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EIP Order Could Open New Avenues for IRS Guidance Challenges

Posted on Sep. 28, 2020

The IRS has 30 days to “reconsider” distributing coronavirus economic impact payments (EIPs) to prisoners, following a district court order enjoining the agency from withholding the payments from incarcerated individuals.

The U.S. District Court for the Northern District of California issued an order September 24 in Scholl v. Mnuchin finding for the plaintiffs on every argument they made that the IRS violated the Administrative Procedure Act (APA) and the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) when it denied EIPs to prisoners.

“The IRS’s decision to exclude incarcerated persons from advance refund payments is likely contrary to law,” District Judge Phyllis J. Hamilton wrote in allowing the plaintiffs’ claim for denied EIPs to proceed as a class action lawsuit.

The suit was filed on behalf of Colin Scholl, a prisoner working as a porter and part-time artist, and other incarcerated individuals denied EIPs by the IRS, despite Congress’s mandate that CARES Act funds be distributed “as rapidly as possible” and without regard to a person’s incarcerated status.

‘Incredibly Important’

Nina Olson, executive director of the Center for Taxpayer Rights, praised the district court’s reasoning in denying the IRS sovereign immunity under the APA and detailing the tax agency’s allegedly arbitrary and capricious use of FAQs, which she noted can be changed at a moment’s notice but can’t be relied on in court disputes.

“Regardless of the ultimate outcome, I think it’s an incredibly important order,” said Olson, former national taxpayer advocate. She argued that the order opens a door to potential litigation in other areas where the IRS exercises unchecked discretion in administering myriad — and often nontax — federal benefits.

National Taxpayer Advocate Erin Collins estimated in May that the IRS had issued almost 500 nonregulatory COVID-19-related FAQs since the coronavirus pandemic emergency began. With the proliferation of FAQs, many observers have predicted an increase in legal challenges to the IRS’s reliance on such nonregulatory guidance.

“This is a major development in APA-related tax litigation,” said Villanova University’s Christine Speidel, co-counsel in McGruder v. Mnuchin. Like Scholl, that case challenges the IRS’s ability to use the APA as a shield against the agency’s reliance on nonregulatory guidance.

45 Days to Report

The district court order enjoins the IRS from denying EIPs to anyone based on their incarcerated status. It also requires the agency to update its website and communications with federal and state correctional facilities within 30 days.

The order further specifies a 45-day deadline for the IRS to file a declaration with the court that the changes have been implemented. The declaration must include data on the number and amount of benefits disbursed.

A June 30 Treasury Inspector General for Tax Administration report noted that the IRS in April had sent 84,861 EIPs, totaling $100 million, to incarcerated persons. The IRS had already reversed course with a May 6 FAQ specifying that no such further payments would be made and that payments made should be clawed back.

Significantly, the district court found that the IRS’s FAQ, and IRS Chief Counsel Michael Desmond’s comments that the agency had no intention of following up on the FAQ, meant that the guidance was a final agency action under the APA.

Olson said she thought the government “was too cute by half” in asking for sovereign immunity based on an FAQ that the IRS admitted didn’t meet APA notice and comment and review standards.

Not the End

Speidel noted that the IRS could still appeal Scholl. She added that she expects the agency to continue to assert that EIP plaintiffs don’t have jurisdiction to challenge late payments in court until after filing their 2020 tax returns in 2021, after which they must wait six months to make a claim in court.

Speidel said she expects that argument despite the Scholl order’s finding that the EIP is “not merely a tax refund claim; it’s a different kind of monetary benefit that just happens to be distributed through the tax code.”

Scholl “is not the end of the conversation,” Olson said, describing it as “another little stab at tax [law] exceptionalism” and Chevron deference.

Chevron [deference] may be on the way out,” Speidel agreed.

In Scholl v. Mnuchin, No. 4:20-cv-05309 (N.D. Cal. 2020), the plaintiffs are represented by Lieff Cabraser Heimann & Bernstein LLP and the Equal Justice Society.

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