition
of highway vehicle, which we call the mobile machinery rule,
IRS did not analyze the rule making because the proposals ``do
not impose on small entities a collection of information
requirement,'' according to the published preamble of the
proposal.
The Office of Advocacy respectfully disagreed with IRS'
original rationale, and ultimately under Assistant Secretary
Pam Olson's leadership Treasury rethought how their proposal
would impact small business, and we believe this realization
would have happened earlier if IRS had more thoroughly and
publicly analyzed small business impact.
In those cases where the IRS feels that they are
constrained by the law to structure their regulations in a
certain way, and it is apparent that the structure will have a
significant economic impact on a substantial number of small
entities, we still believe that there is value in assessing the
impact in an open and transparent process of that structure on
small business. We also feel that considering alternatives
could help them reach the same public policy goals, but in a
manner less burdensome to small businesses.
I will sum up with responding to what the Committee asked
in my letter of invitation, and that was to report on Treasury
and IRS compliance with Executive Order 13272, specifically the
President's requirement that plans on complying with the RFA be
submitted to the Office of Advocacy and, after revision, be
made publicly available. Treasury/IRS have complied with
Executive Order 13272, and their compliance plan is on line.
The URL for that plan and the Web site are in my written
testimony.
The Office of Advocacy is currently preparing to move into
the next phase under Executive Order 13272, which requires the
Office of Advocacy to train federal agencies on how to
adequately consider small business impact prior to finalizing
rules and regulations.
Thank you for allowing me to present these views. I would
be happy to answer any questions after the witnesses have
presented their statements.
[Mr. Sullivan's statement may be found in the appendix.]
Chairman Manzullo. Thank you, Mr. Sullivan.
Batting clean-up, in the appropriate place because the
first three witnesses were not in a position to analyze the RFA
at the time of its enactment, is former Congressman Andy
Ireland. Andy was elected to Congress in 1976, a Member of the
Committee on Small Business his entire tenure, retiring in 1992
as the Committee's Ranking Minority Member.
He is the 1980 author of the Regulatory Flexibility Act, so
he is going to tell us what he meant by it and whether or not
it is being complied with. We really look forward to your
testimony.
STATEMENT OF ANDY IRELAND, PRINCIPAL, ZELIFF, IRELAND &
ASSOCIATES, WASHINGTON, DC
Mr. Ireland. Thank you, Mr. Chairman. I appreciate the
opportunity to be with you and the others this morning.
In my extended testimony that you have said you will put in
the record you will find some detail, but I thought in my
remarks here that I would address some of the background, as
you say, that got us to where we are.
When I arrived at the beginning of my 16 years in the
Congress, I, like many others, had the real concern about the
federal government's one-size-fits-all regulatory process and
began in the spring of 1977 with a little, tiny bill that
gradually became the Regulatory Flexibility Act to bring some
sense to the one-size-fits-all operation.
A lot of people worked on it to help. Mike McKevitt and
John Motley of the NFIB were influential. Ike Skelton, who came
with me into the Congress, was very helpful. The late Steve
Lynch was a real pioneer on the staff working on it, and a much
younger Frank Swain here was deep into it as well.
An unusual thing happened during 1980. They had a Small
Business White House Conference, which was kind of a new thing.
Because of that and the handiwork of Mr. Swain here, the result
was three really important small business pieces of
legislation. Not only the Regulatory Flexibility Act was
passed, but also the Equal Access to Justice and the Paperwork
Reduction Act, all a result of that in 1980.
Of course, that was quite a triumph and new thing for the
small business community coast to coast, but the implementation
of the Regulatory Flexibility Act was a very difficult hill to
climb. It was new. There was a lot of resistance among the
departments and regulatory bodies, chiefly agencies saying that
they are not covered by this new Act and then the old time
handicap of not having judicial review.
One of the most consistent arguments against compliance at
that time, however, always seemed to come from the IRS. It was
their view that they did not need to comply with the RFA when
they were engaged in interpretive rule makings; that since the
RFA was for the most part an extension of the Administrative
Procedures Act, they were not required to do anything in the
way of cost/benefit analysis because they were not making new
demands on small businesses, but only formatting legislative
edicts that were already contained in the Internal Revenue
Code. That was then and is now the foundation of IRS resistance
to this.
As I exited, the year or two before I left the Congress
there was one or two examples of this. A rule making was
proposed by the IRS on the payroll tax reporting. It turned out
that the people, when I went down to the IRS for a meeting with
the Commissioner's people, they could not understand the
ruling, and yet they were expecting the small businessman in
America to do it. I fortunately had a good schoolmate in
college named Nick Brady, who happened to be Secretary of the
Treasury, and he was able to get it straightened out.
The other big hill to climb was the judicial review. Tom
Ewing, your colleague from Illinois, was instrumental, along
with Kit Bond, in getting that problem straightened out.
Here we are again with the same kind of a problem seven
years after SBREFA has been passed and 23 years after the
Regulatory Flexibility Act was passed. We are here again with
the same kind of resistance problem that just really in this
day and age just need not be what we have to devote our time
to.
The current issues, many are going to speak directly to
them, and I will not elaborate on them. The IRS rule on deposit
interest is bad economics. It is bad as a burden to small
business. Application of a Reg Flex analysis at the beginning
of the process would have saved an awful lot of problems for us
all.
With that, Mr. Chairman, I will be ready for any questions.
Thank you.
[Mr. Ireland's statement may be found in the appendix.]
Chairman Manzullo. Thank you, Congressman Ireland.
