U.S. Supreme Court Makes It Easier to Challenge IRS Regulations

Over the years, the IRS has enacted voluminous regulations interpreting ambiguous tax code provisions or filling in administrative gaps.

Indeed, IRS regulations dwarf the tax code: the tax code is about 2,600 pages long, while all the rules written by the IRS amount to over 16,000 pages. Think an IRS regulation is unfair or overreaches? Until now, there wasn’t much you could do about it.

Chevron Deference Overturned

For decades, a legal rule called Chevron deference required courts to defer to government regulations so long as they were reasonable. This gave federal agencies like the IRS considerable power, as courts rarely struck down their regulations.

In a landmark decision, Loper Bright Enterprises v. Raimondo, the U.S. Supreme Court overturned the Chevron doctrine. Courts are now empowered to make their own interpretations of tax laws without automatically deferring to IRS regulations.

What This Means for Taxpayers

• More legal challenges to IRS regulations are expected, including new cryptocurrency regulations.
• The IRS may enact fewer regulations, relying more on subregulatory guidance like revenue rulings and procedures.
• IRS regulations must now be crafted more carefully to withstand judicial scrutiny.
• The IRS could begin settling disputes regarding regulation validity rather than risking unfavorable court decisions.

Key Limitations

Importantly, the Supreme Court’s decision applies only prospectively. Existing regulations remain valid, and past court decisions relying on Chevron deference are unaffected.

While this decision doesn’t automatically invalidate any current IRS regulations, it paves the way for a more balanced and scrutinized regulatory process.