The Supreme Court of the United States granted a significant victory for taxpayers’ advisors today, which also happens to be tax filing day. It is no wonder that soon after revenue laws were enacted taxpayers sued to prevent the IRS from assessing and collecting tax. We are, after all, a nation founded on a tax revolution. If taxpayers could sue the IRS prospectively to prevent the IRS from assessing or collecting tax, then the IRS could never do its job. For that reason, taxpayers generally lack the power to sue the IRS unless the IRS claims that the taxpayer owes taxes. In a unanimous opinion written by Justice Kagan, CIC Services, LLC v. Internal Revenue Service et al, the Supreme Court held that taxpayers’ advisors have the right to sue the IRS to set aside or invalidate IRS Notices. The decision isn’t as revolutionary as the Boston Tea Party, but it gives tax advisors a legal right to contest – or “protest” – IRS enforcement of Notices that seek to impose penalties, and may open the door for taxpayers to directly contest such notices in the future.
IRS Enforcement Regime
The IRS does more than just collect and assesses taxes. Since 1960, Congress has enacted over 50 penalties that carry hefty civil fines and potential criminal penalties. At issue in CIC Services was a penalty applicable to “material advisors” for providing “aid, assistance, or advice” to taxpayers who participate in a so-called “reportable transaction”. The IRS requires “material advisors” to file a form reporting various key elements of reportable transactions, to better enable the IRS to examine those taxpayers.