The IRS was actively involved in implementing various policy objectives of the Obama Administration and issued various controversial regulations, including those dealing with the Affordable Care Act. With Donald Trump soon to step into the Oval Office, one may wonder about the extent to which the Trump Administration can reverse regulations issued by the Treasury/IRS over the past 8 years.
Under general principles of administrative law, an agency cannot simply withdraw legislative regulations. Rather, some type of notice and explanation must be provided, though the precise requirements remain the subject of debate. See Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 42 (1983); Kozel & Pojanowski, Administrative Change, 59 UCLA L. Rev. 112 (2011-2012). Thus, if the Trump Administration wishes to formally revoke controversial regulations, it can expect judicial challenges.
However, the Trump Administration’s ability to reverse controversial tax regulations may be relatively easy due to the IRS’s odd habit of disclaiming its obligation to comply with the Administrative Procedure Act. When the IRS issues regulations, it will frequently allow the public a chance to comment, but it makes clear that it does so only out of administrative grace. See, e.g., “Health Insurance Premium Tax Credit,” 77 Fed. Reg. 30377, 30385 (May 23, 2012) (“Section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations.”). As prior posts explain, the IRS generally believes that its regulations are merely “interpretive” and thus exempt from the APA’s requirements.
The IRS’s avoidance of the APA and its invocation of the interpretive exception may backfire under the Trump Administration. Unlike legislative regulations issued by (say) the Environmental Protection Agency, interpretive regulations can be revoked quite easily. As the Supreme Court recently and unanimously explained: “Because an agency is not required to use notice-and-comment procedures to issue an initial interpretive rule, it is also not required to use those procedures when it amends or repeals that interpretive rule.” Perez v. Mortg. Bankers Ass’n, 135 S. Ct. 1199, 1206 (2015) In other words, it’s much, much easier to repeal an interpretive rule than a legislative rule. The IRS’s self-serving statements about the APA may have helped it when it issued regulations under the Obama Administration, but those same statements now make tax regulations susceptible to easy repeal by the Trump Administration.
Additionally, the IRS’s hostile attitude towards taxpayer standing may backfire. When taxpayers attempt to mount pre-enforcement challenges to tax regulations, the IRS usually argues that under Section 7421, courts lack jurisdiction to hear those challenges. The IRS believes that a taxpayer must engage in the conduct proscribed by its regulations, pay the associated tax or penalty, and only then file a lawsuit. Under this expansive reading of Section 7421, a taxpayer who claims grievances resulting from the Trump Administration’s withdrawal of tax regulations issued under the Obama Administration will have a hard time getting a court to hear his or her case.
This is not to say that the Trump Administration should casually repeal tax regulations. Instead, the change in administration should give career IRS employees a reason to think more carefully about the agency’s relationship with the APA. In my view, the IRS is generally wrong when it calls its regulations “interpretive” and when it argues that taxpayers cannot challenge them prior to enforcement. Perhaps this unexpected shift of events will lead IRS employees to more seriously consider the democratic safeguards provided in rule-making statutes, leading to an improvement in IRS guidance practices.
Also, though regulations should not be haphazardly repealed, the IRS has undoubtedly stretched the law in some contexts, including for regulations issued under the Affordable Care Act. (See my prior article, “Lurking Challenges to the ACA Tax Credit Regulations,” Bloomberg BNA Tax Insights (2015)). For regulations of dubious validity, the Trump Administration should be aware that different (lower) standards and obstacles will likely apply to the repeal of tax regulations. If questioned on this issue, all the Trump Administration has to do is point to the IRS’s own statements during the past 8 years.
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