Taxpayer First Act of 2019/TFA Archives

IRS Roundup January 13 – 17, 2025

Check out our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of January 13, 2025 – January 17, 2025.

TAX CONTROVERSY-RELATED DEVELOPMENTS

January 15, 2025: The US Department of the Treasury (Treasury) and the IRS published final regulations, providing guidance on the resolution of federal tax controversies by the IRS Independent Office of Appeals (IRS Appeals). These final regulations are applicable to requests for IRS Appeals consideration made on or after February 14, 2025.

The Taxpayer First Act of 2019 (TFA) codified IRS Appeals and prescribed that its consideration should be “generally available to all taxpayers” who wished to resolve their federal tax controversies. Proposed regulations published on September 13, 2022, identified 24 exceptions to the term “federal tax controversy.” These exceptions preclude IRS Appeals from considering taxpayer challenges to the constitutionality of statutes and the validity of regulations, as well as the procedural validity of notices and revenue procedures. During the comment period for the proposed regulations, the exceptions regarding statutory/regulatory challenges were the focus of most public comments by far. However, the exceptions were left almost entirely unchanged in the final version of the regulations.

Practice Point: Because the TFA prescribes that IRS Appeals consideration should be “generally available to all taxpayers,” we expect judicial challenges to the validity of the final regulations on Administrative Procedure Act and substantive grounds. In the interim taxpayers should continue asserting their arguments challenging the validity of deficient guidance on constitutional or other grounds.

Relatedly, the IRS issued Announcement 2025-6, which describes three pilot initiatives that will test changes to existing Alternative Dispute Resolution programs. These programs are designed to help taxpayers resolve tax disputes earlier and more efficiently. The pilots focus on Fast Track Settlement, a program that allows IRS Appeals to mediate disputes between a taxpayer and the IRS while the case is still within the jurisdiction of the examination function, and Post-Appeals Mediation, a program in which a mediator helps foster a settlement between IRS Appeals and the taxpayer.

CLEAN ENERGY-RELATED DEVELOPMENTS

January 14, 2025: The Treasury and the IRS published final regulations regarding the clean electricity production credit under Internal Revenue Code (Code) Section 45Y and the clean electricity investment credit under Code Section 48E, established by the Inflation Reduction Act of 2022 (IRA). These final regulations provide rules for determining greenhouse gas emissions rates resulting from the production of electricity, petitioning for provisional emissions rates, and determining eligibility for these credits in various circumstances. The final regulations affect all taxpayers who claim the clean electricity production credit with respect to a qualified facility or the clean electricity investment credit with respect to a qualified facility or energy storage technology, as applicable, that is placed in service after 2024.

January 15, 2025: The IRS issued Notice 2025-9, which provides a safe harbor for the incremental cost of certain qualified commercial clean vehicles placed in service in calendar year [...]

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IRS Appeals Will Not Consider Regulatory Invalidity and Subregulatory Procedural Invalidity Challenges

In Mayo Found. for Med. Educ. & Rsch. v. United States, 131 S.Ct. 704 (2011), the Supreme Court of the United States made clear that administrative law rules apply to tax guidance like they do to other federal agency guidance. Since Mayo, the Supreme Court and other courts have provided further guidance—both in the tax and non-tax contexts—regarding the proper analysis in determining the validity of, and deference to, regulatory guidance.

Over the past decade, the number of taxpayer challenges to guidance issued by the Internal Revenue Service (IRS), whether in the form of regulations or subregulatory guidance (i.e., revenue rulings, revenue procedures, notices and announcements), has increased significantly. These challenges have taken a variety of forms, such as regulatory invalidity under Chevron USA, Inc. v. NRDC, 467 U.S. 837 (1984) and procedural invalidity under the Administrative Procedure Act (APA). Some successful challenges to the validity of IRS guidance and the ability to challenge such guidance in a pre-enforcement context include CIC Servs., LLC v. IRS, 141 S.Ct. 1582 (2021); United States v. Home Concrete & Supply, LLC, 132 S.Ct. 1836 (2012); Mann Construction, Inc. v. Commissioner, 27 F. 4th 1138 (6th Cir. 2022); Good Fortune Shipping SA v. Commissioner, 897 F.3d 256 (2018) and Liberty Global, Inc. v. United States, No. 1:20-cv-03501-RBJ (D. Colo. 2022). Many other challenges are pending both at the administrative level and in court.

The IRS and the US Department of the Treasury (Treasury) have noticed the increase in challenges to its published guidance. One important change is the more detailed discussions in preambles to final regulations regarding comments received and how the IRS views and incorporates said comments. This is a welcome development, although sometimes a tortuous one for taxpayers who must wade through hundreds of pages of preambles in some regulation packages. Another change, and the subject of this post, is the IRS’s views on how to deal with such challenges during the administrative process.

A federal tax controversy can involve three levels of review: Examination, Appeals and litigation. At the Examination stage, revenue agents and other IRS personnel develop the facts and determine whether an adjustment is warranted. Importantly, “hazards of litigation” are not considered at the Examination level, meaning, issues are viewed as binary—in favor of the IRS or the taxpayer—and not negotiated as a percentage of the item. However, at the Appeals level, the Appeals team weighs “hazards of litigation” to determine whether a case can be settled by the parties. Hazards of litigation are also considered at the litigation level.

Validly promulgated tax regulations are approved at the highest levels of the IRS, Treasury generally carry the force and effect of law and are binding on taxpayers and the IRS. Subregulatory guidance is also approved at senior levels of the IRS and the Treasury. At the Examination level, the IRS will not entertain challenges to the validity of [...]

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IRS Roundup January 13 – 17, 2025

IRS Appeals Will Not Consider Regulatory Invalidity and Subregulatory Procedural Invalidity Challenges

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