Federal Tax Regulations, also known as Treasury Regulations, are the U.S. Department of the Treasury’s official interpretation of the Internal Revenue Code. Regulations are not technically laws, but they do carry significant authority. They give directions on how to comply with new tax laws and how to deal with issues that arise in connection with existing laws. They offer detail that the Code may not provide, and often include some helpful examples. The Treasury Department’s authority for issuing regulations can be found in 26 U.S. Code 7805, and the Treasury Regulations themselves in Title 26 of the Code of Federal Regulations (“26 C.F.R.”).
As a governmental agency, the Treasury Department must comply with the Administrative Procedure Act. This means that it must follow certain procedures when establishing new regulations:
Advance Notice of Proposed Rulemaking
The Treasury Department may announce that it is considering regulatory action in connection with a specific issue through An Advanced Notice of Proposed Rulemaking (ANPRM). ANPRMs describe the need for a particular regulation and the agency’s planned approach. ANPRMs also seek input from the public about the issue which they address.
Notice of Proposed Rulemaking
A proposed regulation will be published in the Federal Register as a Notice of Proposed Rulemaking (NPRM). Proposed regulations explain how the IRS is interpreting a particular provision of the tax law and provide the public with an opportunity to give their input through written comments or a public hearing (“notice and comment”). Note that proposed regulations may be withdrawn or modified, and generally do not have any legal effect unless they are adopted as final regulations or if the IRS has included an express statement that they may currently be relied upon (these are also known as “reliance regulations.”).
It can take years for a final regulation to become effective, so a temporary regulation may be issued at the same time as a proposed regulation, particularly if the IRS needs a regulation to become effective quickly. Temporary regulations may be issued before the notice and comment stage and provide guidance during the proposed regulation review process and until final regulations have been adopted. They take effect when published in the Federal Register via a Treasury Decision and are usually valid for up to three years. During that time, they have the same authority as final regulations. Temporary regulations can be identified by the “T” at the end of the regulation number.
A final regulation is issued after the public has had an opportunity to comment on the proposed regulation. It provides an analysis of the public comments, explains the final decision of the agency, and contains the text of the regulation. The number of each regulation corresponds to the Internal Revenue Code section that it interprets.
Final and temporary regulations are legally binding on taxpayers and the IRS. Each is published as a Treasury Decision (TD), which adds, removes, or revises text contained in the C.F.R. and lists the regulation’s effective data. If challenged by a taxpayer, these are usually upheld by the courts, particularly in the case of a final regulation which has been in effect for a long time.
Regulations not subject to Administrative Procedure Act requirements
Regulations that provide guidance as to legislative or procedural application of the tax law must follow the notice requirements outlined above. Interpretive regulations (issued to interpret the language of the IRC by filling in gaps in the law or by repeating law that is included in some underlying legislation), however, are exempt from the notice and comment requirements of Administrative Procedure Act.