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More Shields and Fewer Swords in Realm of Federal Regulation

Yesterday the New Civil Liberties Alliance (NCLA) held a fascinating event on one of their marquee cases, Baldwin v. United States (read more in my post from last month—it’s the second of the four cases discussed). The case involves the Internal Revenue Service issuing a tax filing rule that conflicted both with legislation passed by Congress and with centuries-old common law practice. Despite a loss for the government at the circuit court level, a Ninth Circuit panel ruled in favor of the IRS earlier this year, invoking Supreme Court precedents in NCTA v. Brand X and Chevron v. NRDC that courts should defer to the agency in question. NCLA currently has a cert petition pending before the Supreme Court to reconsider the case.

That topic made for a great discussion, but one especially interesting angle arose during the question and answer portion. Longtime tax attorney and Georgetown Law professor Robert Carney mentioned that when different circuit courts have ruled different ways on a particular tax issue, it can be useful (and helpful for taxpayers) for the IRS to issue “sub-regulatory guidance” on the topic, so that people know what rules to follow. Executive Director Mark Chenoweth took issue with that, nothing that NCLA is generally opposed to agencies issuing an increasing volume of guidance documents. Because guidance documents do not go through the same traditional notice-and-comment process as formal rules and can be more challenging to catalog and track, the Competitive Enterprise Institute’s Wayne Crews has come to refer to them as “regulatory dark matter.”

This highlights what has become an ironic conflict for federal agencies—informal guidance documents are supposed to help Americans navigate the regulatory system and provide them with clarity and certainty, but their proliferation and very informality has itself become a problem. In a Forbes column Thursday, former Office of Information and Regulatory Affairs administrator Susan Dudley addressed this very topic, reacting to two new executive orders (“Promoting the Rule of Law Through Improved Agency Guidance Documents” and “Promoting the Rule of Law Through Transparency and Fairness in Civil Administrative Enforcement and Adjudication”), issued this week by the White House:

These actions are the latest attempt to ensure that the guidance agencies provide regulated parties is informative without being binding, or legally enforceable. Agency guidance, or “regulatory dark matter” as Forbes contributor Wayne Crews has dubbed it, can refer to a variety of different policy statements and interpretive rules, including manuals, opinion letters, and even blog posts. They can provide valuable information on how an agency interprets regulations and statutory law, providing a safe harbor on which regulated parties can rely. But there has long been concern that agencies sometimes use guidance inappropriately to make binding policy without going through transparent rulemaking steps.

Since 1946, the Administrative Procedure Act (APA) has required agencies to develop a supporting record and seek public comment before issuing binding final rules. Complying with these procedures can be cumbersome and sometimes takes years. Since the APA excludes some policy statements from its requirements, “guidance” can be an appealing vehicle for issuing policy quickly. While that’s fine for informing regulated parties of agencies’ interpretations of policy or responding quickly to questions that might arise, it becomes problematic if agencies treat noncompliance with the guidance as an illegal act. In other words, guidance is valuable as a shield, but should not be used as a sword.

Much in the same way that the burden of proof required is different in civil and criminal proceedings, reflecting the greater potential hazards of the latter, rules one can be prosecuted under (swords) need greater procedural safeguards than guidance that can potentially save you from being prosecuted (shields). In that sense, agencies should have a great deal of leeway in establishing policy that provides a safe harbor for law-abiding Americans, but should have to meet a much higher standard for publishing new regulations that could expose Americans to additional enforcement penalties.

This week’s new executive orders will move us in that direction, with the requirement that (as Dudley writes) “agencies must provide anyone subject to a legal action an opportunity to contest its legal and factual determinations, and they must respond to parties’ comments in writing.” Agencies must also offer people who do run afoul of the rules the opportunity to obtain reduced penalties for self-reporting and sharing information with the enforcing agency.  

See more from Wayne on regulatory dark matter in the video below.