On January 20, 2017, the White House issued a Memorandum freezing all new regulations (former President Obama issued a similar freeze at the start of his administration). In addition, on January 30, 2017, the President issued an Executive Order requiring federal agencies to eliminate two prior regulations for every new regulation issued. The regulatory freeze and reduction order may hamper the IRS’s ability to implement recently enacted legislation (the IRS’s 2016-2017 Priority Guidance Plan listed 281 projects it planned to tackle through June 2017). While recent comments by the IRS Commissioner indicate that the IRS plans to begin issuing sub-regulatory guidance, the guidance surrounding the regulatory reduction order has done little to clarify the IRS’s ability to issue new regulations.
The Memorandum prohibits agencies from submitting new regulations to the Office of the Federal Register (OFR) until they have been reviewed and approved by a department or agency head appointed by the President. Regulations that were sent to the OFR but not published in the Federal Register by January 20th are required to be withdrawn from the OFR for review and approval. For those regulations that were published in the Federal Register but were not in effect on January 20, 2017, the order calls for their effective date to be temporarily postponed for 60 days.
At the time the Memorandum was issued, the IRS had issued several important sets of regulations that had not been published in the Federal Register, including the following:
- Final, temporary, and proposed dividend equivalent regulations.
- Final regulations on the treatment of certain types of income as “qualifying income” to publicly traded partnerships.
- Proposed regulations on the new centralized partnership audit regime.
Nevertheless, the recently issued dividend equivalent regulations and the publicly traded partnership regulations were published in the Federal Register on January 24, 2017, seemingly avoiding the regulatory freeze. The IRS withdrew the partnership audit regulations in accordance with the Memorandum.
The Memorandum specified that the term “regulation” applies to any “regulatory action” including all “guidance documents” suggesting the applicability of the regulatory freeze to sub-regulatory guidance, like notices, revenue procedures, and revenue rulings. Indeed, the IRS has not released any sub-regulatory guidance since January 20th, aside from most routine items (including revenue rulings on applicable federal rates). The IRS has continued to release private letter rulings and chief counsel advice memoranda. However, recent comments by IRS Commissioner John Koskinen make clear that the IRS plans to begin issuing sub-regulatory guidance. On March 21st, speaking at the 67th Midyear Conference sponsored by Tax Executives Institute Inc., Commissioner Koskinen stated that after conversations with the Treasury Department and the Office of Management and Budget (OMB), there is an understanding that much of the guidance the IRS publishes is not part of the regulatory process targeted by the President, because, the guidance issued is for the benefit of taxpayers.
On February 2, 2017, the OMB issued a memorandum providing interim guidance on how government agencies can implement the two-for-one executive order that seeks to streamline the regulatory burden on taxpayers. The interim guidance says that the agencies must issue two deregulatory actions for each new significant regulatory action that imposes a cost. A deregulatory action is any action that that produces verifiable savings, streamlined reporting and reduced record keeping and disclosure requirements. For these purposes, cost is defined as the opportunity cost to society as discussed in OMB Circular A-4.
How the IRS will choose two regulations that meet the order’s cost-benefit analysis is still unclear. But, the IRS has pushed back and Commissioner Koskinen stated that in accordance a 1983 memorandum of agreement with the OMB, IRS guidance and Treasury regulations have historically been exempt from such executive orders because they interpret the tax law and provide help that taxpayers need, rather than imposing additional burdens and costs. He noted that the burden imposed on taxpayers exists by virtue of the statute Congress passed and not by the IRS regulations and guidance, which are intended to provide certainty and clarity to taxpayers.