Regulatory Guidance Processes: Treasury and OMB Need to Reevaluate Long-standing Exemptions of Tax Regulations and Guidance
Published: 2016-09-06T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.
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.
section_title: What GAO Recommends
paragraphs: 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.

section_title: Letter
paragraphs: The Internal Revenue Service (IRS), in collecting revenue owed to the  government, is responsible for helping taxpayers understand the tax law  and meet their tax responsibilities. To do so, IRS issues multiple types of  guidance for taxpayers, such as notices and Frequently Asked Questions  (FAQs).
You asked us to examine the extent to which IRS policies, procedures,  and practices for issuing guidance conform to applicable statutory and  related authorities. This report reviews 1) how IRS communicates its  interpretation of tax laws to the public, and how it decides what type of  guidance to issue, 2) what relevant authorities apply (including statutes,  executive orders, and Office of Management and Budget (OMB)  guidance), and what policies and procedures IRS uses, when issuing its  guidance, and 3) to what extent selected IRS guidance products followed  relevant authorities.
For the first two questions, we collected and analyzed documents that  defined IRS guidance types, reviewed IRS’s policies and procedures for  issuing guidance, conducted literature reviews on IRS’s issuance of  guidance, and interviewed relevant officials at IRS, the Department of the  Treasury (Treasury), the OMB Office of Information and Regulatory  Affairs (OIRA), the National Taxpayer Advocate, and tax practitioner  associations. To understand the variety and quantity of IRS guidance  documents issued, we downloaded lists of all Internal Revenue Bulletin  (IRB) documents published from 2002 to 2015. To determine the topics  for which guidance is issued, we reviewed the Highlights page for each  IRB issue published from 2013 to 2015. To understand what authorities  apply to IRS guidance, we reviewed language in IRS guidance  documents issued from 2013 to 2015 that explained whether the  guidance was subject to rulemaking requirements and additional  analyses. We also searched a database of agency rules submitted to us  under the Congressional Review Act (CRA) and a database of regulatory  actions submitted to OMB. For our third question, we selected a non- generalizable sample of guidance documents published in 2015, and then  reviewed IRS documentation associated with eight guidance projects  (case files) to evaluate how the guidance process followed relevant  authorities in these cases. We selected this sample to ensure  representation of each of the four non-regulatory IRS guidance types– revenue rulings, revenue procedures, notices, and announcements– removing guidance covering administrative topics, such as rate  adjustments, and any duplicate tax topics. We determined that the data  we obtained through our reviews were sufficiently reliable for our  purposes.
We conducted this performance audit from July 2015 to September 2016  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: IRS’s mission is to provide America’s taxpayers top quality service by  helping them understand and meet their tax responsibilities and enforce  the law with integrity and fairness to all. For more than 100 years,  Treasury, in conjunction with IRS, has issued tax regulations and other  guidance documents to help taxpayers comply with the tax code.  Treasury and IRS are among the largest generators of federal agency  regulations and they issue thousands of other forms of taxpayer  guidance. The Internal Revenue Code (IRC) authorizes the Secretary of  the Treasury to “prescribe all needful rules and regulations for the  enforcement of” the code. IRS publishes tax regulations and other  guidance in the weekly IRB. Each annual volume of the IRB contains  about 2,000 pages of regulations and other guidance documents.
In addition to the guidance published in the IRB, thousands of other  documents that provide information to taxpayers are available on IRS’s  website. Some IRS guidance written by the IRS Office of Chief Counsel  provides detailed and technical explanations of tax laws for professional  return preparers as well as taxpayers. Other IRS sources of information  that explain tax law in “plain language” include:  forms, instructions, and publications for taxpayers to use in preparing  their returns; news releases, fact sheets, and tax tips to the news media; online interactive tools in which taxpayers can receive answers after  asking general or taxpayer-specific questions; and  instructional audio and video presentations.
These various communication tools are intended to help taxpayers  understand tax laws, improve voluntary compliance, and control IRS’s  administrative costs.
subsections: section_title: Statutes Relevant to the IRS Regulatory Process
paragraphs: IRS’s policies and procedures for producing regulations and other  guidance cite five legal authorities for IRS to follow when drafting and  issuing regulations: the Administrative Procedure Act (APA), the  Paperwork Reduction Act (PRA), the Regulatory Flexibility Act (RFA), the  Congressional Review Act (CRA), and a section of the IRC.
