Most clients I speak with are often surprised (shocked even) to learn that the Government (and by implication, the IRS) cannot be sued in most instances. Rather, Congress must generally authorize the suit under a specific statute. This doctrine, referred to as sovereign immunity, often works against taxpayers who seek relief against the Government with respect to assessment or collection actions taken against them by the IRS.
But, significantly, there are notable exceptions to the doctrine of sovereign immunity. Specifically, the Anti-Injunction Act, see I.R.C. § 7421 of the Code (AIA), carves out statutory exceptions to the doctrine of sovereign immunity. Moreover, taxpayers can file refund claims against the Government, provided they meet those requirements. This Insight will discuss the doctrine of sovereign immunity, the AIA, and some of their exceptions.
I. The Doctrine of Sovereign Immunity and the Anti-Injunction Act
The doctrine of sovereign immunity is actually antithetical to the history of the United States. Specifically, the doctrine is borrowed from England under the “fiction that the Crown could do no wrong.” See Lewis v. Comm’r, 93 AFTR 2004-229 (D.C.N.Y. 2004) (citing Feres v. U.S., 340 U.S. 135, 139 (1950)). Under the doctrine of sovereign immunity, the United States and its agencies – including the IRS – may not be named as defendants in a lawsuit without the Government’s express consent. Id. Generally, this means that a specific statute must unequivocally authorize the lawsuit. Lane v. Pena, 518 U.S. 187, 192 (1996).
If the sovereign immunity doctrine leaves any doubt with respect to taxpayers’ ability to file lawsuits for tax claims, the AIA removes such doubt. Under the AIA, it provides:
Except as provided in sections 6015(e), 6212(a) and (c), 6213(a), 6232(c), 6330(e)(1), 6331(i), 6672(c), 6694(c), and 7426(a) and (b)(1), 7429(b), and 7436, no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed.
The Supreme Court has indicated that the purpose of the AIA is to protect “the Government’s ability to collect a consistent stream of revenue, by barring litigation to enjoin or otherwise obstruct the collection of taxes.” Nat’l Fed. of Indep. Bus. v. Sebelius, 567 U.S. 519, 543 (2012).
- Statutory Exceptions to the AIA
Although the AIA will serve as a formidable roadblock to taxpayers seeking to bring suit against the Government for federal tax claims, there are some notable statutory exceptions to its reach. In addition, the Supreme Court has carved out a judicial exception. These exceptions are discussed more fully below.
a. Innocent Spouse Relief
The AIA excludes from its limitation any suit brought under I.R.C. § 6015(e). Generally, I.R.C. § 6015 permits taxpayers to bring a lawsuit against the Government for claims that the taxpayer should not be jointly and severally liable for the tax debts of a year in which the taxpayer filed a joint tax return. See I.R.C. § 6015. Thus, under I.R.C. § 6015(e), an aggrieved taxpayer can file a lawsuit in the Tax Court against the IRS asserting they are entitled to innocent spouse relief. Moreover, in the event the Tax Court does not have jurisdiction over the claim, the taxpayer may, in certain instances, file suit against the Government in the federal district court or the Court of Federal Claims to enjoin certain premature levy and collection actions. See I.R.C. § 6015(e)(1)(B)(ii), (e)(2)(3).
b. Tax Court Petitions
Another notable exception from the AIA is the timely filing of a petition in the United States Tax Court. See I.R.C. § 6212. Generally, if the IRS asserts a deficiency against a taxpayer, the taxpayer may file a petition with the Tax Court within 90 days of the notice of deficiency. If the petition is timely filed, the IRS is prohibited from assessing or levying against the taxpayer until the Tax Court decision has become final. I.R.C. § 6213(a). Thus, the AIA exempts from its scope timely filed petitions to permit taxpayers an opportunity to litigate their claims before the Tax Court.
