One of the responsibilities of the IMA® (Institute of Management Accountants) Small Business Financial and Regulatory Affairs Committee (SBFRC) is to comment on government rules and regulations that impact small and medium-sized businesses. This year there weren’t many new regulations requiring comment, but it has been a very busy year nonetheless. Why?
The onset of a new presidential cycle brings a Regulatory Review. The review generates Executive Orders (EOs), which typically lead to new rules and regulations, but this year it’s different. A number of new EOs call for a reduction in the number of rules and regulations, especially those that have a negative economic impact.
Historically, the Internal Revenue Service (IRS) is the rule and regulation leader. The National Taxpayer Union notes, “Undergirding the complex Tax Code are the 22 volumes of Title 26 of the Code of Federal Regulations. These provide ‘the official interpretation of the Tax Code by the U.S. Department of the Treasury.’ The current volume racks up to 16,426 pages. The Tax Foundation estimates that it includes 7,655,000 words.” (http://bit.ly/2hV30AA).
The complexity of the Tax Code has a substantial cost. Early in 2017, the IRS Taxpayer Advocate (TPA) noted that “businesses spend about six billion hours a year complying with the code’s filing requirements—if tax compliance were an industry, it would be one of the largest in the United States.” (http://bit.ly/2z4c75I). In the same report, the TPA also noted that complexity “rewards taxpayers who can afford expensive tax advice and discriminates against taxpayers who cannot.”
A distinction must be made between written statutes, which are passed by Congress, and tax regulations, which are standards and rules adopted by the IRS that govern how laws will be enforced. Lobbying for Statutory Tax Code changes is beyond the purview of the IMA SBFRC. But participating with the regulation drafting process isn’t. This year, the EOs generated from the Regulatory Review actively encourage participation.
To identify and prioritize the tax issues that should be addressed through regulations, revenue rulings, revenue procedures, notices, and other published administrative guidance, the IRS prepares a Priority Guidance Plan (http://bit.ly/2kqftwK). It invites public comment through an invitation published in the Federal Register (http://bit.ly/2yNwp2E). In a typical year, only lobbyist and tax professionals respond. But this year’s invitation noted that “the Service recognizes the importance of public input in formulating a Priority Guidance Plan that focuses resources on guidance items that are most important to taxpayers and tax administration.…This input is of particular importance in light of Executive Order 13771 (82 FR 9339) and other recent executive orders that may affect the number or type of guidance projects that can be issued during the 2017-2018 plan year.”
Normally, the SBFRC reviews the IRS Priority Guidance Plan, but this is the first year we entered an official comment in the Federal Register. The SBFRC usually reacts to newly published regulations. We wished we could draft a broad letter covering multiple tax regulations that impact small business, but, unfortunately, resources are limited. Writing a good comment letter typically involves 40-80 staff hours of work. The SBFRC is a volunteer committee, staffed by small business professionals working hard in their respective small businesses (their day jobs). Based on the personal experience of some SBFRC members, we decided to focus on IRS rules and regulations relating to the worker classification “employee or independent contractor” (http://bit.ly/2xn6Mo4).
The SBFRC isn’t alone in recognizing this issue. A June 2017 Strategic Finance article (“Risk Management: What You Don’t Know May Be Costing You!” by Kelley Zanfardino) profiled employee classification as a risk. Some of the SBFRC recommendations were consistent with ones noted by the TPA before the House Small Business Committee (“The Sharing Economy: A Taxing Experience for New Entrepreneurs,” May 26, 2016, http://bit.ly/2zq2ZaX).
For worker classification determinations, the core document is Form SS-8, “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.” The SBFRC proposal calls for a simplified version of SS-8 (an SS-8EZ) tailored for use by small business employers and their employees. Why SS-8EZ? Why not simplify the simple process?
Section 530 of the Revenue Act of 1978 limits the regulation-making power of the IRS regarding worker classification. Section 530 was drafted because of concern over an IRS bias against independent-contractor determination. Because of the Section 530 prohibition, state and common law (as adjudicated) still have a major impact on the manner in which the IRS addresses worker classification. As noted in “Present Law and Background Relating to Worker Classification for Federal Tax Purposes,” prepared by the staff of the Joint Committee on Taxation on May 8, 2007 (JCX-26-07), “Section 530 also prohibits the Department of Treasury and the IRS from publishing regulations and revenue rulings with respect to the employment status of any individual for purposes of the employment taxes. However, a taxpayer may generally obtain a written determination from the IRS regarding the status of a particular worker as an employee or independent contractor for purposes of Federal employment taxes and income tax withholding.”
The way that the IRS provides a written determination is through a form SS-8 and a group of supporting rules and regulations. According to the form, it takes approximately 24 hours of effort to complete (including recordkeeping) and takes more than six months to get a determination.
The SBFRC believes that the SS-8EZ, with a strict focus on small employers, could simplify the process. As long as the scope is confined to smaller employers and their employees, bright lines may be drawn, or at least safe harbors (with limited scope) could be promulgated. You can read the full text of SBFRC comment letter on the IMA website (http://bit.ly/2y11QWi). If an SS-8EZ is possible, then an online tool and a streamlined adjudication process are also possible.
In June 2017, under direction of EO 13777 (Enforcing the Regulatory Reform Agenda), the Department of Treasury initiated a Regulatory Review. EO 13777 encourages agencies to seek input from small businesses, state and local governments, trade associations, and other stakeholders significantly affected by regulations. Public comment can be made through a formal invitation published in the Federal Register (http://bit.ly/2fPtaAb). SBFRC plans parallel submission of our comment letter on worker classification to this forum. Regulatory reviews (EO 13772) are under way in every major U.S. government department, not just the Department of the Treasury.
Concerned about regulations? Opportunity is knocking, and there are a number of opportunities to pursue the issue. We encourage IMA members to get involved. We’re always interested in new SBFRC members, but we’ll settle on targeted ideas for regulatory reform (email Linda Devonish-Mills, CMA, CPA, CAE, at email@example.com).