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The IRS Gets Handcuffed by the Congress

by Andy Grewal — Wednesday, May 3, 2017

The House and Senate recently reached agreement on a comprehensive spending bill and expect to pass it soon. Regarding the IRS, the bill freezes the agency’s budget at $11.2 billion and thus does not, as some feared, make substantial cuts to its funding. Nonetheless, the IRS may face hardships, because its funding remains significantly below its 2010 level ($13.6 billion) while its responsibilities have greatly expanded in recent years, especially because of the Affordable Care Act.

A somewhat strange provision in the spending bill might create further hardships. Under Section 126 of the bill, a carryover from the prior year’s spending bill, the IRS cannot issue any general guidance on the “standard. . . used to determine whether an organization is operated exclusively for the promotion of social welfare” under Section 501(c)(4).* Instead, whether any organization qualifies under Section 501(c)(4) must be made on a case-by-case basis, without the benefit of any new rules or regulations.  Although the IRS’s prior regulations under Section 501(c)(4) will remain effective, those regulations, issued in 1959, apparently have “created considerable confusion for both the public and the IRS,” IRB 2013-52 (Dec. 23, 2013), especially regarding the extent to which Section 501(c)(4) organizations may engage in political activities. But under the spending bill, the IRS must follow these regulations and cannot, as is typically the case, modify or revoke its own guidance.

Whatever the wisdom of the prior regulations (or the controversial 2013 proposed regulations), Congress’s approach here does not comport with sound tax administration. It makes little sense to prevent the IRS from issuing national guidance for a statute that it must apply nationally. The existing regulations under Section 501(c)(4) do not address all possible issues, and because of the spending bill, the IRS cannot state, in generally applicable guidance, how it will address new, unresolved issues. Instead, any new agency view must be applied on a taxpayer-by-taxpayer basis. This leads both to waste of administrative resources and problems for taxpayers, who may learn the IRS’s views on an issue only through the audit process and not in advance, while filing their tax returns.

Congress has previously attempted to handcuff the IRS’s rulemaking authority and the results were less than ideal. In the 1970s, the IRS proposed guidance on fringe benefits, a hot button issue at the time. But to preserve its power in that area, Congress passed a statute prohibiting the IRS from finalizing that guidance. Not until 1984 did Congress finally enact statutory rules on fringe benefits, and the IRS faced difficulties in the interim. As Commissioner Kurtz explained, the moratorium on rulemaking created “severe problems,” causing “existing inconsistencies [to] continue and expand.” See Archie Parnell, Congressional Interference in Agency Enforcement: The IIRS Experience, 89 Yale L.J. 1360, 1376 (1980).

For Section 501(c)(4), Congress should address any deficiencies in the existing regime by amending the statute itself, not by handcuffing the IRS. I suspect, however, that Congress will back away from this challenge and, year-after-year, extend Section 126’s moratorium on rulemaking.

*The full text of Section 126 provides:

SEC. 126. During fiscal year 2017 —

(1) none of the funds made available in this or any other Act may be used by the Department of the Treasury, including the Internal Revenue Service, to issue, revise, or finalize any regulation, revenue ruling, or other guidance not limited to a particular taxpayer relating to the standard which is used to determine whether an organization is operated exclusively for the promotion of social welfare for purposes of section 501(c)(4) of the Internal Revenue Code of 1986 (including the proposed regulations published at 78 Fed. Reg. 71535 (November 29, 2013)); and

(2) the standard and definitions as in effect on January 1, 2010, which are used to make such determinations shall apply after the date of the enactment of this Act for purposes of determining status under section 501(c)(4) of such Code of organizations created on, before, or after such date.

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About Andy Grewal

Law Professor, University of Iowa

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