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OMB and Treasury announce new coordinated review of certain tax regs

April 13, 2018

The Office of Management and Budget (OMB) and the Treasury Department have released a Memorandum of Agreement (MOA) announcing a new coordinated review of certain tax regs. The action was taken in response to an Executive Order (EO) directing reconsideration of the “existing exemption for certain tax regulations” from review.

Background—EOs on regulatory review. According to the Congressional Research Service (RS20846, “Executive Orders: Issuance, Modification, and Revocation”), President Reagan issued an EO that directed agencies to implement rules only if the “potential benefits to society for the regulation outweigh the potential costs to society.” Under this rule, agencies were required to prepare a cost-benefit analysis for any proposed rule that could have a significant economic impact.

President Clinton later issued EO 12866, which retained many of the basic features of President Reagan’s order but eased the cost-benefit analysis requirements. President Bush subsequently issued two EOs, both of which amended EO 12866. President Obama revoked both of the Bush EOs and issued EO 13563, which, among other things, reaffirmed and supplemented the principles of regulatory review in EO 12866, and mandated that agencies develop a preliminary plan to review existing significant regs for potential modifications or repeal.

Background—review of IRS regs. Most IRS regs released after the issuance of EO 13563 contain the following statement:

Certain IRS regulations, including these, are exempt from the requirements of Executive Order 12866, as supplemented and reaffirmed by Executive Order 13563.

A “regulatory action” is defined by EO 12866 in Sec. 3(e) 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 or regulation, including notices of inquiry, advance notices of proposed rulemaking, and notices of proposed rulemaking.”

A “significant regulatory action” is defined by EO 12866 in Sec. 3(f) as “any regulatory action that is likely to result in a rule that may: (1) 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; (2) Create a serious inconsistency or otherwise interfere with an action taken or planned by another agency; (3) Materially alter the budgetary impact of entitlements, grants, user fees, or loan programs or the rights and obligations of recipients thereof; or (4) Raise novel legal or policy issues arising out of legal mandates, the President’s priorities, or the principles set forth in this Executive order.”

As explained by the Government Accountability Office (GAO) in GAO-16-720, Regulatory Guidance Processes (September 2016), few tax regs are deemed “significant” by the Office of Information and Regulatory Affairs (OIRA; an office within the Office of Management and Budget (OMB), an Executive agency) and thus few are subject to additional review and analysis under EO 12866. IRS and Treasury officials told GAO that they rarely designate tax regs as economically significant under EO 12866 because of their view that any economic impact generally stems from the underlying statute, not the reg.

EO 13789. On Apr. 21, 2017, President Trump issued EO 13789, which, among other things, directed Treasury and OMB to “review and, if appropriate, reconsider the scope and implementation of the existing exemption for certain tax regulations from the review process set forth in Executive Order 12866 and any successor order.”

New procedures. A “Memorandum of Agreement” (MOA) has been issued that sets out circumstances in which OIRA will review tax regs.

Tax regs will be subject to review by OIRA under EO 12866 if they are likely to result in a rule that may:

  1. create a serious inconsistency or otherwise interfere with an action taken or planned by another agency;
  2. raise novel legal or policy issues, such as by prescribing a rule of conduct backed by an assessable payment; or
  3. have an annual non-revenue effect on the economy of $100 million or more, measured against a no-action baseline.

Tax regs that fall within the scope of (1) – (3), above, will be “subject to the analytical requirements applicable to significant regulations” under EO 12866, Sec. 6(a)(3)(B), which generally requires the issuing agency to provide to OIRA a draft of the reg, a description of the need for the regulatory action, and an assessment of its costs and benefits. For tax regs that fall within (3), additional materials are required, including more detailed assessments of the reg and analysis of the costs and benefits of “potentially effective and reasonably feasible alternatives” to the planned reg.

To facilitate determinations as to whether a reg falls within (1) – (3), Treasury will submit to OIRA a quarterly notice of planned tax regs describing each regulatory action, identifying any significant policy changes proposed or resulting from the reg, and articulating the basis for determining whether it is a reg subject to OIRA review.

In order to ensure that taxpayers are provided with timely guidance, OIRA review of tax regs will conclude 45 days after the information specified above is provided to it, subject to extensions as agreed to by Treasury and OMB. Certain regs relating to the Tax Cuts and Jobs Act (P.L. 115-97, 12/22/2017) may be subject to expedited 10-day review. Treasury is directed to not publish or publicly release any tax regs subject to OIRA review until OIRA notifies Treasury that it has waived or concluded review. If necessary, OIRA will facilitate a “principals meeting” to resolve any issues that weren’t resolved during the review process.

The MOA also specifies a number of regulatory actions that are exempt from review, including, as pertains to the Treasury, regs concerning the periodic reporting of portfolio capital positions and transactions pursuant to the International Investment and Trade in Services Survey Act and the Bretton Woods Agreement Act, and the reporting of foreign currency positions of large U.S. business enterprises and their foreign affiliates pursuant to 31 U.S.C. § 5315.

Memorandum of Agreement, The Department of the Treasury and the Office of Management and Budget Review of Tax Regulations under Executive Order 12866

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