We have previously briefly discussed the challenge that a group of noncompliant taxpayers brought against the IRS decision to disallow participation in the so-called Streamlined Procedures of the offshore disclosure program. Last year, a district court held that the Anti Injunction Act (AIA) barred the taxpayers from challenging the IRS decision. Last week the DC Circuit Court of Appeals in Maze v IRS upheld the district court.
Maze is the latest in a series of important Anti Injunction Act decisions and reflects the statute’s ability to insulate IRS decisions from judicial review until a taxpayer fits squarely within deficiency, refund or CDP procedures.
The main issue that the Maze opinion considers whether the AIA is a bar to preventing the court from considering the taxpayer’s argument that the IRS should have used streamlined disclosure procedures rather than transition streamlined procedures. Streamlined procedures allow for no payment of accuracy related penalties; transition rules required payment of up to eight years of those penalties. (Readers looking to learn more on the offshore disclosure program can look to our colleague Jack Townsend over at Federal Crimes Blog; Jack is also the primary author in the criminal tax penalty chapter in the Saltzman Book treatise, and we discuss the IRS offshore disclosure policies in detail in the treatise).
The importance of Maze for our purposes is its consideration of the AIA and in particular Maze’s efforts to get court review of the IRS decision to shoehorn her into the Transition Streamlined procedures rather than the regular Streamlined disclosure procedures.
This takes us into the AIA itself, which is codified at Section 7121. The AIA provides that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person . . . .” The key in the case is whether the lawsuit would have the effect of restraining the assessment or collection of any tax. There is a current ambiguity as to whether restrain for these purposes is defined broadly or narrowly. Not surprisingly the government argued for a broad application, urging that the term includes “litigation that completely stops the assessment or collection of a tax but also encompasses a lawsuit that inhibits the same.” Maze urged a more narrow reading, arguing restrain refers “solely to an action that seeks to completely stop the IRS from assessing or collecting a tax.”
The scope of the term “restrain” is a hotly contested issue in AIA litigation; proponents of the narrow reading have pointed to the analogous Supreme Court discussion of the term in the Direct Marketing opinion from a couple of years ago. Earlier this year, the Tenth Court of Appeals in Green Solutions carefully distinguished Direct Marketing and held that the broader reading of restrain is the more appropriate reading in the context of federal AIA litigation.
The DC Circuit in Maze sidestepped this definitional issue; in resolving the opinion in favor of the government the court assumed that the more narrow reading that the taxpayers urged was correct. Using that narrow reading, the DC Circuit still found that the taxpayers came up short.
To get there it first concluded that for these purposes accuracy related penalties are taxes for purposes of the AIA (as the Court discussed not all penalties are taxes for these purposes). After reaching that decision, it was fairly easy to get to the government’s view:
As participants in the 2012 [Offshore Voluntary Disclosure Program], the plaintiffs are required to pay eight years’ worth of accuracy-based penalties. These penalties are treated as taxes under the AIA and any lawsuit that seeks to restrain their assessment or collection is therefore barred…. This lawsuit, in which the plaintiffs seek to qualify to enroll in the Streamlined Procedures, does just that; to repeat, the Streamlined Procedures do not require a participant to pay any accuracy-based penalties for the three years covered by the program. Thus, their lawsuit would have the effect of restraining—fully stopping—the IRS from collecting accuracy-based penalties for which they are currently liable. We believe this fact alone manifests that the AIA bars their suit. See 26 U.S.C. § 7421(a).
To shift the focus away from the lawsuit’s impact on a possible assessment or collection, Maze emphasized that its efforts concerned a desire to apply to Streamlined procedures, which in and of itself alone was not a determination that there were no penalties due. The DC Circuit rejected that view:
They note that their eligibility to enroll alone, viewed in vacuo, has no immediate tax consequence. But we have never applied the AIA without considering the practical impact of our decision. Rather, we have recognized our need to engage in “a careful inquiry into the remedy sought . . . and any implication the remedy may have on assessment and collection.” Cohen, 650 F.3d at 724 (emphasis added). And here, the plaintiffs concede that they will enroll in the Streamlined Procedures if they are deemed eligible, see Oral. Arg. Rec. 3:10-3:15, thereby stopping the IRS from collecting the 2012 OVDP accuracy-based penalties.
The taxpayer noted that the Streamlined procedures would not have resulted in a more favorable treatment if the IRS determined that there was willful noncompliance or a foot fault with the Streamlined procedures. That too was not enough:
But the fact that their attempt to take advantage of the Streamlined Procedures’ more lenient tax treatment might be thwarted by the possibility of an adverse IRS determination does not make their lawsuit one that is not brought “for the purpose of restraining the assessment or collection of any tax.” 26 U.S.C. § 7421(a).
Conclusion
There are still important definitional questions that the courts are wrestling with as the IRS and Treasury get dragged kicking and screaming into the 21st Century post Mayo world. Using its centuries old shield of tax exceptionalism that is the AIA, the IRS still enjoys powerful procedural protections that essentially shoehorn procedural challenges to IRS rulemaking decisions to traditional tax litigation. The DC Circuit in Maze was careful to note (and the DOJ attorney conceded at oral argument) that Maze could have challenged the IRS position in a refund suit. This concession is important because there is an exception to the AIA if there is no other remedy for the alleged wrong. Of course, a traditional tax refund suit generally requires full payment, and that is a considerable bar and practical limit on taxpayers who do not like the rules of the game. Cases like Maze suggest that while the IRS is less special than it used to be the IRS still enjoys a limit on court inquiry into its decisions.