Help Wanted: Treasury And The IRS Gear Up On Energy Tax Guidance

Help Wanted: Treasury And The IRS Gear Up On Energy Tax Guidance

When Congress added a host of new credits, concepts, and changes to the energy provisions in the tax code through the Inflation Reduction Act (IRA, P.L. 117-169), it became clear that the guidance writers at the IRS and Treasury would have to clear their calendars this fall.

Last year’s legislative back-and-forth over Build Back Better gave a preview of the general direction the energy provisions might take. That provided the IRS and Treasury with a head start in thinking through the range of issues that guidance might need to address.

But guidance projects can’t start in earnest without a statute, and the August enactment of the IRA marked the formal beginning of implementation.

The government signaled with a series of six notices and a fact sheet on October 5 that it wants to speed up the guidance process. That might be a challenge, particularly when the guidance must be in the form of regulations and so must comply with the Administrative Procedure Act, which requires a notice and comment period.

Informal guidance such as notices, revenue rulings, and FAQs will suffice for pieces of the IRA implementation, but taxpayers will want many of the rules to be in regulations so that they have the full force of law. Treasury and the IRS announced that they’d like prompt assistance in identifying the implementation issues that taxpayers care the most about and what the rules should be.

The result is more than 100 pages spread across six notices of recitation of the statutory language and questions that the government hopes taxpayers and their representatives will answer. The opening request in all of them is for assistance in triage: Each notice asks commentators to identify which issues need guidance quickly and which are most important. Those comments will likely form the basis of the to-do list and could help smooth the guidance process and make it more responsive.

The notices are also intended to weed out issues in the hopes of streamlining the process. Several of the questions indicate that the administration would like to know if it shouldn’t bother to issue guidance on a particular topic.

The phrase “what, if any, guidance is needed” is a common refrain. But some of those queries look like wishful thinking. Notice 2022-51, 2022-43 IRB 1, optimistically asks of the apprenticeship requirement: “What, if any, clarification is needed regarding the good faith effort exception?”

There might not be enough apprentices to go around, which will make clarity in the application of the good-faith exception important to taxpayers.

There are no promises about what will be addressed in regulations versus informal guidance or when any rules will be released, but the notices and the November 4 deadline for comments suggest that the IRS and Treasury have a tight schedule in mind. However, the deadline has some built-in flexibility.

Recognizing that a month is a short period in which to produce comments, the notices say that “consideration will be given, however, to any written comment submitted after Friday, November 4, 2022, if such consideration will not delay the issuance of guidance.”

Nicole M. Elliott of Holland & Knight LLP said it’s encouraging that the “IRS and Treasury seem to be intent on engaging stakeholders early and often.” Many technical issues and details will require stakeholder education of the administration, she said.

Engagement Process

Treasury’s fact sheet on its plans for the implementation process identified three core principles: strong and broad public engagement, clarity and certainty, and sound stewardship. On the first, Treasury pledged to “engage a broad spectrum of taxpayers, stakeholders, and communities to inform guidance and rulemaking.”

The plans include several roundtable discussions with “industry, labor unions, climate and environmental justice advocates, and others.”

Pre-guidance meetings and communications between taxpayers and the government are routine; less typical is for the IRS and Treasury to convene formal meetings of their own accord, rather than at the request of taxpayers.

Taxpayers have been considering how the new credits and changes might apply to them since at least August. Although the IRS has a long history of using notices to seek comments on particular topics, it rarely poses so many questions about the implementation of a single bill all at once. The sheer number might be unique to the IRA because of the interconnectedness of many of its provisions.

For taxpayers preparing comments, two process questions loom particularly large: First, the order in which the IRS and Treasury might prepare and release guidance, and second, when the guidance will be released.

The notices give no indication of what might be prioritized. The fact sheet says the objective is that “the climate and economic benefits of this historic legislation [are] felt as quickly as possible.”