Our next witness is Frank Swain. Frank, we look forward to
your testimony.
STATEMENT OF FRANK SWAIN, ESQ., PARTNER, BAKER & DANIELS,
WASHINGTON, DC
Mr. Swain. Thank you very much, Mr. Chairman. It is a real
pleasure to be here and to be on this very distinguished panel.
Secretary Olson's observation about accounting rules
reminded me it is difficult and challenging to work with small
business. When I was Chief Counsel for Advocacy, I recall a
conversation with several small business owners over the
accounting issues, which were related to the ones that have
been more recently solved. This was 20-some years ago.
I said to the business people, I said well, do you
generally use LIFO or FIFO? One guy spoke up and he said well,
I use FISH. I was not familiar with that. I said what is FISH?
That is first in, still here.
[Laughter.]
Mr. Swain. This is a pretty arcane issue, and I come this
morning to try to crystallize it with one example.
Essentially the Regulatory Flexibility Act, which
Congressman Ireland was really the godfather of, attempts to
get agencies to take a second look at regulations if they have
a significant economic impact on a substantial number of small
businesses.
For reasons that Secretary Olson has described, the IRS
rule making procedure is actually different than EPA and OSHA
and other regulatory agencies because they issue a lot of rules
that they regard as interpretive. I will leave it to other more
articulate people as to why that is different or the same, but,
at any rate, when IRS issues these interpretive rules, they do
not have to for technical legal reasons go through this
analysis of whether it is significant or not. As Dr. Graham
said, they really go back to an analysis of simply whether new
information is collected or not.
One of the questions for you to determine in this whole
issue is how that works and whether that is an adequate hook,
if you will, to get the IRS to do what I think it ultimately
should be doing in more cases than it is.
I absolutely agree with the description by Secretary Olson
that this administration has done a lot in a number of ways to
make the Service much more responsive to small business and to
take a second look and probably a third and a fourth look at
several significant regulations. I suspect that reflects a lot
of time and effort on the part of her and her colleagues at
Treasury and the very senior people at IRS. I am not sure that
it is a message that has filtered down far enough in the
bureaucracy yet.
The mobile machinery rule is the case in point. It is a
rule based on a law that the Congress passed 50 years ago. It
has been a rule in place since 1977, and last year the IRS
proposed to eliminate a certain part of that exemption. Now, I
will not get into the details about whether that should happen
or should not happen. I certainly have my views on that, but
the fact is that when IRS proposed the elimination of this
exemption they said we do not need to do a regulatory
flexibility analysis because we do not collect any additional
information by eliminating this exemption, and this is not a
major rule.
Left with no analysis, the affected community, which turns
out to be heavily small business, can only guess at what the
impact is. The impact for businesses that use this kind of
machinery is quite significant in additional fuel taxes and
additional excise taxes.
As I mention in my written statement, I think it is
terrific that the Service has been actually quite open in
discussing this. Secretary Olson and her office have been quite
open in meeting and discussing it. As she mentioned, the
administration has directed the IRS not to make any final rule
on this until the Congress has the opportunity to review it,
presumably in the context of the transportation legislation now
pending.
My point is simply that had IRS done an analysis earlier
on, I think we could have had a lot smarter and more efficient
discussion of this. The reason I am able to say that even more
definitively this morning than I was a week ago is because two
days ago in the mail we received a report from the Federal
Highway Administration, a copy of which is appended to my
testimony.
The Federal Highway Administration, it turns out, had told
the IRS in 1999 that elimination of this exemption would have
an annual cost of approximately $250 million. The Federal
Highway Administration sent me an update of that analysis, and
they now estimate that the elimination of the exemption would
have an annual cost of $460 million or approximately half a
billion dollars.
All I am saying is this is information that somebody
someplace down in the bowels of the IRS probably had in a file,
but for whatever reason it did not get to or it was not noticed
by the people when they were publishing the proposal. This is
clearly a rule that whatever the technicalities of the Reg Flex
Act will certainly have a significant economic impact on a
substantial number of small businesses.
It appears to me that it is also a rule that is a major
rule, a significant rule deserving of Dr. Graham's office
review, but it did not happen. There needs to be a way to get
that to happen, and there needs to be a will on the part of the
IRS to take significant actions, which is certainly not every
action that they take, but to take the more significant actions
and say we are going to take a look at this, we are going to
try to do a minimal analysis and at least get the public on the
same wavelength as to what we are doing and why we are doing
it.
Thank you very much for the opportunity to appear, and I
will be happy to answer any questions.
[Mr. Swain's statement may be found in the appendix.]
Chairman Manzullo. Thank you. Appreciate your testimony.
Our last witness is Dan Mastromarco testifying on behalf of
National Small Business United. We look forward to your
testimony.
STATEMENT OF DAN MASTROMARCO, ESQ., PRINCIPAL, THE ARGUS GROUP,
ARLINGTON, VA
Mr. Mastromarco. Thank you. What you will hear in my
testimony is a recurring theme Frank Swain mentioned concerning
the crossover between rulemaking and policy-making. If the rule
that Frank mentioned is one that cost small businesses $500
million, that is a rule that should be done in a legislative
process where at least it could be used to pay for something
such as repeal of the death tax, in part.
Let me begin, before rushing to disingratiate myself with
Treasury officials, to thank you for exploring how well the RFA
functions or does not. NSBU is the oldest small business
organization in the nation, established before the Reg Flex Act
and before President Truman's Administrative Procedure Act.
