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Spotlight on IRS Guidance: A Look at Recent Blog Posts on How Agencies Communicate

Posted on Feb. 5, 2018

Subtitle: And a Nudge to Look at the National Taxpayer Advocate Purple Book’s Proposal to Formalize the NTA in the Rulemaking Process

Last week I attended an outstanding presentation on the recently enacted tax legislation that Tal Tigay, Brian Volz, Cuyler Lovett, Brian Thaler, and Howard Gavin (all from PWC) gave for the Villanova Graduate Tax Program. The Power Point presentation summarizes the new legislation’s main individual, corporate, and international provisions. The presentation included review of the legislative process that led to a number of substantive decisions in the legislation and covered how any technical changes legislation will not be able to rely on a simple majority in the Senate to pass, but instead will need 60 votes for cloture to avoid a likely filibuster.

There are  numerous areas where the legislation is in need of further clarification. My colleague Professor Ed Liva, Director of the Villanova Graduate Tax program, noted in his introductory remarks that in today’s charged environment in DC, it may be difficult to get the 60 votes in the Senate to get a technical corrections bill passed, putting even greater pressure on IRS and Treasury to get guidance out in the form of regulations or less formal guidance.

The pressing need for tax guidance in light of the legislation leads me to a fascinating series of posts from our blogging colleagues at Notice & Comment, which last week hosted an online symposium on how agencies communicate.

As part of that series, there are three posts sweeping in IRS: one by Professor Andy Grewal called Involuntary Rulemaking that discusses IRS use of less formal guidance like Chief Counsel Advice, a post by Professors Susan Morse and Leigh Osofsky called How Agencies Communicate: Introduction and an Example, discussing how IRS sometimes fills the gap in regulations and less formal advice by using examples, and Interim-Final or Temporary Regulations: Playing Fast and Loose with the Rules (Sometimes), a post by Professor Kristin Hickman discussing Treasury’s use of temporary regulations. All of the posts are worth a careful read, as does Professor Bryan Camp’s outstanding post a couple of weeks ago in Tax Prof called Treasury Regulations and the APA that looks at the Tax Court’s opinion in SIH Partners v Commissioner involving an APA challenge to longstanding regulations under Section 965. (Bryan’s post is part of a series of posts he regularly places on Tax Prof called Lessons from the Tax Court; for tax procedure types the series is a must read).

Today I will focus on Professor Hickman’s Notice & Comment post. In her post she notes how Treasury has skirted pre-promulgation APA notice and comment requirements with what she believes is an excessive use of temporary regulations (an issue we have discussed on PT in the context of the Chamber of Commerce challenge to the temporary anti-inversion regs). Calling the practice short-sighted, Professor Hickman laments that “post-promulgation notice and comment are an inadequate substitute for pre-promulgation procedures that themselves are already a second-best proxy for the legislative process.” Adding to the concern, Professor Hickman notes that social science research suggests that once a decision has been made and Treasury is administering a regulation it is less likely to change gears and respond to comments.

Professor Hickman’s comments have broad appeal, especially among  administrative law scholars who might find Treasury’s use of temporary regulations (or interim final regulations in admin law speak) to be an outlier agency practice. The argument also finds a soft landing spot among those who may not like the IRS, for both legitimate and perhaps less legitimate reasons.

Perhaps because I come at the issue more from the perspective of thinking about agency rulemaking as it applies to individual taxpayers, and especially lower income taxpayers, when reading Professor Hickman’s post I thought of the recent National Taxpayer Advocate (NTA) Report and its Purple Book. The Purple Book is a concise summary of suggestions that the NTA believes will strengthen taxpayer rights and improve tax administration. One of the NTA’s recommendations is that Congress should amend Section 7805 to require that IRS/Treasury should be required to solicit comments from the NTA when it promulgates regulations. And for good measure, the NTA proposes that Treasury should have to address those comments in the preamble to the final rules.

This mirrors a proposal I made when I last wrote a longish article about Treasury’s rulemaking process, in the 2012 Florida Tax Review’s A New Paradigm for IRS Guidance: Ensuring Input and Enhancing Participation.  I made a similar suggestion to amend Section 7805, drawing on Section 7805(f), which requires Treasury to solicit input from the Small Business Administration when proposed rules were likely to have an impact on small business taxpayers. I noted that the absence of participation is particularly troubling for rules that have a likely impact on those the agency is less likely or able to consider in the first instance (such as low income taxpayers or other taxpayers without much voice), and that the tax system would be better if there were a more formalized role for proxies like the NTA that could ensure all voices and views are before the agency.

The NTA proposal is a bit more nuanced than mine, as in my article I pegged the requirement to Treasury promulgation of final regs, while the Purple Book proposal adds that the requirement should also apply when Treasury is contemplating issuing temporary regulations.

The increasing attention around IRS’s rulemakng practice is likely to be intensified given the pressing need for guidance following the passage of the sweeping tax legislation. While it seems unlikely that Congress can in a bipartisan way approach the issue from an agency best practices perspective, perhaps the tax legislation’s passage will nudge the IRS to reflect further not just on the public’s need for guidance but also think about the process it uses get that guidance to the public.

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