NYU Tax Law Center Asks IRS to Avoid Limited Perspectives in PGP

1. Acknowledges that the 2021-2022 PGP will need to be a flexible plan for a highly fluid context. It is being prepared in the face of substantial operational, legislative, and administrative uncertainty. This may make it especially appropriate to defer some decisions about specific regulatory projects until later in the 2021-2022 cycle when circumstances become clearer, and/or to treat the initial PGP as especially tentative.

2. Notes factors that should be heavily weighted when considering potential regulatory projects. We submit that some tax administration considerations should be weighted heavily in choosing priority projects, regardless of how circumstances develop. In particular, we submit that the IRS and Treasury should prioritize projects that promote sound tax administration, encourage stronger tax compliance, and improve confidence in the fairness and integrity of tax law.

While sound tax administration considerations always shape the PGP, research shows that comments from taxpayers tend to be dominated by well-resourced and directly-affected filers seeking guidance that directly benefits them. This structural issue means that taken in isolation, taxpayer comments tend to underweight specific types of projects with high tax administration benefits. Projects that should be heavily weighted for PGP consideration even though directly-affected taxpayers are unlikely to request them include:

Heavily weighing these tax administration considerations when developing the PGP is consistent with Executive Order 13985 (EO 13985), which asks federal agencies to pursue equity, meaning “consistent and systematic fair, just, and impartial treatment of all individuals,” including those in various underserved communities as outlined by EO 13985. We suggest that EO 13985 be added to future calls for comments on the PGP.

Specific illustrations of projects consistent with these factors are discussed in this letter. These include the need for guidance on state paid leave programs, as well as considering revisions to certain Affordable Care Act regulations that could expand availability of premium tax credits (and thus, access to affordable healthcare).

a. Projects with substantial potential to improve tax compliance. Projects that would substantially improve taxpayer compliance should be given high priority, in accordance with the 2018-2022 IRS strategic goals to “[p]rotect the integrity of the tax system by encouraging compliance through administering and enforcing the tax code.”¹³

This may include clarifying areas of law where uncertainty about the correct interpretation of the law may lead to or facilitate non-compliance. Compliance with the tax law is in itself an element of tax system fairness and integrity. Furthermore, by ensuring compliance in specific areas of law, specific regulatory projects may strengthen general taxpayer and public trust in the integrity of the tax system, which in a tax system that relies heavily on voluntary compliance, is in itself an important tax administration goal.¹⁴ Such projects should be especially highly weighted if they are targeted to an area of non-compliance that contributes substantially to the tax gap.

In some areas of interpretive uncertainty, taxpayers will request guidance in order to reduce potential risk and controversy, and in doing so will improve compliance. But in other cases, where the regulatory project is seen as likely to result in a clarification of the law that is not favorable to directly-affected taxpayers, those filers may not be as likely to request further guidance.

This is an area where potential pending legislation, if it enacts provisions with strong tax compliance benefits, may heavily drive the ultimate projects chosen. But some non-exhaustive, illustrative examples of possible projects in major areas of non-compliance include:

• Projects that would furnish information to improve targeting of compliance activities (especially if legislation restores resources for IRS to undertake compliance activity). Such projects could both implement any new authorities enacted by legislation, and improve the use of existing regulatory authority.

  An illustrative example is the potential for improvements to the Schedule UTP (Form 1120), on which certain corporations are required to report income tax positions taken on their Federal return for which the corporation or a related party has either recorded a reserve for that position for Federal income tax in audited financial statements, or did not record a reserve for that position because the corporation expects to litigate the position. The Treasury Inspector General for Tax Administration has recommended that the IRS “consider the feasibility of either modifying Schedule UTP to include information needed to be useful for its intended purpose or removing the Schedule UTP filing requirement.”¹⁵

• Projects targeted at improving pass-through compliance. For example, in considering improvements to Schedule UTP in the example above, the IRS could give consideration to whether a requirement similar to Schedule UTP can be applied to certain partnerships.¹⁶ This would, of course, require certain modifications, since the financial reporting standards on which Schedule UTP are based do not normally apply to partnerships. This and other projects in the partnership and pass-through space more broadly could be considered in order to target a known area of substantial non-compliance,¹⁷ and to help better target partnership and S corporation audits (which should also increase in number as resources allow).¹⁸

• Projects in other major areas of non-compliance concern, including prioritizing, for example, guidance on cryptocurrency broker reporting.¹⁹

• Projects addressing valuation issues across areas including, but not limited to, transfer pricing, transfer taxation, and other areas where there is substantial prospect of non-compliance taking the form of overly aggressive valuation positions, or where current guidance accommodates approaches to valuation that do not align with economic value and the statutory framework. Again, there are many potential projects in this area, but as an illustrative example, consideration could be given to addressing the use of legal restrictions to reduce the value of closely-held stock for transfer taxation (but without any reduction in underlying economic value), a regulatory project begun in 2016 but withdrawn in 2017.²⁰

• Projects revisiting earlier guidance where the interpretation was favorable to directly-affected taxpayers, but arguably oversteps statutory authority or has other substantial tax administration costs.

  There are sound operational and administrative stability considerations to avoid revisiting guidance very regularly in areas of the law considered settled. In cases where existing guidance is considered favorable to directly-affected taxpayers, there is unlikely to be taxpayer demand for further guidance. However, the IRS should nevertheless in some cases consider updating guidance where there are strong tax administrative reasons to do so.

