Evading Oversight: The Origins and Implications of the IRS Claim That Its Rules Do Not Have an Economic Impact

Evading Oversight: The Origins and Implications of the IRS Claim That Its Rules Do Not Have an Economic Impact

A tension exists in federal administrative law. Agencies are tasked by statute with executing delegated functions, and the president is assigned by the Constitution to head the Executive Branch and take care that laws are faithfully executed. This creates tension because agencies can make controversial, burdensome, unwise, or unaccountable decisions that may conflict with statutory mandates or the president’s chosen governing course. This tension has heightened over the past one hundred years as the size and scope of the administrative state has dramatically increased. Disputes over how to control administrative agencies and the validity of their actions have also sharpened during the same period.

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In an attempt to alleviate these tensions, Congress and the president have installed various regulatory-oversight mechanisms. The mechanisms, embodied in statutes and executive orders, seek to mitigate the worst agency abuses, while also reinjecting constitutional actors into the agency decision-making process. When agencies act to subvert these oversight mechanisms, they undermine legitimate checks on their power and raise concerns about the propriety of their decisions, thereby exacerbating concerns about lack of control over the administrative state.

The Internal Revenue Service (“IRS”) is one such agency. It has systematically constructed a series of exemptions from certain aspects of three important oversight mechanisms: the Regulatory Flexibility Act, White House review pursuant to Executive Order 12,866, and the Congressional Review Act. The IRS purports to base these self-made exemptions on the claim that any economic impact of the rules that it issues flows from the underlying statute and is not attributable to its regulatory actions, for the purpose of triggering economic impact analyses and information sharing under these three oversight mechanisms. The IRS, however, has not provided any detailed, public explanation to justify its position. Further, the IRS position, if correct, would apply to any regulation promulgated by any agency, as hopefully all regulations are based on a statute.

All three oversight mechanisms are designed to: (1) increase information sharing between agencies and the constitutional actors that oversee their actions, and (2) disclose to the public the economic significance of agency decisions. By claiming an exemption from these mechanisms, the IRS is denying Congress, the president, and the public important information about how IRS rules impact the economy and how different administrative choices could alleviate that impact.

Key Findings:

  • Finding #1: In the three sections of the Internal Revenue Manual that govern the IRS approach to compliance with three important regulatory oversight mechanisms, the agency claims that its regulations have no economic impact because any such impact is attributable only to the underlying statute.
  • Finding #2: The IRS asserts that its regulations have no economic impact to claim self-bestowed exemptions that allow it to avoid economic impact analyses and the sharing of information with the White House, Congress, and the public. The IRS has provided no detailed, public explanation to justify its position.
  • Finding #3: The IRS first claimed that its regulations have no economic impact to evade a congressional amendment to the Regulatory Flexibility Act that was explicitly designed to cover IRS regulations.
  • Finding #4: Over time, the IRS has expanded its self-bestowed exemption to avoid a greater number of regulatory-oversight mechanisms. The exemption first applied only to the “revenue impacts” of IRS regulations but is now claimed for all “effects.” In addition to avoiding the requirement of the Regulatory Flexibility Act, the IRS also applies its exemption in the context of White House Office of Information and Regulatory Affairs review and the Congressional Review Act. The IRS has provided no detailed, public explanation to justify these expansions.
  • Finding #5: The combination of the IRS assertion that its rules do not create an economic impact and a 1983 memorandum of understanding between the White House and the Department of the Treasury has created a moral hazard that allows the IRS to determine which rules it sends to the White House for pre-publication review, as required under Executive Order 12,866 and its progeny.