Post Hearing Questions and Answers for the Record Submitted to Senator Olympia J. Snowe, From Dr. Winslow Sargeant

Post Hearing Questions and Answers for the Record Submitted to Senator Olympia J. Snowe, Ranking Member U.S. Senate Committee on Small Business and Entrepreneurship From Dr. Winslow Sargeant, Chief Counsel for Advocacy Office of Advocacy, U.S. Small Business Administration

“Next Steps for Main Street: Reducing the Regulatory and
Administrative Burdens on America’s Small Businesses”

(1) Dr. Sargeant, you were recess appointed by President Obama 91 days ago, despite concerns that many Senators, including myself, had with your qualifications to be Chief Counsel for Advocacy. Our reservations primarily related to your lack of commitment to reducing the regulatory compliance burden that disproportionately affects small firms. So at our hearing, you had an opportunity to address these concerns and inform Members of this Committee of your accomplishments, to date, in addressing regulatory compliance costs for America’s entrepreneurs – and promoting less burdensome alternatives at Federal agencies.

And your role is key because the U.S. Chamber of Commerce estimates that the health reform law alone mandates 41 separate rulemakings and at least 100 additional regulatory guidance documents. The Wall Street Reform Bill will require an estimated 553 new regulations. And with this Administration having promulgated 43 major regulations in fiscal year 2010 alone – at EPA, OSHA, and dozens of other agencies – the Office of Advocacy is more important now than ever before in its vital role as small business’ regulatory watchdog.

Now that you have been in your position for over three months, I trust that you have implemented a plan to evaluate and comment on the growing mountain of proposed rulemakings that potentially threaten small businesses’ ability to recover and create jobs. What is your plan to tackle this spate of regulations? What steps are you taking to “triage” new regulations that are being proposed – to identify where you need to focus your energies?

Having been on the job of Chief Counsel for almost five months, I am happy to report that the approach we are taking at Advocacy to tackle the multiple and varied regulations coming out of the federal government is working well. I am fortunate to have a very talented legal team with a wealth of knowledge and experience working with agencies within their particular areas of expertise. I have also added to my regulatory team by bringing in new attorneys with in-depth experience in the regulatory process. For example, one of my first hires as Chief Counsel was an expert on the Paperwork Reduction Act who spent 14 years working on environmental and other regulatory issues at the Office of Information and Regulatory Affairs. With experienced attorneys like this on staff, we have been able to cover the regulations coming out of the federal government and maintain our strong presence with the agencies to ensure they are following the RFA and considering the impact of proposed regulations on small business.

In order to stay in touch with the concerns of the small business community, Advocacy is constantly hosting roundtables and meeting with small businesses and trade associations to hear about their priorities and help set Advocacy’s agenda. Since I was sworn in last August, Advocacy has hosted 17 roundtables on a wide variety of regulatory issues and I have signed 22 public comment letters.

Four agencies where Advocacy has been particularly active are the Environmental Protection Agency (EPA), the Occupational Safety and Health Administration (OSHA), the Internal Revenue Service (IRS), and the Consumer Financial Protection Bureau (CFPB). Our work with CFPB has largely focused on ensuring that the new agency is well prepared to conduct the Small Business Advocacy Review (SBAR) panel process and that they adopt the best practices for the process from the beginning. We have been very involved with EPA and OSHA on the various rules coming out of these agencies and on a number of SBAR panels. IRS regulations are another area where we have been very engaged, on issues such as the Form 1099 requirement and the home office deduction.

As you know, Advocacy has a multi-faceted approach to working with agencies on new rules that potentially burden small businesses. This approach often includes public comment letters, roundtables, and confidential interagency communications. Through the use of these tools and the RFA, Advocacy will continue to effectively focus in on the small business community’s priorities and give small entities a voice in the rulemaking process.

(2) Dr. Sargeant, we have recently corresponded regarding the issue of the “1099” paperwork burden on small businesses inflicted as a component of the health reform law. I have stated my abiding concern that you chose to not submit public comments on this mammoth mandate and you have responded that the “confidential interagency process” is your preferred tool for effectuating change on that issue. We may need to simply “agree to disagree” on that point and move on to glean what it is that you believe is an appropriate level of interaction between the Office of Advocacy and the IRS with respect to tax regulations – in particular on the repeal of the onerous “1099” provisions which is a top issue of concern for the small business community.