APA generally requires that agencies notify the public about, and solicit  comments on, proposed regulations via a notice of proposed rulemaking  (NPRM) in the Federal Register. PRA requires agencies to minimize the  paperwork burden they impose on the public, and submit certain  proposed information collections to OMB for approval. RFA generally  requires agencies to consider the impact of their regulatory proposals on  small businesses and other small entities, analyze effective alternatives  that minimize small entity impacts, and make their analyses available for  public comment. CRA requires agencies to submit each rule to Congress  and to the Comptroller General before it can take effect. All agencies are  also required to specify whether the rule is “major” under CRA; but OIRA  is responsible for determining whether a rule is major based on certain  criteria. We issue reports to Congress on major rules, summarizing and  assessing the agency’s compliance with required procedural steps.
section_title: OMB Oversight of Agency Regulatory Actions
paragraphs: Presidents have issued executive orders to centralize review of executive  branch agency rulemaking within OMB, and to require executive branch  agencies to prepare additional assessments and analyses of the potential  costs and benefits of significant and economically significant rules. OIRA  is the OMB organization responsible for the coordinated review of  regulatory actions by executive agencies. Such coordinated review is  necessary to ensure that, among other things, regulations are consistent  with applicable laws, the President’s priorities, and the principles set forth  in executive orders, and that decisions made by one agency do not  conflict with the policies or actions taken or planned by another agency.  Executive agencies provide OIRA with lists of planned regulatory actions  when drafting rules, including assessments about whether the rules are  significant under Executive Order (E.O.) 12866, to determine if additional  OIRA review is required. If so, agencies provide the text of the draft  regulation and any required analyses (including information on estimated  costs and benefits) to OIRA before issuing the rule. OIRA staff review the  rule and related documents and may request changes or additional  analyses. OIRA can notify the agency that it has separately determined  that a planned regulation is a significant regulatory action. OIRA also  has a responsibility under CRA for determining when rules issued by  executive branch and independent regulatory agencies are major.
section_title: OMB Oversight of Agencies’ Non-Regulatory Guidance
paragraphs: OIRA is responsible for reviewing certain non-regulatory guidance issued  by executive branch agencies. OMB issued a bulletin in 2007 to  establish policies and procedures for the development, issuance, and use  of “significant” guidance documents by executive branch agencies. The  bulletin’s definition of a significant guidance document is similar to the  definition of a significant regulatory action under E.O. 12866. The  bulletin requires that agencies establish procedures to allow the public to  view and comment on significant guidance documents after they are  released and, for any economically significant guidance documents, also  make a draft available for public comment and announce its availability in  the Federal Register. Consistent with an OMB memorandum  implementing the bulletin, OIRA has the opportunity to review some  significant guidance documents prior to issuance. Guidance that is not  significant (as defined by the OMB bulletin) is not subject to policies and  procedures in the bulletin, and guidance procedures are left to agency  discretion.
section_title: IRS Communicates Its Interpretation of Tax Laws through a Variety of Products
paragraphs: Although IRS issues thousands of publications in a variety of different  forms to help taxpayers and their advisors understand the law, IRS has  stated that only guidance published in the IRB contains the IRS’s  authoritative interpretation of the law (see figure 1).
Internal Revenue Code (IRC). Federal tax law begins with tax  provisions enacted by Congress and codified in title 26 of the U.S.  Code as the IRC. Consequently, the IRC is the most authoritative  source of information for taxpayers. It is the codified collection of U.S.  laws on income, estate and gift, employment, and excise taxes, plus  administrative and procedural provisions.
Treasury (tax) regulations provide Treasury’s and IRS’s official  interpretation of tax laws. Regulations are the most authoritative  source of published guidance, and they are binding on taxpayers and  IRS since they have the force and effect of law. They are published  both in the IRB and the Federal Register.
Other IRB guidance (revenue rulings, revenue procedures, notices,  and announcements) do not have the same “force and effect” of  Treasury regulations, but taxpayers can still rely on them as  authoritative. For example, taxpayers can use IRB guidance to  support a position knowing that IRS is bound by IRB guidance  because IRS employees must follow it.
Written determinations are Chief Counsel letters to, or memorandums  regarding, individual taxpayers; but IRS cautions that only the  taxpayer addressed by the guidance can rely on it as precedent.  Every year, the Chief Counsel issues thousands of private letter  rulings to taxpayers or their advisors who request (for a fee) answers  to technical questions about potential tax consequences of particular  transactions. The Chief Counsel also issues technical advice  memorandums to IRS offices that have technical or procedural  questions about an individual taxpayer case. When written  determinations are later published via the IRS website, they often  contain disclaimers noting any legal limitations.
