The IRS Evades Accountability—and Its Excuse Is Ridiculous
Every American knows the Internal Revenue Service collects taxes and audits taxpayers. Fewer realize that the agency also issues far-reaching rules that affect the entire economy. Any agency with such vast rule-making power deserves the highest level of scrutiny and accountability. The IRS is in particular need of oversight following the scandals that have engulfed it in recent years.
Yet a new report from the Cause of Action Institute reveals that the IRS has been evading numerous oversight mechanisms, and it refuses to comply with laws requiring it to measure the economic impact of its rules.
Congress has passed several laws, including the Regulatory Flexibility Act and the Congressional Review Act, that require agencies to report on their rules’ economic impact to lawmakers and the public. The president also conducts oversight of agency rules through the White House Office of Information and Regulatory Affairs. These good-government measures are meant to ensure unelected bureaucrats can be checked by the public.
The IRS prominently used this excuse in 2016. It had proposed changes to the way it valued interests in closely held businesses for estate- and gift-tax purposes. This rule would have had a dramatic effect on thousands of small businesses and family farms and their inheritors. The affected communities reacted strongly, but the IRS still asserted the rule was only interpretive. It provided no more than the boilerplate statement that any economic effect “is derived from the operation of the statute, or its intended application, and not from the proposed regulations in this notice of proposed rule-making.”
This is pablum. Were it correct, rules from every federal agency would be exempt from oversight, since all agency rules are based in statute. If other agencies adopted this mind-set, it would gut oversight of the regulatory state by the elected branches.
The IRS did submit the rule to the Small Business Administration’s Office of Advocacy for comment on how it would affect small businesses. That office firmly rejected the IRS claim that the rule was exempt from economic analysis. The IRS brushed aside the SBA’s argument, but the Trump Treasury Department halted this ill-advised rule.
Yet the IRS’s brazen assertion of immunity from oversight remains in place. It first bestowed the economic-impact exemption on itself in 1998, after Congress amended the Regulatory Flexibility Act expressly to cover IRS interpretive rules. The IRS Office of Chief Counsel issued a notice claiming that its interpretive rules do not have an economic impact, an outrageous assertion meant to help the agency avoid the new law. The IRS originally stated that only the “revenue impact”—the amount of money collected and transferred to the Treasury—was exempt from analysis. It has since broadened this claim to evade White House review and the Congressional Review Act. The IRS now asserts the exemption for all “effects” from its rules, including macroeconomic impacts, behavioral changes, compliance costs, and record-keeping and reporting burdens.
Criticism of the IRS position goes beyond the SBA. Members of Congress and the Government Accountability Office have also called for reform of this baseless practice. Congress and President Trump should step in to correct this dubious behavior and ensure the IRS is held accountable for its actions.
Specifically, the White House should demand that the IRS submit all rules to the Office of Information and Regulatory Affairs for review. It should make it known that it will delay the implementation of any new rules until the IRS conducts the requisite economic analysis. And the Senate should demand that President Trump’s nominee for IRS commissioner—who has yet to be named—publicly commit to reforming this practice. Anyone who wants to lead the IRS should promise to produce economic analyses for proposed rules and share that information with the public.
No agency has more influence over every taxpayer than the IRS. It’s time for oversight of that agency to match its unparalleled role in Americans’ lives.
Mr. Vecchione is president and CEO of Cause of Action Institute, where Mr. Valvo is counsel and a senior policy adviser.
Appeared in the January 10, 2018, print edition.