Regulatory Guidance Processes:

Treasury and OMB Need to Reevaluate Long-standing Exemptions of Tax Regulations and Guidance

GAO-16-720: Published: Sep 6, 2016. Publicly Released: Sep 6, 2016.

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sagerm@gao.gov

 

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What GAO Found

The Internal Revenue Service (IRS) uses a variety of documents to communicate its interpretation of tax laws to the public, but only considers Internal Revenue Bulletin (IRB) guidance to be authoritative. IRS information published outside of the IRB can help taxpayers understand tax laws and make informed decisions, but does not always include information clarifying the limitations of its use. IRS has detailed procedures for identifying, prioritizing, and issuing new guidance. However, it lacks procedures for documenting the decision about what type of guidance to issue.

Hierarchy of Authority for IRS Guidance and Other Information Sources

Hierarchy of Authority for IRS Guidance and Other Information Sources

In a review of tax guidance, GAO found few instances in which the Office of Management and Budget (OMB) determined that a tax regulation was likely to have significant economic effects and would thus be subject to additional analysis. OMB's significance determinations largely result from initial assessments by the Department of Treasury (Treasury) and IRS that many administrative law or executive order requirements do not apply to most tax regulations and other guidance. Some tax regulations and other guidance are also exempt from further analysis and review under a 1983 agreement between OMB and Treasury, which was reaffirmed in 1993. This agreement has not been revisited in more than 20 years, and it is unclear whether this agreement is still relevant.

GAO also reviewed eight case files of non-regulatory IRS guidance documents published in 2015 and found that IRS did not consistently document required steps during key phases of the issuance process. Although these eight case files are non-generalizable, documenting key decisions may help IRS evaluate the risk of challenges to IRS assessments about whether tax guidance is significant enough to warrant additional OMB and congressional review.

Why GAO Did This Study

The public relies on IRS guidance to understand complex tax laws and meet their responsibilities. GAO was asked to examine IRS guidance and rulemaking processes. This report reviews (1) how IRS communicates its interpretation of tax laws to the public and decides what type of guidance to issue; (2) what relevant authorities apply and what policies and procedures IRS uses when issuing guidance; and (3) to what extent selected IRS guidance products followed relevant authorities. GAO reviewed IRS policies and procedures for issuing guidance, conducted literature reviews, analyzed eight non-generalizable case files for compliance with relevant authorities, and interviewed agency officials and other subject matter experts.

What GAO Recommends

GAO is making six recommendations, including that IRS communicate more clearly the limitations of information not published in the IRB, and that IRS develop procedures to better document the type of guidance it plans to issue and the key decisions made during the evaluations. GAO also recommends that Treasury and OMB reevaluate their long-standing agreement to exempt some tax guidance and regulations from OMB oversight. IRS and Treasury agreed with all of GAO's recommendations, and OMB neither agreed nor disagreed.

For more information, contact Michelle Sager at (202) 512-6806 or sagerm@gao.gov.

Recommendations for Executive Action

  1. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Commissioner of Internal Revenue should communicate more clearly the limitations of information not published in the IRB to taxpayers. Such action could include adding clarifying language to some pieces of information not published in the IRB, like FAQs, and amending policies and procedures, such as the Internal Revenue Manual (IRM), to clarify when IRS information should contain a statement regarding its legal authority and whether the item can be used or cited as precedent.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Commissioner of Internal Revenue should amend current policies and procedures for drafting guidance to include factors to consider when deciding what type of guidance to issue and procedures for documenting those decisions internally.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Commissioner of Internal Revenue should develop policies and procedures to help guidance-drafting teams assess whether non-regulatory guidance should be considered a rule for purposes of the Congressional Review Act (CRA) and in turn major, and document those assessments internally.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Commissioner of Internal Revenue should take action to ensure that required steps are consistently documented during key phases of the non-regulatory guidance process, as defined in the Chief Counsel Directives Manual.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  5. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Director of the Office of Management and Budget and the Secretary of the Treasury should examine the relevance of the long-standing agreement that exempts certain IRS regulations from executive order requirements and Office of Information and Regulatory Affairs (OIRA) oversight; and if relevant, make publicly available any reaffirmation of the agreement and the reasons for it.

    Agency Affected: Department of the Treasury

  6. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Director of the Office of Management and Budget and the Secretary of the Treasury should examine the relevance of the long-standing agreement that exempts certain IRS regulations from executive order requirements and Office of Information and Regulatory Affairs (OIRA) oversight; and if relevant, make publicly available any reaffirmation of the agreement and the reasons for it.

    Agency Affected: Executive Office of the President: Office of Management and Budget

  7. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Director of Office of Management and Budget and the Secretary of the Treasury should develop a process to ensure that OIRA has the information necessary to determine whether IRS rules are major under CRA and significant under E.O.12866. Consideration should be given on ways to solicit public comments on the potential effects of proposed regulations and non-regulatory guidance, including measures of economic impacts, and on how to document internally the consideration of significant comments by both IRS and OIRA.

    Agency Affected: Department of the Treasury

  8. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Director of Office of Management and Budget and the Secretary of the Treasury should develop a process to ensure that OIRA has the information necessary to determine whether IRS rules are major under CRA and significant under E.O.12866. Consideration should be given on ways to solicit public comments on the potential effects of proposed regulations and non-regulatory guidance, including measures of economic impacts, and on how to document internally the consideration of significant comments by both IRS and OIRA.

    Agency Affected: Executive Office of the President: Office of Management and Budget

 

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