In brief
On 9 June 2023, the White House released a memorandum of agreement (MOA) between the Treasury Department and the Office of Management and Budget (OMB), which clarifies that tax regulations will not be subject to review by the Office of Information and Regulatory Affairs (OIRA) and, in doing so, supersedes and essentially reverses a 2018 memorandum of agreement from the Trump administration.
Oversight of rulemaking process
In his final days in office, President Carter signed two pieces of legislation aimed at the burgeoning promulgation of federal regulations. The Paperwork Reduction Act of 1980 (PRA) established OMB as the centralized review point for federal paperwork management, mandating a reduction of the federal paperwork burden by 25% within three years. A companion piece of legislation, the Regulatory Flexibility Act of 1980, required agencies to determine the economic impact of proposed regulations on small businesses and governmental units.
In an effort to further the burden-reducing objectives of these Acts and to enhance presidential oversight over the regulatory process, President Reagan kicked off his presidency by signing Executive Order (EO) 12291, which expanded upon OMB’s oversight and approval role in the federal agency rulemaking process and mandated that regulatory action could be taken only where the potential benefits to society for the regulation outweighed the potential costs to society. Under EO 12291, agencies were required to submit descriptions of their planned regulatory programs to OMB biannually for review. EO 12291 also required agencies to submit a regulatory impact analysis for “major” regulations, defined as those that have an annual effect on the economy of USD 100 million or more; result in major cost increases for consumers, individual industries, Federal, State, or local government agencies, or geographic regions; or have significant adverse effects on the market. Further, EO 12291 prescribed the processes and timelines for providing this information.
Because OMB and Treasury immediately disagreed on how EO 12291 applied to Treasury regulations, various administrations over the last forty years have executed a series of memoranda of agreement and superseding executive orders over the last forty years in a continuous attempt to balance effective administration of the tax laws by subject matter experts and appropriate executive branch oversight of Treasury’s regulatory actions.
1983 MOA
On 29 April 1983, representatives from Treasury and OMB signed a MOA, Treasury and OMB Implementation of Executive Order 12291, which waived the review procedures set out in EO 12291 for an IRS regulation unless it was both a legislative regulation and a major regulation as defined in EO 12291. Nonetheless, the MOA required Treasury to:
- Identify economic issues in the regulation and prepare a regulatory impact analysis (when required)
- Alert OMB to a major regulation for which EO 12291 is waived under the MOA and any non-major regulation that reasonably could be suspected to have a significant economic impact
- Hold publication of any regulation if notified that OMB has reserved the right to review its economic impact under the terms of the executive order.
Treasury was also required to provide a statement to OMB before publishing a regulation in the Federal Register, unless an exception applied under a separate provision of the MOA. Excepted regulations included those subject to OMB review and certain regulations where any degree of OMB review was unnecessary. The statement was to include: the regulation’s title; where the regulation was in the rulemaking stage; and descriptions of any significant policy changes related to the regulation and why the regulation was determined to be either interpretive or outside the definition of a major regulation.
Executive Order (EO) 12866
On 4 October 1993, President Clinton signed EO 12866, revoking EO 12291, subsequent EO 12498, and all guidelines and exemptions issued under those orders. The primary purpose of the changes made in EO 12866 was to reaffirm the primacy of Federal agencies in the regulatory decision-making process. The order’s Statement of Regulatory Philosophy and Principles provided agencies with considerable discretion in promulgating regulatory guidance and loosened the cost benefit analysis requirement to “making a reasoned determination that the benefits of the intended regulation justify its cost.” The process for OMB review was generally streamlined and an IRS regulation was only subject to OMB review if it was a major, legislative regulation.
EO 12866 officially bestowed upon the Office of Information and Regulatory Affairs (OIRA)—an organization established within OMB under the PRA—the responsibility for the centralized review of regulatory actions by executive agencies. If OIRA concluded that a rule was “significant,” then OIRA was to review a draft of the regulation and could request changes or additional analyses.
EO 12886 generally required agencies to provide OIRA an annual list of its planned regulatory actions, indicating those that the agency believed were a significant regulatory action, which was defined under the order as any regulatory action that was likely to result in a rule that may:
- Have an annual effect on the economy of USD 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
- Create a serious inconsistency or otherwise interfere with an action taken or planned by another agency
- Materially alter the budgetary impact of entitlements, grants, user fees, or loan programs, or the rights and obligations of recipients thereof
- Raise novel legal or policy issues arising out of legal mandates, the President’s priorities, or the principles set forth in this Executive order.
While OIRA was able to waive review of a significant regulatory action, where further review of a significant regulatory action was needed, the issuing agency was required to provide to OIRA the regulatory text, a description of the need for the regulatory action and an explanation of how the regulatory action would meet that need, and an assessment of the potential costs and benefits of the regulatory action. For rules that were projected to have an annual impact of USD 100 million or more or adversely affect the economy, the agency was also required to submit a regulatory impact statement. In addition, EO 12886 meant to accomplish greater transparency by requiring agencies to identify changes in regulatory actions made at the suggestion of OIRA and by requiring OIRA to make public any communications with the agency after the publication of a reviewed regulation.
