Did the Supreme Court give the IRS too much power to govern itself?

Earlier this year the U.S. Supreme Court, in a unanimous opinion appeared to give the IRS new, much broader powers to write its own rules. Following a case captioned, Mayo Foundation for Medical Education and Research v. U.S. (562 U.S. _, and 568 F.3rd 375, 2011), some tax attorneys are concerned the Court appears to be giving the agency the ability to overturn prior court decisions, ignore, or at least stray from legislative history, and even arguably allowing them to use those new powers against taxpayers who relied in good faith on prior law and precedent.

Tax lawyers and other tax professionals see the Mayo decision as a problematic development which could permit the IRS to benefit from an uneven playing field against taxpayers by writing rules and regulations to support their own agenda, even supposedly if that agenda has been rejected by Congress and/or the Courts.

What the Supreme Court actually said was the IRS’s rule-writing function should be given “deference” by the Courts. Where the opinion seems to fall short, according to some tax lawyers however, is it creates confusion over how much “deference” to give. Citing a string of cases, the high Court suggested in its unanimous opinion that regulations issued after an opportunity for public notice and comment will be given to the same high level of deference by the courts.

As the IRS has now started pushing to extend the time limitation period to conduct audits, many tax lawyers and other tax professionals are waiting to see how several federal appeals court cases turnout. The pending cases question the validity of recent regulations asserting the agency has six (6) years, rather than three (3) years, to audit and adjust a tax return under circumstances when the taxpayer failed to properly report a capital gain or a loss due from a property miscalculation. Much like the Mayo case, this latest regulation was allegedly promulgated only after the agency suffered losses on the issue in Court.

If these recent developments are a sign of things to come, some tax lawyers and other tax professionals are concerned the agency’s approach could be extended in the future to address changes in how the IRS deals with taxpayers owing back taxes, having unfiled returns, or whom are subject to IRS wage garnishments, IRS levies and/or IRS liens.

 

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