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Stimulus Payment Delays Spurring Challenges to IRS Guidance

Posted on July 30, 2020

Legal challenges to the IRS’s reliance on informal guidance to administer economic impact payments may proliferate as tax lawyers take on the agency’s compliance with the Administrative Procedure Act.

Christine Speidel, co-counsel in McGruder et al. v. Mnuchin, told Tax Notes that the plaintiffs’ attorneys may file a preliminary injunction this week to compel the IRS to provide a pathway for their clients and hundreds of thousands of other disadvantaged people to get their denied payments. Plaintiffs’ representatives are also talking with the Justice Department, which represents the IRS and Treasury in the suit, about a possible settlement in the case, she said.

Alternatively, Speidel said the plaintiffs are ready to ask the federal district court to expedite proceedings to compel the tax agency to accommodate her disabled and poor clients, who were shut out of receiving some economic impact payments.

McGruder may be only the first of many challenges to the IRS and Treasury’s issuance of informal guidance, such as press releases and FAQs, to implement pandemic relief measures in the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136).

The Center for Taxpayer Rights is conducting periodic litigation strategy teleconferences with low-income taxpayer clinics, prisoner support groups, and disability rights advocates about potential challenges to the IRS’s reliance on FAQs, according to Nina Olson, the center’s executive director and former national taxpayer advocate.

The IRS and Treasury’s use of informal guidance “is a bigger concern that applies to a broader number of CARES Act issues,” Speidel said, noting the Taxpayer Advocate Service’s count of almost 500 CARES Act-related FAQs since the COVID-19 crisis began.

“Some of the FAQs and informal guidance being issued really looks like legislative rulemaking,” which should be subject to the APA, Speidel said. “It looks like the IRS or Treasury is setting policy, and really saying what they think the law should be.”

“The pandemic has just exploded the use of this information,” Speidel said.

Not Much Time

The Administrative Procedure Act (APA) requires government agencies to provide the public with sufficient time to review and comment on legally binding new rules. Officials must show that they gave an adequate amount of consideration to significant comments. Courts can set aside as arbitrary and capricious any new rules that don’t meet those standards, that agencies abused their discretion in applying, or aren’t in accordance with the law.

At a July 29 American Bar Association webinar, IRS Chief Counsel Michael J. Desmond said the agency understands taxpayers' concerns about FAQs.

“I can tell you we’ve had a number of robust internal discussions about that, and we continue to think about appropriate safeguards around the use of FAQs to be sure they are used appropriately,” he said.

Desmond added that he isn’t aware of an exam position being taken that’s contrary to an FAQ, or of penalties being asserted against a taxpayer for taking a position consistent with an FAQ. 

Sunita Lough, deputy commissioner for services and enforcement, said if an agent takes a position inconsistent with an FAQ in exam, the taxpayer should raise it with the manager. Tax attorneys said they were unable to recall a case where the IRS took a position different from that stated in an FAQ.

Some tax professionals said that's beside the point. Taxpayers “will rely on the FAQs just because the IRS published them,” said Thomas A. Gorczynski, of Gorczynski & Associates, LLC.

“The way [the IRS and Treasury] announced their policy is completely part of why we think it’s arbitrary and capricious,” including the use of FAQs and press releases to set online economic impact payment eligibility deadlines as short as 40 hours for disabled poor people without home internet access, Speidel said. “We’re not saying the reason it was arbitrary and capricious per se was because they didn’t go through rulemaking,” she said.

For a long time, tax lawyers didn’t even consider challenging agency rules under the APA because tax rules and regulations were considered beyond the reach of that law, Speidel explained. Treasury and the IRS Chief Counsel’s office had argued that the APA didn’t apply to them, Olson noted.

But the Supreme Court’s 2011 decision in Mayo Foundation for Medical Education and Research v. United States, [Sup. Ct. Dkt. No. 09-837, 562 U.S. 44] (Jan. 11, 2011), which found that Treasury general authority regulations adopted after a notice and comment period carry the force of law and are eligible for Chevron deference, opened them up, Olson said.

Left unanswered by the Court's ruling is whether temporary Treasury regulations and Internal Revenue Bulletin documents enforceable through civil penalties but enacted without notice and comment should also get Chevron deference, and perhaps be subject to APA notice and comment requirements, Olson said.

Mayo “was a blow for tax exceptionalism,” Speidel noted. The idea that tax regulations might be no different than other rules subject to the APA was a wake-up call that spurred research and discussions in the tax controversy community, she said.

“You have tax practitioners [who] are looking at every issue they come across these days from an APA perspective” since Mayo, said Robert M. Russell of Kostelanetz & Fink LLP. “Every [tax law] conference has a panel on the status of APA challenges,” he said.

Good Cause?

In one of the few legal cases focusing on the issue of FAQ authority, Frank Degen, former president of the National Association of Enrolled Agents, pointed to Reed v. Commissioner, T.C. Memo. 2014-41, in which the taxpayer cited potentially supportive FAQs posted on the IRS website.

The court didn’t review the FAQs, simply stating that “informal guidance, such as the FAQs posted to the IRSWeb site, is not an authoritative source of Federal tax law.”

The APA contains a “good-cause” exception that permits agencies to skip notice and comment rulemaking if the process would be “impracticable, unnecessary, or contrary to the public interest.” Some have questioned whether Treasury and IRS could claim that implementing the CARES Act provisions via FAQs is justified because of the coronavirus emergency.

But Monte A. Jackel of Jackel Tax Law said he doubts that the good-cause exception would apply in McGruder.

“The IRS has never given advance notice and opportunity to comment on any FAQ,” Jackel said. “I think that any FAQ that is either adverse to the taxpayer or was favorable to the taxpayer and then withdrawn would be a rule subject to prior public notice and comment.”

Speidel said, “Nobody’s arguing that the IRS acted in bad faith” with its informal CARES Act guidance. But bad faith is not a requirement for a violation under the APA or the Constitution, and it’s really not a defense, either, to say that you didn’t intend to harm disabled people with children and grandchildren.”

Jackel said trying to prevent abuse would be a better IRS argument for bypassing notice and comment. For the CARES Act provisions, Treasury and the IRS should’ve issued a notice incorporating the FAQs and soliciting comments, and then issued further notices if changes were made, he said.

“But then the FAQs would be authority under section 6662, and the IRS would bear a cost if they were wrong on the law,” Jackel said. “Since FAQs are not authority, the IRS can move faster with less review, because they can easily change their answer if they are wrong.”

Evolving Area of Law

Further complicating matters in McGruder, Desmond said in a May 6 Tax Analysts webinar that while the agency is open to suggestions on turning particular FAQs into regulations, “I don’t think we’re going to take every FAQ and turn that into a full-blown notice, or certainly a Treasury decision or proposed regulation.”

The IRS also issued a May 6 FAQ denying or delaying economic impact payments to dead people, the incarcerated, and people who use individual identification numbers rather than Social Security numbers, the effects of which might support a class action suit on grounds that denying their payments didn’t comport with the CARES Act, Olson said.

Tax professionals said Desmond’s statement blurs the lines established by the Supreme Court in Mayo. But Olson said Desmond’s suggestion that some IRS FAQs may be considered the final agency guidance to which APA tests apply suggests that the agency is now giving the informal guidance a formal role.

Sydney Gernstein, branch chief in the IRS Office of Associate Chief Counsel, told an ABA webinar July 28 that FAQs are well-suited for getting tax advice to individuals quickly during the pandemic. On the downside, he noted that FAQs lack the substantial authority of formal regulation.

In a statement provided to Tax Notes July 21, the IRS said: “Recognizing that some FAQs issued in these circumstances provide substantive interpretations of the law, we have solicited and received input from taxpayers and tax professionals on whether some should be included in follow-up guidance published in the Internal Revenue Bulletin, and we are considering that as an option."

“I hope people do bring these challenges,” said Speidel. Treasury and the IRS’s use of informal guidance such as FAQs “needs clarification to really hammer out what the agency’s obligations are, particularly with informal guidance,” she said.

Russell said the biggest news from the statement is that the IRS acknowledges that some of the substantive FAQs should be followed up with more formal guidance.

For Olson, the situation shows that FAQs are “an evolving area of law. And that comes smack into the litigation that the Center for Taxpayer Rights and the [low-income taxpayer clinics] and others are working on.”

Kristen Parillo and Frederic Lee contributed to this article.

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