Partner Alston + Bird LLP
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IRS Legal Fight
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Court Allows for Pre-Enforcement Challenges vs IRS

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Taxpayers and those subject to IRS enforcement are often stymied in their efforts to prospectively challenge IRS regulatory actions. The Anti-Injunction Act (AIA), originally enacted in 1867, generally restricts any suit “for the purpose of restraining the assessment or collection of any tax.” Case law has historically applied this broad prohibition to effectively restrict legal challenges to a federal tax unless the taxpayer pays the tax and sues the government for a refund.

Jun 25th 2021
Partner Alston + Bird LLP
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The Supreme Court, in its recent holding in CIC Services LLC v. Internal Revenue Service, narrowed the reach of the AIA by opening the door to more pre-enforcement challenges to IRS regulatory action involving reporting requirements backed by civil and criminal penalties.

The ruling is a significant win for those subject to IRS regulatory action and provides welcome clarification of the scope of the AIA. Questions remain, however, about the breadth of the Supreme Court’s ruling and its applicability in different circumstances.

Background

CIC Services involved a challenge to the legality of IRS Notice 2016-66 under the Administrative Procedure Act (APA) for failing the APA’s notice-and-comment requirements. The Notice, promulgated under the IRS’s authority to designate certain transactions as “reportable transactions” subject to heightened information reporting requirements, designated certain micro-captive insurance transactions as potentially subject to tax evasion and thus additional reporting requirements by taxpayers or material advisors that aid, assist, or advise in such transactions.

Very generally, micro-captive insurance structures targeted by the Notice involve a parent company that seeks to deduct insurance premiums paid to a captive insurer under the parent company’s control as business expenses while the premiums are excluded from the insurer’s gross income under specific rules that apply to premiums received by small insurance companies. Concerned with possible tax avoidance underlying the insurance contracts inherent in these structures, the Notice purports to compel taxpayers and their advisors to provide the IRS with information for it to determine whether such micro-captive insurance schemes are structured for tax avoidance purposes.

Importantly, taxpayers participating in covered micro-captive insurance transactions and their material advisors are subject to civil and criminal penalties for failing to comply with the information reporting requirements outlined in the Notice. The petitioner in CIC Services was a material advisor to taxpayers that participated in micro-captive transactions the Notice targeted that sought to nullify the Notice for being an unlawful exercise of IRS regulatory authority under the APA.

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