We know that ensuring sound regulatory due process is a
sweeter victory than any individual fight in which small
businesses may engage--because the results last much longer.
Having said that, let me be blunter than Mr. Sullivan could be
and perhaps a tax lawyer should be. The RFA is an invaluable
due process tool, but for nearly a quarter century it has been
reviled by a culture like a bad strain of SARS, which I will
call the severe acute regulatory sophistry, and has found a way
to mutate around the changes in SBREFA.
The primary infirmity from which the RFA suffers is not a
legal one. Rather, it is an institutional one, but it manifests
itself in legal interpretations that are as parsimoniously
drawn as lawyerly possible. Responding to President Bush's
strong support of the RFA through his Executive Order, the
Treasury wrote a policy handbook. That handbook merely adopts
the positions of an existing internal 1998 checklist. Both read
like survival guides for bureaucrats seeking to avoid the RFA.
Pamela has an excellent opportunity to change all this, and
with her experience, background and inclination I would
challenge her to do so.
Let me walk through the decisional flowchart for the RFA
that is presented on the easel and that looks kind of like an
organic chemistry reaction. It is suitable for framing, Mr.
Chairman.
Chairman Manzullo. In reference to your biological terms of
SARS, an organic chemistry compound would make sense.
Mr. Mastromarco. That is exactly right.
Chairman Manzullo. It looks more like the directions to
Johnny Carson's used car lot, but go ahead please.
Mr. Mastromarco. Let me use the non-resident alien
reporting rule as an example of just how narrowly the Treasury
parses the law.
Coined the U.S. anti-savings directive, this rule would
require U.S. payers of interest to residents of France, Germany
and other friendly countries to report these payments to the
IRS and ultimately foreign governments. Treasury asserts the
rule is interpretive and imposes no collection of information
requirement.
Assuming a formal rule making threshold question Frank
mentioned is whether the Treasury properly calls the rule
merely interpretive. If interpretive, it is exempted from the
RFA as long as there is no collection of information
requirement and also from the possible impact analysis since it
stems from the underlying statute.
Treasury frequently uses this interpretative rubber stamp,
but what standard they apply is difficult to know because their
Pavlovian reflex to consider virtually all rules as
interpretive is untenable. Seventeen years ago, former
Commissioner Egger testified that the difference is primarily
the degree of discretion in applying the rules. How much
discretion was used here?
Turning to this rule making, the Treasury not only used
discretion, but crossed the line into law making by fiat and to
such a degree that if the policy were properly considered by
the Congress the policy assumption that it was Treasury's role
to help foreign nations' tax investments in the United States
would have been rejected.
Witnesses at the administrative hearing raised nothing but
policy concerns. They questioned why the rule would overturn
U.S. economic policy, why it was needed when bank deposit
interest is not taxable to foreigners, why it was more like
foreign policy than tax policy, and bad foreign policy at that,
why asset mobility, like the freedom to immigrate, does not
create a welcome check on governments against excessive
taxation.
As narrow as Treasury's interpretation of legislative rules
is, it is the Rio Grande when compared to the interpretation of
the collection of information requirement. Here, in this rule,
the Treasury said 2,000 persons were subjected to it. It may
have wrongfully estimated the burden as 15 minutes per
respondent, and I submit it would take that long just to speed
read the rule. That still hurdled the 10 person threshold of
the RFA.
If the Service argues, as they seemingly are today, Mr.
Chairman, that there is no collection of information if there
is an OMB control number or an existing form, imagine a
hypothetical form or not--we will call it the 1099
Miscellaneous--that integrates all future record keeping the
Service thinks it needs. It may be 560 page long, but it will
serve the purpose of avoiding the Regulatory Flexibility Act.
If the Service is able to claim this non-resident alien
rule is interpretive even as the entire hearing was based on
policy and if the Service was able to argue that it did not
impose a collection of information requirement when the essence
of the rule was reporting, then, Mr. Chairman, the Service has
defined the Reg Flex Act out of existence, and we are in 1995.
Mr. Chairman, I have several recommendations that are made
in my testimony. Doubtless, your very able counsel, Barry
Pineles, will have his. I raise only one here. If the IRS
should be singled out in the future as it was in SBREFA, it
should be singled out for more stringent standards since it is
the only agency which rules affect all 23,000,000 small firms.
Congress must not only close the loopholes, but it must
continue to exercise vigilant oversight like today. If you are
successful, you will accelerate the adoption of true guidance
and ensure that pure policy choices, as this rule I mentioned,
are properly left to Congress. To the Service's surprise,
greater compliance, less controversy and higher enforcement
will result.
[Mr. Mastromarco's statement may be found in the appendix.]
Chairman Manzullo. Thank you very much. I appreciate
everybody's testimony.
Ms. Olson, in answering the questions if there is somebody
from your staff that you feel would have more information than
you do to testify, you can bring that person up next to you and
just introduce them for the record.
Ms. Olson. Thank you, Mr. Chairman. I promise to do my best
to field questions myself.
Chairman Manzullo. Okay. The same with you, Dr. Graham. We
always have that invitation out there. I would rather have that
happen than the whispering that might incur trying to get the
information.
I need to reconcile a couple things. On Mr. Sullivan's
statement, page 8, it says, ``As we stated in our report to
Congress in January, the IRS has often taken the view that
unless a form is required no record keeping requirement is
imposed by the rule.''
