The IRS's Growing Role as A "Rules Interpreter"

A recent article by the National Review brought to light how the IRS has taken on the role of “rules interpretation” in recent years, which is beyond its scope as the nation’s tax collecting agency. The most notorious example of this new role is highlighted in the King vs Burwell case before the Supreme Court — where the IRS interpreted the language of Obamacare other than what was expressly written down as law. However, as the National Review discusses, the IRS has grown accustomed to interpreting law as it sees fit, without the oversight of Congress. Therein lies the problem.

With Burwell, the question being debated is over the letter of the law vs the spirit of the law. As Obamacare was written, tax subsidies were available for federal exchanges (letter of the law). As the IRS is the administrator, so to speak, of the subsidies, it interpreted that line of law to apply to all healthcare exchanges (spirit of the law) and ruled that subsidies were available for both federal and state exchanges, even though Obamacare never specified state exchanges, only federal. The federal government was sued, claiming that the IRS had not the power to administer subsidies beyond what was written, passed, and voted into law. SCOTUS will issue its ruling on the matter later this summer.

The question of rules interpretation is an interesting one. How much power, if any, does the IRS have in sorting out the minutiae of detail in the myriad of tax credits and subsidies that the tax code is riddled with?

The potential for abuse is certainly there. The National Review article focused on just one type of tax credit, the “production tax credit” (PTC) which applied to wind-energy producers, and all the changes the IRS made to the rules regarding this tax credit over the past few years:

*“In December 2012, Congress extended the production tax credit (PTC) to cover wind-energy producers who were in the beginning stages of construction by the subsidy’s cutoff date. The IRS clarified shortly thereafter that wind-farm projects would be able to receive the special tax giveaway if they spent as little as 5 percent of the construction costs.”

*“In April 2013, the IRS apparently decided the tax credit wasn’t large enough. So it simply raised the value of the PTC from $22 per megawatt-hour of electricity produced to $23 per megawatt-hour. Voilà — more federal spending courtesy of you, the taxpayer.”

*“In September 2013, the IRS went a step further. It expanded the PTC to cover wind-farm projects that generate power before the end of 2015, despite the fact that the PTC for all projects was set to expire at the end of 2013. The IRS also said in the notice that even projects that come online after that might still qualify; the agency intends to make decisions on a project-by-project basis.”

*“In August 2014, the IRS decided it would not only pay wind-energy developers for each megawatt-hour they produce. It would also allow them to sell a project — regardless of whether it was completed — and use the selling costs they incur to count toward qualifying for the PTC.”

*“The IRS also loosened its requirement that companies need to spend only 5 percent of construction costs to qualify. The agency said it would consider only the nature of the work (such as digging foundations, installing transformers, building roads), not the extent or the cost of the overall project. This more subjective standard gave the IRS even more leeway in doling out government subsidies.”

*In March 2015, the IRS loosened the PTC eligibility requirements yet again. The agency clarified what “begin construction” means. Under the new guidance, if a wind-project developer began construction on a new facility prior to January 1, 2015, and places the project in service before January 1, 2017, then the facility will be considered to be in progress for the purposes of receiving the PTC. This is regardless of the amount of physical work performed or the amount of costs paid or incurred within that amount of time.”

The PTC tax credit, between December 2012 and March 2015, had its rules significantly altered by the IRS. The crux of the issue, however, is the fact that this happened without any congressional oversight. The IRS workers, the ones making the decisions on these rules, are unelected, and accountable to no one. And yet, the changing of the tax credit affects the taxpayer. National Review notes, “While the PTC has historically averaged roughly $5 billion per year, the most recent one-year extension will cost taxpayers $13 billion.” That is an alarming expansion of taxpayer money just in this particular credit instance, without the approval of Congress.

This is also an effect of the larger problem of Congress using the tax code to pick winners and losers. Here, we have special tax credits to companies in order to push “green energy”. It is the essence of crony capitalism, where politicians trade favors and barters to support certain initiatives or restrict others via new taxes or credits. They’re basically all gimmicks to aid in reelection or pander to a portion of the electorate — and then we never get rid of all the tacked-on programs and policies because no one wants to give up their special initiatives.

The code has grown immensely complex. And now we have the IRS regularly going beyond its authority as well. The IRS must be reigned in from interpreter of law back to mere enforcer, as it goes about its business of tax collection. As such, Congress would also do well to reduce the amount of crony capitalism it engages in and stop playing games with our tax code.

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