Report of Treasury-IRS Regulation Simplification Task Force.

• Author: Klein, Kenneth

Report of Treasury-IRS Regulation Simplification Task Force

SCOPE OF TASK FORCE

The Regulation Simplification Task Force was directed to identify, analyze, and recommend ways in which the content and presentation of regulations could be simplified. The task force was directed to identify simplifying techniques, as well as steps that may be taken to identify other simplifying techniques. The task force was not directed to address the regulations process more generally or to identify methods to increase the timeliness of regulations. (1)

BACKGROUND

Regulations are an authoritative source of tax law and, as such, function as the ultimate source of nonstatutory guidance from the Service to taxpayers. The purpose of tax regulations is to transform statutes into a functioning part of the tax law, consistent with congressional intent, rational tax policy, and the need for administrability. To this end, regulations must take into account the intent of Congress, the realities of transactions, the burdens of compliance, the need to monitor compliance, and the overall integrity of the tax system.

Regulations are not ordinarily designed for direct use by all taxpayers. They operate as only one part of a system for communicating guidance to taxpayers. For example, the Service provides guidance directly to individual taxpayers primarily through its forms, instructions to those forms, and tax publications. These materials are intended to be useful to most taxpayers without technical background or great study.

Regulations, on the other hand, are generally written for tax professionals. Depending on the application and complexity of the underlying law, the professionals likely to use regulations directly range from lawyers and accountants in general practice (and other general financial advisors) to lawyers and other professionals with significant expertise in the subject matter. Even though taxpayers may not directly use most regulations, however, they are affected by their complexity as the resulting rules are translated into forms, publications, and other secondary sources.

The attempt to provide fair, complete, and effective guidance has led to increasingly complex regulations that have confused many taxpayers, their advisors, and the Service personnel who must apply them. Two types of complexity are encountered. First, regulations have often suffered from a complexity of draftsmanship that has made them difficult to understand. Second, regulations often are substantively complex; for example, they may include numerous complicated definitions, tests, special rules, and exceptions.

Substantive complexity has been caused by (i) complex underlying statutes, (ii) the need to address increasingly complex or innovative taxpayer transactions, (iii) an attempt to prevent abuses and close loopholes, (iv) the provision of special rules for taxpayers who would be treated unfairly under general rules, and (v) poor drafting or organization.

The true test of substantive simplicity is whether the regulation operates simply, not how it appears. A simpler regulation is a regulation that is easier to apply, and a simpler regulation will not in all cases be a shorter regulation. For example, a simply stated test based on a taxpayer's "principal purpose" may lead to uncertain or unpredictable results when a taxpayer can not be sure which motivations will be found to have been significant. Further, apparent complexity can be the result of including numerous examples in lengthy regulations.

This report addresses techniques to reduce substantive complexity and to increase the understandability of regulations. It also recommends a number of steps designed to implement this reduction in complexity. Finally, it recommends that outside assistance be sought to identify other ways to reduce complexity.

UNDERLYING CONSIDERATIONS

When considering the recommendations of the Regulation Simplification Task Force, four considerations should be kept in mind.

First, obtaining significantly simpler regulations will not be without cost. Obtaining substantively simpler regulations will often require giving up fine distinctions or complex rules that were designed to achieve fairness or prevent abuse. Then Deputy Assistant Secretary Ross stated in his memorandum of February 2, 1989, on this subject:

Although new simplifying techniques may be developed, we should not mislead ourselves into thinking that "technological" breakthroughs in regulations writing will permit us to issue regulations that are substantially less complex than those we issue today. At bottom, we face a basic trade--off: do we opt for simple rules of general application, or do we add levels of complexity to achieve fairness objectives or prevent manipulation. This has always been a matter of balance, and the real question is whether simplification objectives have been given too little attention...