In a ruling with implications for retirement and tax planning generally, the U.S. Supreme Court has determined that, in certain circumstances, taxpayers can challenge reporting requirements before complying with the requirement – typically prohibited in tax collection cases by the Anti-Injunction Act.
Congress enacted the Anti-Injunction Act in 1867 (the Act) which has remained largely unchanged. The Act provides that “[N]o suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person.” As a result of the Act, a taxpayer protesting the collection of any tax must pay the tax and then seek remedy through a claim of refund. The Act is intended prevent a disruption in the collection and flow of tax revenue.
A 2016 IRS notice requires certain advisors to report their clients’ activities involving “micro-captive insurance transactions” (a transaction considered a potentially abusive “reportable” transaction by the IRS). Advisors that fail to comply with the reporting requirement are subject to tax and criminal penalties. A tax penalty is generally viewed as a tax in the context of the Anti-Injunction Act.
In CIC Services, the plaintiff challenged the reporting requirement as arbitrary and capricious and procedurally invalid because IRS did not provide a notice and comment period. Plaintiff brought suit before complying with the requirement. The IRS argued that the suit violated the Anti-Injunction Act because plaintiff sought to enjoin a tax (the penalty) without first satisfying the requirement.
The District Court in Tennessee and the 6th Circuit Court of Appeals agreed with the IRS. The lower courts determined that “CIC’s suit sought to restrain the IRS’s assessment or collection of the tax penalty that could be imposed for noncompliance” and that “CIC’s suit would restrain (indeed eliminate) the tax penalty by invalidat[ing] the Notice, which is [that tax’s] entire basis.”
The U.S. Supreme Court reversed the lower courts, finding that the substance of the plaintiff’s suit relates to “invalidating the Notice and thereby eliminating its onerous reporting requirements—not as blocking the downstream tax penalty that may sanction the Notice’s breach.”
The Court emphasizes that the tax penalty is removed from the notice requirement that the plaintiff is attempting to invalidate and that the existence of the potential criminal penalty supports the argument that the objective of the claim is not simply to enjoin the collection of tax:
“[T]he Anti-Injunction Act’s familiar pay-now-sue-later procedure…subjects the party to criminal punishment…Only an injunction against the Notice gives the taxpayer or advisor what it wants: relief from the obligation to report transactions. An injunction against the tax penalty would not do so. Because such an injunction would leave both the reporting duty and the criminal penalty untouched…CIC’s suit aims to enjoin a standalone reporting requirement, whose violation may result in both tax penalties and criminal punishment. That is not a suit “for the purpose of restraining the [IRS’s] assessment or collection of a tax, and so does not trigger the Anti-Injunction Act.”
CIC Services provides authority for the position that certain reporting requirements can be challenged pre-compliance if a suit’s objective involves more than the avoidance of an underlying (tax) penalty.
Please contact the employment law attorneys at Kerr Russell with any questions.
About the author:
Liam K. Healy focuses his practice on helping clients maintain compliance with the myriad of state and federal tax laws and regulations that govern individuals and businesses. A particular focus of Liam’s practice is in the area of employee benefits and ERISA. Liam specializes in designing pension and executive compensation plans to benefit business owners and executives. His practice includes drafting and reviewing deferred compensation agreements, severance agreements and non-compete agreements, representing employers in multi-employer plan collection and withdrawal liability matters.
Other posts to consider: