IRS Appeals Will Not Consider Regulatory Invalidity And Subregulatory Procedural Invalidity Challenges – Tax Authorities – United States – Mondaq

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In Mayo Found. for Med. Educ. & Rsch. v.
United States
, 131 S.Ct. 704 (2011), the Supreme Court of
the United States made clear that administrative law rules apply to
tax guidance like they do to other federal agency guidance.
Since Mayo, the Supreme Court and other courts have
provided further guidance—both in the tax and non-tax
contexts—regarding the proper analysis in determining the
validity of, and deference to, regulatory guidance.

Over the past decade, the number of taxpayer challenges to
guidance issued by the Internal Revenue Service (IRS), whether in
the form of regulations or subregulatory guidance (i.e.,
revenue rulings, revenue procedures, notices and announcements),
has increased significantly. These challenges have taken a variety
of forms, such as regulatory invalidity under Chevron USA, Inc. v. NRDC, 467 U.S.
837 (1984) and procedural invalidity under the Administrative
Procedure Act (APA). Some successful challenges to the validity of
IRS guidance and the ability to challenge such guidance in a
pre-enforcement context include CIC Servs., LLC v. IRS, 141 S.Ct.
1582 (2021); United States v. Home Concrete & Supply,
, 132 S.Ct. 1836 (2012); Mann Construction, Inc. v.
, 27 F. 4th 1138 (6th Cir. 2022); Good Fortune Shipping SA v.
, 897 F.3d 256 (2018) and Liberty Global, Inc. v. United
, No. 1:20-cv-03501-RBJ (D. Colo. 2022). Many other
challenges are pending both at the administrative level and in

The IRS and the US Department of the Treasury (Treasury) have
noticed the increase in challenges to its published guidance. One
important change is the more detailed discussions in preambles to
final regulations regarding comments received and how the IRS views
and incorporates said comments. This is a welcome development,
although sometimes a tortuous one for taxpayers who must wade
through hundreds of pages of preambles in some regulation packages.
Another change, and the subject of this post, is the IRS’s
views on how to deal with such challenges during the administrative

A federal tax controversy can involve three levels of review:
Examination, Appeals and litigation. At the Examination stage,
revenue agents and other IRS personnel develop the facts and
determine whether an adjustment is warranted. Importantly, “hazards of litigation” are not considered at the
Examination level, meaning, issues are viewed as binary—in
favor of the IRS or the taxpayer—and not negotiated as a
percentage of the item. However, at the Appeals level, the Appeals
team weighs “hazards of litigation” to determine whether
a case can be settled by the parties. Hazards of litigation are
also considered at the litigation level.

Validly promulgated tax regulations are approved at the highest
levels of the IRS, Treasury generally carry the force and effect of
law and are binding on taxpayers and the IRS. Subregulatory
guidance is also approved at senior levels of the IRS and the
Treasury. At the Examination level, the IRS will not entertain
challenges to the validity of regulations or the procedural
validity of subregulatory guidance. This makes administrative
sense, given that hazards of litigation are not considered at the
Examination level.

However, at the Appeals level, hazards of litigation are
required to be considered. Thus, historically, taxpayers could at
least raise validity challenges to published IRS guidance and have
those challenges be heard and considered. Although it is difficult
to convince an IRS Appeals Officer to offer a settlement based on
such challenges, it has always been possible (and in our
experience, has sometimes resulted in settlement by the parties).
This possibility no longer exists.

On September 13, 2022, the IRS and the Treasury
published proposed regulations in
the Federal Register regarding the resolution of
federal tax controversies at the Appeals level. The purpose of the
proposed regulations is to reflect on amendments made by additions
to Internal Revenue Code Section 7803 in
the Taxpayer First Act of 2019 (TFA). We
 some of the changes to IRS procedures and
options by the TFA, focusing on changes to the IRS Independent
Office of Appeals (IRS Appeals) process.

The TFA established the new IRS Appeals and provided that the
right of appeal is “generally available to all
taxpayers.” The modified “generally” has been
understood by many to mean that appeals may not be available where
taxpayers who advance frivolous positions or refuse to extend the
statute of limitations to allow for review by IRS Appeals or for
matters where the IRS has designated the issue for litigation. The
recently proposed regulations provide 24 specific exceptions
(listed at the end of this post) to IRS Appeals consideration and
invite comments on the proposed exceptions, as well as whether any
additional exceptions are warranted.

Two of the exceptions concern challenges to validity of
regulations and challenges alleging that a notice or revenue
procedure is procedurally invalid. Unless there is an unreviewable
decision from a federal court invalidating the regulation or
subregulatory guidance at issue, IRS Appeals will not consider the
challenge. (The proposed regulatory text for these two exceptions
is provided at the end of this post.)

The proposed regulations contain other notable provisions. For
example, Proposed Treasury Regulation § 301.7803-2(g)(2)
provides that IRS Appeals and IRS Chief Counsel may coordinate on
settlement authority before a docketed US Tax Court case is
transferred to IRS Appeals. Further, the preamble to the proposed
regulations envisions that IRS Chief Counsel may delay forwarding a
case to IRS Appeals or may request the return of case from IRS
Appeals before IRS Appeals has completed its consideration of a

The portion of the proposed regulations discussed above are to
apply to requests for consideration by IRS Appeals made 30 days
after the regulations are finalized. Comments on the proposed
regulations are due within 60 days of the date of publication of
the proposed regulations.

