Pre-Enforcement Litigation Needed for Taxing Procedures

By McMahon, Stephanie Hunter | Washington Law Review, September 1, 2017 | Go to article overview

Pre-Enforcement Litigation Needed for Taxing Procedures


McMahon, Stephanie Hunter, Washington Law Review


INTRODUCTION

Politicians demand a more fair, more efficient, and simpler tax system as the press rails against problems plaguing the tax system's administration.1 However, improving the tax system and making substantive change to tax administration, whether or not considered independently of the substance of the tax law, is not easy. Protecting taxpayer rights while raising the revenue necessary to fund our government is a complicated balancing act. That balancing requires compromise resulting from a sensitivity to the push and pull between taxpayers' rights (and some taxpayers' desire not to pay taxes) and the system's administration (and the need for revenue).

Balancing these competing interests in the complicated world of taxation is hard. It is made more difficult by the fact that tax is an area of law recognized as unique and yet bound by general systems of law. Historically, a silo evolved around taxation that allowed the tax system to develop its own answers to procedural questions; that silo is now being challenged. Those challenges often do not fully consider the unintended consequences that arise when tax administration is forced into ill-fitting procedures that work imperfectly for other government agencies and were certainly not created with the tax system in mind.2

This tension plays out in cases that would shoehorn tax guidance into the mold created by the Administrative Procedure Act (APA).3 The APA "afford[s] parties affected by administrative powers a means of knowing what their rights are and how they may be protected."4 Unless specifically carved out, all agencies that create informal guidance, as opposed to formal rule-making, are required to follow a procedure laid out in the APA popularly referred to as notice-and-comment.5 An agency is required to provide the affected public with notice of proposed rules and consider the public's comments after a reasonable comment period.

The Treasury Department often summarily relies on statutory exceptions from the requirement for notice-and-comment when it issues tax guidance.6 Since 2011, when the Supreme Court warned in Mayo Foundation for Medical Education & Research v. United States1 that the Internal Revenue Service (IRS) will not be granted special exemption from administrative law, this reliance has come under attack.8 This is part of a wave of attacks against Treasury Department procedures that are argued not to comply with the APA. As a result, what APA compliance looks like in the tax context has been a hot topic. Despite a need for clarity of the law, courts have yet to establish a coherent jurisprudence on this issue.9

In other areas of law, agencies often litigate the application of the APA to their guidance before the guidance is enforced against the public.10 Pre-enforcement litigation can isolate procedural issues and allow the public thereafter to focus on the substance of the rules as it applies to their facts. This process is not currently available in the tax context because of statutory and prudential prohibitions on pre-enforcement litigation on either substantive or procedural grounds.11 Most challenges to tax guidance and the collection of tax are deferred until after a taxpayer is audited, is found to owe tax, and completes the agency's appeals process. These tax specific and general prudential doctrines minimize the number and type of attacks the Treasury Department faces even when the APA would otherwise permit the challenge.

Only those taxpayers who are found to be in violation of the tax guidance and who do not settle with the IRS have any ability to initiate a judicial challenge of the guidance's procedural history. In most instances, this potential tax litigation results from either refund or deficiency suits. Refund litigation occurs when a taxpayer has paid taxes or penalties and seeks to recover these payments.12 Deficiency litigation challenges an IRS audit that determines taxes are owed but are not yet paid. …

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