The IRS has filed its brief in CIC Services v. Internal Revenue Service, a case now pending in the U.S. Supreme Court for argument in late 2020 or early 2021. Back in July we filed our brief in the case, which deals with the agency’s sweeping, overbroad assertion of power and their efforts to insulate themselves from challenge.
The IRS continues to invoke the federal Anti-Injunction Act (an 1867 statute that essentially states that a taxpayer must pay a tax before bringing a suit to challenge it) to prevent a taxpayer from challenging a dubious IRS regulation without first violating it and incurring criminal penalties. In CIC Services, the taxpayer has argued that the IRS regulation should have complied with the notice-and-comment provisions of the Administrative Procedure Act (APA), an argument the IRS does not address in its brief other than to say the APA can be overridden by other federal laws (Brief at 40-41). The IRS replies that the Anti-Injunction Act applies because if the taxpayer would owe money to the IRS in the form of penalties if they do not comply with the regulation:
Petitioner’s situation is no different from that of any other taxpayer who is contemplating an activity with potential tax consequences, and who seeks a judicial ruling that would preemptively shield the activity from those consequences. The Anti-Injunction Act and the Declaratory Judgment Act squarely foreclose such suits. (Brief at 13.)
As we wrote in our brief, the Anti-Injunction Act can only be invoked if a lawsuit involves (1) taxes, and the (2) purpose of the lawsuit is (3) to restrain revenue assessment or collection. This lawsuit is (1) about penalties, not taxes; (2) is a regulation with excessive reporting and recordkeeping requirements and not specifically to restrain revenue collection; and (3) no assessment has been issued. Further, putting taxpayers in a "report to prison first [and] challenge later" position, to quote Judge Jeffrey Sutton's opinion in the lower court, violates due process.
The IRS contends that the taxpayer has a remedy available: a post-payment refund suit. (Brief at 44-46.) They refreshingly do acknowledge that the taxpayer would face a risk of “incurring a penalty that it might have avoided if it had received an advance judicial ruling that Notice 2016-66 was valid” (Brief at 46). They muse that the taxpayer has nothing to worry about because “no prosecution…has been brought under Section 7203 against a taxpayer who, in order to obtain administrative and judicial review, failed to comply with a reporting requirement based on a good-faith belief that the requirement did not apply, disclosed that belief to the IRS in a timely return, and incurred and paid a penalty.” (Brief at 47). In other words, “Trust us.”
The same IRS that is refusing to accept any input on this regulation outside of an IRS enforcement action is claiming not to understand why on earth any taxpayer would be afraid of it. CIC Services is one of the most important cases for establishing some semblance of limits on IRS enforcement and bears close monitoring by those interested in defending taxpayer rights.
The case is CIC Services, LLC v. Internal Revenue Service, No. 19-930, and our brief can be found here.