On May 17, 2021, the Supreme Court of the United States unanimously decided that preemptive relief could be sought through the courts related to reporting requirements imposed by the Internal Revenue Service (IRS). The Supreme Court reversed lower courts’ rulings that injunctive relief could not be sought because the Anti-Injunction Act bars any suit “restraining the assessment or collection of any tax.”
Generally, the Anti-Injunction Act requires that the tax be paid prior to filing a suit for refund. The Court determined that the Anti-Injunction Act did not apply in cases where the substance of the challenge was a reporting requirement and not the tax penalty assessed to enforce the requirement.
Details of the Court’s Ruling and its Implication on Micro-Captives
The case involved a company called CIC Services, LLC (CIC) that provided aid, assistance and advice to various clients that participate in certain insurance transactions, including micro-captive transactions. The IRS believes that some micro-captive transactions may have “a potential for tax avoidance or evasion.”
In light of this concern, the IRS issued Notice 2016-66 requiring reporting by taxpayers and material advisors (like CIC) of the details of the micro-captive insurance transactions that they participated in or for which they provided aid, assistance or advice. This imposed significant reporting requirements and compliance costs on taxpayers and material advisors. It also imposed a tax penalty for non-compliance with the reporting requirement as well as criminal penalties of up to a year in prison.
CIC sought relief from the burdensome reporting requirements through the courts, citing the fact that the IRS did not follow the Administrative Procedures Act before issuing the notice. The Government argued that CIC should be barred from seeking such relief under the Anti-Injunction Act because it related to the assessment or collection of a tax (the tax penalty imposed under the notice for non-compliance with the reporting requirements).
The Supreme Court found that CIC’s claim for relief is not barred by the Anti-Injunction Act for several reasons. If CIC had followed the Government’s proposed course and requested a refund after being charged a penalty for non-compliance, CIC would have to have violated the reporting requirement and exposed itself to criminal penalties. The Court also noted that the assessment and collection of the tax penalty was several steps removed from the reporting act that CIC sought relief from. For instance, CIC would have to fail to report, then the IRS would have to determine that there was a violation, and finally the IRS would have to assess the tax penalty.
The Supreme Court ultimately decided that the reporting requirement, not the tax penalty that may be assessed to enforce it, was being challenged by CIC. The question of the validity of the reporting requirement and if the IRS violated the Administrative Procedures Act with how it issued Notice 2016-66 were remanded to the lower courts for determination.
What This Ruling Means for Taxpayers
For taxpayers, this ruling narrows the scope of the application of the Anti-Injunction Act, allowing preemptive legal challenges to certain reporting or other requirements that are separate from, but backed by, a tax penalty. It does not reverse or remove the reporting requirements under Notice 2016-66 for taxpayers or material advisors. That will be determined by the lower courts.
- Discuss the current guidance and reporting requirements with their tax adviser.
- Continue to monitor Eide Bailly communications about this ongoing litigation to see if reporting requirements change.
Mandatory disclosure is an increased burden for organizations. Understanding when to disclose, and the form of the disclosure, can be a confusing process.