Other IRS publications and information are described in the Internal  Revenue Manual (IRM) as “a good source of general information.”  However, the IRM states that these documents cannot be relied upon by  taxpayers as authoritative or as precedent for their individual facts and  circumstances since they are not binding on IRS. Tax practitioners and  other tax law experts note that courts have ruled that taxpayers cannot  rely on IRS documents published outside the IRB to support a position.  The form that information in this category can take varies widely, and  includes IRS videos, online tools, forms and publications, and Frequently  Asked Questions (FAQs).
subsections: section_title: IRS Considers Only IRB Documents to Be Authoritative Guidance
paragraphs: Guidance published in the IRB goes through a multi-step clearance  process at both Treasury and IRS, involving review and approval by  officials in a wide variety of Treasury and IRS offices. The weekly IRB is  described as the “authoritative instrument” for publishing official IRS  rulings and procedures and tax regulations. This distinction is important  because, according to IRS officials, only guidance published in the IRB is  binding on IRS and can be relied upon by taxpayers as authoritative. The  five types of guidance published in the IRB are: regulations, revenue  rulings, revenue procedures, notices, and announcements. Tax  regulations are also published in the Federal Register and codified in the  Code of Federal Regulations like other federal agency regulations. Table  1 describes the types of IRS guidance published in the IRB.
From 2013 to 2015, the IRB (52 weekly issues) contained nearly 300  guidance documents per year, as shown in figure 2, that total about 2,000  pages. From 2002 to 2008, the number of IRB items published annually  was higher (about 500 items), but starting in 2009 that number began to  decline. IRS officials told us that, from 2002 to 2003, the then-Chief  Counsel diverted resources away from litigation and toward the issuance  of guidance, in particular revenue rulings, which contributed to the  increasing counts of guidance documents during these years. Regarding  the recent decline in the number of guidance documents issued, IRS  officials said that hiring freezes have reduced the total number of chief  counsel attorneys by 14 percent from 2011 to 2015. They also said that  issuance of complicated regulations to implement the Patient Protection  and Affordable Care Act (PPACA) and the Foreign Account Tax  Compliance Act (FATCA) has contributed to fewer overall guidance  documents being issued in recent years.
section_title: Limitations of Non-IRB Guidance are Not Always Clearly Communicated
paragraphs: Even though IRS officials told us that only documents published in the  IRB constitute guidance, and can be relied upon by taxpayers as  authoritative and as precedent for their individual circumstances,  limitations on the use of other IRS documents is not always clearly  communicated to taxpayers. IRS officials said that the agency  distinguishes between official guidance published in the IRB and its  thousands of other documents by explaining that information in the IRB  can be relied upon as authoritative and that it is binding on IRS. Some  taxpayers with relatively uncomplicated tax questions may only need to  consult instructions or publications written in plain language for the  general public. Other taxpayers with complicated returns or transactions  may require more technical, but also more authoritative, guidance. For  example, individual or corporate taxpayers (or their advisors) looking to  structure a transaction in a certain way to reduce taxes and avoid  potential penalties may seek the protection of “substantial authority” to  support their position. Treasury regulations define “substantial authority”  to include, among other sources, the IRC, tax regulations, and other  guidance published in the IRB. The IRM states that IRS is bound by this  guidance published in the IRB (both regulations and non-regulatory  guidance). Furthermore, even if subsequent case law would result in a  ruling more favorable to IRS, the IRM states that IRS will not take  positions in litigation contrary to published IRB guidance.
In our review of IRS guidance, we found that in recent years, IRS has  issued information for taxpayers in the form of FAQs. This does not fall  under IRS’s definition of official guidance and cannot be relied upon as  precedent by taxpayers to support a position if it has not been published  in the IRB. However, limitations on using this information are not always  communicated clearly to taxpayers or their advisors. In our review of tax  guidance issued from 2013 to 2015, we found a few examples of  guidance published in the IRB that was written in the form of FAQs.  Such FAQs are authoritative because guidance published in the IRB is  binding on IRS and can be relied upon by taxpayers as authoritative. For  FAQs not published in the IRB, tax practitioners have noted that  sometimes IRS has included a disclaimer noting that the FAQs do not  constitute legal authority and may not be relied upon. A third variety of  FAQs, however, are published outside the IRB but without any disclaimer  or explanatory language noting any limitations.
The National Taxpayer Advocate and tax practitioners said that some  FAQs may not warrant additional clarifying language or publication in the  IRB. They cited, for example, FAQs published on the IRS website that  disseminate administrative or procedural information to taxpayers  needing information quickly, such as those who have lost financial  records in a major disaster. The Taxpayer Advocate also noted that  sometimes IRS’s position on a tax issue is not yet fully formed, but IRS  may need to publish answers quickly for taxpayers who are facing  deadlines. FAQs published on the IRS website are an effective format for  this purpose.
The Taxpayer Advocate and tax practitioners have raised concerns,  however, about the authority and reliability of FAQs published outside the  IRB that have contained more substantive guidance. In our interviews and  in tax industry publications we reviewed, tax practitioners and other  experts cited the example of FAQs that established an IRS voluntary  disclosure program for taxpayers with previously undeclared offshore  bank accounts. The Taxpayer Advocate and some tax practitioners  noted that IRS had previously launched a similar disclosure program by  issuing a revenue procedure in the IRB. For the more recent and current  programs, they recommended that IRS replace the series of FAQs issued  on the IRS website with more authoritative and reliable guidance in the  IRB. Some tax practitioners and experts have also recommended that  IRS include disclaimers on information to taxpayers published outside the  IRB noting any legal limitations. They stated that some IRS publications  and, as we noted above some FAQs, already contain disclaimer-like  language.
