Summary: While the job of the legislative branch is to write the tax law, the executive branch must put the law into practice. The Treasury Department and the Internal Revenue Service (IRS) bring laws to life by enforcing the requirements, developing regulations that interpret the law, and issuing practical guidance for taxpayers. Together, these agencies provide the direction and oversight needed to administer the nation’s tax system.
How does the executive branch shape tax law?
The U.S. tax code may be an extensive document, but it rarely tells the whole story. While its complex explanations and technical details outline the rules, taxpayers often need additional guidance to understand how those rules apply in practice. For example, Congress may write a new tax credit in a just a few sentences, but claiming the credit can raise a host of practical questions:
How do you know if you qualify?
What records do you need to keep?
What tax form do you use to claim the credit?
The executive branch typically fills in these critical details, primarily through the Treasury Department in conjunction with the agency most familiar to taxpayers, the IRS.
Article I of the U.S. Constitution gives Congress the power to write laws, while Article II gives the executive branch the responsibility to faithfully carry them out. Federal tax laws enacted by Congress include the Internal Revenue Code (IRC), which the executive brand administers and enforces. Specifically, the IRC authorizes the secretary of the Treasury to assess and collect taxes and issue the rules and regulations needed to enforce the tax law. The Treasury Department and the IRS use this rulemaking authority to fill in the details and provide detailed guidance taxpayers need to understand and comply with their tax obligations.
How does the Treasury Department write the rules?
The most authoritative rules the Treasury and the IRS write are Treasury regulations. The purpose of a Treasury regulation is to explain the IRS’s interpretation of the tax law. Sometimes, a tax statute written by Congress will explicitly instruct the Secretary of the Treasury to create regulations for a specific tax code section.
For example, the tax code permits an affiliated group of corporations to file a consolidated return but only offers a few details on the subject. Instead, Section 1502 of the tax code authorizes the secretary to write regulations that govern the filing of consolidated returns and the computation of tax for a consolidated group. In turn, the regulations for this section are extensive and provide commentary and examples covering a wide variety of situations.
The Treasury and the IRS do not publish a regulation as soon as it is written. Instead, the regulation must go through the notice-and-comment process as required by the Administrative Procedure Act (APA). This process includes:
- Proposed regulations are published: The Treasury Department and the IRS publish a notice of proposed rulemaking that includes the proposed regulatory text and explains the IRS’s reasoning behind it.
- The public submits comments: The public typically has 30 to 60 days to comment, as specified in the notice. Anyone is permitted to comment – not just tax professionals, but also business owners, trade associations, and any other stakeholders who might have an opinion.
- Feedback is reviewed: The Treasury Department and the IRS must consider all relevant comments and address any significant issues raised, while retaining final authority over any revisions.
- Final regulations are issued: A Treasury Decision explains any revisions made after the comment period, and the final regulations are published in the Federal Register, officially becoming part of tax law.
A recent example involving the “no tax on tips” deduction in the One Big Beautiful Bill Act (OBBA) illustrates the influence that ordinary taxpayers have on the regulatory process. A few months after the bill was passed, the Treasury issued proposed regulations that included a list of occupations that customarily receive tips and would therefore be eligible for the deduction. The Treasury and the IRS received comments, several of which named occupations that commenters believed should also be included, such as florists, visual artists, and even gas pump attendants. The Treasury agreed with the comments after reviewing the data, and those occupations were added to the final regulations.
Meanwhile, other commenters noted that app-based delivery drivers might not qualify for the deduction based on the definition of delivery worker in the proposed regulations, and the Treasury responded by explicitly including such workers in the final regulations. Even so, not every commenter was successful, as the Treasury declined to include certain occupations, such as clergy members and accountants.
When can the IRS skip the notice-and-comment process?
One notable exception to the notice-and-comment process is when the IRS has good cause to issue regulations that are effective immediately. For example, taxpayers may need guidance to help them respond quickly to a new tax law that is going into effect. This happened frequently during the COVID-19 pandemic as the government attempted to help taxpayers as expeditiously as possible.
When this occurs, the IRS is permitted by the Administrative Practices Act (APA) to issue temporary regulations that taxpayers can use right away. Temporary regulations expire within three years of issuance; meanwhile, corresponding proposed regulations are simultaneously issued that go through the normal process.
What if a taxpayer disagrees with a Treasury regulation?
Courts will always consider Treasury regulations when a dispute between a taxpayer and the IRS goes to litigation. However, the amount of deference that courts are required to grant to regulations has recently undergone a significant change.
What was the Chevron deference?
For many years, federal courts followed the “Chevron deference” standard, established in the 1984 case Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. In this case, the Supreme Court held that where a statute is ambiguous on a specific question, courts should make their decisions according to the regulations as long as those regulations are based on a permissible construction of the statute.
