IRS Plans to Begin Issuing ‘Sub-Regulatory’ Guidance Again

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By Allyson Versprille

The IRS plans to resume issuing sub-regulatory guidance—notices, revenue procedures, revenue rulings—the agency’s leader said.

The Internal Revenue Service is continuing to have productive conversations with the Treasury Department and the Office of Management and Budget, said IRS Commissioner John Koskinen. And “as we’ve been having discussions, we have made clear—and people have agreed—that a lot of the sub-regulatory guidance we issue is really for the benefit of the taxpayers,” he said March 21 at the 67th Midyear Conference sponsored by Tax Executives Institute Inc. “I think we will begin to issue some greater guidance in those areas.”

Through the discussions, people are beginning to understand that much of the guidance the IRS publishes isn’t a part of the regulatory process that President Donald Trump’s recent actions are targeting, Koskinen said. Trump imposed a regulatory freeze upon assuming the presidency and on Jan. 30 signed an executive order requiring that federal agencies eliminate two rules for every new one.

The commissioner noted that historically through a 1983 memorandum of agreement with the OMB, IRS and Treasury regulations have been exempt from such executive orders because they are simply interpreting a statute, thus the burden imposed by the rules is a result of the burden imposed by the statute, he said.

Only regulations that have a significant impact such as the debt-equity regulations under tax code Section 385 aren’t included within this exclusion, Koskinen said.

IRS Budget Woes

At the conference, the commissioner also discussed how the president’s proposed $239 million funding cut would impact the IRS.

“Ultimately that comes out of people,” he told reporters after his speech. In other words, “we have $239 million plus you have $200 million more in payrolls and inflation, so we have about $430 million we’d have to find in the budget.”

“Seventy percent of our budget is people,” he said, which means “we’re going to end up shrinking by another couple thousand” employees, at least. The IRS has lost about $900 million in funding since 2010, which has resulted in a reduction of more than 17,000 full-time employees, 7,000 of whom were key enforcement personnel, Koskinen said.

The commissioner said Treasury Secretary Steven Mnuchin has been supportive of the fact that the IRS needs appropriate resources. “We look forward to working with the secretary, the administration and the Congress,” he said. “The budget process is a long process.”

Koskinen said he plans to explain what the impact of increasing the IRS’s budget versus cutting it would be. In fiscal years 2016 and 2017 Congress approved a $290 million boost to the agency’s resources, which helped improve taxpayers services, cybersecurity and efforts to combat identity theft, he said.

‘Fast and Loose.’

Koskinen said that the number of audits conducted on large corporations in fiscal year 2016 was at the lowest point in more than a decade, nearly half of what it was 10 years ago.

While companies may see this as a positive, it could actually hurt businesses in the long run, the commissioner said.

Because the IRS lacks the resources to replace experienced examiners once they retire, there are fewer and fewer people within the agency that have a solid understanding of complex business issues, he said. This could prevent the audits that do occur from running smoothly.

Additionally, “if the IRS isn’t out there working to improve tax compliance, it leaves the door open for taxpayers to play fast and loose with the rules,” Koskinen said. “That situation can put tax compliant corporations in a bind as they often conduct business in an extremely competitive environment,” he said. “When one company is engaging in a tax transaction that pushes the envelope, it’s sometimes hard for others not to do that same thing so that they don’t lose their competitive edge.”

The commissioner pointed to the proliferation of tax shelters in the late 1990s and early 2000s as an example.

The IRS is trying to maintain enforcement and compliance with a tighter budget by being more efficient. The Large Business and International Division’s campaign program is one way the IRS is trying to achieve that goal, Koskinen said.

On Jan. 31, the agency announced 13 initial campaigns to target specific issues—such as transfer pricing for inbound distributors and repatriation—in audits. This will help focus the IRS’s resources in the places where they’re needed most, Koskinen said.

To contact the reporter on this story: Allyson Versprille in Washington at aversprille@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

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