Tax practitioners and the Taxpayer Advocate told us that publishing the  offshore program FAQs via the IRS website has also made it difficult to  keep track of updates to the FAQs. If the FAQs had been published in the  IRB, it would be easier for practitioners to track those changes. IRS  officials said that while they received some negative feedback following  the 2009 FAQs, subsequent feedback about the 2011 and 2012 FAQs  has been more positive. They stated that providing the offshore program  terms and instructions as FAQs allowed IRS more flexibility to incorporate  input from stakeholders than would have been available through the Chief  Counsel publication process. This flexibility includes being able to quickly  respond to practitioner concerns and trends with program submissions.  According to IRS, the formal guidance process would not allow for such  flexibility.
Clarity about the authoritativeness of certain IRS publications, such as  some FAQs involving more substantive guidance, could be improved by  either noting any limitations or publishing those FAQs in the IRB.  Additional explanatory language would help taxpayers understand what  type of IRS information is considered authoritative and reliable as  precedent for a taxpayer’s individual facts and circumstances. The first  article in the IRS’s Taxpayer Bill of Rights–”The Right to Be Informed”– states that taxpayers have the right to know what they need to do to  comply with tax laws. The article further states that taxpayers are  entitled to clear explanations of the laws and IRS procedures in all forms,  instructions, publications, notices, and correspondence. Just as taxpayers  have the right to clear explanations in IRS instructions and publications,  taxpayers should be alerted to any limitations that could make some IRS  information less authoritative than others. Other federal agencies  sometimes include disclaimers in their guidance to note that the  documents have no legally binding effect on regulated parties or the  agencies. OMB’s 2007 bulletin on good guidance practices also  recommends that agencies’ guidance include disclaimers noting the legal  effect of the guidance.
Failing to note any limitations associated with particular guidance could  lead to misinterpretation of non-authoritative information sources from  IRS. If taxpayers make decisions after using particular guidance that is  non-authoritative, those taxpayers’ confidence in IRS and the tax system  could be undermined. As we have noted in prior reports, taxpayers’  perceptions that IRS is fairly and uniformly administering the tax system  helps further overall voluntary compliance and lowers IRS’s administrative  costs. Furthermore, as IRS notes in its current Strategic Plan, if  taxpayers receive unclear guidance or doubt its reliability, they are more  likely either to contact IRS for clarification or make mistakes, thereby  adding to IRS’s workload and administrative costs.
section_title: IRS Procedures Do Not Include the Selection of a Type of Guidance
paragraphs: designate it as a priority for the year. Projects are recommended for the  PGP if they meet at least one of six criteria (see sidebar). In addition to   these criteria, the CCDM instructs IRS and Treasury officials to consider  priorities for the PGP based on whether the guidance is required by  statute, affects a large number of taxpayers, and whether the Chief  Counsel has resources available to complete the project within a  particular year.
Two sections of the CCDM, the Chief Counsel Regulation Handbook and  the Chief Counsel Publication Handbook, include more than 150 pages of  detailed procedures and instructions for IRS to follow when drafting and  publishing guidance. These policies and procedures cover the entire life  cycle of a regulation or non-regulatory guidance document, including:  how to identify and open a guidance project; how to comply with relevant  administrative laws and executive orders that govern regulatory and  guidance processes; how to draft guidance and coordinate reviews with  other IRS and Treasury offices, or other agencies; and how to process  public comments and finalize guidance for publication.
Written procedures are a basic component of internal controls.  Documented policies and procedures such as those in the CCDM help  ensure a consistent approach to and effective management of guidance  initiation, development, and review. However, IRS does not have  documented procedures for selecting the type of guidance product to  issue, other than definitions of guidance types in the CCDM. IRS officials  told us that they refer to these definitions when selecting a guidance  type. The definitions alone do not constitute policies and procedures, or  factors to consider, when deciding whether to issue guidance as a  revenue ruling, revenue procedure, notice, or announcement.
Treasury and IRS officials told us that it may not be practical or feasible to  develop clear-cut procedures for selecting guidance types because  determining the appropriate type is not always a straightforward process.  They also said sometimes the most appropriate type of guidance may not  be known at the start of a project, and the choice of guidance type may  change as the project develops. However, IRS officials told us that the  CCDM could be revised to include a list of factors to consider when  selecting a guidance type. Consistent with internal control standards,  documentation of this decision-making process would help IRS evaluate  decisions about guidance type during the drafting and approval process.