Then Mrs. Olson says on page 5 at the bottom, the last
paragraph, ``We have heard some speculation that the IRS
considers the 1996 amendment to apply only when a regulation
results in small business taxpayers having to complete a new
form. This is categorically not correct.''
Someone help us out. Let us have a dialogue here between
Mr. Sullivan and Mrs. Olson. Are we speaking about the same
thing? What is going on here?
Ms. Olson. The IRS and Treasury do interpret the Paperwork
Reduction Act and the RFA to apply not just to information that
is put on forms and furnished to the IRS, but also to the
record keeping that underlies complying with the tax laws, so
we do take a broader interpretation.
Chairman Manzullo. Mr. Sullivan?
Mr. Sullivan. I would be happy to clarify my written
statement on page 8.
What we have put in our testimony is not a written policy
by the Department of Treasury, and so in that sense Pam Olson
is absolutely correct. What we do view it as is a rationale,
and that is when we look at the two examples that really were
mentioned I think best by the other members of the panel,
mobile machinery and non-resident reporting on interest. What
we see is the lower tiered folks who looked at the burden and
approached the rationale of information collection requests,
Paperwork Reduction Act and the Reg Flex Act, by focusing on
whether or not additional forms would be used, and we believe
that point is where the lack of analysis and flushing out of
burden existed.
I also need to clarify that there is a distinction in the
view of the Office of Advocacy between the analysis done under
the Paperwork Reduction Act and the analysis done under the
Regulatory Flexibility Act. I think that distinction really is
what is driving at the differences of opinion.
The distinction that is under the Regulatory Flexibility
Act you are required to look at the segments of the small
business community who would be affected. Additionally, you are
required to analyze the less burdensome alternatives that arise
in your consideration of a rule making. Those two requirements
do not exist under the Paperwork Reduction Act or the process
under which information collection requests are made, and it is
that distinction, the more thorough analysis specific to the
small business community, where information comes up and should
be made publicly available so that there is less of a
disagreement of whether or not the analysis has been done.
Chairman Manzullo. Let me throw this out. On the interest,
on reporting requirement of payments of interest, Section 6049
of the Code where it says Interest Is Defined, A General Rule.
It says, ``The term interest means...'', and then it just talks
about interest on any obligation, blah, blah, blah, all the way
down to (G) where it says, ``To the extent provided in
regulations prescribed by the Secretary, any other interest
which is not described in paragraph 2.''
My question is Congress gave to Treasury the ability to
define other areas of interest, and my question is, is that
legislative, or is that interpretive? The IRS has ruled it is
interpretive.
Ms. Olson. Yes. It is the Treasury Department's view that
it is an interpretive rule.
Chairman Manzullo. Good. When I see something that
interprets something, somebody speaks in Polish, and then an
interpreter says exactly what that person says. In other words,
interpretation has an equal mark. Something has been stated,
and an interpretation is a restatement from the Greek or the
Hebrew in the Bible to the vernacular, to the English so we can
understand it. It is a statement of existing facts that are
already there, and it is simply a matter of interpreting or
saying the same thing in another manner.
I cannot understand when the Treasury is tasked with the
responsibility for coming up with additional definitions of
that which interest is and obviously a tremendous impact on the
small business factor how the word interpretation could come in
as opposed to reading an extension of the legislative power we
gave to the Treasury in order to further define interest.
Does that make sense, or do you still say it is
interpretive?
Ms. Olson. I would still say it is interpretive. Although
many times I have thought that parts of the Code are written in
Greek, they are in fact written in English, and what we were
interpreting was the meaning of the term interest.
I had the misfortune perhaps in my younger days of having
been a drafting attorney in the Legislation and Regulations
Division and spent about six months of my life trying to help
people understand what interest meant and what dividends meant
in the context of rules that were enacted in 1982.
I can tell you from that experience that there are always
questions about the meanings of even simple words written in
English and that the IRS undertakes as much as possible to
provide as much clarity as possible to people on complying with
the law.
Chairman Manzullo. I guess the reason I bring this up is,
you know, why not err on the side of safety? You know, why not
err on the side of small businesses?
Mr. Mastromarco mentioned that the studies had already been
done by the Federal Highway Administration, a half billion
dollar impact on moving this massive equipment onto roads. I
mean, the IRS is 106,000 employees. I mean, why not just as a
matter of course say, you know, whatever we do here, whether it
is interpretation or legislative, regardless of what we do it
has a significant impact on the community of taxpayers.
Let us just as a matter of course follow the RFA. Would
that be too oppressive? Too onerous?
Ms. Olson. Again, the Reg Flex Act applies to the paperwork
and the record keeping and so forth that goes along with the
statutory provisions, but it does not apply to the substance of
the statutory provisions or what the statutory provisions mean.
In the context of the mobile machinery exception, the IRS
had been taking the position in audits and in litigation for an
extended period of time that those vehicles were in fact
subject to the excise tax and so by ceasing the audits and
litigation and instead issuing a notice of proposed rule
making, we open the opportunity for a discussion about what
those----.
Chairman Manzullo. But then you walk into the trap--I think
it was Congressman LaFalce's language--in Section 385,
Treatment of Certain Interest in Corporations, Stock or
Indebtedness, down to (C), Effect of Classification by Issuer,
Section 2.
This section appears all over the Code. It says, ``Except
as provided in regulations, paragraph 1 shall not apply to any
holder of an interest if such holder on his return
discloses...'' Wait. Is this what I wanted, Barry? Am I reading
the wrong one here? Section 2? I am sorry.
