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. 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. 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. 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. 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). 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. 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. 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. 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. 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. 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). 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. 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. 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. 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. 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. 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. Michelle A. Sager at (202) 512-6806 or sagerm@gao.gov. 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.

Summary: 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. 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. 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.