While these changes in EO 12866 may have been more impactful for other agencies, Treasury and OIRA exchanged a series of communications confirming that OIRA was continuing the Treasury Department’s then existing exemptions from regulatory review. As a result, the vast majority of tax regulations were not reviewed by OIRA prior to their publication in the Federal Register. There were a handful of notable exceptions ─ mainly, the consolidated return regulations and Circular 230 ─ where the regulations themselves (and not the statutory text) are likely to result in an annual impact of USD 100 million or more or adversely affect a particular industry (such as those who practice before Treasury and the IRS). These specific regulations were reviewed by OIRA prior to their publication in the Federal Register.
Call for accountability
In 2016, the Government Accountability Office (GAO) under the Obama administration released the report Regulatory Processes: Treasury and OMB Need to Reevaluate Long-standing Exemption of Tax Regulations and Guidance, which determined that Treasury and the IRS routinely did not comply with rulemaking requirements when issuing regulations. OIRA rarely identified a Treasury regulation as significant or major because their position was that any economic impact of a tax regulation generally comes from the underlying statute, and not the regulation. Another finding in the report was that the IRS did not follow its own policies and procedures in the Chief Counsel Directives Manual (CCDM), which lays out the process for drafting, approving, and publishing tax regulations and other guidance. In 2018, the IRS updated the CCDM to provide greater specificity as to the process of issuing regulatory guidance.
EO 13789 and the 2018 MOA
In EO 13789, issued on 21 April 2017, President Trump 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 EO 12866 and any successor order”.
On 18 April 2018, Treasury and OMB signed a new MOA entitled Review of Tax Regulations under Executive Order 12866 that flipped the default approach to OIRA review. Suddenly, virtually all tax regulations were subject to OIRA review. OIRA’s review of a tax regulatory action was required if it was likely to result in a rule that may:
- Create a serious inconsistency or otherwise interfere with an action taken or planned by another agency
- Raise novel legal or policy issues, such as by prescribing a rule of conduct backed by an assessable payment
- Have an annual non-revenue effect on the economy of USD 100 million or more, measured against a no-action baseline.
Under the 2018 MOA, Treasury was also required to submit quarterly notices of planned tax regulatory actions that could result in a substantive consultation at the OIRA Administrator’s request. In addition, the OIRA review period was extended to 45 days — however, regulations implementing the Tax Cuts and Jobs Act of 2017, were subject to a expedited process (which OIRA could unilaterally choose to extend).
On 11 December 2020, the 2018 MOA was amended to require a regulatory impact analysis of regulatory actions to account for transfer (including revenue effects) of tax regulatory actions to the same extent as non-revenue effects.
As a practical matter, the 2018 MOA led to more information being provided in the preambles of tax regulations describing a regulation’s economic impact. Because EO 12866 also gave stakeholders the opportunity to meet with OIRA to discuss a regulation that was under its review, the 2018 MOA also gave stakeholders another opportunity to share their comments on tax regulations. The tax press regularly published the version of a regulation that was sent to OIRA for its review and a comparison against the version that was ultimately published in the Federal Register. These comparisons indicated that OIRA rarely made changes to the draft text initially provided by Treasury and the IRS. In the few instances where it appears that OIRA did require changes from Treasury or IRS, none of those changes affected the approach taken in the regulations.
Where are we now?
The 2023 MOA, Review of Treasury Regulations under Executive Order 12866, took effect on 9 June 2023, and is the most Treasury-friendly agreement yet. The MOA exempts all tax regulations, including income, excise, estate, gift and employment tax regulations from OIRA’s standard centralized review. Under the 2023 MOA, even regulations such as the consolidated return regulations and Circular 230 would not be subject to OIRA review. While OIRA’s review under the 2018 MOA generally did not prevent tax regulations from being issued, as noted above, it did allow another avenue for taxpayers to engage with the government during the regulatory process. Some critics of the 2018 MOA charged that it often delayed the publication of regulations without providing any significant benefit, given OIRA’s extremely rare changes to draft regulatory text.
The 2023 MOA is likely not the final word on whether it’s appropriate for OIRA to review tax regulations and, if it is, in what circumstances that review is warranted. The debate over whether OIRA’s purview should include reviewing tax regulations has been going on for 40 years. While recent experience may demonstrate that OIRA review didn’t result in any significant, observable changes to tax regulations, OIRA could find itself responsible for reviewing tax regulations again in the future if Treasury and the IRS gain a reputation for not being accountable to the executive branch or for failing to seriously consider stakeholder comments. Thus, the onus is on Treasury and the IRS to continue to demonstrate that an exception to OIRA’s general responsibility to review agency regulations is warranted.
