The Honorable William V. Roth, Jr.

Chairman

Committee on Finance

United States Senate

Washington, D.C. 20510

Dear Mr. Chairman

The Department of the Treasury would like to take this opportunity to express its views on

S. 1156, the "Small Business Advocacy Review Panel Technical Amendments Act of 1999."

We understand that S. 1156 may be offered as an amendment during floor consideration of the pending tax legislation. The Department of the Treasury strongly opposes S. 1156 for the reasons set forth below.

The bill would amend section 609(d) of the Regulatory Flexibility Act (RFA) to include the Internal Revenue Service (IRS) within the limited group of agencies subject to the provisions of section 609. RFA section 609 requires agencies to engage in a review panel process before they can issue a rule for which an initial regulatory flexibility analysis is required.

The bill would also amend RFA section 603 to remove the current provision that limits RFA applicability to IRS proposed interpretative rules to the extent they impose reporting or recordkeeping requirements on small businesses. This provision was added to the RFA in 1996 as part of the Small Business Regulatory Enforcement and Fairness Act (SBREFA) to address concerns expressed by small businesses about paperwork burdens associated with IRS regulations. In its place, the bill would insert a provision expanding the applicability of the RFA to all IRS proposed, temporary, and final interpretative regulations.

The most frequent criticism of IRS rulemaking is that the IRS needs to provide taxpayers with more guidance and provide that guidance faster. Subjecting IRS rules to the review panel process will make it impossible for the IRS to quickly provide needed regulatory guidance to taxpayers in many cases when the rule contains a paperwork requirement, and by diverting resources to comply with the review panel process the bill will reduce the total amount of guidance the IRS is able to issue for the benefit of all taxpayers.

It is the policy of the Department of the Treasury to impose the least burden on regulated entities consistent with statutory requirements and sound regulatory objectives. The Department particularly recognizes the importance of this policy with respect to small businesses and other small entities. However, we are not aware of any demonstrated need to subject IRS rules to the review panel process. Nor are we aware that any IRS rule issued since the enactment of SBREFA has imposed a paperwork or other requirement on small businesses that is inconsistent with statutory objectives.

We are seriously concerned that the review panel process will result in a select group of small entity taxpayers having advance knowledge of regulatory provisions that often could result in a competitive advantage relative to other taxpayers. The premature disclosure of regulatory provisions is particularly sensitive in the tax area because it could allow those with advance knowledge to structure transactions to avoid effective dates or otherwise frustrate the intent of a regulation. Such a result would be fundamentally unfair to other taxpayers and would erode public confidence in the integrity of tax administration.

Subjecting IRS rules to the review panel process is unnecessary. Pursuant to section 7805(f) of the Internal Revenue Code (26 U.S.C. 7805(f)), every IRS proposed rule is required to be sent to the Chief Counsel for Advocacy for review and comment. The IRS is then required to

consider all comments submitted by the Chief Counsel and to address those comments in the preamble to the final rule. We are confident that the Chief Counsel consults with small entities and their representatives in determining whether to submit comments on these rules.

The 1996 amendment to RFA section 603 that limits applicability of the RFA to IRS proposed interpretative rules that contain a paperwork requirement struck the appropriate balance between the concerns expressed by small businesses and the recognition that IRS interpretative rules provide taxpayers with guidance on how to comply with the provisions of the tax code. We are not aware of any demonstrated need for removing this limitation.

Subjecting IRS temporary rules to the requirements of the RFA is inconsistent with the informal rulemaking provisions of the Administrative Procedure Act (APA) (5 U.S.C. 553) and would represent a significant departure from the current statutory scheme. The APA has long recognized that in carefully defined circumstances an agency may issue rules without public notice and comment. Since its enactment in 1980, the RFA has only applied to rules that are issued for notice and comment because to do otherwise would interfere with the authority of an agency under the APA to issue regulations that respond to emergency situations or for other good cause. This amendment, particularly when coupled with the review panel provisions in the bill, will effectively prevent the IRS from quickly issuing regulations needed to curb tax abuses, to provide regulatory guidance to the public with respect to changes in the tax law made late in the year, or to address other needs for immediate regulatory guidance. We also note that the IRS is the only agency whose temporary regulations will be subject to the requirements of the RFA.

Sincerely,

/s/

Linda L. Robertson

Assistant Secretary

(Legislative Affairs and Public Liaison)

[Identical Letter to the Honorable Daniel Patrick Moynihan]