What You Need to Know
- The federal Anti-Injunction Act normally keeps taxpayers from challenging taxes before they pay the taxes.
- The IRS wants taxpayers to send it reports about micro captive insurance arrangements.
- Justices held, unanimously, that the reporting requirement is not a tax, and that taxpayers can challenge it without having to violate it.
The U.S. Supreme Court has handed down a unanimous decision that could help everyone —from tax advisors and the wealthy to low-income individuals and other taxpayers — fight IRS reporting requirements in court.
The court ruled 9-0 Monday, in CIC Services LLC v. IRS (19-930), that an IRS information reporting requirement for users and advisors of micro captive insurance arrangements is different from a tax, even though a taxpayer that violates the reporting requirement might have to pay a penalty.
The federal Anti-Injunction Act of 1867 usually keeps taxpayers who have not yet paid, or intentionally failed to pay, federal taxes from suing for “injunctions,” or court rulings that restrain the the government from ever trying to collect the taxes.
The IRS cannot use the Anti-Injunction Act to shield IRS reporting requirements from lawsuits seeking injunctions against enforcement of the reporting requirements, the court held.
Letting the IRS use the Anti-Injunction Act to block suits seeking injunctions against a reporting requirement would be unconstitutional, Justice Elena Kagan wrote in an opinion for the court. This is because, under the current rules, the only way for a taxpayer to challenge the requirement would be to violate the requirement and face the risk of spending a year in prison.
“And that is not the kind of thing an ordinary person risks, even to contest the most burdensome regulation,” Kagan wrote. “So the criminal penalties here practically necessitate a pre-enforcement, rather than a refund suit — if there is to be any suit at all.”
CIC is a Knoxville, Tennessee-based company that has helped business owners form “micro captives,” or small insurance companies that serve only the owners.
Most micro captives insure the owners against property and casualty risks, but some micro captives invest assets in corporate-owned life insurance or have other connections with life insurance.
The IRS has argued for years that some taxpayers set up micro captives simply to evade income taxes. The agency announced in 2016 that the captive owners and advisors would have to send it reports on all micro captive transactions.
CIC and other captive owners and advisors have argued that the IRS violated federal regulation-writing rules by imposing the reporting requirement without providing a comment period or other chance for affected parties to challenge the requirements.
When CIC sued, the IRS said micro captives should challenge the reporting requirement by disobeying the requirement and then suing for refunds of any tax penalties paid.
A federal district court judge in Tennessee sided with the IRS. The 6th U.S. Circuit Court of Appeals agreed with the district court. The Supreme Court has now reversed the 6th Circuit ruling and sent the case back down into the court system for further action.
The federal courts have not yet ruled on the merits of CIC’s case.