APA Compliance

[LPC]

One tax protester refrain is that the IRS has failed to comply with the Administrative Procedures Act, but some tax lawyers think that there is some truth to that.

According to a study of 232 regulatory projects of the Treasury Department from 2003 to 2005, Kristin E. Hickman, an associate professor of law at the University of Minnesota Law School, found that Treasury failed to satisfy APA's notice and comment process in at least 40 percent of the projects. For example, she concluded that Treasury should issue a notice of proposed rulemaking with proposed regs, then allow for public comment before issuing final regs, but she found that 36 percent of the projects issued legally binding temporary regulations at the same time as the notice.

Treasury disputes her conclusions on the grounds that many of their regulations are "interpretive" and not "legislative" and so do not require the same procedures.

In a presentation to the DC bar, Hickman asked "Do you really want Treasury and the IRS to be perceived by taxpayers as not following the law in promulgating their regulations?"

See "Panel Explores Tax Bar's 'Ignorance' of Administrative Procedure Act" by Amy S. Elliott, 2008 TNT 234-1 (12/4/2008).

[Famspear]

Here's another report, this excerpt from CCH:

NEWS-FEDERAL, 2008TAXDAY, (Dec. 04, 2008), Item #M.1, Taking Note of APA Violations Is Viable Tax Litigation Strategy, Tax Expert Claims

[By Torie Cole, CCH News Staff]

Many experienced and sophisticated tax litigators may not be aware that Administrative Procedure Act (APA) violations by the Treasury are potential assets in their toolbox of arguments, according to Professor Kristin Hickman, Associate Professor of Law at the University of Minnesota Law School. Hickman discussed how to apply the APA to the Treasury's tax regulatory process at a December 3 luncheon at the D.C. Bar Association in Washington, DC. She explained the requirements of the APA for all federal agencies, noted how the Treasury may not be in compliance, and defended her assertions to some skeptical practitioners.


APA Requirements

Hickman explained the basic requirements of the APA when issuing legislative regulations. There must be a notice of proposed rulemaking, a period allowed for written comments, and a concise statement of the basis and purpose for the regulations (known to tax practitioners as the "preamble" to Treasury regulations). These requirements do not apply to interpretive rules, procedural rules, policy statements, and instances where the process is not followed for good cause.

Hickman asserted that because the Treasury's official position is to apply the APA notice-and-comment process to all of its tax regulations, and Code Sec. 6662 penalties apply regardless of a regulation's proper classification, most tax litigators do not distinguish between legislative (binding) versus interpretive or procedural regulations (which are not binding upon taxpayers) when developing a trial strategy. Also, despite Treasury's official position, her research indicated that the agency fails to follow the notice-and-comment process approximately 40 percent of the time. This opens the door for many federal tax regulations to be invalidated for failure to follow the notice-and-comment process of the APA, she noted. Thus, this argument may be a defense to a client's alleged tax liability.


Skepticism

However, practitioners pointed out that Hickman's administrative law reasoning, while valid, may not have practical implications for the average tax law litigator. Attorney Michael Desmond at McKee Nelson (and former Tax Legislative Counsel for the Treasury) pointed out that very little litigation is brought against the government before enforcement of the tax law has begun. Instead, taxpayers taking issue with a regulation are more likely to go to Congress to change the law or make unsolicited comments to Treasury in instances where no notice-and-comment process is granted. Most importantly, he pointed out, taxpayers are very unlikely to "shine a spotlight" on their tax position if they are not currently under examination by the IRS.

Hickman herself pointed out that taxpayers are restrained from directly bringing a cause of action to dispute the validity of a tax regulation by the Code Sec. 7421 prohibition against restraining the assessment or collection of tax.

[ . . . ]

Remaining Importance

[ . . . ]

[Hickman] reasoned that since the Treasury and IRS vigorously enforce the tax laws, the general public perception that they in turn follow the law is important. "The APA is the law, do you really want Treasury and the IRS to be perceived by taxpayers as not following the law when promulgating their regulations?" she proposed.

[ . . . ]

U.S. Tax Court Judge Mark Holmes echoed this sentiment, explaining that, in the final analysis, the IRS is an administrative agency that must comply with the administrative law requirements when issuing its guidance. George Hani, member at Miller & Chevalier Chartered, also commented that pointing out Treasury's failure to follow the APA notice-and-comment process could provide negotiating leverage when attempting to settle a dispute.