Treasury and the IRS could be at risk of challenges to tax overhaul regulations if they don’t make potentially controversial rules final in the next six weeks.
The Treasury Department and Internal Revenue Service have until June 22—exactly 18 months after the 2017 tax overhaul was signed into law—to make rules final if they want them to be retroactive to the law’s enactment date.
Meeting this deadline for regulations in both the international and domestic spaces is a stated goal of Treasury and IRS officials.
“But really the only thing that needs to be finalized by that June 22 date is a rule that is essentially less taxpayer-favorable than the statute,” said Tom West, who recently worked as tax legislative counsel at Treasury’s Office of Tax Policy.
For example, the IRS has already proposed regulations on the tax law’s base erosion and anti-abuse tax (BEAT), which is meant to prevent companies from shifting profits offshore. If the agency, since publishing the proposed rules, finds there is a loophole it wants to close, it is going to be especially motivated to get those final rules out before June 22.
Tax code Section 7805, which includes the 18-month rule, says final regulations can be retroactive to the date on which related proposed or temporary regulations are filed with the Federal Register. This means the IRS can technically make final rules retroactive to 2018 if it issued proposed or temporary rules in that year—even if it misses the June 22 deadline.
The code section includes a similar rule for notices as long as a notice “substantially” describes the expected contents of any temporary, proposed, or final regulations.
But the agency opens itself up to challenges from taxpayers over effective dates when rules are modified and straddle that June 22 date. And people are more likely to oppose rules if they’re made less taxpayer friendly during that period, said West, who now works as a principal in KPMG LLP’s Washington National Tax practice.
It is those cases—where the government wants to add an anti-abuse provision and ensure it is retroactive to either the release of the proposed regulations or the enactment of the 2017 tax law—where the June 22 deadline becomes very important, West said.
Typically, however, that’s not the progression, said Pamela Olson, the U.S. deputy tax leader at PwC, also known as PricewaterhouseCoopers. Olson is also a former Treasury assistant secretary for tax policy.
“Generally speaking, you don’t tighten regulations when you go from proposed to final. So you don’t make them more taxpayer-adverse,” Olson said. “So if you’re liberalizing the regulations, then there’s nobody to complain, really.”
Some Rules Final
Treasury has already issued most of the final regulations it absolutely wanted to be retroactive to the 2017 law’s enactment.
The biggest priority on that front was guidance under Section 965, which deals with the law’s one-time repatriation tax, or transition tax. The IRS released those final rules (T.D. 9846) at the beginning of 2019.
The tax applies to U.S. companies’ accumulated earnings and profits kept offshore since 1986. They’re hit with a 15.5 percent tax on cash and cash assets, and an 8 percent tax on illiquid assets.
The provision was one of the few changes in the tax law effective for 2017, which is why it was so important for Treasury and the IRS to ensure rules were made final before June 22. Otherwise, companies might have been able to plan around it, Olson pointed out.
The IRS also quickly issued final regulations (T.D. 9847) implementing a new 20 percent write-off for pass-through businesses. Those rules were released Jan. 18.
The urgency there was likely the result of the tax-filing season, Olson said. Under a pass-through structure, income flows through to the owner of the business and is taxed at the individual level. Many individuals affected by the new 20 percent deduction file their taxes by the IRS’s normal April deadline, Olson said.
The IRS and Treasury likely “wanted to make sure that the rules were complete in order for those individual taxpayers to be able to take them into account when they filed their returns,” she said.
The IRS has a little more leeway to complete other rules that primarily affect companies because most companies get an extension to file their returns in the fall.
This batch of guidance includes proposed rules (REG-104259-18) on how to allocate expenses under a tax law provision meant to ensure multinationals pay at least a minimum amount of tax on overseas profits earned in countries with lower tax rates than the U.S. It also includes proposed rules (REG-106089-18) that would cap the amount of interest payments companies can write off on their taxes.
Even if the June 22 deadline isn’t “real” in the sense that the IRS must meet it for all regulations on the tax law, it could serve as a jumping-off point for political messaging on Capitol Hill, a former House Republican aide said.
Senate Republicans, in particular, have been waiting until June 22 to see how the IRS and Treasury implement the tax law before holding hearings or publicly discussing whether the law was a success, the former aide said.
So lawmakers may be disappointed to find out that the date isn’t as much of a dividing line as they might think, the former aide said.
Across the aisle, if the IRS still hasn’t finished many of the tax law regulations, that might provide Democrats with more ammunition to criticize the complexity of the law, the former aide said.
It might also serve as grounds to argue for additional IRS funding—saying the agency couldn’t implement the law on time because it lacks the necessary resources, the former aide said.