Recent efforts by conservative groups to impeach Internal Revenue Service (IRS) Commissioner John Koskinen have highlighted potential abuses by the agency. In recent years, the IRS has been accused of inappropriately flagging several conservative groups’ 501(c)(3) applications and abusive anti-corporate inversion regulations. Former Chairman of the House Ways and Means Committee, Bill Archer, recently stated that despite protections the committee has put in place, these "recent events make it clear that the IRS remains abusive towards taxpayers and often unaccountable." Is Bill Archer correct? Has the IRS abused its power?
Inappropriate Flagging of 501(c)(3) Applications
In True the Vote, Inc. v. IRS, the US Court of Appeals for the District of Columbia Circuit’s ruled that the IRS had committed “unconstitutional acts against” several conservative groups. The complaint alleged that IRS officials had flagged several conservative groups’ applications for additional scrutiny because of the groups’ political beliefs. Some of these groups were Tea Party organizations that advocate for lowering taxes. This additional scrutiny led to delays in processing their 501(c)(3) applications for tax-exempt status. The Court of Appeals agreed with the groups’ arguments that their applications were “subjected to extended delay” and “were not receiving the same processing as those of other organizations.” Moreover, two groups are still waiting for their applications to be processed and the IRS has resisted court orders to disclose a list of targeted groups. Based on the facts laid out in this case, it is likely that the IRS abused its discretion.
Abusive Anti-Corporate Inversion Regulations
In April 2016, the IRS released several anti-corporate inversion regulations by arguably failing to follow rulemaking requirements applicable to all federal agencies. A corporate inversion is where a US based company buys a foreign company to take advantage of the foreign company’s lower-tax jurisdiction. For a corporate inversion to reap maximum tax benefits, the foreign company must be at least one-quarter and ideally two thirds the size of the US based company. The IRS’s new inversion regulations disregard stock attributable to acquisitions from the previous three years to determine the company’s size, making it difficult for companies to achieve the ratios needed for the tax incentives.
There is speculation that these new regulations targeted the then-pending merger between Pfizer and Allergan. The $150 million merger would have relocated Pfizer, the biggest American pharmaceutical company, to Ireland and would have lowered its taxes. The new regulations issued by the IRS effectively removed the tax incentives to merge with Allergan and the merger did not take place. Mergers with foreign companies tend to uproot American companies and decrease tax revenues in the United States. But, moving the company to a lower tax jurisdiction would allow the company to stay competitive on the global market and gain access to Allergan’s growing product line. Critics also believe the regulations have no basis in law and the US Chamber of Commerce and the Texas Association of Business have filed a lawsuit.
Is Bill Archer Correct?
Does the IRS remain abusive and unaccountable towards taxpayers? To some extent, it is correct that the IRS is shielded from regular rule making procedures, which may have led to abuses by the agency. Under the Anti-Injunction Act of 1867, no suit “for the purpose of restraining the assessment or collection of any tax” can be brought in federal courts. Consequently, the IRS can issue a potentially illegal rule increasing a taxpayer’s federal taxes and the taxpayer must wait for the IRS to assess the tax before bringing suit in federal court. Moreover, the taxpayer would have to risk incurring penalties before the court makes a decision. Since a taxpayer would bear majority of the risk in bringing suit, most are unwilling to attempt the process. Thus, it is difficult to hold the IRS accountable in court.
The IRS may have respectable motives behind its initiatives, such as protecting much-needed revenue streams. But, based on recent events, it appears that the IRS may have abused its power by targeting tax-exempt groups and business entities who threaten tax revenues.
Authored by Robin Sheehan, LegalMatch Legal Writer