Supreme Court’s Newest Tax Case Offers Window to Challenge IRS

The US Supreme Court’s decision to take up a case on the US Tax Court’s authority provides an opportunity for the justices to rule broadly on a due process issue of particular importance to low-income taxpayers, legal observers said.

Commissioner v. Zuch concerns whether a Tax Court challenge to a levy became moot once the IRS stopped pursuing that levy while the litigation was pending.

On its face, the case is a “ticky-tacky procedural issue,” said Adam Chodorow, a professor at Arizona State University’s Sandra Day O’Connor College of Law.

He and other legal observers said they were surprised that the Supreme Court said last week that it would review the case.

But a broader ruling has the potential to tackle larger questions about how and when the IRS collects on debts and taxpayers’ recourse to contest them, they said.

“The outcome of this case is important because taxpayers should not be in a position where they lose their ability to assert their procedural rights—and, as was the case in Zuch, the ability to challenge the underlying tax liability—in Tax Court solely because the IRS has eliminated the tax liability through unilateral action,” said Ted Afield, director of Georgia State University’s Philip C. Cook Low Income Taxpayer Clinic.

Tax Court petitions can take years to resolve and often involve many procedural roadblocks, Afield said.

Allowing the IRS to moot a due process proceeding by applying a tax refund from a different year adds another roadblock to being able to challenge the debt, disenfranchising low-income taxpayers who must wait even longer to be vindicated if the IRS shouldn’t have collected the tax in the first place, he said.

Mootness Debated

Jennifer Zuch told the high court that she and her ex-husband made $50,000 in prepayments to the IRS, which were meant to apply to Zuch’s $27,000 debt but got diverted by the agency and applied to the ex’s separate balance. The IRS proposed a levy to satisfy Zuch’s remaining liability, which she challenged in the Tax Court under IRC Section 6330.

While the suit was pending, the IRS dropped the proposed levy and instead applied Zuch’s 2018 tax refund to the amount the agency said she owed. Without a levy in dispute, the Tax Court deemed her case moot and granted the IRS’s motion to dismiss.

Zuch appealed and the US Court of Appeals for the Third Circuit revived her case, finding that the IRS can’t remove the Tax Court’s jurisdiction by satisfying Zuch’s purported debt using her own funds.

The IRS asked the high court to review the ruling, saying it improperly expanded the Tax Court’s jurisdiction and “could be used to transform the nature” of a Section 6330 proceeding beyond its statutory purpose, which is to notify a taxpayer of their right to a hearing before a levy is made.

The IRS processes “tens of thousands” of Section 6330 proceedings annually, the agency said in its petition.

The Third Circuit is also at odds with the D.C. and Fourth Circuits, which concluded that a Section 6330 proceeding is moot when the IRS abandons its levy and concedes the taxpayer has no outstanding liability, the IRS said.

‘Excruciatingly Cautious View’

“I’m stunned they took it up,” Chodorow said of the Supreme Court’s decision to hear the case. “To my read, the Third Circuit got it right; it seems wrong to think the IRS can seize your refunds, pay off a prior debt, and then call it moot and kick you out with no recourse.”

Caleb Smith, a professor at the University of Minnesota’s Ronald M. Mankoff Tax Clinic, said a narrow ruling could be as simple as applying the mootness doctrine—courts lack jurisdiction to hear cases that don’t involve a live controversy between the parties.

Considering the complexity of Zuch’s situation, the case could be limited to similar, specific circumstances, such as divorced couples settling a joint tax debt, he said.

But Afield said he hopes to see the Supreme Court establish that the Tax Court has refund jurisdiction in collection due process cases, which has been an objective of the National Taxpayer Advocate.

The group, an independent organization within the IRS, argues doing so would make it easier for taxpayers to go to court, as they currently are only able to petition the Tax Court if the IRS has issued a notice of deficiency. If they want to dispute an overpaid tax, they must turn to “less user friendly and more costly” federal courts, it says.

Smith said he’s similarly hopeful because the realities facing taxpayers who want to contest an IRS liability can be frustrating.

The Tax Court takes an “excruciatingly cautious view” of where it can rule on cases, which leaves it up to generalist courts with a limited understanding of tax law to make many of the ultimate decisions in these cases, he said.

Complicated taxation questions need the special venue that the Tax Court provides, and situations like Zuch’s would be all the more frustrating for low-income taxpayers who don’t have the resources to fight a tax levy for years on appeal, Smith said.

That makes the Supreme Court’s ultimate ruling all the more important.

“It could do a lot of good for taxpayers, " Smith said.

Agostino & Associates PC and Skadden, Arps, Slate, Meagher & Flom LLP represent Zuch.

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