November 19, 1996
Honorable Margaret Richardson
Commissioner
Internal Revenue Service
11th & Constitution Ave. NW
Room 3000 Washington, DC 20224
re: CC:DOM:CORP:R (IA-42-95) Definition of Reasonable Basis
Dear Commissioner Richardson:
The following comments are submitted regarding proposed amendments to the Income Tax Regulations related to the definition of reasonable basis for the purpose of accuracy-related penalty regulation under Chapter 1 of the Internal Revenue Code. These comments are submitted pursuant to section 7805(f) of the Internal Revenue Code1 and also under general authority to monitor compliance given to this office by the Regulatory Flexibility Act (the Act) 2 as amended by the Small Business Regulatory Enforcement Fairness Act (SBREFA). 3 The Office of Advocacy is not questioning the need for the rule at this time, but rather the absence of information to support the IRS's position that no analysis is required by the Act or that there is no impact on small business.
The 'Special Analyses' section of the notice of proposed rule-making states as follows: "(I)t has been determined that section 553(b) of the Administrative Procedure Act and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations and therefore a Regulatory Flexibility Analysis is not required." We question this determination. The statement does not explain why the IRS has concluded that the Act does not apply to the current rule-making. We believe that the IRS should include a statement pursuant to sec. 605(b) of the Act (as amended) giving the factual basis for its finding so that interested parties can evaluate and comment thereon.
If the IRS has come to the conclusion that the proposed regulation does not require an initial regulatory flexibility analysis because it is interpretative, we maintain that Section 603(a) of the Act as amended by the SBREFA requires interpretative rules involving internal revenue laws to have an initial regulatory flexibility analysis, where such rules impose a collection of information requirement, including record-keeping. We think the proposed regulation, which will tighten the definition of 'reasonable basis', will require small businesses to keep and maintain records (such as the documents referred to in 1.6662.4(d)iii) to meet the additional burden of proof that this regulation would impose to support tax reporting decisions.
We anticipate that the IRS might contend that nothing in the regulations compels record-keeping but we believe the new stricter standard imposes a de facto record-keeping requirement. As such, SBREFA requires the burden on small business to be analyzed with an opportunity for the public to comment on the analysis.
If, upon analysis, the IRS believes that the proposed rule does not have a significant economic impact on a substantial number of small businesses the Administrator may so certify in the notice of proposed rule-making and support the finding with factual information.4 We surmise that such certification would not be plausible since the summary of the proposed rule states that it would effect all taxpayers that file returns. This would include 20 million small businesses. Small business will be held to this new higher standard and will be compelled to keep and account for significantly more documents than heretofore to verify that they relied on "substantial authority" and thus had a reasonable basis for their choices in their tax returns. In view of the penalties that may apply, this is a substantial impact, we feel, which at least warrants some analysis.
Thank you for this opportunity to comment. If the Office of Advocacy can be of assistance to you with regard to these comments or the hearing, please feel free to contact us at 202-205-6533.
Sincerely,
Jere W. Glover
Chief Counsel
Russell Orban
Assistant Chief Counsel
ENDNOTES
1 26 U.S.C. 7805(f)
2. 5 U.S.C. Chapter 6
3 P.L.104-121
4 P.L. 104-121, sec. 243 amending 5 U.S.C. 605(b)