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Passing Marks?

New legislation could improve the IRS' report card when it comes to considering the needs of small business.

Regflex isn't the latest exercise trend-'s a law designed to make sure federal agencies address the needs of small business when they issue rules and regulations. The Regulatory Flexibility Act (RFA) requires agencies to determine whether their proposed and final rules will have an economic impact on small business and to examine less burdensome alternatives if the impact is deemed significant. So far, however, small-business advocates say the IRS is not keeping up its end of the deal.

To bring the IRS into better compliance, the House Committee on Small Business recently held hearings on the issue. Ranking Democratic member Rep. Nydia M. Velázquez (NY) is especially concerned about the financial impact tax regulations are having on entrepreneurs. "Despite the fact that the IRS is responsible for the highest regulatory costs impacting small businesses, it has been the worst violator of applying RegFlex analysis," she contends. The cost per employee with regard to small-business tax compliance topped the costs for large companies by 114 percent, she says.

But the Treasury Department's Assistant Secretary for Tax Policy, Pamela F. Olson, testified that the IRS is making progress in easing the regulatory burden on entrepreneurs. "Treasury and the IRS take their responsibilities under the RFA very seriously," she testified, adding that every IRS regulation is reviewed by three different offices for compliance with the RFA.

Olson points out that the IRS has streamlined many of its procedures to make compliance less burdensome for entrepreneurs. Specifically, business filers can now e-file employment tax and fiduciary tax returns and, at the same time, pay the balance due electronically by authorizing an electronic funds withdrawal. Now business preparers can also e-file their clients' employment tax returns.

Nevertheless, Dan Mastromarco, representative for bipartisan advocacy group National Small Business United at the hearings, believes the IRS still has a long way to go. "The Service's failure to debug rules has not only inflicted injury on the small-business community, but resulted in false regulatory starts, considerable delays and Congressional involvement in the rule-making process,' he says.

Rep. Velázquez is considering introducing legislation to amend RegFlex so the IRS is held to the same standards as the EPA and OSHA when it comes to the impact of agency rules on small business. In 1996, when it passed the Small Business Regulatory Enforcement Fairness Act, Congress required the two agencies to receive statements from representatives of small entities affected by their rules through a review panel process. Says Rep. Velázquez: "By putting the IRS under the same review panel process, it will ensure that small businesses have a voice in the creation and execution of federal regulations that might harm them."


Great Falls, Virginia, writer Joan Szabo has reported on tax issues for 16 years.

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This article was originally published in the November 2003 print edition of Entrepreneur with the headline: Passing Marks?.

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