Reg Challenge Finds Ally in Center for Taxpayer Rights

Monte Silver
By Monte Silver

The Center for Taxpayer Rights is joining the fray in an administrative law challenge to the transition tax regs, emphasizing the high stakes for low-income taxpayers if the IRS continues to ignore the Regulatory Flexibility Act (RFA).

The nonprofit organization filed a memorandum of law of amicus curiae May 18 in support of Monte Silver’s RFA challenge to the section 965 regs.

“When Treasury and the IRS fail to consider the impact of regulations on [low-income small business owners] as required by the RFA, they put pressure on these vulnerable taxpayers to comply with increased complexity that may not be necessary to achieve Congressional goals. For many of these taxpayers, having to contest a regulation in the context of litigation concerning the merits of the liability on a tax return could be difficult or impossible from a financial perspective,” the center’s brief states. “These small businesses deserve to have Treasury and the IRS consider their circumstances when promulgating regulations as Congress intended.”
Silver’s suit against the section 965 transition tax rules imposed on accumulated offshore earnings alleges that the IRS ignored its duty to perform the small business impact evaluations required under the RFA and the Paperwork Reduction Act (PRA). In his May 15 motion for summary judgement, Silver asserts that the IRS violated the "letter and spirit" of the RFA and PRA.

Under the RFA, an agency is required to perform an initial and final regulatory flexibility analysis when issuing proposed and final regs. The final analysis, under 5 U.S.C. section 604, must include a statement on the significant issues raised by public comments, a description of the number of small entities to which the rule will apply and their projected reporting and compliance requirements, and a description of the steps that the agency has taken to minimize the economic impact on small entities.

An exception from the RFA is available if an agency certifies that the rules will not have a significant economic impact on a substantial number of small entities — a certification that the IRS and Treasury asserted for the section 965 rules.

The Center for Taxpayer Rights, which was founded by former National Taxpayer Advocate Nina Olson, is “dedicated to advancing taxpayer rights and ensuring due process for taxpayers.” The center’s brief was prepared by the Philip C. Cook Clinic and the Harvard Tax Clinic. It acknowledges that clinic clients are not typically U.S. shareholders to whomsection 965  would apply, but the clinics are worried about the regulatory precedent that could be set by an adverse ruling that could hurt low-income taxpayers later.

‘From Uber drivers to restaurant owners, many small businesses would benefit from a more regular use of the regulatory flexibility analysis on tax regulations, so as to not be burdened by paperwork designed with large business in mind,’ the brief states.

“Were this Court to find that the IRS properly complied with the RFA, low-income taxpayers, particularly those who are self-employed and those with small businesses, could be disproportionately affected by similar regulatory action designed to increase information reporting in the sharing economy sector,” the brief states.

According to the brief, regs pertaining to gig economy workers could include those targeting classification of individuals as businesses. The brief warns about potential Treasury rules written to classify those workers as employees instead of independent contractors, saying that, even if done with the intention of closing the gig economy tax gap, they could increase the tax burden “on a vast majority of low-income taxpayers.”

“From Uber drivers to restaurant owners, many small businesses would benefit from a more regular use of the regulatory flexibility analysis on tax regulations, so as to not be burdened by paperwork designed with large business in mind,” the brief states. “If the Secretary is permitted to simply ‘certify’ that such regulation will not harm small businesses, rather than providing the requisite impact analysis, an overly broad regulation directed at small businesses could have a devastating impact on gig workers without first meaningfully considering the impact.”

Other potential rulemaking that could affect gig economy workers, according to the brief, includes tighter substantiation requirements for business expenses under section 247, and guidance related to the requirements to issue a Form 1099-K.

The amicus brief is the most tangible evidence yet of the hypothesized broader ramifications that Silver could have at the intersection of tax and administrative law related to a statute that was until now largely ignored. The brief accuses Treasury and the IRS of having “consistently sidestepped the regulatory flexibility analysis on small entities required by the RFA through the excessive use of the exemption certifications.”

The brief notes that, as evidenced through the 1996 amendments to the RFA, Congress was concerned about agencies making casual certifications of the inapplicability of the RFA analysis. However, the IRS and Treasury have rarely performed the required analysis, the brief alleges. Like Silver, the amicus brief cites a 2016 Government Accountability Office report that found that the IRS avoided the RFA in 99.5 percent of its cases.

The brief argues that the reason for the IRS’s noncompliance is a mystery because the rationale for its exemptions remains opaque, with the government not disclosing its method in making those determinations.
Dana Montalto of the Legal Services Center of Harvard Law School is counsel for the amicus curiae.

The case is Silver v. IRS, No. 19-cv-00247 (D.D.C. 2019).