Taxpayers have individualized guidance priorities, which typically start with the specific credit that they would like to qualify for and then extend to questions about applying the overarching concepts in the IRA, such as the rules on domestic content, prevailing wages and apprenticeships, energy communities, transferability, and direct pay.

The result will likely be a large volume of comment letters for the IRS and Treasury to work through. But soliciting comments early might have ancillary benefits. It’s possible that the initial round of comments results in fewer later on the proposed regulations, which in turn could shorten both the route to final regulations and the preambles in them.

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Because these input-seeking notices aren’t required by the Administrative Procedure Act, the IRS and Treasury won’t be obligated to respond to individual comments when they issue substantive guidance. It will be interesting to see if they include responses in the eventual guidance, particularly when it’s in forms that don’t require it.

As a matter of public engagement, including thorough explanations of the reasoning that went into even informal guidance might be a good idea. Treasury’s fact sheet explained that the department is committed to “being responsive to public input,” but for guidance other than regulations, that responsiveness may be found only in the substantive guidance, rather than as a separate discussion, as in preambles to final regulations.

Whether this pre-issuance approach will reduce the number of comments that must be addressed in response to proposed regulations remains to be seen, but it’s a distinct possibility.

The early engagement may prove particularly fruitful in identifying issues that the IRS and Treasury haven’t considered yet, but that are important to taxpayers. The questions in the notices cover a wide range of topics, but some are catchall, asking for any other credit-related issues that are important to taxpayers. Identifying those early could help speed things up.

The notices don’t indicate what guidance format the IRS and Treasury will select for any given topic. If guidance is drafted as proposed regulations, there will be another comment period, but no period is required for informal guidance.

Elliott said it’s understandable that the IRS and Treasury didn’t explain which issues they planned to address in proposed and final regulations because the purpose of the notices is to help identify the sticking points that must have the full force of law.

But some items, like the prevailing wage and apprenticeship rules, will likely be issued as formal guidance. Notices are a good option for taxpayer-favorable rules, but rules that the IRS will need to enforce are most likely to be in proposed and final regulations, Elliott said.

Substance

After reciting how the statutory text works, the notices ask about standard issues addressed in guidance, including what terms need to be defined and how, what documentation is available or could be made available to support a claim for a credit, and what factors to include in applying tests and exceptions.

Little can be gleaned about what direction the eventual guidance might take in either the summaries of the law or the questions. In its fact sheet, Treasury emphasized that it intended to help “put in place effective guardrails and reporting” to effectuate the law. The notices contain many questions about documentation.

The questions in the notices demonstrate that the IRS and Treasury were thinking about potential implementation issues throughout the legislative process, said Amish M. Shah of Eversheds Sutherland (US) LLP. “The number and type of questions confirms that they have been spending time thinking about the kind of guidance that would be needed if Build Back Better or the Inflation Reduction Act passed,” he said.

The notices suggest that the IRS and Treasury plan to take the opportunity of drafting IRA guidance to provide clarity on long-standing questions that taxpayers asked before the IRA’s passage.

Shah noted that, for example, in Notice 2022-49, 2022-43 IRB 1, the IRS and Treasury asked for input on whether guidance is needed under the section 48 energy investment credit to help determine whether an investment credit facility that elects the section 48 credit instead of the section 45 production tax credit is subject to all the requirements of section 45, including the requirement that electricity generated by the investment credit facility be sold to an unrelated person. That question predated the IRA, as did some of the other questions in the notice, he said.

The notices also reassured taxpayers that the 60-day clock that the statute sets for satisfying the prevailing wage and apprenticeship requirements is not started by the release of the notice seeking input. Rather, that will be expressly identified in coming guidance, according to Notice 2022-51.

The rare, compehrensive pre-guidance invitation to provide comments to the IRS and Treasury is a notable development in the regulatory process.

It may ultimately end up being unique to the IRA, because of the specialized nature of the energy tax law changes, but it suggests that the IRS and Treasury are experimenting with seeking more input before releasing guidance. This new model seems likely to be mutually beneficial to both taxpayers and the government.

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