Don't Bet the Business

On June 28, the U.S. Supreme Court issued its ruling in Loper Bright Enterprises v. Raimondo, and Relentless, Inc. v. Department of Commerce, overturning the longstanding Chevron doctrine that generally required federal courts to defer to a federal agency's reasonable interpretation of an ambiguous statute.

As a federal agency, the Internal Revenue Service (IRS) is subject to the new post-Loper legal environment in the same way as other federal agencies.

This landmark ruling has significant implications for the IRS and the broader landscape of tax law. While the overall consequences of the Loper decision are unclear, there is little doubt it will significantly impact the IRS, how it operates and the remedies available to taxpayers when resolving their tax cases. This post will explore the potential impact of this decision on the IRS' regulatory authority, tax compliance and the altered legal environment for taxpayers.

Background: The Chevron Doctrine

The Chevron doctrine, established by the 1984 Supreme Court case Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., was a landmark decision that empowered agencies to interpret statutes without judicial guidance or, some might say, interference. The Chevron doctrine provided that courts should defer to a federal agency's interpretation of an ambiguous statute it administers, if that interpretation was deemed reasonable.

Provided that an agency complied with the rule-making requirements for such interpretations, under Chevron, courts were required to defer to such agencies as experts in their respective fields. Because of this deference, the agencies became the final arbiters of the regulations that fell under their authority. This principle guided judicial review of agency regulations for four decades, ensuring that agencies like the IRS had significant leeway in interpreting tax regulations. The IRS relied on Chevron when issuing regulations that impacted the Internal Revenue Code.

Key Changes after Loper

After Loper, courts no longer were required to defer to a federal agency’s regulatory interpretations. Instead, the courts could now determine the “best” interpretation of the statute themselves. Because the courts are now tasked to determine the best interpretation of a statue, challenges to agency interpretations will be more common. These challenges will lead to increases in litigation and the need for higher courts to review lower court rulings. This will lead to increased compliance issues and opportunities for taxpayers during their interactions with the IRS.

Overall, it is expected that this change will lead to an increase in taxpayer challenges to IRS issued regulations and to greater uncertainty surrounding the application of U.S. Department of Treasury (Treasury) regulations that are enforced by the IRS until Congress further clarifies a statute or Treasury issues new regulations that withstand judicial scrutiny.

This shift has several critical implications:

1. Increased Legal Challenges to IRS Regulations

Without Chevron deference, taxpayers and other stakeholders are more likely to challenge IRS regulations in court.  Previously, the IRS could rely on the deference courts gave to its interpretations, but now each regulation must stand on its own merit as the “best” interpretation of the statute. The frequency of legal challenges to IRS regulations is expected to increase, as taxpayers may see more opportunities to contest regulations that they find unfavorable.

2. Stricter Judicial Scrutiny

Courts will now scrutinize IRS regulations more rigorously, evaluating whether the agency’s interpretation of a statute is indeed the best one. This change could lead to more regulations being struck down or modified by the courts. It may also lead to significant delays at the IRS when its regulations are challenged. These delays could impact taxpayers who may be unable to comply with current or proposed regulations while these regulations are the subject of lawsuits or judicial review.

Existing IRS regulations may be revisited and challenged, potentially leading to significant changes in tax compliance and enforcement.  While the Loper ruling suggested that rules or regulations issued under the Chevron doctrine are not subject to the new regulatory interpretation regime under Loper, there is no doubt that they will still be challenged. It remains to be seen how lower courts will respond to such challenges.

3. Legislative Clarity and Congressional Action

The reversal of Chevron places a greater onus on Congress to draft clear and unambiguous tax laws. Congress can no longer expect that the IRS will clarify ambiguous statutes through the issuance of regulations. Ambiguities that were previously resolved by the IRS through regulatory interpretations will now require more precise legislative language to avoid judicial disputes.

Congress will need to provide more detailed guidance within tax statutes to reduce ambiguity and the resultant litigation. It remains to be seen whether Congress is up to this task.

Implications for Taxpayers

The reversal of Chevron has several implications for taxpayers, both individuals and businesses:

1. Uncertainty and Compliance Challenges

The increased likelihood of legal challenges and stricter judicial scrutiny will create uncertainty around tax compliance. Taxpayers may face new challenges in understanding and adhering to the current and proposed tax code.

Businesses and individuals can expect higher compliance costs as they are compelled to seek legal and professional advice to navigate the evolving regulatory landscape. Taxpayers may also have to delay certain tax planning initiatives or transactions while regulations are under judicial review.

2. Potential for Favorable Outcomes

On the other hand, taxpayers may benefit from new opportunities to challenge unfavorable IRS regulations. Courts may now be more willing to overturn or modify regulations that do not represent the “best” interpretation of a statute. This shift could result in more favorable rulings for taxpayers in disputes with the IRS, potentially reducing tax liabilities or compliance burdens.

Conclusion

The Supreme Court’s decision to overturn Chevron marks a significant shift in the balance of power between federal agencies and the judiciary.  For the IRS, this means navigating a more challenging regulatory environment with increased legal scrutiny and potential challenges to its authority.

Taxpayers, meanwhile, must stay informed and seek professional guidance to manage the uncertainties and opportunities presented by this new legal landscape. As the implications of this decision unfold, it will be crucial for all stakeholders to closely monitor developments and adjust their strategies accordingly.