On Friday, the U.S. Supreme Court released two opinions limiting the power of federal agencies like the IRS to interpret ambiguous statutes and handed that power to the federal courts. Until the Supreme Court issued those opinions Friday, U.S. courts were required to defer to the decisions of administrative agencies when interpreting ambiguously worded statutes. Now, courts are free to disregard rules provided by federal agencies and interpret federal statutes as they see fit.
The IRS was not directly involved in either case and it was not specifically mentioned in the decisions, but most observers believe the IRS is among the “agencies” that will be directly impacted by court’s rulings. As a result, the decisions are likely to restrict the IRS’s rulemaking powers going forward, but it will take some time to sort out the extent of those restrictions. Additionally, because courts are no longer required to accept IRS readings of statutes, the decisions could also limit taxpayers’ reliance on IRS regulations in court.
Friday’s decisions in Relentless v. Department of Commerce and Loper Bright Enterprises v. Raimondo overturned the high court’s 1984 decision in Chevron v. Natural Resources Defense Council, which gave rise to what is known as the “Chevron doctrine.” Under that doctrine, when a statute did not directly address a question, federal courts were required to uphold any reasonable interpretation by a federal agency. The Chevron doctrine is regularly cited in federal court cases challenging the IRS’s application of the Tax Code in situations not specifically addressed in the text.
The Relentless and Loper Bright Enterprises decisions were both authored by Chief Justice John Roberts, who found Chevron deference to be inconsistent with the Administrative Procedure Act (APA). The APA sets out the procedures federal agencies must follow when taking action and allows federal courts to review that action. Roberts observed that the statute directs courts to decide legal questions using their own judgment. He concluded that the APA “makes clear that agency interpretations of statutes – like agency interpretations of the Constitution — are not entitled to deference.” As a result, courts have responsibility for ensuring that the laws “mean what the agency says.”
NATP will continue monitoring the impact the Supreme Court’s ruling will have on the IRS and provide updates on any changes that could affect our members’ tax practices.