So Dr. Sargeant, in your informal comments by conference call to the IRS, were you specific in your concern about the invasive nature of changes to accounting systems and in the cost to businesses of implementing these invasive changes? What precise information did you convey? Did you share with the IRS your response letter to me, dated October 21, 2010? Why or why not?

Also, did you find in your confidential interagency process that the IRS was attuned to the needs and concerns of small business with respect to this new mandate? How were they addressing small business concerns? What specific accommodations will the IRS likely to take from your recommendations?

As described in our letter to you, dated October 21, 2010, Advocacy regularly meets agency staff to discuss rules as they are being developed. This confidential interagency process allows agencies to work closely with Advocacy early on, while a rule is still being developed, to help ensure that the agency is taking into consideration the rule’s potential impact on small businesses. Advocacy continues to have great success in relating to the IRS the concerns of small businesses by engaging in this confidential interagency process.

Advocacy made the October 21 st letter to you public on its website. Additionally, Advocacy shared this letter with the IRS.

The IRS has not yet issued proposed regulations to implement the expanded Form 1099 requirement. Nonetheless, during our conversations with the IRS, Advocacy emphasized small business concerns about the expanded Form 1099 requirement so that the IRS could consider ways of minimizing burdens when it began drafting regulations to implement the expanded requirement. The Chief Counsel at IRS noted in a discussion with Advocacy that a legislative fix will be needed to adequately address the 1099 concern.

Advocacy received extensive feedback from small businesses concerning the expanded Form 1099 requirement and how it should be addressed. Almost unanimously small businesses believed that only congressional action would address the burdens imposed by the expanded requirement. As a result of this feedback, Advocacy recognized that regulatory action by the IRS would likely not be able to minimize the impact of the expanded Form 1099 requirement. For this reason, when I testified before the Senate Small Business and Entrepreneurship Committee, I endorsed the complete repeal of the expanded Form 1099 requirement.

(3) Dr. Sargeant, in August the IRS proposed regulations that would effectively put an end to a method of paying taxes that has existed since World War I. This system relies upon a coupon book and checks. The IRS and its sister agency at the Treasury Department – the Financial Management Service – propose to now only take payment through the Electronic Federal Tax Payment System (EFTPS) for liabilities that exceed $2,500 per quarter. In the proposed regulations a “special analysis” was propounded that stated that this is not a “significant regulatory action” and that a regulatory assessment is not required. It also stated that the Regulatory Flexibility Act does not apply. However, the regulations were specifically submitted to you as the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

I understand that you recently met with the National Federation of Independent Business (NFIB) on this issue. Can you please tell me what your reaction was to this mandate and what you have heard from the small business community? From your understanding of small business and that of your staff, do you think that moving a mandate from tax liabilities of $200,000 a year down to $10,000 per year in just a matter of four months is a breathtakingly short amount of time to force this type of change? Wouldn’t some kind of transition phase-in period, at a minimum be required to mitigate adverse small business economic impact?

Advocacy has been closely involved in monitoring this EFTPS issue from the earliest stages of the regulation. Advocacy recognized and was concerned that this regulatory change could unfairly burden small businesses. As a result, Advocacy reached out to small businesses and also looked at what options small businesses would have under this new plan. We have also had discussions with NFIB and congressional offices about potential concerns with the rule.

One important option for small businesses that do not have internet access is newly established call centers. Treasury has established dedicated EFPTS call centers to allow small businesses to pay taxes via telephone 24/7. Treasury advises that all calls to EFTPS centers should be answered in 30 seconds or less.

Advocacy has sought feedback on the regulatory change from the small business community to gauge their concerns. In the April 2010 edition of the Advocacy newsletter, the Small Business Advocate, we published an article describing Treasury’s press release to announce its new initiative that will require payroll taxes to be paid electronically. In the August 2010 edition of the Advocacy newsletter, Advocacy published an article on the IRS proposed rule that would implement Treasury’s initiative to expand the requirement to expand the EFTPS.

