Future of IRS Authority in Question After Supreme Court Overturns Chevron Doctrine

The Supreme Court has overturned the Chevron Doctrine--a four decade-old ruling that enabled Federal agencies, including the Internal Revenue Service (“IRS”), to interpret ambiguous laws passed by Congress, and to have such interpretations enjoy a significant degree of deference. The fallout is not clear yet, but in theory, the ruling pulls the rug out of the IRS’s rulemaking authority and returns the power either to the federal courts to interpret the law, or to Congress to write and pass tax sections to the Internal Revenue Code that have clearer language.

For practically four decades, the IRS had the wide-ranging authority to issue guidance such as Regulations and Revenue Rulings that explained the Internal Revenue Code to taxpayers and tax practitioners that courts found authoritative. Taxpayers and tax practitioners seeking resolution for issues ambiguously presented by Congress in the Internal Revenue Code had their disputes’ outcomes influenced by the very agency they found themselves facing—the IRS. The Chevron Doctrine gave the IRS, and other federal agencies in similar positions, great power to decide how the litigation against its own agency would be decided, and promptly closed doors to those taxpayers and tax practitioners who desired to litigate issues.

With the IRS’s rulemaking authority weakened, an uptick in litigation is likely to occur. Federal courts will now have the jurisdiction to review the IRS’s view on a taxpayer’s or tax practitioner’s problem and review both sides of the problem with possible equal opportunity for either side to convince the court and prevail.

How far the IRS’s Regulations and Revenue Rulings will fall from their current pedestal is unknown. Will there no longer be Regulations? Not likely. Will there be challenges to Revenue Rulings? Potentially. Tax guidance and rules may now have to go through a more tedious and prolonged process to become a settled law. The IRS’ issuing power will likely be constrained by this process. On the other hand, if Congress or the courts are relied upon to revise sections or issue guidance, the process will be equally lengthy.

As of now, it’s a waiting game to see whether overturning Chevron will favor tax practitioners and taxpayers or the IRS. What is certain is that further litigation will make the Supreme Court’s ruling in Loper Bright Enterprises v. Raimondo clearer in the months and years ahead.

Dinsmore’s tax team will stay on top of any developments and is here to answer any questions in the meantime.