According to internal control standards, agencies should use techniques  and processes to identify and manage risk. Agencies face multiple risks  when issuing guidance, including the risks of challenges to an agency’s  regulatory authority. For example, the IRS faced challenges to a notice  discontinuing an excise tax for telephone charges and creating a refund  process for taxes erroneously collected. Court cases were filed that  argued that the notice should be reviewed as a substantive rule under the  Administrative Procedure Act (APA). Internal control components, such  as written procedures for selecting among guidance types, can help  agencies evaluate the level of risks associated with issuing potential  guidance. Procedures that identify factors to consider and criteria for  selecting among different guidance types, and that require documentation  of the decision, could encourage consideration of alternatives to mitigate  risks, while retaining flexibility for IRS.
section_title: IRS Guidance Is Routinely Exempt from the Analysis and Oversight Requirements of CRA and E.O. 12866
subsections: section_title: Non-Regulatory IRS Guidance Is Exempt from OMB Review
paragraphs: OMB’s 2007 bulletin on agency good guidance practices and an  accompanying memorandum establish executive branch policies and  procedures for agencies to follow when they develop and issue significant  guidance documents. The bulletin and memorandum also encourage  agencies to ensure that significant guidance documents receive  appropriate review and are consistent with other agency actions. In the  OMB bulletin, the term guidance would normally apply to IRS non- regulatory guidance documents such as revenue rulings, revenue  procedures, notices, and announcements. However, OMB’s bulletin  excludes tax guidance documents from the definition of economically  significant guidance. When Treasury issued procedures in 2007 to  comply with OMB’s bulletin, it adopted OMB’s position.
The effect of the exemption in OMB’s bulletin is similar to that of the 1983  agreement between OMB and Treasury in that non-regulatory tax  guidance is exempted from centralized review and additional analysis.  The agreement between Treasury and OMB exempting certain Treasury  bureaus’ regulations also exempted other agency documents from  centralized review. Treasury is still responsible under the 1983  agreement for notifying OMB if any of these other documents could  reasonably be expected to have a significant economic impact, and OMB  reserves the right to review them. In a 2009 investigation of the process  used to issue one IRS notice, the counsel to the Treasury Inspector  General reported that Treasury and OMB’s use of the 1983 agreement to  exempt the notice from OIRA review did not appear improper. However,  he stated that the agreement itself “may warrant further inquiry and  consideration,” because it appears to allow Treasury to unilaterally  determine whether some tax guidance could be considered a rule under  CRA. As we have noted in decisions on the applicability of CRA to  agency guidance, the definition of a rule under CRA is very broad and  can include non-regulatory guidance. However, our opinions have not  addressed the question of whether guidance that met the definition of a  rule for CRA purposes was in turn major or nonmajor. CRA, as we noted  above, also entrusts the determination of what is a major rule to OIRA.
The CCDM explains how IRS Chief Counsel drafting teams are to notify  us and Congress when publishing final regulations as well as non- regulatory guidance. The instructions state that revenue rulings and  revenue procedures are generally subject to CRA, and must be submitted  for congressional review before they can become effective. For notices  and announcements, the CCDM states that these types of guidance are  generally not subject to congressional review under CRA, but a final  determination is made on a case-by-case basis. There are no  documented procedures, however, for how this determination is to be  made.
The CCDM also lacks detailed procedures to help drafting teams assess  whether any revenue rulings, revenue procedures, notices, and  announcements should be considered a rule for purposes of the CRA and  in turn deemed major. Similar to instructions regarding regulations, the  congressional notification instructions for other guidance simply state that  “almost all” IRS guidance is not major because any economic effects  result from the underlying statute. In the event a drafting team was to  conclude that a non-regulatory guidance product met CRA’s definition of  a rule and in turn a major rule, there are no procedures in the CCDM for  notifying or coordinating with OIRA. IRS and Treasury officials told us that  if a piece of non-regulatory guidance was thought to be significant or  major, it would be issued as a regulation. In our review of guidance  issued from 2013 to 2015, we found no examples of IRS non-regulatory  guidance being reported to us as meeting the definition of a rule under  CRA and in turn major, nor could we find any examples in our database  covering the period from 1996, when CRA was enacted, through June  2016.
Although the OMB bulletin and Treasury’s 2015 directive exempt IRS  non-regulatory guidance from OIRA review, IRS generally applies the  recommended practices for agency guidance in the OMB bulletin. IRS  officials said that when drafting all guidance (both regulations and other  guidance), they take into consideration OMB’s good guidance principles  such as transparency, interagency coordination, and public input.
To ensure public input when developing non-regulatory guidance, IRS  has documented processes for soliciting suggestions from tax practitioner  organizations as well as taxpayers. Tax practitioner organizations we  interviewed said that IRS officials routinely share their plans for non- regulatory guidance at tax forums, conferences, and conventions. IRS  and Treasury have also established policies and practices to help  coordinate with other departments and agencies that have a stake in the  implementation of tax guidance. The CCDM contains an entire section of  policies and procedures for coordinating the drafting and clearing of  guidance with other agencies.
