The Treasury Department released a policy statement (Policy Statement on the Tax Regulatory Process) that indicated the agency will rely less on temporary regulations and subregulatory guidance (such as Notices) than it has in the past.
The statement begins by noting the IRS will continue to use the notice-and-comment process for both interpretative and legislative regulations even though the Administrative Procedures Act (APA) exempts interpretive regulations from that requirement. The policy explains:
This process allows the public to participate before any final rule becomes effective and ensures that all views are adequately considered. It also enables the public to apprise the government of relevant information that the government may not possess or to alert the government to consequences that it may not foresee.
With regard to temporary regulations, the agency will now begin issuing a “good cause” statement when a temporary regulation is issued. Previously the IRS had taken the position that such a statement was not required for tax temporary regulations. The policy statement provides:
As a matter of sound regulatory policy, the Treasury Department and the IRS commit to include a statement of good cause when issuing any future temporary regulations under the Internal Revenue Code. In certain exceptional circumstances, sound tax administration may require temporary regulations to be issued without notice and comment. For example, such regulations may be necessary and appropriate to stop abusive practices or to immediately resolve an injurious inconsistency between existing regulations and a new statute or judicial decision. When sound tax administration does warrant temporary regulations, the Treasury Department and the IRS will make their reasons for issuing such immediately-effective regulations clear by including a statement of good cause in the preamble.
Presumably this will set a higher bar for the IRS to clear in order to issue temporary regulations, resulting in few such regulations.
The IRS has not used temporary regulations generally in dealing with the Tax Cuts and Jobs Act changes. Rather the agency has favored issuing proposed regulations with a statement in the preamble to the proposed regulations that “taxpayers may rely” on those proposed regulations until final regulations are issued. So, as a practical matter, this is simply formally announcing what the IRS has already been doing.
The policy statement outlines limits on subregulatory guidance. The statement provides:
Subregulatory guidance is not intended to affect taxpayer rights or obligations independent from underlying statutes or regulations. Unlike statutes and regulations, subregulatory guidance does not have the force and effect of law. Taxpayers can have confidence, however, that the IRS will not take positions inconsistent with its subregulatory guidance when such guidance is in effect. In applying subregulatory guidance, the effect of subsequent legislation, court decisions, rulings, and procedures must be considered.
The IRS states they will not claim in litigation that subregulatory guidance has the force of law. The statement continues:
When proper limits are observed, subregulatory guidance can provide taxpayers the certainty required to make informed decisions about their tax obligations. Such guidance cannot and should not, however, be used to modify existing legislative rules or create new legislative rules. The Treasury Department and the IRS will adhere to these limits and will not argue that subregulatory guidance has the force and effect of law. In litigation before the U.S. Tax Court, as a matter of policy, the IRS will not seek judicial deference under Auer v. Robbins, 519 U.S. 452 (1997) or Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), to interpretations set forth only in subregulatory guidance.
The policy outlines how the IRS will decide whether to issue regulatory or subregulatory guidance:
In deciding whether to issue regulations or subregulatory guidance, the Treasury Department and the IRS must consider the content and nature of the interpretation or position being announced. Factors to be considered include the intended effect on taxpayers’ rights or duties, the need for public comments, the form and content of prior positions, the significance of the issues, the statutory framework, and whether the interpretation or position is of short-term or long-term value.
Regulatory guidance rather than subregulatory guidance will be issued in the following situations:
After weighing relevant factors, if the intended interpretation or position would have the effect of modifying existing legislative rules or creating new legislative rules on matters not addressed in existing regulations, the interpretation or position will generally be issued through notice-and-comment rulemaking, absent exceptional circumstances.
Similarly, the IRS will issue subregulatory guidance in the following situations:
Where the Treasury Department and the IRS intend to provide only an interpretation of existing law applied to a limited set of facts, a statutorily prescribed form of relief, a statement of agency procedure or practice, a public announcement of intent to issue proposed legislative rules, or an announcement that has only immediate or short-term value, the intended interpretation or position will generally be issued as subregulatory guidance rather than through notice-and-comment rulemaking.
Finally, the policy statement outlines limits on cases where the IRS issues a notice that explains what the IRS plans to issue as regulatory guidance at some point in the future. The key problem is when such a notice is issued and then the promised regulations do not appear timely.
To address this issue, the policy provides:
To limit the uncertainty that these situations may create, the Treasury Department and the IRS will include a statement in each future notice of intent to issue proposed regulations stating that if no proposed regulations or other guidance is released within 18 months after the date the notice is published, taxpayers may continue to rely on the notice but, until additional guidance is issued, the Treasury Department and the IRS will not assert a position adverse to the taxpayer based in whole or in part on the notice.