The following information will outline the process taken by Congress to create a tax law and will explain the different levels of authority to follow in order to read, understand, and comply with such tax law.
The 16th Amendment to the Constitution of the United States acts as the legislative tax authority and “Grants Congress the power to: lay and collect taxes on income, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration”. In essence, this means Congress is charged with creating and interpreting the tax code as well as putting in place an organization, the Internal Revenue Service (“IRS”), to enforce the code.
The Tax Legislation Process
Section 7 of the Constitution states, “all bills for raising revenue shall originate in the House of Representatives”.
The House of Representatives creates a tax bill, which is sent to the House Ways and Means Committee. After discussing the bill, the House Ways and Means Committee either kills it and it must be resubmitted later by the House, or amends some or the entire bill.
The House reviews the amended bill and decides whether to kill the bill or amend some or the entire bill and sends it to the Senate. The Senate follows the same process as the House and sends the bill to the Senate Finance Committee. The Senate Finance Committee can also amend some or the entire bill and either kill or send the amended bill back to the Senate.
If no further changes are made by the Senate, which is very rare, the bill is sent on to the President for a final review. If changes are made, a Joint Conference Committee containing both House and Senate members will be held to further amend the bill. Once finished, the bill is then sent to the President for final review.
The President can choose to sign the bill into law, veto the law, or take no action.
In a veto, the bill is returned to Congress and if the bill receives a two-thirds majority vote in both the House and the Senate the bill is enacted and is entered into the code without presidential approval.
If the President fails to act within 10 days, the bill is automatically enacted into the Internal Revenue Code (identical to if he signs the bill into law). However, if Congress has adjourned before the 10th day, the bill is vetoed and Congress cannot override the veto as they are not in session. The bill must then go through the entire process again in order to be passed and signed into law.
Legislative Committee Reports
As a bill goes through the legislative process, each committee that looks at the bill submits a report. These Legislative Committee Reports provide good insight as to the legislative intent of Congress when writing the tax law. Legislative Committee Reports have the second highest authority; the only resource with more authority is the Internal Revenue Code.
Often the laws written in the code and the reports from the legislative committees explained above are too general and cannot adequately answer taxpayers’ compliance questions. As such, the Treasury Department will issue interpretations for taxpayers to follow. These are known as Regulations or Temporary Regulations (immediate guidance).
Internal Revenue Service
The IRS is charged with interpreting the Regulations designed by the Treasury Department. These interpretations include:
- Revenue Rulings
- Revenue Procedures, and
- Private Letter Rulings
All of these hold authority and can be used to guide taxpayers through compliance with tax law generated by the code. However, private letter rulings can only be used by the taxpayer requesting the ruling and will hold no authority for any other taxpayer. Private letter rulings are a response by the IRS to a question proposed by a taxpayer or representative of the taxpayer. If these rulings are revoked or modified they can no longer be relied upon and other authority or rulings must be adhered to.
The following summarizes the tax authorities discussed above from the highest to lowest authority.
- Internal Revenue Code
- Reports of the Legislative Committees
- Treasury Department Regulations
- IRS Revenue Rulings and Procedures
The above information is a quick explanation of the process for enacting, upholding, and interpreting tax law for taxpayers to follow in the United States. For a more thorough understanding of the tax law process and authority, or for guidance on a specific tax issue, please do not hesitate to call our offices.