Supreme Court Case Shows IRS Playing From a Problematic Playbook

The US Supreme Court’s decision to hear arguments in Commissioner v. Zuch was surprising because it involves a narrow issue that only affects a handful of taxpayers in any given year. But the IRS’s position is emblematic of a bigger problem in tax administration, and a taxpayer victory could cause the agency to reconsider its approach.

Zuch, at its core, is a collection due process case. When the IRS tries to collect money, a taxpayer can ask for a hearing with the IRS Independent Office of Appeals and raise “any relevant issue relating to the unpaid tax or the proposed levy” or describe certain issues related to collection.

Taxpayers can challenge “the existence or amount of the underlying tax liability” if they never received a notice of deficiency or otherwise failed to have an opportunity to dispute it. This applies for penalties that aren’t part of deficiency procedures or if the IRS fails to mail a deficiency notice to the proper address.

More often than not, the appeals officer sustains the collection action after considering the taxpayer’s arguments. A taxpayer unhappy with this determination can petition the US Tax Court.

In Commissioner v. Zuch, petitioner Jennifer Zuch said the IRS had no right to block her ability to petition the Tax Court by seizing money owed to her and then claiming she no longer owed anything. The US Court of Appeals for the Third Circuit agreed, saying the IRS can’t deprive the Tax Court of jurisdiction by seizing the taxpayer’s money.

The government appealed, given the forcefulness of the Third Circuit’s opinion—which also was at odds with similar opinions at two other circuit courts. That choice is typical of the IRS’s recent approach, which is to assert its procedural prerogatives and stymie resolution of tax matters, even in the face of congressional commands to the contrary.

This can be seen in other recent developments. The IRS’s response to receiving a slew of fraudulent employee retention credit claims was to issue a moratorium on processing new claims (fraudulent or not), which prompted numerous lawsuits.

The IRS argued that it has discretion in processing refund claims and a duty not to issue fraudulent refunds. But simply refusing to process hundreds of thousands of refund requests related to a duly enacted tax credit, for an extended period, frustrates Congress’ intent and taxpayer rights.

Similarly, the IRS recently finalized regulations implementing the Taxpayer First Act of 2019. The law requires the IRS Independent Office of Appeals to provide fair and impartial resolution of tax controversies without litigation, and that the appeals office be “generally available to all taxpayers.”

Yet the regulations provide a list of 24 exceptions, which the preamble to the regulations defends by stating that most existed prior to the implementation of the law, as though IRS practice or regulation can’t be changed by Congress.

For Zuch, a Supreme Court ruling in her favor would result in a remand to the Tax Court for consideration of whether she owed the tax and, if she prevails there, a declaratory judgment in her favor. But if the Supreme Court tries to send the IRS a message—and the agency chooses to listen—a much broader group of taxpayers could benefit.

The IRS could decide that its time and resources are better spent facilitating taxpayer service and collecting the correct amount of tax than on litigating cases seeking to defend procedural roadblocks that frustrate taxpayers. This may be particularly true under the new administration, which has already implemented a hiring freeze targeting the IRS.

Going forward, the IRS is going to have to choose its priorities more carefully, and an adverse ruling in this case could make it decide that litigation where it seems to have acted unfairly toward a taxpayer isn’t in its—or the taxpayer’s—best interest.

The case is Commissioner v. Zuch, U.S., No. 24-416, cert granted 1/10/25.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Robert M. Romashko is leader of Husch Blackwell’s tax practice specialty group and previously was an attorney in the IRS Office of Chief Counsel.

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