The debate over FBAR penalties for non-willful failure to disclose all of an individual’s or…
US Supreme Court Will Favor Taxpayer Challenges to the IRS
- By : Parag Patel
Date : 12-Jul-24
The US Supreme Court’s recent reversal of the Chevron doctrine in the Loper Bright Enterprises v. Raimondo case has significant implications for disputed tax matters. Here are some of the key potential impacts:
- Increased Judicial Scrutiny of Tax Regulations: The Chevron doctrine previously required courts to defer to federal agency interpretations of ambiguous statutes, including tax regulations issued by the Treasury Department and the IRS. With Chevron overturned, courts will now have a more active role in interpreting tax laws and regulations, potentially leading to increased scrutiny and challenges to agency interpretations.
- Potential for Increased Litigation: Taxpayers may be more inclined to challenge IRS interpretations of tax laws in court, as they no longer have to overcome the presumption of deference afforded under Chevron. This could lead to an increase in tax litigation and create uncertainty for taxpayers and the government alike.
- Impact on Tax Guidance: The IRS and Treasury may need to reconsider their approach to issuing tax guidance, such as regulations, revenue rulings, FAQs, and other pronouncements. Without the assurance of Chevron deference, agencies may need to provide more detailed explanations and justifications for their interpretations to withstand judicial scrutiny.
- Accuracy-Related Penalties: Taxpayers could challenge the imposition of accuracy-related penalties, arguing that the IRS’s interpretation of the reasonable cause exception or other penalty provisions is incorrect. Courts may now apply a stricter standard when reviewing IRS decisions on reasonable cause. Previously, under Chevron, courts generally deferred to the IRS’s interpretation of “reasonable cause.” Now, judges might be more willing to substitute their own judgment, potentially making it harder for taxpayers to argue for penalty abatement successfully. With a higher potential for success in court, taxpayers may be more inclined to challenge IRS penalty determinations. This could lead to increased litigation around reasonable cause, with taxpayers arguing for a broader interpretation of what constitutes “reasonable cause.” The IRS might become more cautious in asserting penalties or denying abatement requests, knowing that their decisions are more likely to be scrutinized by the courts. This could lead to more out-of-court settlements or a more lenient approach in some cases.
- Example: Imagine a taxpayer who relied on a tax professional’s advice that turned out to be incorrect, resulting in an underpayment of tax and the assessment of penalties. Under Chevron, the IRS might have denied abatement, arguing that reliance on faulty advice doesn’t automatically constitute reasonable cause. However, post-Chevron, a court might be more sympathetic to the taxpayer’s situation, particularly if the professional’s error was understandable or if the taxpayer took reasonable steps to verify the advice.
Overall, the reversal of the Chevron doctrine represents a significant shift in the balance of power between federal agencies and the courts in interpreting tax laws. As a result, taxpayers could be more aggressive in challenging IRS decisions. It particularly could allow taxpayers to challenge IRS penalty determinations based on reasonable cause more effectively.
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