Letters

Congress Should Urge IRS to Avoid Last-Minute Rulemaking

December 20, 2024

The Honorable Jason Smith, Chairman

The Honorable Richard E. Neal, Ranking Member

Committee on Ways and Means

U.S. House of Representatives

Washington, DC 20515

The Honorable Ron Wyden, Chairman

The Honorable Mike Crapo, Ranking Member

Committee on Finance

U.S. Senate

Washington, DC 20510

Dear Chairman Smith, Ranking Member Neal, Chairman Wyden, Ranking Member Crapo, and Members of the Committee on Ways and Means and the Committee on Finance:

We, the undersigned free-market, pro-taxpayer organizations, urge you to call upon the Internal Revenue Service (IRS) to refrain from implementing major controversial rulemakings, ill-founded legal doctrines, and other harsh tax enforcement policies in the final days of the Biden Administration.

The American people have spoken decisively through this election, and it is incumbent on the Treasury Department to ensure that the IRS reflects the values of fairness, neutrality, and respect for taxpayers. During this transition of political power in Washington, DC, the well-being of millions of taxpayers could be adversely harmed if sweeping, unprecedented IRS initiatives are allowed to take effect or continue in the absence of immediate congressional oversight. These include:

● Imposing Flawed Rules. For example, two highly detrimental rulemakings to curtail taxpayer access to the Independent Office of Appeals and gut the 1998 statutory requirement for supervisor approval of IRS penalties should be reevaluated, not ratified.¹ And, as one of the signatories to this letter noted, the IRS’s rule, finalized in July 2024, regarding taxation of digital assets and the accompanying Form 1099-DA is unworkable.² There is still time to reconsider this poorly-designed, complex regime, which will not take effect until 2025.

● Overturning Established Legal Doctrines. A set of guidance and rulemakings labeling certain partnership investment activities as “transactions of interest” is only the latest of several IRS moves to weaponize the “Economic Substance Doctrine” (ESD) against innocent taxpayers.³ The goal of raising $50 billion through heightened scrutiny of business partnerships is being executed through a major mobilization of IRS agents and Chief Counsel attorneys. Statements from IRS leadership, including publicly labeling taxpayers as “evil,” reveal a troubling bias that undermines public confidence in the impartiality of tax enforcement. Since April 2022, the IRS has encouraged agents to raise ESD issues without the important safeguard of supervisory approval or adequate determination of taxpayer facts. This aggressive approach has resulted in document requests and summonses to which taxpayers cannot reasonably respond, effectively forcing disputes into already overloaded courts (see below).

● Pursuing Indiscriminate Audit and Litigation Strategies. The IRS has been waging ideologically motivated campaigns against taxpayers making deductions under Sections 170(h) and 831(b) of the tax laws. Despite a finalized rulemaking regarding 170(h) conservation easement partnerships, the courts remain clogged with years of cases resulting from near-100% audit rates of these arrangements. Meanwhile, small businesses availing themselves of 831(b) have been deprived of fair and equal treatment under the law, merely for seeking affordable protection through microcaptive insurance.⁴ The IRS’s attempts to aggressively insert the ESD into non-traditional areas portend new waves of audits and litigation that will leave innocent taxpayers awash in paperwork and defense costs.⁵

● Overstepping Authority. The Government Accountability Office cited the IRS for unilateral, opaque implementation of the massive new 1099-K reporting requirements set forth in the American Rescue Plan Act (ARPA). While taxpayers might have welcomed the Service’s decision to set a $5,000 reporting threshold for the form rather than ARPA’s $600, subsequent IRS edicts have also increased data requirements for third party settlement organizations that seem unnecessary under ARPA. Additionally, the IRS has continued to flout congressional intent by creating and expanding the Direct File program, which was only provided with funding for a feasibility study (and no more) under the Inflation Reduction Act of 2022. The Treasury Inspector General for Tax Administration has called out the Service for failing to produce complete records on the actual costs of building the Direct File portal which, again, took place in defiance of Congress.⁶

The President of Taxpayers Protection Alliance, who is a signatory to this letter, recently wrote that “Instead of duty to law, the IRS has instead become an echo chamber of illegal behavior and abusive tactics. This only further emboldens bad actors to carry out partisan retribution.”⁷ Regardless of their tax policy stances, all lawmakers should support measures that will uphold the public integrity of the tax administration system and the IRS.

Many of these activities have been underway for months, if not years, since the Inflation Reduction Act of 2022 carelessly provided the IRS with an additional $80 billion in funding that was weighted toward heavy-handed enforcement instead of taxpayer service and technology improvements. Concerted legislative and administrative action will be necessary in 2025 to reverse the dangerous course that has been charted. One opportunity for Congress to do so exists yet in 2024, as the House of Representatives prepares to vote on H.R. 115, the Midnight Rules Relief Act. This bill would allow a single congressional disapproval resolution of multiple rulemakings (rather than one at a time) submitted for review within the last 60 legislative days of the final year of a president’s term.

Until then, however, congressional bodies charged with oversight and appropriations should publicly call upon the IRS and Treasury to either withdraw or pause all of the items we have outlined, pending a sufficient period of time for the incoming leadership at Treasury and IRS to evaluate more prudent paths forward. Thank you for your consideration, and we stand ready to assist with the urgent, vital task of protecting taxpayers now before you.

Sincerely,

National Taxpayers Union

Americans for a Balanced Budget

Center for a Free Economy

Center for Individual Freedom

Center for Innovation and Free Enterprise

Consumer Action for a Strong Economy

Small Business and Entrepreneurship Council

Taxpayers Protection Alliance

Cc: The Honorable Janet Yellen, Secretary of the Treasury

The Honorable Daniel Werfel, Commissioner, Internal Revenue Service

The Honorable Billy Long, Nominee, Commissioner of Internal Revenue