The U.S. Supreme Court has now ruled against Jennifer Zuch and allowed the IRS to end-run around important taxpayer protections. The Court ruled, 8-1, that the law as written deprives the Tax Court of jurisdiction if the IRS abandons a levy and decides to seize taxpayer assets another way. The decision is important because it highlights the need for Congress to act to stop Ms. Zuch’s pain from becoming the norm across the country.
Ms. Zuch and the IRS disagree on whether she still owes money on her 2010 tax return. During the resulting Collection Due Process hearing in Tax Court—a method taxpayers have to contest the collection of taxes before the government takes the money—the IRS feared it might lose so it decided to takeo a different path. The IRS simply took her tax refunds from other years and applied them to what it calculated as her 2010 liability, reducing the balance owed to zero. Since the balance was now zero, the IRS argued (and the Supreme Court today agreed) that the Tax Court lost jurisdiction—the right to hear and decide—Ms. Zuch’s case.
In the majority opinion written by Justice Amy Coney Barrett, the Court said that taxpayers can always sue to recover what the IRS seized, that is sue for a refund. The problem is suits for refund are much more expensive than Tax Court, which is specifically designed to afford taxpayers more protections in a less formal forum. But, more importantly, suits for refunds require administrative exhaustion first—basically, taxpayers need to ask the IRS for the refund before they have the right to sue in federal court for a refund. Such an ask must happen within 3 years of the taking of the money. That’s a trap for the unwary: in this very case, Ms. Zuch let the deadline pass to initiate a lawsuit for refund because she had this case pending that she understandably thought would resolve the issue. As Justice Gorsuch, writing in dissent, observed:
After today, §6330 proceedings are essentially risk-free for the IRS. It may pursue a levy and argue its case to the Tax Court. Then, if the Tax Court seems likely to side with the taxpayer, the IRS can drop the levy and avoid an unfavorable ruling on the taxpayer’s underlying tax liability. Doing so will often prove only a small setback for the IRS because the agency remains free to pursue other collection methods—including keeping, rather than refunding, a taxpayer’s later overpayments. And the taxpayer will often find herself without any way to challenge the IRS’s error or prevent the agency from keeping more of her money than it is lawfully due.
Congress can act to provide for protections lost after the Zuch decision. It would involve two simple changes. First and foremost, the statutory deadline (26 U.S.C. § 6511(a)) for filing a refund could be explicitly tolled (i.e. the deadline will be held open) while a taxpayer tries her hand in Tax Court under a § 6330 proceeding. Since Congress provided the Tax Court as a place to figure out tax liability, the IRS should not be able to game the system in the way it has here. It’s very likely that, even if Ms. Zuch files for a refund tomorrow, she will not get all of her money back. Congress needs to prevent this from happening again.
Second, Congress can amend the IRS’s powers to stop the IRS from the self-help it engaged in here. The IRS misused 26 U.S.C. § 6402 to take Ms. Zuch’s refunds for later tax years to satisfy what the Service claimed it was owed—while Ms. Zuch was actively contesting in Tax Court. Congress could amend § 6402 to bar such collection if the taxpayer is already involved in a § 6330 proceeding before the Tax Court.
Of course, this case exists because there are so few avenues for a taxpayer to assert their rights before an independent judge. Assertions of other types of claims can be heard in regular federal courts organized under Article III of the Constitution. These are the judges that are nominated by the president, confirmed by the Senate, and have lifetime appointments to be free from political pressure.
Congress needs to quit barring federal courts from hearing most tax challenges. As we have written before, there needs to be serious reform of laws like the Anti-Injunction Act (AIA), the Tax Injunction Act (TIA), and the prohibitions in the Declaratory Judgment Act (DJA). That is because taxpayers should have the right to be before a real judge with Article III powers. As Justice Gorsuch recognized in his Zuch dissent: The Tax Court’s “[n]ame notwithstanding, that body is not part of the Judicial Branch. Instead, it exercises Article II ‘[e]xecutive authority as part of the Executive Branch.’” (He was quoting Judge Srinivasan in Kuretski v. Commissioner of Internal Revenue and citing a Justice Scalia concurrence.) This is the ultimate protection of taxpayers from all sorts of tax administration ills. Reform could be accomplished by amending these laws to only stop preliminary injunctions and orders.
The Anti-Injunction Act, 26 U.S.C. § 7421(a) could read “no suit for the purpose of preliminarily or temporarily restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed. Injunctive or declaratory relief shall be available only after judgment on the merits.” While the Declaratory Judgment Act, 28 U.S.C. § 2201(a), could be amended to “In a case of actual controversy within its jurisdiction, except with respect to preliminarily or temporarily restraining Federal taxes . . . any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought.” And the Tax Injunction Act, 28 U.S.C. § 1341 could be changed to “The district courts shall not preliminarily or temporarily enjoin, suspend or restrain the assessment, levy or collection of any tax under State law . . .” These modest changes mean that the AIA, TIA, and DJA would no longer be trump cards to stop challenges to tax administration abuse, like the self-help the IRS took instead of letting the judicial process conclude on Ms. Zuch’s challenge.
The decision is Commissioner of Internal Revenue v. Zuch, No. 24-416.