Section 3 on Regulations. ``The Secretary is authorized to
require such information as the Secretary determines to be
necessary to carry out the provisions.'' This is a mandate that
whenever you do something at the IRS, as with any other
profession, that there has to be a collection process.
I guess what I am asking you in my final question, because
I am over my time, is I read the statute to require we want
more from the IRS. What language would you suggest that would
be clear to the IRS as to what Congress is expecting of you
than what language you presently have now?
Ms. Olson. I think to the extent we have a difference of
opinion as to the interpretation of the Reg Flex Act the
question comes down to whether it goes into the substance of
the application of the rules that Congress has enacted or
whether it only covers the paperwork portion of it.
The Service and Treasury have consistently interpreted it
as stopping at the level of the paperwork, and I think what you
are talking about is the substance.
Chairman Manzullo. I just find that a reach. I mean, the
purpose of the RFA, which Andy Ireland drafted in 1980--I mean,
small businesses are getting crushed. You know, my brother has
a small Italian restaurant. He does not have regulatory
counsel. He cannot follow all the rules out there. Every time
that there is an IRS interpretation of whatever it is, he is
the one that is getting nailed.
This is what we want, and I am going to do whatever is
possible to get this through, whether I have to sit down with
the new Commissioner and say this is what we want or have one
of our hearings here where we lock the door, bring everybody
together and say this is going to be the result of it.
As far as I am concerned, IRS is simply somebody calls a
switch and says well, this is interpretive. We do not have to
do any more work on it. That hurts small business. As in the
rest of the testimony, you could have all the Web sites you
want. You could have all the outreach as to the IRS. They just
want to know when you are going to pass a regulation how it is
going to impact them. They are not given that. They do not have
it.
Mrs. Velazquez?
Ms. Velazquez. Thank you, Mr. Chairman.
Ms. Olson, the non-resident alien deposit interest rule
discussed by the panel is of interest to me. We have heard
testimony that your proposal will have a dramatic impact on
many small and large financial institutions.
Mr. Mastromarco testified that this change was a
legislative rule. Why did the IRS not classify this as a
legislative regulation instead of an interpretive regulation?
If this major regulation is not legislative then what is? Would
you not agree that this rule would have a significant impact on
small businesses and should be reviewed under the Reg Flex?
Ms. Olson. Ms. Velazquez, no, we do not believe that it is
a legislative regulation. We believe that we are merely
interpreting the word interest, and that is why we treat it as
an interpretive regulation.
We also do not believe that it has a significant impact on
small entities.
Ms. Velazquez. How do you know that? How do you----.
Ms. Olson. The reason we know that is through the work that
we did under the Patriot Act relating to the collection of
information relating to terrorism.
During the course of that work, what the Treasury learned
was that the accounts maintained by non-resident aliens
typically come in through correspondent banks, and the
correspondent banks are the U.S. branches of large
international banks, so the entities that we expect to be
affected by these regulations are large financial institutions
and not small banks.
Ms. Velazquez. Thank you, Ms. Olson.
Mr. Sullivan, based on Ms. Olson's testimony, the IRS is
not going to make any changes unless we draft legislative
reforms requiring them to change the way that they must analyze
the rules and regulations.
In your testimony you stated that the IRS has drawn the
requirements of the Reg Flex analysis far too narrowly. What
changes can be made by us as lawmakers to increase the
transparency of lawmaking and require the IRS to address the
impact that their rules have on small businesses when it is
clear they will not?
Mr. Sullivan. Congresswoman, I believe still that IRS may
go beyond what it currently does as far as analyzing a
proposal's impact on small business. I think that there has
been a lot of discussion about the difference between
legislative and interpretative rules.
Ms. Velazquez. What if they do not?
Mr. Sullivan. I think that the analysis should go beyond
the Paperwork Reduction Act analysis and the information
collection requests regardless of whether or not it is
interpretative or legislative.
If the IRS does not take that enlightened view from small
business, then legislative fixes I think would be before this
Committee. Past proposals have mentioned whether or not the
SBREFA panels that currently encompass OSHA and EPA should be
extended to IRS.
In my position as the Chief Counsel for Advocacy, I can
only take a position where small business owners have told me
to, and in this specific legislative arena extending the SBREFA
panels to IRS, a number of small business groups--NSBU, Small
Business Legislative Council, NFIB--have all been strongly
supportive of extending the panel process to IRS, so in my
current position I would have to support that legislative
approach.
Ms. Velazquez. Thank you.
Ms. Olson, going back to the non-resident alien reporting
rule, at a time when the economy is trying to regain its
footing it would be disastrous if a significant flight of
assets left the U.S. economy due to this rule change.
Indeed, I understand that there have been various studies
conducted by the private sector groups that suggest that the
withdrawal of assets will be significant and the adverse impact
to our economy even more significant.
Has Treasury conducted any detailed analysis about this
potential flight of capital? If so, what did it conclude?
Ms. Olson. We have looked at that question, and what we
have concluded is that based on back in 1996 we put a similar
rule in place with respect to Canadian residents with accounts
here in the U.S., and there was no flight of capital in that
case so we do not expect a flight of capital to occur in this
case either.
Moreover, the amount of dollars and assets that would be
covered by this rule is much smaller than the studies have
indicated, and many of the assets are held not by individuals,
but by entities, so it would be an even smaller effect so we do
not anticipate a flight of capital as a consequence.
Ms. Velazquez. Thank you, Ms. Olson.
Do any of the other members have comments regarding any
studies that have been done on this topic?