IRS routinely provides opportunities for the public to comment on non- regulatory guidance documents that address topics that are likely to be  covered by future regulations. Between 2013 and 2015, IRS issued  several notices in the IRB announcing that it was considering or  beginning to draft regulations. Some of these notices related to topics that  were complex and likely to generate substantial public comments such as  implementation of the Patient Protection and Affordable Care Act  (PPACA) and the Foreign Account Tax Compliance Act (FATCA). By  soliciting comments before drafting proposed regulations, IRS and  Treasury gathered public input earlier than the usual practice of obtaining  comments when proposed or temporary regulations are issued.
While these notices solicited public input early on many issues related to  potential or future regulations, IRS and Treasury did not specifically solicit  input as to whether the future regulations were likely to be significant  under E.O. 12866 or major under CRA, and if so, how any economic  effects might be measured. Obtaining information from taxpayer groups  or industries about likely economic or other significant effects could help  inform preliminary decisions about regulations’ anticipated impacts, which  could be included in memos or other information IRS submits to OIRA.  One option is for IRS to simultaneously solicit this additional information  during the public comment period that is already in place, and within  those timeframes. In our review of tax regulations issued from 2013 to  2015, we found two examples in which Treasury and IRS specifically  solicited comments on their determination that proposed regulations  would not have a significant economic impact on small entities. Using  notices to solicit public comments on likely economic or other significant  effects could help inform IRS’s initial assessment, and OIRA’s final  determination, about whether a rule is significant or economically  significant under E.O. 12866 or major under CRA.
section_title: IRS Did Not Always Clearly Document Required Steps for Developing Guidance in Selected Guidance Products
paragraphs: We found that required steps in IRS’s guidance process, as outlined in  the CCDM, were not always documented in the sample of eight guidance  products that we reviewed. Thus, it was difficult to determine whether  policies and procedures were followed. Our sample included two  guidance products issued in 2015 from each of the four non-regulatory  guidance types (revenue rulings, revenue procedures, notices, and  announcements). Each of the eight products we selected concerned a  different tax issue. As recommended by federal internal control standards,  clear and complete documentation of key decisions would help  management ensure that drafting teams follow all required steps before  issuing final guidance.
The key phases were not fully documented in four of the eight IRS  guidance case files that we reviewed. For example, four of the eight case  files we reviewed were missing a Background Information Note (BIN).  This internal document provides a record of clearance at each stage,  pertinent background information, the identification of risks, and any  significant issues raised during coordination and circulation. In the case  files that were missing BINs, we found some documentation of  information typically contained in the BIN elsewhere in the case files,  such as approvals and clearance prior to publication. IRS also told us that  they use a case management information system to track approvals of  guidance projects.
Of the four case files that included BINs, only one had a complete BIN. In  instances of missing or incomplete BINs, it was not possible to verify that  all steps listed as required by the CCDM were followed from the case file  alone. For example, some case files contained copies of emails noting  that various IRS or Treasury officials had approved moving draft guidance  to the next stage, or clearing the guidance for final publication. However,  the checklist of required approvals on the BIN was incomplete, making it  difficult to determine whether required approvals were received. Complete  documentation of approvals at various stages is an internal control activity  that can help drafting teams, managers, and reviewers track and monitor  guidance projects.
The eight case files that we reviewed also did not consistently document  discussions of whether the final guidance should be reported to us and  Congress as a rule, and whether the guidance could be considered major  under CRA. The CCDM says that all revenue rulings and revenue  procedures will be treated as rules that must be reported to GAO and  Congress. However, one of the two revenue procedures that we  reviewed was not submitted for CRA review. IRS told us that the failure  to notify us and Congress was an oversight due to the revenue procedure  being managed by personnel not familiar with IRS’s usual requirements.  Unlike for revenue procedures and revenue rulings, the CCDM states that  generally notices and announcements are not required to be submitted  for CRA review, but sometimes should be, on a case-by-case basis. For  one of the two notices we reviewed, IRS decided to notify us and  Congress.
The CCDM requires documentation of public comments, if any. Three of  the eight case files that we reviewed contained evidence that public  comments were obtained. One case file contained public comments  estimating sizeable economic impacts from potential guidance being  drafted. Considering public comments on potential economic effects when  assessing whether non-regulatory guidance should be considered a rule  under CRA and in turn major could help promote IRS compliance with  CRA. More complete documentation of how IRS considers the potential  effects of guidance, including consideration of public comments about any  economic effects, could help IRS evaluate the risk of challenges to its  assessments about whether guidance could be considered major.
section_title: Conclusions
paragraphs: Treasury and IRS produce large numbers of regulations and guidance  documents for the public every year. IRS uses a variety of documents to  communicate its interpretation of tax laws to the public, but only considers  guidance published in the IRB to be authoritative. However, IRS does not  always clearly identify the extent to which certain documents published  outside the IRB can be considered authoritative for use by the public.  While IRS does have detailed procedures for identifying, prioritizing, and  issuing new guidance, it lacks documented procedures for deciding what  type of guidance to issue. Policies and procedures that identify factors to  consider when deciding among different guidance types could help IRS  ensure that the selected form of guidance reflects what is known about  the binding nature of various types of guidance.
