2022 was a big year for the Administrative Procedure Act and the IRS’s relationship. It evolved in mostly uncomfortable ways for the IRS as Courts have demonstrated they will use the APA to evaluate the IRS’s conduct. In response, Appeals has removed APA validity challenges from its hazards of litigation analysis (as covered here) which means we may see more APA-related decisions in the future.
The consequences can be harsh when the IRS violates the APA as the sixth and eleventh circuits, as well as the Tax Court have used violations to invalidate regulations and notices.
Where has the IRS gone wrong?
read more…The IRS violated the APA when it did not adequately respond to significant comments made during the notice and comment period in Hewitt (decided by the 11th Circuit at the end of 2021). This case may result in the IRS adopting the practice of responding to every comment as they have done for comments on recent foreign tax credit regulations. Hewitt was also significant because it created a split on this issue with the Sixth Circuit’s decision in Oakbrook for which the taxpayers have sought certiorari.
The IRS violated the APA when it ignored part of a statute that tied the computation of a Title 31 penalty to a specific date in Schwarzbaum (also, the 11th Circuit). The case was remanded to IRS for proper computation of the penalty. The APA does not provide a means for the Court to examine IRS’s conduct in the same way for IRC-based penalty cases. The case later involved the question of whether the Court should retain jurisdiction on remand since the issue is limited to the recalculation of the penalty rather than upholding or setting aside the agency action.
The IRS violated the APA when it did not provide a required notice and comment period in Mann Construction, so the Sixth Circuit invalidated the notice at issue. This case was also significant because it was binding on the district court decision in CIC Services.
The IRS violated the APA when it did not comply with the notice and comment provisions or establish that they were not required in Green Valley Investors, so the Tax Court invalidated the notice in that case. This case has further opened the door for other subregulatory guidance to be evaluated in accordance with the APA and lent some color to debate (here, here, here, here, here and here) over the existence and significance of interpretative regulations and guidance because the Court clarified that the notice was legislative, and not interpretative, because it imposed new rights or duties and changed the legal status of regulated parties.
A future APA challenge may be appropriate to resolve the contradiction between a notice and regulation that address the treatment of payments submitted with offers in compromise.
Not all APA-related decisions resulted in IRS losses; a district court found that the APA did not provide a basis to compel the IRS to provide access to appeals because the decision is solely within the IRS’s discretion. The APA protected the government’s sovereign immunity and forbade relief in Dillon. And going forward an argument may exist that APA challenges can be time barred, so it will be interesting to continue to track the relationship as we enter the new year.
About Samantha Galvin
Samantha, thanks so much for the year end review. 2022 does “seem” to have been a big year for IRS APA losses, but I am not sure that it was that big a year.
1. The IRS may in future notice and comment rulemaking respond to every comment, but I suspect the additional responses (or words in the responses) will not affect the final regulations. Hewitt may signal a short-term IRS loss but nothing of major systemic importance. And it is possible that the analysis in Oakbrook may carry the day, either (i) if Oakbrook’s petition for cert is granted (scheduled for conference on 1/6/23) or (ii) if no Oakbrook cert, Oakbrook being more persuasive than Hewitt in other circuits (for what it is worth, I think Oakbrook is more persuasive).
2. At this stage of the ups and downs in Schwarzbaum, Schwarzbaum has had at most a pyrrhic victory in the Eleventh Circuit’s panel holding that the original FBAR assessments were arbitrary and capricious. Without getting into the details, on the remand to the district court and then remand to the IRS, the IRS assessed the same aggregate penalties as before and the district court entered judgment accordingly. Readers can follow all that commotion in the various filings viewable for free on CourtListener here:
https://www.courtlistener.com/docket/13576659/united-states-v-schwarzbaum/?order_by=desc
Schwarzbaum is heading for appeal again by notice of appeal filed 12/2/22. On appeal, I think Schwarzbaum will argue that, once the original FBAR assessments were declared arbitrary and capricious, the original assessments were null and void, and the IRS has to make a new assessments for which the statute of limitations had long since lapsed. In a vacuum (which is where the original panel seemed to operate), I guess Schwarzbaum’s statute of limitations claim might be a good one. (For what it may be worth, I think the Eleventh Circuit’s original holding of arbitrary and capricious is questionable (or even, dare I say it, arbitrary and capricious) and the Eleventh Circuit may do rough justice (correcting its earlier error) by sustaining the IRS’s new calculations (in aggregate same as prior calculations).) Also one issue that may lurk in Schwarzbaum is whether, if the IRS action on remand is sustained, interest and penalties on the FBAR assessments run from the original assessments or the revised assessments.
3. One APA issue that lurks in the various cases where courts find some footfault in IRS rules is the issue of whether the court (i) can grant a nationwide injunction rather than just affecting the parties before the court or (ii) its equivalent can vacate the rule, a holding called vacatur, having the effect of a nationwide injunction. The Tax Court holding has almost the same effect as vacatur because it is precedent that the Tax Court said it would apply in future cases. So, since the Tax Court has nationwide jurisdiction, parties affected can jockey to get their cases in the Tax Court. There is always the possibility that one or more courts of appeals or the Supreme could reach a different result on IRS appeal. But, although not unique to tax administration, the issue of vacatur is a hot issue for the APA. The Supreme Court will almost certainly weigh into the vacatur issue soon, with uncertain and perhaps dubious pronouncements binding on the lower courts.
