Tax Executives Institute, Inc. - Department of the Treasury liaison meeting agenda February 14, 1991.

Tax Executives Institute, Inc. -- Department of the Treasury

1. OVERVIEW

   Tax Executives Institute has long been committed to developing and maintaining an administrable tax system. Historically, our submissions on legislative proposals, as well as those on regulations and other forms of guidance, have been replete with references to "administrability" and to the compliance burdens engendered by particular provisions and with recommendations for minimizing those burdens. We have focused on what we thought was do-able. At times, the Institute may have regarded itself as a modern-day Diogenes -- a voice crying out for simplicity, searching in the darkness for those who agreed.

   The cumulative effect of a decade of helter-skelter tax legislation is that most thoughtful people now agree that the tax law's complexity has become a problem unto itself. And the agreement has moved from the philosophical plane to the action stage. Congress, the Department of Treasury, the Internal Revenue Service, and the tax community as a whole seem now to agree that complexity of the tax system has exacted too high a cost -- both in terms of the financial resources diverted from more productive activity and of the frustrations caused and the distrust bred by a system so complicated that full compliance may be literally impossible.

   Certainly, there have been several hopeful signs. The 1989 tax act contained several provisions to simplify the tax law, including penalty reform, some revision to the adjusted current earnings provisions of the alternative minimum tax provisions, and the repeal of section 89. In addition, in February and March 1990 the House Ways and Means Committee held hearings on the impact, effectiveness, and fairness of the Tax Reform Act of 1986, and simultaneously announced a major simplification study. A recurrent theme during the hearings -- and also in the comments that were filed with the Committee -- was the growing frustration of taxpayers and the government alike with the complexity of and the inability to administer the Internal Revenue Code. More important were the recommendations for change. More than 200 responses were received from various individuals and organizations, including TEI, and many contained thoughtful proposals, a substantial number of which could be implemented without significant revenue cost. In addition, it was recognized that the Internal Revenue Code could not be made simple overnight and that complexity would have to be attacked on an incremental basis. It was recognized that the time had come for action.

   Unfortunately, subsequent legislative and regulatory actions have seemed at odds with the hopeful rhetoric. Last year saw the enactment of yet another tax act, the Omnibus Budget Reconciliation Act of 1990. These relatively minor changes in the tax law required more than 1,200 pages in the Conference Report to explain -- hardly an encouraging sign of decreasing complexity. Thus, in spite of the legislative strides made in 1989, much needs to be done.

   Tax Executives Institute remains committed to the proposition that a simpler tax code is not only possible, but necessary to sustain the voluntary compliance system. TEI's goal in making these recommendations is simple: to make the tax legislative process more sensitive to "real world" limitations and constraints. Thus, we agree with the statement of the staff of the Joint Committee on Taxation in its April 20, 1990, recommendations for simplification that --

   "prevention rather than cure is the ideal way to deal with excessive complexity."

   Regrettably, a perception exists in the tax community that the Treasury Department, in spite of good intentions and purposes, has sometimes been a contributor itself to the complexity in the Code. We believe, however, that the Treasury Department has a crucial role to play in ensuring that administrative and compliance concerns are addressed before tax law changes are made (by either statute or regulatory action).

   TEI strongly encourages the Treasury Department, together with Congress and its committee staffs and the IRS, to vivify its commitment to simplification. Specifically, the Treasury Department should be in the forefront to assure that unduly complex legislation is not enacted. The hearings process may well be the most efficient means of uncovering problems with proposed legislation. Too often, however, by the time taxpayers become aware of the specifics of a proposal, it is seemingly cast in stone. Thus, more must be done in advance to ensure that proposals are subjected to a "reality check" before it is too late.

   TEI recognizes that the Treasury cannot prevent Congress from enacting unadministrable statutes. We believe, however, that a better job can be done in ensuring that compliance concerns are heard, if not heeded. We also believe that a better job could be done with the revenue-estimating process. Specifically, the assumptions (behaviorally based on otherwise) that underlie revenue estimates should be clearly identified. In addition, when major discrepancies occur between different estimates, efforts should be made to explain the discrepancies and, to the extent possible, reconcile disparate estimates. (1)

   TEI pledges its continued cooperation and support of these simplification efforts. During our liaison meeting, we wish to discuss how TEI can further the prospects of its specific proposals and how the Institute can assist the Treasury Department -- before the fact -- in ensuring that proposed legislation and regulations will be workable and that the cost of compliance will not be unnecessarily excessive.

2. EFFECTIVE DATES

   AND RETROACTIVITY

   1. General Comments

      Statutes and regulations that reach backward to encompass prior transactions and other retroactive provisions breed their own form of complexity. Stated simply, such rules penalize taxpayers for not being prescient. As a matter of principle, TEI strongly opposes the retroactive application of legislation or regulations that work to the taxpayer's detriment. Adverse retroactive changes in the tax law undermine the integrity of the tax system and diminish taxpayer respect for and confidence in the system's fairness. Moreover, retroactivity heightens the need for, and underscores the propriety of, special transition rules (to ameliorate the harshness of retroactivity), thereby complicating the law even more.

      In its simplification recommendations, the Majority Tax...