The Advocacy newsletter reaches approximately 40,000 people in the small business community. We did not receive any feedback on the two news articles discussing the expansion of the EFTPS.

On June 29, 2010, Advocacy hosted a conference call for the small business community with staff from Treasury Department. The purpose of the conference call was for Treasury staff to make a presentation titled “Treasury's Paperless Initiative: What Small Businesses Need to Know.” In addition to making a presentation, Treasury scheduled time to be available to take questions and hear concerns from small businesses. Advocacy invited over fifty small business owners, representatives, and congressional staffers, but only three small business representatives participated in the conference call with Treasury. After Treasury’s presentation, the conference call participants stated that they did not have concerns with respect to Treasury’s expansion of the requirement to make federal tax deposits electronically.

Advocacy first met with staff from Treasury to discuss the potential impact of this issue on small businesses in the spring of 2010. Since this initial meeting, Advocacy has continued to meet and talk with Treasury staff frequently about the expansion of the EFTPS. Advocacy’s involvement in this issue actually occurred earlier in the process than we often have the opportunity to get involved at Treasury and IRS.

While the small business community has not indicated significant concern over the EFTPS issue, we continue to look into it and speak to small businesses about potential problems. Should additional information of concern about the rule arise, Advocacy will take whatever actions are necessary to make sure small business views are heard.

(4) Dr. Sargeant, as you are aware, the IRS recently proposed rules that would effectively eliminate the system of processing Federal Tax Deposits (FTDs) by coupon at financial institutions beginning on January 1, 2011. Under the IRS proposed rule, starting next year, all tax payments that exceed $2,500 per quarter would have to be paid through the Electronic Federal Tax Payments System (EFTPS). This is a major regulatory change and I truly appreciated Advocacy recently soliciting small business stakeholder comments on this proposed rule.

Your office released a report that Senator Kerry and I requested back in 2008, which detailed how our nation’s small businesses are accessing and using high speed Internet services. One of the key observations gleaned from this report is that almost half (48 percent) of rural respondents report they are not satisfied with their internet speed. Additionally, 7.7 percent of rural respondents report having no affordable broadband option at all. While large segments of businesses in this country have access to on-line banking and broadband internet service, it is clearly not yet a universal service.

It is my understanding that mailings were received from the IRS as late as the first week of November, leaving a very short period of time for transition to this new system. What are your recommendations for the IRS given the findings of the recent Office of Advocacy report and how do you balance the proposed rules from IRS with the millions of small businesses that remain paper-based and for whom electronic payment of bills and tax obligations is simply not an option?

As described in greater detail above, Advocacy has been closely involved in monitoring the EFTPS issue and has done outreach to the small business community for their feedback on the EFTPS changes. Advocacy did not submit any recommended changes to Treasury regarding its proposed expansion of the EFTPS based on the feedback we received from the small business community. While small businesses have generally not raised concerns over the change, Advocacy continues to look into the issue and will certainly take whatever actions are necessary if new information arises.

In addition to meeting regularly with Advocacy, it is our understanding that Treasury has been conducting outreach for over one year regarding its plans to expand the EFTPS. For example, Treasury has been reaching out to potential stakeholders regarding its initiative via letters, e-mails and webinars. See

For small businesses that do not have internet access, Treasury has established dedicated EFTPS call centers to allow small businesses to pay taxes via telephone 24/7. Treasury advises that all calls to EFTPS centers should be answered in 30 seconds or less. While the lack of internet service in some small businesses certainly creates problematic challenges, the phone option appears to be a viable alternative.

Advocacy will continue to stay on top of this issue and address any small business concerns regarding EFTPS, should they arise.