Our analysis indicates that IRS has inconsistently documented required  steps during key phases of the guidance issuance process. Although  results from our analysis are not generalizable, complete documentation  of key decisions could help IRS better track and monitor guidance  projects.
Our review of IRS guidance issued from 2013 to 2015 also found that  very few tax regulations were (1) determined to be significant regulatory  actions under E.O. 12866, (2) determined to have significant economic  impacts on small businesses under RFA, or (3) considered major rules  under CRA. These determinations reflect Treasury’s and IRS’s position  that any impacts associated with tax regulations or other guidance result  from the underlying statute rather than the regulations or guidance  implementing it. Some tax regulations and other guidance are also  exempt from the requirements of E.O. 12866 under a long-standing  agreement between OMB and Treasury. This long-standing agreement,  however, has not been reevaluated since 1993 to ensure that it still  reflects current requirements for reviewing regulations and guidance as  well as the current environment for tax regulations and guidance  (including an increased use of the tax code to accomplish economic and  social objectives through the use of tax expenditures).
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Commissioner of Internal Revenue take the  following four actions:  1.  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 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.  2.  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.  3.  Develop policies and procedures to help guidance-drafting teams  assess whether non-regulatory guidance should be considered a rule  for purposes of the CRA and in turn major, and document those  assessments internally.  4.  Take action to ensure that required steps are consistently  documented during key phases of the non-regulatory guidance  process, as defined in the CCDM.
We recommend that the Director of the Office of Management and  Budget and the Secretary of the Treasury take the following two actions:  1.  Examine the relevance of the long-standing agreement that exempts  certain IRS regulations from executive order requirements and OIRA  oversight; and if relevant, make publicly available any reaffirmation of  the agreement and the reasons for it.  2.  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.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Commissioner of Internal  Revenue, the Secretary of the Treasury, and the Director of the Office of  Management and Budget for comment. IRS officials met with us during  their review in order to discuss the type of actions IRS could take to  satisfy our first recommendation. Based on these discussions, we revised  that recommendation to clarify the kinds of actions that IRS could take  and sent the revised recommendation to the three agencies reviewing the  draft report.
We received written comments from Treasury and IRS, which are  reproduced in appendices II and III. Both Treasury and IRS agreed with  our recommendations and identified steps that they will take to implement  them. OMB staff provided oral comments and neither agreed nor  disagreed with our recommendations.
All three agencies also provided technical comments that were  incorporated as appropriate.
We are sending copies of this report to the Secretary of the Treasury, the  Commissioner of Internal Revenue, the Director of the Office of  Management and Budget, and other interested parties. We are also  sending copies of this report to the Chairmen and Ranking Members of  other Senate and House committees and subcommittees that have  appropriation, authorization, and oversight responsibilities for IRS. In  addition, the report will be available at no charge on the GAO website at  http://www.gao.gov.
If you or your staff have any questions or wish to discuss the material in  this report further, please contact me at (202) 512-6806. Contact points  for our Offices of Congressional Relations and Public Affairs may be  found on the last page of this report. Key contributors to this report are  listed in appendix IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report addresses 1) how the Internal Revenue Service (IRS)  communicates its interpretation of tax laws to the public, and how it  decides what type of guidance to issue; 2) what relevant authorities apply  (including statutes, executive orders, and Office of Management and  Budget (OMB) guidance), and what policies and procedures IRS uses,  when issuing its guidance; and 3) to what extent selected IRS guidance  products followed relevant authorities.
subsections: section_title: Guidance Definitions and Type
paragraphs: We collected and analyzed documents on IRS’s website that defined  guidance types, and reviewed IRS policies and procedures for issuing  guidance in the IRS Chief Counsel Directives Manual (CCDM). We also  interviewed relevant officials at IRS, the National Taxpayer Advocate, and  two tax practitioner associations. We conducted a literature search of  relevant articles and studies from the tax practitioner community that  described how IRS communicates its tax law interpretations. To identify  these articles, we conducted searches of various databases, such as  ProQuest, PolicyFile, HeinOnline, Lexis, JSTOR, and EconLit. We  identified 22 articles that were relevant to our report objectives, and we  interviewed the author of 6 of those articles.