Despite the applicability date of 30 days after finalization,
immediately following the publication of the proposed regulations,
the IRS issued an internal memorandum to all IRS Appeals employees
that essentially finalizes the proposed regulations with respect to
the exceptions for challenges to IRS guidance (Appeals Memorandum).
The Appeals Memorandum states that IRS Appeals “will not apply
litigating hazards to arguments raised by a taxpayer regarding the
validity of Treasury regulations or procedural validity of IRB
notices or revenue procedures” unless “there is an
unreviewable decision from a federal court hold the regulation, IRB
notice, or revenue procedure invalid.” The guidance is
effective for all pending and future IRS Appeals cases and will be
incorporated into Internal Revenue Manual 8.1.1. The Appeals
Memorandum raises interesting issues given that the proposed
regulations were just issued and are in the notice-and-comment
rulemaking process, which is a requirement before any final
regulations can be valid under the APA. Thus, the Appeals
Memorandum could be viewed as an end-run around the APA’s
requirements given that it is effective immediately.

Practice Point: Many viewed the TFA as
reflecting US Congress’ intent to provide more access to IRS
Appeals. However, that does not appear to be the case in the
IRS’s view. Taxpayers who have challenged or intend to
challenge the validity of regulations or the procedural validity of
subregulatory guidance should prepare for a long fight if their tax
returns are selected for examination and the issue is identified.
The IRS, through its proposed regulations and the Appeals
Memorandum, prevents taxpayers from seeking resolution of a
validity challenge at IRS Appeals, leaving litigation as the only
recourse for resolution of such a challenge. It also seeks to allow
more involvement by IRS Chief Counsel attorneys in docketed cases
where taxpayers had not previously participated in the IRS Appeals
process, which could lead to less potential for settlement of
docketed cases than in the past. Interested taxpayers should
consider submitting comments to the proposed regulations.

Exceptions to Appeals Consideration:

  1. Frivolous Positions
  2. Penalties Related to Frivolous Positions and False
  3. Whistleblower Awards
  4. Administrative Determinations Made by Other Agencies
  5. Taxpayer Assistance Orders
  6. Materials to Be Deleted from a Written Determination
  7. Denials of Access Under the Privacy Act
  8. Issues Settled by a Closing Agreement
  9. The IRS Erroneously Returns or Rejects an OIC
  10. Branded Prescription Drug Fee and Health Insurance Providers
  11. IRS Automated Process of Certifying a Seriously Delinquent Tax
  12. IRS’s Automated Process of Certifying a Seriously
    Delinquent Tax Debt
  13. Issues Barred from Consideration in CDP Cases
  14. Authority Over the Matter Rests with Another Office
  15. Certain Technical Advice Memoranda
  16. Technical Advice from an Associate Office in a Docketed
  17. Letter Rulings Issued by an Associate Office
  18. Challenges Alleging that a Statute is Unconstitutional
  19. Challenges Alleging that a Treasury Regulation is Invalid
  20. Challenges Alleging that a Notice or Revenue Procedure is
  21. Case or Issue Designated for Litigation or Withheld from
  22. Appeals Issued the Determination that is the Basis of the Tax
    Court’s Jurisdiction
  23. Appeals Consideration is a Prerequisite to the Jurisdiction of
    the Tax Court
  24. An Administrative Determination to Deny or Revoke a CPEO

Proposed Treasury Regulation §

Exceptions to consideration by IRS
 The following are federal tax controversies
that are exempt from consideration by IRS Appeals or matters or
issues that are otherwise ineligible for consideration by IRS
Appeals because they are neither a federal tax controversy nor
treated as a federal tax controversy under paragraph (b)(3) of this
section. If a matter not eligible for consideration by IRS Appeals
is present in a case that otherwise is eligible for consideration
by IRS Appeals, the ineligible matters or issues will not be
considered during resolution of the case. The exceptions are:

Proposed Treasury Regulation §

Any issue based on a taxpayer’s argument that a Treasury
regulation is invalid unless there is an unreviewable decision from
a federal court invalidating the regulation as a whole or the
provision in the regulation that the taxpayer is challenging. This
exception does not preclude IRS Appeals from considering a federal
tax controversy based on arguments other than the validity of a
Treasury regulation, such as whether the Treasury regulation
applies to the taxpayer’s facts and circumstances.

Proposed Treasury Regulation §

Any issue based on a taxpayer’s argument that a notice of
revenue procedure published in the Internal Revenue Bulletin is
procedurally invalid unless there is an unreviewable decision from
a federal court holding it to be invalid. This exception does not
preclude IRS Appeals from considering a federal tax controversy
based on arguments other than the validity of a notice or revenue
procedure, such as whether the notice or revenue procedures applies
to the taxpayer’s facts and circumstances.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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