(5) Dr. Sargeant, as you are well aware, state and local regulators have an enormous impact on small business – and they’re often the most challenging to understand. Regulation varies by industry, and falling out of compliance can leave a small business owner legally liable, or victim to extensive financial penalties. That is why – when the Office of Advocacy introduced the State Regulatory Flexibility Model Legislation Initiative in 2002 – it quickly became an effective tool to help states understand the importance of regulatory flexibility. Throughout the tenure of previous Chief Counsel for Advocacy Tom Sullivan’s – between 2002 and 2008 – over 40 states enacted some form of regulatory flexibility initiative, either through legislation or an executive order – and as of August of this year, only six states – among them Idaho, Wyoming, and North Carolina, have yet to place regulatory flexibility in statute.

What is your plan for encouraging states that have not adopted model regulatory flexibility legislation to do so? And for those states that have this legislation, how will you work to encourage states to strengthen the laws that are already on their books?

As of the end of January, the Office of Advocacy will have most of the regional advocate positions filled. This group of accomplished individuals will be actively engaged with all aspects of Advocacy’s mission and allow me to have eyes and ears on the ground in every region. It is of critical importance that I hear directly from small business owners and other stakeholders outside of DC in order to be able to effectively speak out on the issues that matter most to small business. The regional advocates’ initial focus will be to become integrated into the small business communities in their states and gain a full understanding of how federal regulations are affecting their constituencies.

The State Regulatory Flexibility Model Legislation Initiative at the Office of Advocacy was a great success in helping states understand their role in imposing unfair burdens on small businesses. I commend Tom Sullivan and his team of regional advocates for their work. Moving forward, I would like to thoroughly review what policies have been most successful in individual states. One possibility I am pursuing is having my office conduct a state by state study on state regulatory flexibility and where it stands to help inform me on the most prudent path moving forward.

In the meantime, regional advocates will continue to work closely with state governments on small business concerns that arise on both the federal and local level.

(6) Dr. Sargeant, as you are no doubt aware, your predecessor as Chief Counsel, Tom Sullivan, created the Office of Advocacy’s Regulatory Review and Reform Initiative, or “r3,” a program that was designed to identify and address existing Federal regulations in need of revision either because they are ineffective, duplicative, or out of date. For example, the effectiveness of regulations can change over time due to changing economic conditions or advancements in technology since the rule was initially promulgated. In effect, the r3 initiative is a tool for small business to suggest needed reforms, and is ultimately intended to assist small businesses in addressing the cumulative Federal regulatory burden.

I am curious regarding your recent efforts on the r3 initiative. Since your appointment to the Office of Advocacy in August, which specific existing regulations have you identified as being in need of revision? What is the Office of Advocacy’s agenda for the R3 agenda in 2011 and beyond?

The r3 initiative began in 2007 and asked the public to nominate existing regulations that were ripe for reform. Eighty-two recommendations were received in year one, of which about twenty were regulations that met the criteria of the r3 program. The others were legislative fixes, nonregulations and general complaints. Advocacy chose the ten best and asked the agencies to review them for their impact on small business. In 2008, Advocacy also received nominations, although a significantly smaller number.

In the first and subsequent years of the r3 initiative, Advocacy learned a lot about the best ways to address outdated regulations in need of reform and the challenges involved. One lesson we learned is that in order to be truly successful in such an effort, it must be driven by the agencies. Since Advocacy does not have the authority to require agencies to review or revise existing regulations, our ability to get agencies to change the rules on our top 10 list was limited. While we always reminded agencies of their 610 duties under the RFA and asked that they comply, and did have some success with this strategy on several rules, more often than not little or no action was taken by the agencies. The r3 initiative did provide a lot of useful information for Advocacy on rules that need to be reformed, and we believe this information continues to be useful in our work with the agencies.

Advocacy is encouraged by President Obama’s recent Executive Order 13563 requiring agencies to submit a plan for periodic review of regulations. These required plans will help agencies address what changes should be made to make regulations less burdensome. Advocacy will also encourage each agency to adopt a plan to review existing regulations that would allow them to get direct feedback from the small business community on which regulations should be reviewed and changed.

Advocacy is committed to improving the periodic review of regulations, understanding that a strong new framework is needed to produce real results. Executive Order 13563 and the two presidential memos provide positive steps forward to creating that framework, and my office will be engaged with the agencies and OIRA in their implementation.