[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/
                                 house


                                 ______

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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

                              ----------                              

                               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

                              ----------                              


                         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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