c. BBA Partnership Petitions
In 2015, Congress passed the Bipartisan Budget Act of 2015. Under that Act, the IRS may assess and collect any “imputed underpayment” against the partnership. See I.R.C. § 6232(a). However, similar to its predecessor (TEFRA), the IRS may not assess or levy an imputed underpayment before the close of the 90th day after the day in which it issues a Notice of Final Partnership Adjustment, and if a petition is filed with the appropriate federal court, until the decision of that court has become final. I.R.C. § 6232(b). Under the exceptions to the AIA, if the IRS acts too quickly in its assessment or collection of an imputed underpayment, the taxpayer may file a lawsuit enjoining such action. See I.R.C. § 6232(c).
d. CDP Hearings
In response to perceived and actual IRS abuse, Congress passed the Internal Revenue Service Restructuring and Reform Act of 1998. Under that Act, Congress provided certain protections to taxpayers with respect to proposed tax levies. Specifically, prior to a proposed levy, the IRS must issue a Collection Due Process (CDP) hearing notice to the taxpayer and must provide the taxpayer 30 days to file a grievance with the IRS Independent Office of Appeals (Appeals), the latter of which reviews the collection action. Moreover, if the taxpayer files a timely request for administrative review with Appeals, the IRS may generally not levy against the taxpayer until Appeals has issued a Notice of Determination, and, if the taxpayer files a timely petition with the Tax Court, until after the Tax Court decision becomes final.
Under I.R.C. § 6330(e), if the IRS fails to follow these procedures, the taxpayer can file a petition in the proper court to enjoin the levy action. The AIA permits the taxpayer to file suit in these instances.
e. Divisible Taxes
Under the so-called Flora rule, taxpayers must generally pay the full amount of any taxes assessed against them prior to filing suit against the Government. However, many statutes or judicial interpretations of statutes permit the taxpayer to pay only a portion of the tax due, file a refund claim, and then file a complaint for refund.
Under I.R.C. § 6331(i), no levy may be made on certain divisible taxes during the pendency of any lawsuit if the decision in the lawsuit would be res judicata with respect to the unpaid tax, or the person would be collaterally estopped from contesting the unpaid tax by reason of the lawsuit. Thus, the AIA permits taxpayers to stop such levies.
f. Certain Trust Fund Recovery Penalty Cases
Generally, the IRS will assert trust fund recovery penalties against “responsible persons” who willfully fail to account for or pay federal employment taxes. I.R.C. § 6672. Thus, in these cases, the responsible person and the liable entity both become liable for at least portions of the employment taxes due (i.e., the responsible person becomes liable for the trust fund portion with the employer liable for the entire portion).
But, I.R.C. § 6672(c) also provides that if, within 30 days after the day on which notice and demand for a trust fund recovery penalty is made against such person, such person: (1) pays an amount not less than the minimum amount required to commence a court proceeding with respect to the tax liability; (2) files a claim for refund for such amount paid; and (3) furnishes a bond, then no levy or court proceeding for the collection of the remainder of the trust fund recovery penalty may occur. Accordingly, the AIA carves out an exception for premature levies in these cases.
g. Tax Preparer Penalties
If a tax return preparer prepares a tax return or claim for refund and the position is later found to be an “unreasonable position,” and, in addition, the tax preparer knew or reasonably should have known of the position, the tax preparer can be liable for penalties equal to the greater of $1,000 or 50% of the income derived (or to be derived) with respect to the return or claim. I.R.C. § 6694(a). Generally, a position is unreasonable if it lacked “substantial authority” or the position had a “reasonable basis” and was not disclosed. Moreover, a position is unreasonable for these purposes if the position relates to a tax shelter or reportable transaction unless it is reasonable to believe that the position would more likely than not be sustained on its merits. I.R.C. § 6694(a)(2). In addition, penalties can be increased if the conduct is due to willful or reckless conduct. I.R.C. § 6694(b).
