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March 5, 2007
IRS Floats the Idea of 'Outsourcing' Guidance
by Sheryl Stratton

Full Text Published by Tax Analysts®

Document originally published in Tax Notes
on March 5, 2007.

With no fanfare, the IRS and Treasury last week proposed an entirely new way of promulgating guidance. In a notice soliciting input on changing REMIC rules regarding commercial loan obligations, the government introduced a novel pilot program that would get the tax bar to help write regulations.

As might be expected, the idea was immediately hailed as "innovative" by several practitioners.

Pilot Program

In Notice 2007-17, the IRS and Treasury announced that they anticipate starting a pilot program to solicit greater input from the public in the initial development of some types of guidance projects. As a model for the pilot program, the IRS and Treasury want interested parties to address whether it is appropriate to amend existing income tax regulations governing real estate mortgage investment conduits to permit some modifications to securitized commercial mortgage loans.

Under the pilot program, the IRS and Treasury would publish a notice for each guidance project selected for the program, according to the notice. The notice would identify research, background documents, drafts of proposed guidance, and other work products, and ask interested parties to provide them. The public's written submissions would help the IRS and Treasury determine appropriate areas for publishing guidance.

The idea, the notice explained, is to increase public participation in the preliminary stages of guidance development so as to "hasten the publication of a greater number of guidance projects."


The IRS is, in effect, "outsourcing" guidance development, said Steve Rosenthal of Miller & Chevalier in Washington. "If a taxpayer [or taxpayer group] wants guidance, the taxpayer needs to start the leg work."

The approach the IRS is taking is an innovative way to address getting useful guidance to the public, said Kenneth J. Kies of Clark Consulting. They are obviously looking at this as a model for the guidance process for future projects, he said.

The market has changed since the REMIC provisions were enacted in 1984, observed Kies, who represents the Mortgage Bankers Association. It is an area that needs guidance, he said. Any better way to get guidance out more quickly "is worth a shot."

The approach is sound, said Rosenthal. For many years, he has encouraged the IRS to insist on more help from taxpayers and their representatives. To promulgate rules rationally, he said, the IRS needs current market information and technical input. "Otherwise, the IRS is just groping in the dark."

Taxpayers ought to be willing to bear the costs, Rosenthal believes, if they want guidance. "The IRS outlined a procedure that, potentially, could expedite and improve the quality of much- needed guidance," he said.

It is an innovative way for the IRS and Treasury to prioritize guidance projects, and an innovative way to allocate limited resources toward areas in which the market need is most pressing, agreed Robert P. Hanson of Ernst & Young.

While new in the tax area, the idea has been used to good effect elsewhere. One portion of the Health Insurance Portability and Accountability Act regulations was successfully outsourced by the Department of Health and Human Services, a practitioner contacted by Tax Analysts noted. The agency asked the public to submit draft versions of the regs, he explained, because parts of the act's rules, which require organizations to enforce security controls that promote the confidentiality, integrity, and availability of all personal health information, involved more detailed technical rules than HHS felt comfortable drafting.

IRS Chief Counsel Donald Korb had no comment last week on the pilot program, but through a spokesperson told Tax Analysts that he would "speak to this issue" at the March 9 Federal Bar Association annual Tax Law Conference in Washington.

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