Mr. Mastromarco. If I can, let me just back up for one
second if you will permit me----
Ms. Velazquez. Sure.
Mr. Mastromarco [continuing]. And say that I think that one
of the most important things that you are gathering from
Assistant Secretary Olson's testimony is not really a question
of arguing whether the rule is interpretive or whether there is
a collection of information. It is more a question of finding
out how they define that and, if need be, change the law.
The real point is, for example, in their policy booklet
they did not define what standards they imposed for
interpretive rules. The Courts do. Has wide applicability,
force of law, exercise of discretion, all of which were
triggered here, but they need to put that down, I believe.
Second, as to your specific point of how much would it cost
the economy, well, the study that at least I have seen has been
former Deputy Assistant Secretary Stephen Entin, now with
Institute for Research on the Economics of Taxation, which says
that the outflow of dollars from this country would be
significant and in fact would be so much that it would probably
exceed the benefit of the President's stimulus package as
projected by the administration.
The question here is this. If we are going to be
providing--the United States has in 871(i) of the Internal
Revenue Code specifically reached a decision not to tax bank
deposit interest paid to foreigners. That is because we wanted
to attract that currency to the United States, and we have done
so. How much have we done so? Maybe a trillion dollars in this
economy as a result of that.
If we provide that information to foreign governments who,
by the way, in many ways are not so willing to help us with
similar things such as the FISK provisions and other benefits
that they apply, then we will drive that money out of this
country.
Ms. Velazquez. So what will you tell us lawmakers? How can
we fix this conflict that exists between interpretation?
Mr. Mastromarco. Well, there are two things, and there are
probably more, but I happen to believe, and I know there is
some disagreement with this, that the law needs to at least set
the standards for what is considered an interpretative rule
making because the decision, the trigger point of
interpretative rule making, was the primary point.
Remember, collection of information requirements was just
the fail safe. At one point Senator Pryor in the taxpayer bill
of rights was going to subject all rules and regulations of the
IRS to the Reg Flex Act. The only thing that Congress did was
they said okay, we will have a truce. Collection of
information.
They defined their way out of that too, so I would make
collection of information independent of OMB review of forms so
that it is its own special standard. When a collection of
information exists, the RFA is triggered.
Chairman Manzullo. Congresswoman Majette?
Wait a second. Mr. Sullivan, you had a response?
Mr. Sullivan. Actually, Congresswoman Velazquez, I do have
a response, and actually it gets at your question on whether or
not IRS will not do further analysis.
I would posit to the Committee that if you took Secretary
Olson's response to your question about flight of capital and
you were to detail that out in IRS' proposed rule with the work
that they have already done, you would have in fact met the
further analytical requirements in a transparent way to put
small business and large businesses on notice about what they
were intending to do with that rule making.
Chairman Manzullo. Ms. Majette?
Ms. Majette. Good morning, Mr. Chairman, and thank you.
Good morning, ladies and gentlemen. My question is
addressed to Ms. Olson. I know that one of the biggest ways
that your agency avoids performing the Reg Flex analysis is by
making a determination that the rule does not have a
significant impact on small businesses.
Sitting here just listening to all the comments and
discussion, I am wondering from your perspective what is it
that this Committee can do or what is it that Congress can do
to make it easier for your agency to be in compliance?
Ms. Olson. Rewrite the tax laws so they are much simpler
than they are. That would be the best thing you could do.
Ms. Majette. Well, assuming we cannot do that this week or
this session, although I would love to, and I think that was
probably the only thing that every single Member of Congress
was able to agree on a few weeks ago when we voted on a
resolution with respect to that.
Having said that, perhaps we cannot do that this week. What
would you do?
Ms. Olson. It is very difficult within the confines of the
statutory provisions that have been written for us to simplify
the laws and to simplify compliance with the laws and to ease
the small business burden.
We have as a paramount objective and have had it at the top
of our list since I joined the Treasury Department two years
ago to look for every opportunity to simplify the tax laws,
particularly for small business. We do not undertake a project
without considering specifically its impact on small business,
if there are ways for us to carve small business out of it.
I will give you one example. You know, we have recently
undertaken a lot of activity to try to stomp out tax shelters,
and in the rules that we have written we have designed them
around small business so that small businesses are not captured
by the rules because they only apply to very large
transactions, so we are always looking for ways to simplify
things for small business.
One of the budget proposals that the President put forward
is a pension plan simplification, a 401(k) simplification,
again aimed at small businesses because we know that small
businesses do not have the resources, do not have the assets,
to be able to afford the same number of lawyers, accountants,
actuaries, et cetera, that are necessary in order to adopt
pension plans and stay in compliance with pension plans, so we
are always looking at.
We welcome as many comments from you from your constituents
as you might have about ways in which we have put burdens on
small businesses that are not necessary or that might be
minimized. We are always looking for ways to do that.
Ms. Majette. Thank you. I see I still have a little bit
more time, so I will shift gears for a moment.
One of the things that we are going to continue to deal
with this year is the issue of the possible repeal of the
dividend tax, and so my question is what benefit do you see
that small businesses would reap from the repeal of the
dividend tax inasmuch as that is estimated to cost nearly $400
billion?
Ms. Olson. Well, there are indeed a number of small
businesses that are organized as C corporations, which are the
kind of businesses that do end up paying a double level of tax,
so the benefit that they would get is an elimination of the
double level of tax.
To the extent that they have paid income tax at the
corporate level, they will not pay it again when they make
distributions to their shareholders, so that would be a
significant benefit.
