Using administrative law to challenge IRS determinations.

• Author: Johnson, Steve
• Position: Tax Law

A warrior who does not use all weapons risks unnecessary defeat. Taxpayers engaged in controversy with the IRS have often neglected to use--or even know they had--substantial arguments available to them under the Administrative Procedure Act (APA), 5 U.S.C. [section]551, et seq., and administrative common law. This article encourages taxpayers' counsel to explore such arguments. The article first establishes that administrative law principles apply in tax. The article then illustrates the possibilities through six examples of administrative law arguments that, depending on the facts of the particular case, could prove successful in litigating against the IRS.

Administrative Law Applies to Tax

Administrative law issues have popped up in tax decisions for decades, but their appearance has been comparatively rare. The failure of counsel to raise such issues more consistently, while unfortunate, is understandable for several reasons.

First, when it comes to substantive tax law, both sides can push the agenda. Both taxpayers and the IRS have incentive to search for improved arguments when old arguments are not working well; but only taxpayers are likely to gain from administrative law arguments. Failing to follow required administrative procedures can cause the IRS to lose, but following them cannot, by that fact alone, cause the IRS to win. Understandably, therefore, the IRS is content to allow administrative law to sleep undisturbed. If it is to be jarred from slumber, the burden is on taxpayers' counsel to do so.

Second, the pressures of practice challenge the ability of taxpayers' counsel to shoulder this burden. Counsel's last substantial exposure to the area may have been a general administrative law course taken as a student. Now the sheer volume of core tax work consumes the whole day. "What? I can't even keep up with all the tax advance sheets! You mean I now have to learn administrative law, too??" We've all been there.

Third, there's some cultural oil-and-water. To be sure, ambiguity lurks in many nooks of tax law, but there also is clarity in many respects. Tax does have bright lines and is determinative in important respects. That is much less the case in administrative law. "[T]he [APA] is not the tax code. [Administrative law] cases ... provide rules of thumb, general principles meant to guide interpretation, not rigid rules that narrowly confine it." (1) Shifting mental gears from the largely determinative to the highly fluid can be daunting for the practitioner.

Fourth, agency-specific enabling statutes trump the general principles of the APA and administrative common law. The Internal Revenue Code often prescribes procedures to be followed in tax cases. When it does, those procedures control. However, when Code procedures are not detailed, exclusive, or applicable, general administrative law rules can operate in important ways.

For these reasons, tax law's historic neglect of administrative law is understandable, but it is unfortunate--especially for taxpayers. More importantly, such neglect is no longer feasible. Recent years have seen a dramatic upsurge in administrative law issues in tax, and this tide is irreversible.

Under [section]551(1), with exceptions not here applicable, the APA applies to each "agency" of the federal government. Treasury and the IRS are clearly within the act's definition of "agency." In Mayo Foundation for Medical Education & Research v. United States, 131 S. Ct. 704, 713 (2011), the Supreme Court stated that, absent a contextually relevant justification, the Court was "not inclined to carve out an approach to administrative review good for tax only. To the contrary, we have expressly recognized the importance of maintaining a uniform approach to judicial review of administrative action." The walls of the citadel of tax parochialism have crumbled. (2) Effective representation of clients in controversies with the IRS requires the lawyer to be able to bring general administrative law principles to bear.

The full scope of the possibilities has not yet been comprehensively mapped. The potential for creative lawyering is great. This is illustrated by six examples: 1) possibility...