If President Reagan's tax proposal becomes law, it undoubtedly will suffer a problem that has plagued other major changes in the tax code in recent years: The regulators have a tough time keeping up with the legislators.
The Internal Revenue Service has rarely -- if ever -- been as far behind as it is now in producing the regulations to implement the tax laws that Congress has passed, according to IRS officials and tax scholars.
Congress has passed three major tax laws since 1981, and the IRS has not completed its work on at least 460 regulations involving the legislation, covering such areas as fringe benefits, dependent-care assistance and low-interest loans.
If Congress approves some form of tax simplification, the IRS will have to produce regulations so that taxpayers and auditors will know what rules applied in past tax years. The IRS, however, usually gives priority to areas that offer the most potential for collecting revenue or where taxpayers have the least guidance from the courts.
IRS officials said yesterday that while it is impossible to say how many regulations would be required if Congress votes to simplify the tax code, it would certainly add to the agency's burden.
"In the short run, we will be very busy," said Fred T. Goldberg, chief counsel of the IRS. "There will be a lot of work and a lot of transition work."
The current regulatory lag, tax experts and IRS officials say, has caused an unprecedented amount of tax uncertainty that, at a minimum, causes headaches for taxpayers, their lawyers and accountants, but may also account for the loss of millions of dollars in revenue.
The result of the backlog "is that there's an enormous amount of uncertainty," said Stanley Weiss, a Washington tax lawyer with the New York firm of Roberts & Holland. "Taxpayers just don't know quite what to do.
"You start telling your clients about the uncertainty that exists, and their eyes start glazing up a bit and they go ahead and do what they have to do to keep the business going," he said.
Goldberg acknowledged that taxpayers are inclined to take advantage of the ambiguities, "taking the most favorable ruling."
"But agents trying to administer the law have no guidance either, so the tendency there is often in the other direction," he said. "It's pernicious on both sides.
"Our agents in the field are feeling the same frustration as the practitioners," he added.
The problem is that when Congress passes a tax law, it usually leaves it up to the IRS to provide definitions and explanations of the law and establish administrative procedures and filing dates.
Richard Schmalbeck, a law professor at Duke University, said that tax statutes have historically been ambiguous by nature, so that less regulation leads to greater unpredictability.
"Regulations can move you from 80 percent certainty to 97 percent certainty," he said.
According to Schmalbeck, there is a "fair amount" of regulatory lag all the time, but the problem grows when the volume of legislation increases.
The IRS said it is impossible to determine the financial impact of the regulatory lag on the Treasury. But several practitioners theorized that the lack of regulations has encouraged taxpayers to withhold money that could be owed the government.
"I suspect they've lost quite a lot of revenue," said Weiss, a former IRS official, echoing a view shared by other tax lawyers in Washington and New York.
Weiss said the delays can make it harder politically for the IRS to change the tax rules. "When you have no rules, people go ahead as a herd," he said, making it more difficult then for the IRS to publish regulations that would change taxpayer habits.
Peter Scott, director of the IRS's Division of Legislation and Regulation, agreed that the lag creates problems. "I'm just not sure there is a solution," he said. "We're certainly worried about it though."
Former IRS commissioner Mortimer M. Caplin, a senior partner at the law firm of Caplin & Drysdale, said the problem could be solved by "spacing out legislation so that taxpayers and the IRS could have a chance to absorb it."
Caplin also suggested that Congress pass more precise laws, leaving less work to the IRS and Treasury Department.
Congressional staffers, however, contend that the lag is not a legislative problem, but a political one.
"The great increase in the volume of legislation is not driven by technical concerns, but by budget considerations," a high-ranking staffer on the Joint Committee on Taxation said. "Each piece of legislation is extraordinarily complicated and one can hardly say that the statutes aren't detailed enough."
The official, who requested anonymity, said the tax code "will never be simple once you decide you're going to solve all societal problems by tax provisions."
He said that members of the joint committee expect to encounter at least as many regulatory issues, if not more, under a tax simplification measure.
Goldberg said that tax lawyers "are screaming" about the tax simplification proposal because "in the short run" it will create regulatory problems.
But in the long run, he acknowledged, fewer regulations would be required.