Today NTUF's Taxpayer Defense Center filed an amicus brief before the Supreme Court in the case of CIC Services, LLC, v. Internal Revenue Service. The case concerns sweeping, overbroad IRS powers and their efforts to insulate themselves from challenge. We are proud to be filing a brief on the side of the petitioner, and I wanted to outline why NTUF's Taxpayer Defense Center has weighed in on this case.
In November 2016, the IRS issued Notice 2016-66 which put the dreaded "transactions of interest" label on certain micro-captive transactions. As a result, taxpayers engaging in those transactions must comply with extensive reporting and recordkeeping requirements. Noncompliance can result in penalties including fines ($25,000 for individuals, $100,000 for corporations) and imprisonment up to one year.
Although the federal Administrative Procedure Act (APA) requires federal regulations to go through notice-and-comment procedures before becoming effective, the IRS did not do so with Notice 2016-66. CIC Services LLC filed a lawsuit challenging Notice 2016-66 on the ground that the IRS did not follow those procedures. The IRS moved to dismiss the suit, arguing that the complaint is barred by the Anti-Injunction Act, a federal law that bars lawsuits that have the purpose of restraining the assessment or collection of taxes. The IRS explained that the reporting and recordkeeping requirements are enforceable with monetary penalties that the Internal Revenue Code deems to be taxes, and the taxpayer's lawsuit would restrain their collection. The District Court ruled for the IRS, and a closely divided court of appeals affirmed. On May 4, 2020, the U.S. Supreme Court agreed to hear the appeal this fall and invited parties to submit briefs.
NTUF's brief in support of the taxpayer makes several key arguments:
- The IRS is wrong in its efforts to insulate its regulations from any outside review, by claiming to be exempt from administrative notice-and-comment requirements and also claiming that its regulations cannot be challenged before enforcement begins. It puts taxpayers in a "report to prison first [and] challenge later" position, to quote Judge Jeffrey Sutton's opinion in the lower court, in violation of the Due Process Clause.
- The IRS should not be allowed to invoke the Anti-Injunction Act to prevent a pre-enforcement challenge to its regulation. The Anti-Injunction Act can only be invoked if a lawsuit involves taxes, and the purpose of the lawsuit is to restrain revenue assessment or collection. This lawsuit is about penalties not taxes, is about excessive reporting and recordkeeping requirements not restraining revenue collection, and no assessment has been issued.
- These IRS abuses, while seemingly technical in nature, have real impacts. Tools of enforcement such as civil asset forfeiture, joint liability for couples in tax disputes, and the designated summons power for uncooperative taxpayers have become weaponized to threaten much larger portions of the filing population. The struggle for taxpayer rights and safeguards against overreach from the Internal Revenue Service has occupied National Taxpayers Union Foundation and our sister organization National Taxpayers Union (NTU) for the better part of five decades, involving at least 10 significant legislative or administrative reform initiatives. The U.S. Supreme Court now has the opportunity to ensure that the IRS complies with them.
The case is CIC Services, LLC v. Internal Revenue Service, No. 19-930, and our brief can be found here.