section_title: Relevant Authorities, Policies, and Procedures
paragraphs: To determine what authorities apply, and what policies and procedures  IRS uses when issuing guidance, we interviewed IRS officials and  reviewed relevant sections of the CCDM. We obtained and reviewed a  1983 Memorandum of Agreement between the Department of Treasury  (Treasury) and OMB regarding implementation of Executive Order (E.O.)  12291, as well as an exchange of letters between Treasury and Office of  Information and Regulatory Affairs (OIRA) officials in 1993 regarding  implementation of E.O. 12866. We reviewed relevant executive branch  documents that establish policies and procedures for centralized review  of agency guidance documents, and a Treasury directive implementing  those policies. We reviewed a 2009 memorandum from the Treasury  Inspector General’s office that summarized an investigation of one IRS  notice issued in 2008.
To determine how frequently relevant authorities did or did not apply to  recently issued tax guidance, we first identified all tax guidance  documents issued from 2013 to 2015 using semi-annual cumulative lists  of Internal Revenue Bulletin (IRB) documents. We reviewed explanatory  text in the preambles for all 253 tax regulations issued from 2013 to 2015  to understand how frequently tax regulations are not subject to additional  reviews or analyses. In these preamble sections, Treasury and IRS  describe what authorities apply or do not apply to a particular regulation,  and whether the regulation was subject to additional centralized reviews.  We then searched an online database of agency regulatory actions  reviewed by OIRA to identify any tax guidance determined to be  significant or economically significant under E.O. 12866. We also  searched an online database of agency rules submitted to the  Comptroller General to determine what tax guidance, if any, was  determined to be major under the Congressional Review Act (CRA). We  determined that the data from the IRB and the CRA database were  reliable for the purposes of our review.
section_title: Sample Selection
paragraphs: To determine what topics were addressed by recent tax guidance, we  reviewed summaries from the Highlights page of each IRB issued from  2013 to 2015. We used these summaries to classify each of the 860  guidance documents issued during this period by topic. Our  classifications were based on a plain reading of the Highlights page  summary of the guidance document. To determine whether our  classifications were valid, we cross-checked them against IRS lists of  guidance on particular subjects. We also validated our classifications by  reviewing annual year-in-review articles published by a tax practitioner  trade publication that summarized guidance published for particular  topics. In doing so, we removed from our population about half of the non- regulatory guidance items that involved routine administrative matters  such as: guidance related to the administration of private letter rulings; guidance documents that list tax exempt organizations whose status  has been revoked or is currently being appealed; announcements of disciplinary actions IRS’s Office of Professional  Responsibility has taken against paid tax preparers; and monthly, quarterly, and other periodic updates to interest rates and  other values that taxpayers use to perform calculations when  preparing tax returns.
To determine to what extent selected non-regulatory, non- routine/administrative guidance products followed relevant authorities, we  selected a non-generalizable sample of guidance documents published in  2015. We selected eight guidance documents, chosen so that no two  selected were about the same tax issue. We selected two from each of  the four non-regulatory guidance types published in the IRB (revenue  rulings, revenue procedures, notices, and announcements). We reviewed  IRS documentation associated with each guidance project (case files) to  evaluate how the guidance process followed relevant authorities. Criteria  for our evaluation included elements from executive orders and OMB  bulletins on agency guidance processes, and relevant internal controls.
Because we used a non-generalizable sample to select the guidance  documents, our findings cannot be used to make inferences beyond our  sample of eight guidance projects. However, we determined that the  selection of these guidance projects was appropriate for our design and  objectives, and that the selection would generate valid and reliable  evidence to support our work. We used a standard data collection  instrument to review each case file to ensure we consistently captured  information about the process followed and actions taken to issue the  selected guidance documents. To ensure reliability, two analysts  separately conducted this analysis, and a third analyst compared and  reconciled any inconsistencies. We then analyzed the results of this data  collection effort to identify main themes and develop summary findings,  and traced and verified all information. We determined that the data we  obtained through our reviews were sufficiently reliable for our purposes.
section_title: Appendix II: Comments from the Department of the Treasury
section_title: Appendix III: Comments from the Internal Revenue Service
section_title: Appendix IV: GAO Contact and Staff Acknowledgements
subsections: section_title: Contact
paragraphs: Michelle A. Sager at (202) 512-6806 or sagerm@gao.gov.
section_title: Staff Acknowledgements
paragraphs: In addition to the contact named above, Tara Carter (Assistant Director),  Mark Kehoe (Analyst in Charge), Ben Emmel, Andrea Levine, and  Ifunanya Nwokedi made contributions to the report. Tim Bober, Robert J.  Cramer, Sarah Gilliland, Shirley A. Jones, Heather Krause, Jessica K.  Lucas-Judy, James R. McTigue, Jr., Edward Nannenhorn, Robert  Robinson, Stewart W. Small, and Cynthia Saunders also provided key  assistance.