It’s not a bill for a long-dreamed-of boys’ camp on the Plains, but Frank Capra would probably have appreciated the dramatic possibilities of the events leading up to the proposal of the IRS Accountability and Transparency Act (S. 2981).
Standing in for Jimmy Stewart’s fictional Mr. Smith is Senate Finance Committee member James Lankford, R-Okla., who actually ran the largest youth camp in the United States before running for Congress. Lankford wants tax regulations to undergo the same vetting process that most other federal agency rules do, and his modest plan is to put the requirement into statute.
There are some political head winds blowing against him.
Until now, the decadeslong saga of whether the Office of Management and Budget’s Office of Information and Regulatory Affairs should review tax regulations has played out almost exclusively in a series of internal executive branch memoranda of agreement. The curtain seemingly dropped on the last act of that tragicomedy in June, with a memorandum of agreement between Treasury and OIRA that shut down OIRA review of tax regulations.
Enter Lankford and the IRS Accountability and Transparency Act. Introduced on September 28, the bill would define regulatory action as “any substantive action by an agency (normally published in the Federal Register) that promulgates or is expected to lead to the promulgation of a final rule, including notices of inquiry, advance notices of proposed rulemaking, and notices of proposed rulemaking.”
There is also a definition of tax regulatory action, which encompasses regulatory actions issued by the IRS that may do one of the following: 1) “create a serious [in]consistency or otherwise interfere with an action taken or planned by another agency”; 2) raise “novel legal or policy issues”; or 3) have an annual non-revenue effect on the economy of at least $100 million, measured by a no-action baseline.
Lankford’s bill is the first legislative proposal to end the special treatment of tax regulations.
This isn’t new territory for Lankford, who, as chair of the Homeland Security Regulatory Affairs and Federal Management Subcommittee, held a hearing on the topic in 2018. He pointed out that when the original 1983 memorandum of agreement that exempted most tax rules from review was signed, OIRA and the IRS were different animals. OIRA was only three years old in 1983 and had a limited scope, Lankford noted.
The IRS was and still is the nation’s tax collector and, with Treasury, the author of guidance that interprets tax laws. However, Lankford has a point about the nature of some of the IRS’s work, which has changed considerably as Congress has increasingly pursued nontax policies through the tax code.
The exception to the 1983 exemption was when the rule was both major — meaning likely to result in an annual economic effect of at least $100 million or other significant economic effects — and legislative.
The objective of the new proposal is to make tax regulatory actions subject to review by OIRA and to give greater assurance that they’ll remain subject to that review regardless of the opinions of subsequent administrations.
“Each tax regulatory action shall be subject to review by the Office of Information and Regulatory Affairs, including compliance under section 6 of the Executive Order 12866,” says the proposed subsection (f)(2). As things now stand under the June 2023 memorandum of agreement, tax regulatory actions are entirely exempt from the centralized OIRA review process and the analytical requirements of Circular A-4.
A unique aspect of Lankford’s proposal is that it would still leave tax regulations exceptional, because unlike other agencies’ rules that undergo OIRA review solely as a result of Executive Order 12866 and its successors, tax rules would be statutorily required to go through that review. Congress has invoked EO 12866 before and told agencies how to comply with it, such as in section 1855(e) of title 16, which tells the commerce secretary to comply with the executive order within specific time periods.
The proposed definition of tax regulatory action is largely similar to section 2(f) of EO 12866, which defines a “significant” regulatory action. But the exact language comes from the 2018 memorandum of agreement between Treasury and OMB that brought tax regulations under OIRA review. Accordingly, the provision for an annual economic effect of $100 million or more is slightly different than in the executive order.
EO 12866 identifies rules as significant if they may “have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities,” but the Lankford proposal hinges on whether rules “have an annual non-revenue effect on the economy of $100,000,000 or more, measured against a no-action baseline.”
The Lankford bill also modifies the EO 12866 language “raise novel legal or policy issues arising out of legal mandates, the President’s priorities, or the principles set forth in this Executive order” to “raise novel legal or policy issues, such as by prescribing a rule of conduct backed by an assessable payment.”
The effect would largely be to return to the modus operandi used between April 2018 and June 2023.
IRS Chief Counsel Nomination Hearing
Lankford laid the groundwork for his bill in his questions to Marjorie A. Rollinson during her confirmation hearing for IRS chief counsel on September 28.
He began by asking whether IRS rules carry the force and effect of law. Rollinson replied that the tax regulations promulgated by the IRS and Treasury “are in fact treated as the interpretation of the law.”
Lankford pointed out that although other agencies have to get their rules checked by OIRA, “in the past couple of years, Treasury has said that the IRS, when it goes through all its rulemaking process and actually puts its regulations out, is not accountable to OIRA.”
He asked Rollinson if OIRA should have oversight over the process for developing tax rules, “or can Treasury and the IRS make rules outside of the Administrative Procedure Act?”
Rollinson noted that when she was last at chief counsel, the issue “had just started percolating, because in fact for a long time the rules didn’t go through OIRA.” By the time she left, tax regulations were subject to OIRA review.
“I do think there has been a change, especially given some of the court cases that have come out in terms of what has to happen in order for the regulations to be considered to have met the APA and be compliant,” she said.
Lankford defended OIRA’s role. “OIRA’s design is to be able to make sure that we don’t end up in a bunch of lawsuits, we don’t end up with legal challenges, we actually save the taxpayer money and time, because it’s actually gone through an internal review,” he said.
He criticized the implicit assertion that OIRA oversight was not necessary or desirable, particularly in light of “all that’s going on right now with IRS and with so many new regs that are coming online.” Lankford pointed out to Rollinson that “as counsel, you’ll be in the middle of that, saying does this actually apply to us, or is IRS completely separate from the Administrative Procedure Act?”
He told Rollinson she would need to make recommendations to the administration on whether the IRS should be independent of OIRA review. Rollinson replied that “one of the most important roles of chief counsel is to help ensure that regulations are found valid if and when challenged.”
She said that taxpayers deserve to understand when guidance comes out that it will apply to them, and not be surprised to learn years later that the guidance wasn’t valid. “I will be very interested in making sure [chief counsel] does everything it can to make sure that our regulations are found valid,” she promised.
Maybe Lankford will eke out a win with his new bill. Stewart didn’t win the Oscar for his role as Jeff Smith. In a crowded field, it went to Robert Donat for Goodbye, Mr. Chips. The august Mr. Chipping taught Latin to boys from the British upper class and famously reminded his young wards, during the bombing of Britain, “You cannot judge the importance of things by the noise they make. Oh dear me, no.”
Chips also liked to quote Aeneas, particularly his attempt to rally his men after they’d barely passed Scylla and dodged the boulders of the Cyclops and were reeling from the constant blows: “Haec olim meminisse iuvabit.” Someday perhaps, remembering even this will be a pleasure.
It appears there might still be a long journey before anyone looks back with pleasure on the epic struggle over the review process for tax regulations.