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Following the Supreme Court’s decision in Mayo Foundation v. United States, in which the Court ruled that tax regulations receive deference from courts under the Chevron doctrine that applies to non-tax regulations, many commentators acknowledged the decision’s anticipated impact on disputes about the validity of tax regulations. The new standard gives the IRS much wider latitude in issuing regulations that fill gaps caused by statutory ambiguities. In our prior discussions of the decision, we speculated:
The IRS may be wise to keep in mind that neither it, nor the courts, are the final arbiters of the tax law. Congress ultimately will decide what is the law. And when Congress decides that the IRS has acted too boldly, it has more than one way to rein in the agency.
The IRS may be on a collision course with Congress now, over the question of the statute of limitations that applies to an innocent spouse who wishes to raise an equitable defense under Code section 6015(f) to joint tax liability. Section 6015(f) is silent about whether an equitable defense must be raised within a specified time period; however, IRS regulations issued under that section allow for only a two-year period from the date of the first collection action taken by the IRS. While courts have not always gone along with this rule, the IRS has two circuit courts on its side, Manella v. Comm'r, No. 10-1308 (3d Cir. 2011); Lantz v. Comm'r, 607 F.3d 479 (7th Cir. 2010), and it continues to push the issue.
After the Supreme Court’s decision in Mayo Foundation, taxpayers can expect even greater deference to the IRS’s position in future cases. Nevertheless, the IRS may be running up against a more formidable foe than the innocent spouses whose cases are before the courts. Several senators recently criticized the regulations and have asked the IRS to reevaluate the two-year statute of limitations. (Via accountingtoday.com) Indeed, they have also reminded the IRS that Congress can change this rule by statute if the agency won’t do so by regulation.
The IRS may view this as simply an isolated issue that it will lose if it can’t stop Congressional action. Yet, the agency may discover a more serious problem: once Congress gets a taste for overturning an IRS position, it (and its members’ constituents and a host of lobbyists) may find it easier to attack the next IRS position that is viewed as too extreme. Perhaps, as some have suggested, Congress may overturn Mayo itself. See Jeremiah Coder, Lawmakers Have Upper Hand in Innocent Spouse Battle, 2011 TNT 82-1 (Apr. 28, 2011).