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Year in Review- Administrative Procedure Act

Posted on Dec. 29, 2022

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?

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.

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