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"Employee Retention Credit Notice Likely Lacks the Force of Law"

November 6, 2023

Leo Unzeitig and Jaime Vasquez's article "Employee Retention Credit Notice Likely Lacks the Force of Law" in Tax Notes

Tax Notes

ERC audits are in full swing. As always, the issue for both taxpayers and the IRS should boil down to the application of law to facts. For taxpayers, the difficult part is figuring out exactly what the “law” is and how it should apply.

In a recent Tax Notes article, Leo Unzeitig and Jaime Vasquez, shareholders in our San Antonio tax controversy and tax planning practices, analyze whether IRS Notice 2021-20 regarding the employee retention credit has the force and effect of law and how much deference a court might give it.

Unzeitig and Vasquez note, “The primary confusion we are seeing concerns the extent to which both taxpayers and revenue agents believe that the notices have any authority. At a high level, many taxpayers (and practitioners) seem to think that Notice 2021-20 is enforceable and that courts will grant it deference, but some recent cases have made clear that that’s likely not the case.”

Reviewing the notice through the lens of an Administrative Procedure Act analysis, the authors believe that Notice 2021-20 is likely not “law.” Citing the Supreme Court stating in Mayo in 2011 that there is no such thing as “tax exceptionalism” and that Treasury and the IRS must comply with the APA to create rules that have the force and effect of law.

Unzeitig and Vasquez conclude, “Of course, to the extent that taxpayers intend to rely on Notice 2021-20, they should probably have some confidence doing so. While not required to offer deference to IRS notices, courts will still likely bind the IRS to them to the extent that a taxpayer relies on the published guidance to support a position. (…) [But] while the practical effect of an APA-defective notice will likely further the IRS’s policy goal of limiting claims for credits (because few taxpayers and practitioners have the stomach to disregard an IRS notice), practitioners must look through the smokescreen, remember the fundamental separation of powers doctrine, and recognize when the IRS has overreached. The way we do that is to be aware of how mainstream administrative law principles would be applied in our changing tax landscape as courts move away from the old-school “tax exceptionalism” mindset toward conventional administrative law applications.”

Read the full article here.