Legal Definitions - IRS regulations

IRS regulations are detailed rules and guidelines issued by the Internal Revenue Service (IRS) to explain and interpret the broader tax laws passed by Congress, known as the Internal Revenue Code.

Think of the Internal Revenue Code as the main legal framework for taxation. It sets out the fundamental principles and mandates. However, these laws are often written in general terms. IRS regulations provide the specific instructions, definitions, and procedures necessary for taxpayers and the IRS itself to understand and comply with these laws. While these regulations carry the force of law, the IRS cannot use them to create new taxes or expand existing tax obligations beyond what the Internal Revenue Code permits. If a regulation is found to contradict the underlying tax law, it can be challenged and deemed invalid.

The IRS issues different types of regulations:

• Proposed regulations are published for public review and comment, allowing individuals and organizations to provide feedback before a rule becomes final.
• Temporary regulations provide immediate guidance on new or urgent tax matters. They are effective right away but have a limited lifespan, typically expiring within three years.
• Final regulations are the definitive rules, issued after considering public comments on proposed regulations. Both temporary and final regulations are binding on taxpayers and the IRS.

Here are some examples of how IRS regulations apply:

• Example 1: Clarifying a New Tax Credit

  Suppose Congress passes a new law establishing a tax credit for businesses that invest in certain renewable energy technologies. The law might broadly state that "qualified renewable energy property" is eligible. However, this term is vague. The IRS would then issue regulations to define precisely what types of equipment qualify, what documentation businesses need to keep to prove their investment, and how to calculate the exact credit amount. These regulations provide the necessary specifics for businesses to correctly claim the credit and for the IRS to administer it fairly.

• Example 2: Defining Deductible Business Expenses

  The Internal Revenue Code allows businesses to deduct "ordinary and necessary" expenses. Without further guidance, this phrase could be interpreted very differently by various businesses. IRS regulations step in to clarify what constitutes an "ordinary and necessary" expense in different contexts. For instance, regulations might specify limits on deductions for business meals and entertainment, or provide rules for deducting home office expenses, ensuring consistency and preventing abuse across all taxpayers.

• Example 3: Applying Tax Law to Emerging Technologies

  When new financial instruments or technologies emerge, such as cryptocurrency, the existing tax code may not explicitly address them. Instead of waiting for new legislation, the IRS often issues regulations to explain how existing tax principles apply. For example, the IRS issued guidance clarifying that virtual currency is treated as property for tax purposes, meaning general tax principles applicable to property transactions (like capital gains and losses) apply to cryptocurrency. These regulations help taxpayers understand their obligations in evolving areas.