We have also----.
Ms. Velazquez. Would the gentlelady yield?
Ms. Olson. We have also proposed a simplification in the S
corporation area, which would allow more companies, small
businesses, to move into S corporation status, which is a full
elimination of the corporate tax.
Ms. Majette. Thank you. I yield to the Ranking Member.
Ms. Velazquez. Would you tell us what is the percentage of
small businesses that will benefit from the dividend tax cut?
Ms. Olson. I am sorry. I do not remember the exact number.
I could probably get it if you want to do a question for the
record.
Ms. Velazquez. Is it less than three percent?
Ms. Olson. There are many more companies on the small
business side that are operating in C status than the large, so
it is a very large number of companies. I think it is somewhere
close to 1,000,000 companies that are small businesses that
operate in C corporation and are subject to the double level of
tax.
Ms. Velazquez. What percent would represent 1,000,000 out
of 25,000,000?
Ms. Olson. One million out of 25,000,000? I am not sure
what you are referring to.
Ms. Velazquez. You just said that 1,000,000 businesses out
of 25,000,000 small businesses in America.
Ms. Olson. That are organized as C corporations and bear an
extra level of tax. Yes. The rest of them have all sensibly
structured themselves as either S corporations or as
partnerships or LLCs and so they avoid that double level of
tax.
Ms. Velazquez. It is quite small.
Chairman Manzullo. Congresswoman Millender-McDonald?
Ms. Millender-McDonald. Thank you, Mr. Chairman, and good
morning to all of you. Quite a distinguished panel, I might
add.
When you speak about small businesses in terms of how many
will benefit from dividend taxes, we really do not have a
definitive on what small businesses are we talking about. It
could be one who is under 100, one who is under 50, one who is
under 500.
You know, again we are trying to bounce around what is a
small business in terms of definition, and it seems as if as I
came here this morning semantics is a problem with especially
the Department of Treasury and the Small Business
Administration because your interpretations tend to vary
differently, and I suppose with that it appears to me like
semantics. We are having problems with semantics and
definitions of different terms--interest, analysis of data and
those types of things. It appears to me that we are having
those problems.
Given that, Ms. Olson, you said that you are always looking
at ways by which to simplify the burdens on small businesses.
Have you done a collection of information with reference to
those burdensome concepts that are really affecting small
businesses?
In other words, I heard Mastromarco say that there is not a
collection of information, and if that is indeed true then what
information, or are you collecting any information, that will
gleam the burdensome task that small businesses have with RFA?
Ms. Olson. Well, the IRS is always analyzing the forms and
the burden associated with the forms. In fact, the IRS has
recently undertaken a significant study of the burden that is
imposed on taxpayers in complying with the laws.
They completed a study just on the burden imposed on
individual taxpayers, not counting any business taxpayers, but
just individual taxpayers and complying with the laws, and
concluded that the cost of complying with the laws was nearly
$70 billion.
They have done things with respect to the forms over the
course of the last couple of years that have significantly
reduced the burden hours associated with completing the forms,
some of them specifically targeted at small businesses, by
removing, for example, the requirement that small businesses
complete certain schedules that get attached to the tax returns
that are very complicated.
We can do small things. We can say things like, you know,
increase the threshold for filing special schedules like, for
example, they increased the threshold from $400 to $1,500 for
filing a Schedule B if you have dividend or interest income.
That wipes out the requirement for a whole lot of people to
have to deal with another schedule. It is an effort that goes
on every year with respect to the IRS forms.
Ms. Millender-McDonald. And yet in spite of this we are
still seeing this burdensome task on small businesses with
reference to this RFA Act. What can be done about this?
Dr. Graham, you are the monitor, I suppose, of the rule
making and other provisions that are imposed upon small
businesses. What are we going to do about this particular issue
facing small businesses?
Mr. Graham. Well, I think there is some very good work
going on at Treasury on an expanded model of how to protect and
estimate different kinds of burdens, particularly information
collection burdens, on different segments of individual and
corporate taxpayers.
I would encourage you to look into the progress they are
making and whether they will have the capability to isolate
small business defined in various ways and show how changes in
tax policy and regulations will affect the information
collection burdens of small businesses.
There is progress in that direction, but I think it is an
area that is worth learning more about and understanding what
more can be done.
Ms. Millender-McDonald. And though there is progress that
is being made, would you then agree that legislation needs to
be done to really fix this problem?
Mr. Graham. I think we would need to look at the specifics.
Mr. Swain. Congresswoman, could I make a suggestion?
Ms. Millender-McDonald. Yes.
Mr. Swain. As you stated, one of the debates this morning
has largely been about semantics, and I think it is very----
Ms. Millender-McDonald. Yes.
Mr. Swain. [continuing]. Challenging to figure out what is
interpretive and legislative. This is actually an idea that I
just thought of as we were listening to the discussion, so it
may not be very good, but why not take an entirely different
approach?
Why not say that any IRS regulation, no matter how they
characterize it, if it has an impact of over $100 million
annually has to have a full-blown Regulatory Flexibility Act
analysis; not just the paperwork collection analysis, but the
full analysis of impact and alternatives.
That way we get out from saddling IRS with the burden of
doing an analysis on every little thing that comes along, and
we also get away from this morass of figuring out and arguing
about whether something ought to be interpretive or something
ought to be legislative.
That also installs Dr. Graham's office in a little firmer
position of responsibility because he has to evaluate whether
that threshold decision about the economic impact is an
appropriate decision. It is just a different way of looking at
it. It may not be ultimately adequate after some further
thought.