However, if the IRS issues a notice and demand for payment of the assessable penalty and the tax preparer pays an amount not less than 15% and files a claim for refund, no levy or proceeding in court for the collection of the remainder of the penalty can be had until final resolution of the proceeding. I.R.C. § 6694(c)(1). Under the AIA, any premature levy may be enjoined.
h. Wrongful Levies
Under I.R.C. § 7426(a), if the IRS makes a levy on property or property sold pursuant to a levy, any person (other than the person against whom the tax was assessed) who claims an interest in or lien on the property and that such property was wrongfully levied upon may bring a lawsuit against the United States in federal district court. Thus, under the AIA, taxpayers may bring this lawsuit against the Government.
i. Jeopardy or Levy Assessments
Generally, the IRS may make quick assessment or levies if the IRS believes the tax debts are in danger of ever being paid (a relatively high standard). If this occurs, the taxpayer may request within 30 days an administrative review by the IRS. I.R.C. § 7429(a)(2). If the request is made, the IRS is required to determine whether or not the quick assessment or levy is reasonable under the circumstances. I.R.C. § 7429(a)(3). Thereafter, and generally within 90 days (but in some cases sooner), the taxpayer may bring a lawsuit against the United States for a review of the IRS’ determination. I.R.C. § 7429(b)(1). To permit this lawsuit, the AIA carves out an exception.
j. Proceedings to Determine Employment Status
For federal income tax purposes, a worker can be classified as either an independent contractor or an employee. The characterization can be significant. If the worker is an independent contractor, the payor is not required to withhold and remit federal employment taxes. Conversely, if the worker is an employee, the payor (the employer) must withhold and remit federal employment taxes to the IRS. If the payor failed to withhold, the payor is liable for the employment taxes in the event the IRS is successful in its claims against the payor.
When a dispute arises between the payor and the IRS, the payor can challenge the IRS’ determinations in a federal lawsuit. I.R.C. § 7436(a)(2) (flush language). To permit the payor sufficient time to dispute the IRS’ adverse determination, I.R.C. § 7436(d) and the AIA permit the payor to file suit against the Government with the Government being foreclosed from levying until the proceedings have concluded.
k. Judicially-Created Exceptions to AIA.
The exceptions found in the statutory language of the AIA are not the only exceptions. Significantly, the Supreme Court has carved out a judicial exception to the AIA where: (1) the taxpayer is certain to succeed on the merits of its claim; (2) the taxpayer can demonstrate that the collection of the tax will result in irreparable harm; and (3) the taxpayer has no other adequate legal remedy See Enochs v. Williams Packing & Navigation Co., 370 U.S. 1 (1962). Regrettably, few taxpayers meet the judicial exception to the AIA because in many cases, federal courts have determined that an adequate legal remedy exists if the taxpayer has had the opportunity to file a claim for refund and file suit against the Government, regardless of the amount involved. But see Ponchik v. Comm’r, 854 F.2d 1127 (8th Cir. 1988) (taxpayer meets judicial exception of AIA where, among other things, taxpayer was incarcerated and made 11 cents per hour and IRS’ collection actions would deprive his minor daughter of necessary support).
II. Refund Suits
The AIA does not apply to refund suits. See I.R.C. § 7422. However, for taxpayers to file a suit in federal district court or the Court of Federal Claims, the taxpayer must first file an administrative claim for refund with the IRS. See id. Moreover, under Flora and its progeny, the taxpayer must also full pay the amount of federal taxes allegedly owed. See 28 U.S.C. § 1346; Flora v. U.S., 357 U.S. 63 (1958), aff’d on reh’g, 362 U.S. 145 (1960).
Although the AIA and the Flora rule can serve as significant impediments to litigating the actual amount of federal tax due or the IRS’ collection actions (including levies and liens), taxpayers should be aware of the above exceptions to these rules. In addition, taxpayers should be aware that there may be additional exceptions to bring their claims, depending on their particular facts and the remedies they seek against the Government.
Need assistance in managing the Tax Compliance process? With our unique substantive and procedural knowledge, we can provide a comprehensive approach to the tax dispute resolution process, often collaborating with clients’ existing tax professionals to formulate creative solutions to the most complex tax problems. Freeman Law offers value-driven legal services and provides practical solutions to complex tax issues. Schedule a consultation now or call (214) 984-3000 to discuss your tax concerns and questions.