4. I am not sure what you refer to in saying that Green Valley “further opened the door for other subregulatory guidance to be evaluated in accordance with the APA.” I don’t read Green Valley as addressing subregulatory guidance.
5. Likewise I don’t read Green Valley as adding any new guidance on the legislative / interpretive regulation issue.
I misspoke (stated otherwise, I was wrong) in # 4 above. Green Valley did hold that the Notice, which is subregulatory, was a legislative rule because it imposed a new duty or obligation not fairly within the interpretive scope of the statute. So, Green Valley simply applied the APA general rule that new duties or obligations are legislative in character and require notice and comment regulations (except for good cause). That has always been the law, and I don’t think the IRS has argued that the general APA requirement was otherwise. As noted in a TP blog, the IRS simply believed and so argued that Congress had excepted this type of Notice from the notice and comment requirement for legislative rules. I don’t think the fat lady has finally sung on that issue.
Hi Jack- Happy New Year. My PT notifications are still being sent to my Denver email, so I didn’t see your comment right away. I appreciate your contributions here. Admittedly, I’m not as in the weeds on these issues as you are so these additional points are valuable to me and the PT community.
Those wanting to chase down further in the Schwarzbaum case might check the CourtListener docket entries linked in my original comment.
On January 6, 2023, the Government filed a “Renewed Motion for Order to Repatriate Assets” in which the Government said (excerpts):
[*3]
n2 Although the IRS recalculated the penalties at higher amounts than originally assessed, the United States requested entry of judgment in the amounts originally assessed, plus further accruals of interest and late-payment penalties. Id. [JAT Note: The Government has discretionary authority to impose the willful FBAR penalty at less than the maximum amount allowed by the statute.]
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On November 1, 2022, the Court issued a Final Judgment After Remand providing that Schwarzbaum is indebted to the United States in the aggregate amount of $17,929,717.88. ECF No. 162. Post-judgment interest pursuant to 28 U.S.C. § 1961 and late-payment penalties continue to accrue from and after November 1, 2022. Schwarzbaum has again appealed and posted no bond. ECF No. 164.
* * * *
[*5]
Schwarzbaum should not be allowed to avoid paying his judgment debt any longer by keeping funds in foreign bank accounts. A new order that Schwarzbaum repatriate the funds in his Swiss accounts is appropriate, up to the amount he owes to the United States pursuant to the Final Judgment After Remand plus the 10% surcharge under 28 U.S.C. § 3011(a) and accrued late payment penalties and post-judgment interest.n3
n3 The surcharge, authorized by 28 U.S.C. § 3011(a), applies once a judgment debtor fails to pay the amount due under a judgment pursuant to a demand for payment, and the United States must resort to post-judgment remedies under the FDCPA to enforce the claim for the judgment debt. See Off. of Thrift Supervision v. Paul, 985 F. Supp. 1465, 1476 (S.D. Fla. 1997) (ordering payment of the ten-percent surcharge to cover litigation costs of collecting a federal debt).
The senior people at IRS and Justice (Tax) made their careers in an environment where the problems with IRS compliance with the APA were known and discussed in hushed tones (at least going back as far as my days at Justice). In time, they all informally agreed to overlook the problems and to treat nearly anything issued by IRS as law. It made the IRS’s job of administering the tax system if they operated without the burdensome requirements imposed by the APA upon other agencies. Most tax professionals, particularly those with accounting backgrounds, went along. That worked for a long time.
But, following cases like Mayo, the days of tax exceptionalism are over and the handwriting has been on the wall for pretending that the reams of sub-regulatory guidance issued by the IRS are more than non-binding opinions. Unfortunately, the agency (and its leadership) cannot imagine a world in which the law requires the IRS to comply with the APA.. They still want to go back to the days when they could make law by publishing something called guidance in the Internal Revenue Bulletin.
My guess is that the agency will conbtinue to take its lumps for a few more years. Then, someonet with he power to drag the bureaucracy into a new paradigm will have to tackle the institutional problem with an imaginative new way of doing business in compliance with APA. It won’t be easy, but it will have to be done Just like it is done in every other federal agency..
I have informally received a critical response to my earlier comment suggesting that I had accused past government officials of intentional misconduct in issuing regulations, etc. which did not comply with the strictures of APA rulemaking. That was not my intent and I believe that those officials acted honorably in all respects.
As a matter of historical fact, the law and procedures regarding IRS guidance developed somewhat separately from other areas of APA jurisprudence. To the extent that concerns were identified regarding whether the IRS’s rulemaking procedures were possibly subject to APA challenge, most practitioners (including myself) did not recognize the issue. The existing system had been in place for decades, worked reasonably well, and changes were not on anyone’s front burner. “Tax exceptionalism” was widely accepted as almost black=-letter law; APA rulemaking requirements were not often discussed in the existing environment and most of us were largely unaware of a potential APA problem.
What I now want to add to the record is my experience that there were smarter and better-informed people around before Mayo and they did recognize potential challenges to regulations based upon what we now recognize as defects in the rulemaking process. The guidance I received was to tread lightly around rulemaking procedure issues to avoid the risk of creating the type of precedent we are now seeing. In my mind, that was perfectly ethical and wise guidance.
My present concern is the policy-makers who are resisting making changes to the rulemaking process to more closely comply with the APA; they long for the days of tax exceptionalism. To my mind, they are stuck in the past and unduly committed to the “law” they learned when we were all younger. That war has been lost and the IRS would be well served to recognize the change and to bring itself into conformity with the APA.