Testimony of

                        Russell Orban

                   Assistant Chief Counsel

                     Office of Advocacy

             U.S. Small Business Administration

                              

                         Hearing on

     "Guidance on Reporting of Deposit Interest Paid to

 Nonresident Aliens" a rule proposed by the Internal Revenue

                           Service

                 10 a.m. - December 5, 2002

Members of the review panel:



Thank you for this opportunity to contribute to the record.

My name is Russell Orban and I am Assistant Chief Counsel

for the Office of Advocacy of the Small Business

Administration. I am here on behalf of Advocacy (Advocacy)

to offer comments and answer questions about the application

of the Regulatory Flexibility Act to the proposed rule

Guidance on Reporting of Deposit Interest Paid to

Nonresident Aliens.



You have a copy of Advocacy's formal comment letter filed

for the record on November 14, 2002.



Congress established the Office of Advocacy to represent the

views of small business before Federal agencies and

Congress.  The Office of Advocacy is an independent entity

so the views I express here today do not necessarily reflect

the views of the SBA or the Administration.  Section 612 of

the Regulatory Flexibility Act (RFA) also requires the

Office of Advocacy to monitor agency compliance with the

RFA.  Recently, Executive Order 13272 entitled "Proper

Consideration of Small Entities in Agency Rulemaking

underscored the importance of agency compliance with the

RFA.



Normally the Regulatory Flexibility Act applies to every

rulemaking required by the Administrative Procedure Act.

The RFA requires an initial regulatory flexibility analysis

that looks at the impact of proposal on small businesses and

reviews alternative methods of regulating that may be less

burdensome.



If this regulation is legislative, in other words, if the

IRS is making policy decisions without specific direction

from Congress and exercising its discretion to impose legal

requirements to carry out that policy, then the RFA would

apply without question and the IRS must do an analysis of

the impact this regulations will have on small financial

institutions.  Other witnesses testifying today are

addressing these policy and discretion issues. They will

also discuss the possible impacts on small businesses beyond

the administrative and paperwork burden.  For that reason, I

will limit my remarks to what the law requires if this

regulation is interpretative as the IRS claims in the

preamble of the NPRM.



In 1996, Congress amended the RFA to require an analysis for

IRS regulations even in cases where it is interpretative, if

the proposal requires a collection of information.



The Special Analyses Section of the preamble to the NPRM

asserts that the RFA does not apply to this regulation

apparently because the Administrative Procedure Act does not

apply to interpretative rules and because the NPRM requires

no "collection of information on small entities."



We believe that RFA does apply in this case. The entire

purpose of this proposed rule is to create a collection of

information system. The NPRM creates a vast new group of

reports that would have to be filed on form 1042S by

financial institutions that pay interest to nonresident

aliens in the named countries.  In addition, there is a

continuing requirement on the financial institution to

maintain records on each interest payee (either a FormW-8 or

W-9 depending on withholding options).



All financial institutions, large and small, that pay

interest on accounts to nonresident aliens from the named

countries will be required to collect information under the

proposal.



After reviewing the NPRM and discussing it with affected

small businesses and groups that represent them, it is clear

that many of them will be dramatically impacted by this

proposal.



First they will need a tracking system for the interest they

pay and to match the withholding or non-withholding

instructions and the addresses of all the parties. They will

also need to discern the depositors' countries of residence,

apply the requirements of the proposed rule to designated

countries, and prepare and send the correct forms.



Next, they tell us that many of their members currently have

deposits from nonresident aliens in the named (and many

other) countries. The majority of the financial institutions

in the country are small entities. For a small financial

institution, the burden associated with setting up a system

to monitor and report in accordance with the regulation is

significant.  It would include the cost of equipment,

software and set-up, plus the ongoing costs of operation,

maintenance, and/or purchases of services to provide this

information.



A small financial institution has a smaller customer base

over which to defray these costs. This is just one more cost

that makes it difficult for small financial institutions to

compete with larger institutions.



In closing, even if this proposed regulation is

interpretative, the Regulatory Flexibility Act specifically

requires the IRS to conduct an initial regulatory

flexibility analysis where a collection of information is

required, unless the IRS certifies that the proposed

regulation will not have a significant economic impact on a

substantial number of small entities.  If the IRS does not

have specific authority for the elements of this regulation,

and so used its discretion to set up a monitoring system,

then an initial regulatory flexibility analysis is certainly

required.  In any event, we believe all the criteria are met

to require an analysis. The Office of Advocacy encourages

the IRS to carefully review the comments of affected small

entities and take appropriate steps to bring this NPRM into

compliance with the requirements of the RFA.