  One such situation is where there is strong, reasoned concern that specific existing regulation or other guidance is without statutory authority. In addition to the potential legal defect, the view that certain filers are enjoying favorable tax treatment outside the bounds of statutory authority may be especially corrosive to perceptions that the tax system is fairly and impartially applied to all. Treasury and the IRS face a unique practical burden of demonstrating that tax guidance is within statutory authority in such cases, given that those arguing that a regulation or other guidance is overly generous to a certain set of filers are generally not able to seek a judicial view on the soundness of the regulation due to lack of standing.²¹

  In other instances, there may be strong tax administrative reasons to consider that existing guidance is not the best use of statutory authority or the best interpretation of the law possible, and revisiting guidance in some such circumstances may also be appropriate.

  For consideration in this category: practitioners and academic commentators have raised concerns about certain aspects of the authority underlying some of the regulations implementing various provisions of the 2017 tax law.²² Again, some of these areas may be addressed by pending legislation, and therefore specific regulatory projects will need to be chosen based on how these and other circumstances develop.

b. Projects that would have potential benefits for filers with less ability to provide input into tax regulatory processes. Applying the tax laws fairly and impartially, in the context of the PGP, also means prioritizing guidance projects that benefit low- and moderate-income taxpayers and other communities who may be unable — due to lack of awareness, resources, or other systemic barriers — to engage in the formal tax regulatory process and bring attention to their concerns.²³

In contrast with well-resourced taxpayers, other communities and individuals are less likely to formally request tax regulatory guidance that may have benefits not only for themselves but for the integrity of the tax system.

For example, consider the recent regulations on the definition of dependents finalized in October 2020, with recommendations relating to these changes first put forth by a notice of proposed rulemaking on January 19, 2017 (and included on the 2017-2018 Priority Guidance Plan). The regulatory project and final regulations clarify and simplify a number of definitions that will make tax filing simpler for very large numbers of households, and in particular may reduce errors while also enabling a number of lower-income families to claim tax benefits to which they are entitled. Only eight comments were received on the proposed rulemaking itself. Further few comments were made on subsequent PGPs asking for this guidance to be finalized. This lack of input on both the substantive regulation and its urgency is not, however, any good indication of the importance of the regulations for tax administration, and instead likely simply reflects a lack of awareness or resources, or other barriers, that prevent directly-affected households from participating in the regulatory comments process.

Continuing to prioritize regulatory projects that may have diffuse benefits to filers or benefits that are concentrated among groups who may be less likely to participate in formal requests for guidance for inclusion in the PGP is also consistent with EO 13985,²⁴ which asks federal agencies to pursue equity, meaning “consistent and systematic fair, just, and impartial treatment of all individuals,” including those in various underserved communities as outlined by EO 13985.

We also note that the call for comments on the PGP did not include EO 13985 within the list of considerations that Treasury and IRS will consider, and suggest that such an inclusion be considered for the next call for comments on a PGP. This would be consistent with how prior PGPs have treated relevant Executive Orders (such as Executive Order 13563; and Executive Order 13771; Executive Order 13777, Executive Order 13789, superseded by Executive Order 13992).²⁵

Again, pending legislation and other changing circumstances may determine which specific projects to prioritize in this category. For example if improvements to the Earned Income Tax Credit and Child Tax Credit are extended or made permanent, guidance on these credits and new periodic payment mechanisms — including guidance that is clear and accessible for newly-eligible filers — should be a key priority. However, illustrative examples of potential regulatory projects in this space include:

• Equity in tax implementation. Treasury should continue to prioritize implementation of any legislative tax provisions benefiting low- and moderate-income filers at least as heavily as the implementation of any tax provisions benefiting higher-income or business filers that may have more ability and resources to demand swift implementation of those benefits.

• Guidance on state paid family leave programs. An increasing number of states, currently ten, offer state paid leave programs.²⁶ In general, these programs are structured as state insurance plans funded by payroll taxes. These state programs cover millions of American workers. These workers are diffuse, and may not generally be well-positioned to directly advocate for guidance on several important issues including: (i) deductibility of employee contributions, (ii) taxability of employer contributions to the employee, and (iii) the taxation of benefits to the employee. This topic has been on the Priority Guidance Plan since the 2019-2020 version was issued October 8, 2019.

• Addressing the Affordable Care Act “family glitch.” Currently, the ACA is interpreted to prohibit family members from receiving premium tax credits, which defray the cost of enrollment in marketplace plans if one member of the family has an offer of “affordable” employer coverage based on their employee-only premiums. This interpretation ignores the cost of covering other family members under the employer's offer, even if that cost is prohibitive. In our view, the best interpretation of Internal Revenue Code Sections 36B(c)(2)(C)(i) and 5000A(e)(1)(B),given the text and statutory framework, is that it encompasses the special rules for related individuals and those special rules should use the cost of family rather than standard coverage. This proposed interpretation is consistent with the standard of “affordability” of employer coverage used for the individual responsibility provision of the ACA. Based on this statutory support and the strong potential benefits for low- and moderate-income families, the 2021-2022 PGP should prioritize rulemaking to assess and redress the current interpretation, even though the direct beneficiaries may not have submitted public comments requesting a fix for this so-called “family glitch.”