In other words, courts are not to substitute their own judgment about the meaning and application of a statute where existing regulations already provide a reasonable interpretation of the law.
How did Loper Bright change the standard?
The judicial doctrine of Chevron deference was the standard followed by courts until the 2024 case Loper Bright Enterprises v. Raimondo. In that case, the Supreme Court overturned the 40-year precedent set in Chevron and determined that the courts should interpret the law for themselves and draw their own conclusions about the meaning of a statute instead of being bound by executive branch regulations. This ruling opened the door for taxpayers to challenge regulations in cases where the taxpayer disagrees with the IRS’s interpretation of an ambiguous statute.
What does Loper Bright mean in practice?
The new Loper Bright standard has already been consequential in tax cases over the last two years. One example is 3M Co. & Subsidiaries v. Commissioner, a transfer-pricing dispute involving royalty income from a foreign subsidiary. The Tax Court had originally ruled in favor of the IRS’s allocation of an additional $23.7 million of royalty income to the parent corporation based on guidance provided in a Treasury regulation.
However, the Supreme Court’s decision in Loper Bright came down while the case was on appeal at the 8th U.S. Circuit Court of Appeals. In light of the new Loper Bright standard, the 8th Circuit determined that its best reading of the relevant statute did not agree with the interpretation in the regulation and therefore reversed the Tax Court decision on that basis.
The result was significant, as 3M Co. received a refund of over $5 million of tax and interest because of the reversal. This case and others demonstrate that regulations are not the final word when it comes to interpreting the tax code, and that taxpayers can successfully take a position that is contrary to a regulation in some circumstances.
To be clear, the Loper Bright precedent does not mean that Treasury regulations are no longer authoritative or that courts will no longer rely on them. Taxpayers should still expect courts to respect regulations and weigh them heavily when reaching a decision. However, a taxpayer who can make a strong case that regulations miss the mark in interpreting a statute should find that courts are more willing to consider their argument than they would have been under Chevron deference.
What other guidance does the IRS provide?
In addition to regulations, the IRS frequently issues other types of guidance that taxpayers can rely on to varying degrees.
| Guidance type | What it does | How much weight it carries |
|---|---|---|
| Treasury regulation | Explains how the Treasury and the IRS interpret a statue, usually after a public notice-and-comment period. | Most authoritative. Courts weigh regulations heavily, though Loper Bright lets taxpayers challenge them. |
| Revenue ruling | States the IRS’s position on a fact pattern common enough to warrant a public answer, such as the treatment of certain digital asset transactions. | Official guidance taxpayers can rely on, without going through a notice-and-comments period. |
| Revenue procedure | Sets out the steps and calculations to follow and reach a result, such as the accounting method changes reported on Form 3115. | Authoritative, but not enforceable when it conflicts with the tax code or regulations. |
| IRS notices and announcements | Delivers more informal official guidance, often when taxpayers need an answer quickly. | Does not bind the IRS when they conflict with more authoritative sources. |
| Chief Counsel Advice and website FAQs | Provides insight on how the IRS is thinking about a topic. | Cannot be cited as precedent and are not binding guidance. |
How does the IRS enforce the law?
Beyond issuing rules and guidance for the tax code, the IRS is also responsible for administering and enforcing tax law, including through audits. The typical audit process provides the taxpayer with ample opportunity to challenge an assessment of additional tax from the IRS.
A taxpayer who disagrees with an assessment has three routes:
- Pursue an appeal with the IRS Independent Office of Appeals.
- Request a collection due process hearing if the IRS has filed a tax lien notice or proposed a levy.
- Challenge a proposed assessment by filing a petition with the Tax Court.
The IRS is represented by an attorney from the IRS Office of Chief Counsel for Tax Court cases, although an attorney from the Department of Justice will take over for the government if the case is then appealed to a U.S. court of appeals.
Does the IRS prosecute tax evasion?
A taxpayer who willfully evades tax or files fraudulent tax returns may be subject to criminal prosecution by the government. Contrary to popular perception, the IRS itself does not prosecute taxpayers for tax evasion. Instead, IRS Criminal Investigation gathers evidence and then makes prosecution recommendations to the Tax Division of the Department of Justice based on their findings.
Final thoughts: why the executive branch matters beyond tax enforcement
Under the U.S. constitutional system of government, the role of the executive branch can be broadly described as enforcement of the law. For taxes, that enforcement mandate belongs to the Treasury Department and specifically to the IRS. However, the IRS also plays an essential role in clarifying the meaning of tax statutes, creating procedures that facilitate compliance with the tax law, and timely communicating information to taxpayers.
Understanding how the IRS carries out these various responsibilities can help individuals and businesses navigate the complicated terrain of the tax law. Knowing where a rule comes from, and how much weight it carries, can help you weigh a filing position before it turns into a costly dispute.
