In the U.S., it can often seem as if the Internal Revenue Service has nearly unlimited power. But the IRS is an executive branch agency, subject to the same limitations of all government agencies. While Congress passes laws that agencies must enforce, agencies can't unilaterally change the rules and regulations they must follow. The Administrative Procedure Act (APA) governs the process by which agencies develop and implement regulations. See 5 U.S.C. § 551 et seq. (1946). The APA requires that federal agencies issue proposed and final rules in the Federal Register, giving the public notice and the opportunity to comment on proposed regulations. In the last decade, the IRS has played fast and loose with the APA requirements, and recently, the U.S. Supreme Court called them to task.
CIC Services v. Internal Revenue Service
In CIC Services v. Internal Revenue Service, CIC brought suit against the IRS challenging Notice 2016-66, imposing substantial reporting requirements for certain insurance transactions. The IRS imposed the requirements of 2016-66 without using the rulemaking processes required by the APA. When CIC challenged this in court, the IRS used a common argument using the Anti-Injunction Act (AIA) to dismiss the suit. In many situations, taxpayers must pay a tax assessment before they can challenge it in federal district court or the U.S. Court of Federal Claims. Alternately, the IRS must issue a notice that a taxpayer owes money before the taxpayer can initiate a suit in federal Tax Court.
The purpose of the AIA was to keep taxpayers from challenging IRS decisions in court simply to delay paying an assessment. However, the IRS also applied this standard to reporting requirements it issued, even when it failed to follow APA administrative procedures to implement those requirements. The IRS's interpretation of the AIA has left many taxpayers with no way to challenge administratively improper regulations.
The U.S. Supreme Court reined in the IRS, agreeing that this standard would leave taxpayers in a Catch-22 position, needing to pay large fines and risk jail time for failing to follow the requirements of Notice 2016-66 before they could challenge the legality of the Notice in court. In a unanimous opinion authored by Justice Elana Kagan, the Supreme Court held that a suit to enjoin the requirements of Notice 2016-66 did not trigger the Anti-Injunction Act.
Ultimately, the CIC Services case will go a long way towards allowing taxpayers to validly challenge the legality of IRS regulations that haven't gone through the proper administrative process. The decision could help make the IRS more accountable to taxpayers and legislators.
Hire an Experienced Tax Attorney
If you're facing a dispute with the IRS, whether over policy or an assessment, you need the guidance of an experienced tax professional. Don't try to face the IRS on your own. If you need help, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.