Could I mention one other thing briefly?
Ms. Millender-McDonald. I could not agree with you more on
that because a threshold has to be established and analyses be
driven by the threshold that you have just outlined. I could
not agree with you more on that.
Mr. Swain. If I could mention just one other thing on the
dividend tax issue?
As a private attorney, if somebody comes to me and they say
I want to start a business, usually what I say to them is the
last thing you want to be is a C corporation. That is why,
Congresswoman Velazquez, there are so few C corporations,
percentage-wise, because you do not want to be a C corporation
so that you are paying dividends to your investors and you are
taxed twice.
I think the big advantage of the proposal to eliminate
taxation on dividends is that a business owner will be able to
either form a corporation or not form a corporation, either
borrow money or receive equity money from investors, based on
business reasons of what is best for the business and not based
on reasons of what is best for the tax return.
Ms. Velazquez. If the gentlelady would yield?
Ms. Millender-McDonald. Wait, wait, wait. Ms. Ranking
Member, let me just conclude here.
Mr. Chairman, this is why, given just what the gentleman
has said--Mr. Ireland is it? I cannot see you. Mr. Swain?
Chairman Manzullo. This is Swain over here.
Ms. Millender-McDonald. Wait a minute. The one who just
spoke. Swain. Right.
I think there needs to be a set of standards set that will
be established to guide this issue because otherwise
misinterpretations are going to be made, and we are going to
continue to be mired in this type of issue, so to me, as I
close and turn it over to you or the Ranking Member, I think we
need to have some standards set, and for that I do have a----.
Chairman Manzullo. I agree with you. We are going to come
up with legislation.
I am going to go back to the Ranking Member for one last
question because I know that Ms. Olson----.
Ms. Velazquez. Thank you.
Ms. Millender-McDonald. I just want to put my statement in
the record.
Chairman Manzullo. Right. That will be in the record.
Before I do that, let me just state that since 1996 there
have been 330 proposed rules by the IRS. There have been 13
preliminary RFAs and only nine final RFAs. I just think that is
not acceptable. I mean, everything is interpretive. It just
means that is a way for the IRS to do less work.
If you really want to help out, Ms. Olson, if you really
want to help out small businesses, you know, you do not need
the programs. You do not need the Web sites. Do the RFA because
when you find out the impact on small businesses after you have
done the RFA chances are you will pull back. That is the best
thing you can do for the small businesses is to comply with the
RFA.
Now, a point in fact where somebody did not comply with the
RFA and got in big trouble is HUD on that proposed RSPA. With a
$9 billion impact, they came up with a miserable report of $140
million per page where HUD told us and this Committee that they
had the right to determine which entities were impacted.
The quality of the RFA will determine the viability of the
proposed regulation.
One last question from Mrs. Velazquez, and then we will end
up here.
Ms. Velazquez. Thank you, Mr. Chairman.
Mr. Swain, you know, you just were talking about the
dividend tax cut, so a small percentage of small businesses
will benefit out of that, but we are here discussing how can we
protect and enhance small businesses.
In light of the proposed stimulus package, I would like to
know what is your opinion in light of the fiscal constraints
that we are facing here in Washington regarding the dividend
tax cut or the increased expensing proposal aimed at small
businesses? What will you choose between those two? As you
know, we will not be able to pass both.
Mr. Swain. I think the challenge to Congress is choosing
among a number of worthy things, and complete elimination of
the dividend taxes is extraordinarily expensive and very
difficult.
I am simply pointing out, because you had asked the
question earlier, why so few small businesses are corporations.
It is because of the way the tax system is structured. Whether
you can afford to change it as it ought to be changed this year
or not, I cannot judge that. Certainly expensing is a very
valuable option, but dividend taxation is something that ought
to be changed if not now, then eventually.
Chairman Manzullo. Okay. Mr. Ireland?
Mr. Ireland. One last comment for you and the Ranking
Member.
Both of you seemed, in my interpretation, predisposed to do
something about this, and I would congratulate you. This is 23
years we have been hearing this same thing. You have
articulated it better than I have heard it before, but the time
has come for the IRS and some of these other agencies--they are
not alone--to respond to the Congress and Congress representing
the small business.
You know, maybe some of the things like a commission or
something like that might be something of last resort, but
after all this period of time and a clear indication of what is
needed, the time has come to do something.
Chairman Manzullo. I think we have, as a result of this
hearing, come up with some language that would be very specific
and directed.
If there is any commission, Andy, you will be a commission
of one that has been around trying to interpret the rules.
Ms. Velazquez?
Ms. Velazquez. Yes. Mr. Ireland, would you not agree with
me that a solution could be to bring the IRS under the SBREFA
panel review process?
Mr. Ireland. Absolutely. I mean, in each one of these there
have been all these threats along the way, but they always get
nibbled. There is always this track around it.
If they really wanted to save the country money and energy
and real dollars, wherever it bubbles up at the bowels of the
Internal Revenue they have said look, the deal is over. We are
going to stop fighting.
Devote that energy to really doing something. That is what
these initiatives that you are referring to are pointed toward.
Chairman Manzullo. Again, thank you all for coming here.
This has been extremely helpful. We have gotten some great
ideas on drafting very specific legislation. Obviously we are
going to bounce it off everybody here.
Again, thank you for your time, and thank you for your
patience. This hearing is adjourned.
[Whereupon, at 11:09 a.m. the Subcommittee was adjourned.]
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