Internal Revenue Code (IRC). Treasury (tax) regulations provide Treasury’s and IRS’s official  interpretation of tax laws. Limitations of Non-IRB Guidance are Not Always Clearly Communicated

Even though IRS officials told us that only documents published in the  IRB constitute guidance, and can be relied upon by taxpayers as  authoritative and as precedent for their individual circumstances,  limitations on the use of other IRS documents is not always clearly  communicated to taxpayers. Some tax practitioners and experts have also recommended that  IRS include disclaimers on information to taxpayers published outside the  IRB noting any legal limitations. These policies and procedures cover the entire life  cycle of a regulation or non-regulatory guidance document, including:  how to identify and open a guidance project; how to comply with relevant  administrative laws and executive orders that govern regulatory and  guidance processes; how to draft guidance and coordinate reviews with  other IRS and Treasury offices, or other agencies; and how to process  public comments and finalize guidance for publication. The effect of the exemption in OMB’s bulletin is similar to that of the 1983  agreement between OMB and Treasury in that non-regulatory tax  guidance is exempted from centralized review and additional analysis. More complete documentation of how IRS considers the potential  effects of guidance, including consideration of public comments about any  economic effects, could help IRS evaluate the risk of challenges to its  assessments about whether guidance could be considered major. IRS uses a variety of documents to  communicate its interpretation of tax laws to the public, but only considers  guidance published in the IRB to be authoritative. While IRS does have detailed procedures for identifying, prioritizing, and  issuing new guidance, it lacks documented procedures for deciding what  type of guidance to issue. Our analysis indicates that IRS has inconsistently documented required  steps during key phases of the guidance issuance process. Some tax regulations and other guidance are also  exempt from the requirements of E.O. 12866 under a long-standing  agreement between OMB and Treasury. Communicate more clearly the limitations of information not published  in the IRB to taxpayers. OMB staff provided oral comments and neither agreed nor  disagreed with our recommendations. Appendix I: Objectives, Scope, and Methodology

This report addresses 1) how the Internal Revenue Service (IRS)  communicates its interpretation of tax laws to the public, and how it  decides what type of guidance to issue; 2) what relevant authorities apply  (including statutes, executive orders, and Office of Management and  Budget (OMB) guidance), and what policies and procedures IRS uses,  when issuing its guidance; and 3) to what extent selected IRS guidance  products followed relevant authorities. In these preamble sections, Treasury and IRS  describe what authorities apply or do not apply to a particular regulation,  and whether the regulation was subject to additional centralized reviews.
Why GAO Did This Study

The public relies on IRS guidance to understand complex tax laws and meet their responsibilities. GAO was asked to examine IRS guidance and rulemaking processes. This report reviews (1) how IRS communicates its interpretation of tax laws to the public and decides what type of guidance to issue; (2) what relevant authorities apply and what policies and procedures IRS uses when issuing guidance; and (3) to what extent selected IRS guidance products followed relevant authorities. GAO reviewed IRS policies and procedures for issuing guidance, conducted literature reviews, analyzed eight non-generalizable case files for compliance with relevant authorities, and interviewed agency officials and other subject matter experts.

What GAO Found

The Internal Revenue Service (IRS) uses a variety of documents to communicate its interpretation of tax laws to the public, but only considers Internal Revenue Bulletin (IRB) guidance to be authoritative. IRS information published outside of the IRB can help taxpayers understand tax laws and make informed decisions, but does not always include information clarifying the limitations of its use. IRS has detailed procedures for identifying, prioritizing, and issuing new guidance. However, it lacks procedures for documenting the decision about what type of guidance to issue.
In a review of tax guidance, GAO found few instances in which the Office of Management and Budget (OMB) determined that a tax regulation was likely to have significant economic effects and would thus be subject to additional analysis. OMB's significance determinations largely result from initial assessments by the Department of Treasury (Treasury) and IRS that many administrative law or executive order requirements do not apply to most tax regulations and other guidance. Some tax regulations and other guidance are also exempt from further analysis and review under a 1983 agreement between OMB and Treasury, which was reaffirmed in 1993. This agreement has not been revisited in more than 20 years, and it is unclear whether this agreement is still relevant.
GAO also reviewed eight case files of non-regulatory IRS guidance documents published in 2015 and found that IRS did not consistently document required steps during key phases of the issuance process. Although these eight case files are non-generalizable, documenting key decisions may help IRS evaluate the risk of challenges to IRS assessments about whether tax guidance is significant enough to warrant additional OMB and congressional review.

What GAO Recommends

GAO is making six recommendations, including that IRS communicate more clearly the limitations of information not published in the IRB, and that IRS develop procedures to better document the type of guidance it plans to issue and the key decisions made during the evaluations. GAO also recommends that Treasury and OMB reevaluate their long-standing agreement to exempt some tax guidance and regulations from OMB oversight. IRS and Treasury agreed with all of GAO's recommendations, and OMB neither agreed nor disagreed.