Excessive review of IRS regulation delays needed government revenue

Should regulations issued by the Internal Revenue Service be subjected to the same level of review as those issued by other agencies?

The Senate’s Homeland Security and Governmental Affairs Committee (HSGAC) Subcommittee on Regulatory Affairs and Federal Management is exploring this question at a hearing on Thursday.

{mosads}For several years, the Government Accountability Office, the Congressional Research Service and other groups have urged reconsidering and possibly doing away with the agreement the Treasury Department and the Office of Information and Regulatory Affairs (OIRA) reached in 1983.

Under the agreement, which has been renewed several times, most IRS regulations are exempted from OIRA review. Early in his administration, President Trump issued Executive Order 13789, instructing the Treasury secretary and the director of the Office of Management and Budget (OMB), of which OIRA is a component, to “review and, if appropriate, reconsider the scope and implementation of the” 1983 agreement.

That review has been going on for some time, as have discussions between OMB and Treasury about severely curtailing the tax guidance the IRS issues that is not required to go under OIRA review.  

Most critiques of the agreement suffer from three fundamental flaws: They misunderstand and overstate the extent of the exemption; they suggest OIRA review would have prevented certain IRS actions; and they offer no description or quantification of the value that would be added by OIRA’s review.

Contrary to popular opinion, the IRS does not have a blanket exemption: OIRA does review rules meeting certain criteria as “major” or “significant.” Also, OIRA is apprised of all IRS rules projects and can ask to review them.

One commentator used the IRS’ Tea Party targeting scandal as an example of why OIRA ought to be reviewing all IRS regulations.

But Tea Party targeting was an internal matter, one whose marching orders, to the extent any were expressed, would never have reached OIRA under any review scheme. OIRA review is not the solution to operational misconduct by government officials.  

A recent WSJ op-ed by Susan Dudley and Sally Katzen, two former highly respected heads of OIRA, cites the anti-inversion regulations the IRS proposed in 2016 as an example of regulations that should have undergone OIRA review, and the havoc that is wreaked when they don’t.

They write that those proposed regulations were “intended to discourage American companies from moving their headquarters overseas for tax reasons. Far from being a technical tax rule, this was a major policy aimed at so-called tax inversions, with potentially significant economic effects.”

Rather than proving the need for OIRA review, however, the anti-inversion regulations illustrate why IRS rules are generally exempt from it. The anti-inversion regulations were not “intended to discourage American companies from moving overseas.”

Rather, they were intended to implement the law Congress had passed to do that. The “major policy aimed at so-called tax inversions” was neither IRS nor Treasury Department policy. It was a policy Congress had written into law after years of deliberation.

The policy was certainly major, with potentially wide-ranging economic effects, but it didn’t originate with Treasury or the IRS. It came from Congress. And it was the IRS’ and Treasury’s duty to implement it.

Dudley and Katzen explain that “OIRA ensures that agencies have weighed the likely costs and benefits of proposed regulations and it coordinates the interagency review of these proposals across the federal government.”

But where tax provisions are concerned, the economic impact has already been the subject of economic estimates by the Joint Committee on Taxation, the Congressional Budget Office and the Treasury Department’s Office of Tax Policy, as well as quite a few private entities.

A proper consideration of tax regulations, however, requires an entirely different way of looking at costs and benefits. The uncertainty created by lack of regulations can carry an enormous economic cost: Transactions that would boost productivity are not consummated because tax advisors cannot vouch for their tax consequences.

On the other hand, the government benefits from being able to enforce the tax laws because regulations have been promulgated to implement them.

A reason once given for the 1983 agreement was the sheer number of IRS regulations. Between 2000 and 2014, Congress made more than 5,000 changes to the tax code. The pace of change has not slowed since then, and the IRS is responsible for issuing regulations to implement each and every change.

The IRS has as many rules in the pipeline at any given moment than most other agencies combined. On any given day, the number of IRS regulations in the pipeline is at least 10 times the number of those for the next closest agency, and 100 or more times those of most other agencies. 

Congress’ frequent changes to the tax code are not the only reason the IRS must issue a high volume of regulations. Tax administration and enforcement are a cat-and-mouse game. In administering the tax laws, the IRS regularly discovers the need to clarify or otherwise modify existing regulations.

Many clever people make it their life’s (lucrative) work to find ways around tax laws. When the IRS discovers these end-arounds, it issues regulations or other guidance letting people know they don’t work and will be punished.

The sooner regulations like this can get out, the sooner tax revenues that would otherwise be lost to the Treasury can be saved. It is difficult to envision what value OIRA could add to this process or product.

Criticisms of the 1983 agreement do not specify how OIRA review would improve IRS regulations. They merely assert that subjecting them to the same sort of review other agencies’ regulations undergo would make the IRS more politically accountable.

Ever since President Nixon wanted to use the IRS to torment his political adversaries, however, most White Houses have preferred to keep their distance from tax implementation and enforcement. It is still a good idea.

It has been reported that OIRA is already hiring people with tax expertise in anticipation of reviewing IRS regulations. But President Trump’s Executive Order 13781 instructs OMB to streamline government operations and to identify and eliminate duplication.

Adding a layer of review guaranteed to delay and unlikely to improve tax regulations would run counter to that objective. 

So, sure: revisit and reconsider the criteria used to exempt most IRS regulations from OIRA review. Publish the results and explain the rationale so the public understands the reasons and the process.

But don’t impose unnecessary OIRA review on regulations that taxpayers and their advisors need to understand the law, and that the IRS needs to enforce it.

Eileen J. O’Connor, a Washington, D.C. lawyer, is chairman of the executive committee of the Federalist Society’s Administrative Law Practice Group and served for six years as head of the Justice Department’s Tax Division in the administration of President George W. Bush.