Small business owners often struggle to keep up with the ever-changing labyrinth of IRS regulations. Deciphering these complex rules can be time-consuming and costly, diverting resources from core business operations.
This leads to the question of what happens when the IRS fails to properly consider the unique burdens its rules place on small entities? The Regulatory Flexibility Act (“RFA”) offers a potential lifeline, requiring agencies to analyze how proposed rules will affect small businesses.
A recent court case, Silver v. IRS, No. 1:20-cv-01544 (D.D.C. February 5, 2025), explaines when and how small businesses can use the RFA to challenge IRS regulations in court.
Facts & Procedural History
The plaintiffs in a lawyer and his Israeli law firm. They sued the IRS and Treasury Department, alleging these agencies neglected their RFA obligations when issuing regulations for the “GILTI” international tax rules under the 2017 Tax Cuts and Jobs Act (“TCJA”).
Originally, the plaintiffs asked the court to vacate the regulations and defer enforcement against small businesses until the agencies fully comply with the RFA. The IRS moved to dismiss, arguing the Anti-Injunction Act (“AIA”) stripped the court of jurisdiction and the plaintiffs lacked standing. The district court initially agreed the AIA barred the suit.
On appeal, the D.C. Circuit remanded for further factual development of the plaintiffs’ argument that the South Carolina v. Regan exception to the AIA applied. This exception allows tax challenges by those with no alternative remedy. Post-remand, the plaintiffs sought to amend their complaint to remove the deferred enforcement request and add allegations about their ongoing compliance costs and non-liability for the GILTI tax itself.
How the RFA Protects Small Businesses in Tax Rulemaking
Congress enacted the RFA to ensure agencies adequately consider how new regulations impact small businesses and non-profits. It requires an analysis of a proposed rule’s small business effects and consideration of less burdensome alternatives.
For rules that will have a significant economic impact on a substantial number of small entities, the agency must prepare initial and final regulatory flexibility analyses. These describe the rule’s impact on small entities, steps taken to minimize that impact, and why other alternatives were rejected. The RFA also mandates periodic review of existing rules for their small business impact.
The goal is to lessen the disproportionate regulatory load on small businesses that may lack the compliance resources of larger firms. By forcing agencies to squarely confront and justify these impacts, the RFA gives small businesses a voice in the rulemaking process they might otherwise lack.
Can the Anti-Injunction Act Bar RFA Challenges to the IRS?
The key jurisdictional issue in this court case is the interplay between the RFA and the AIA. The AIA generally prohibits suits “restraining the assessment or collection of any tax.” Citing the AIA, the district court originally dismissed the case, finding the plaintiffs’ request to defer enforcement of the GILTI regulations ran afoul of the AIA.
However, Supreme Court precedent clarifies the AIA does not categorically prohibit all tax-related lawsuits. South Carolina v. Regan allows challenges by plaintiffs who have no alternative way to contest the tax. Similarly, in Cohen v. United States, the D.C. Circuit permitted an AIA suit contesting an IRS notice’s procedural defects, concluding it did not seek to stop tax assessment or collection.
Acknowledging these precedents on remand, the district court recognized that a complaint seeking to set aside a tax rule on procedural grounds, without enjoining tax collection, might survive the AIA. The plaintiffs’ amended complaint, dropping the deferred enforcement request, aims to fit within this category of permissible AIA challenges. While the court must still decide if the South Carolina exception definitively applies, the amendment bolsters the plaintiffs’ position.
If the court finds jurisdiction, the substantive issue will be whether Treasury and the IRS breached the RFA when promulgating the GILTI regulations. This likely depends on factors like whether the plaintiff’s firm qualifies as a “small entity” under the RFA, if the GILTI rules significantly impact a substantial number of small entities, and the sufficiency of the agencies’ analysis of that impact and alternatives.
Implications for Small Businesses Facing Burdensome IRS Rules
This case shows the importance of the RFA for small business concerns in tax rulemaking. While small businesses may not have big corporations’ lobbying muscle, the RFA guarantees agencies will at least study and explain the distinct compliance pressures tax rules exert on smaller entities.
With the rise of complex international tax regimes like GILTI, small businesses increasingly encounter formidable hurdles in understanding and fulfilling their tax duties. Accurately completing required forms often necessitates expensive accountants and tax counsel. Mistakes risk audits, penalties, and prolonged IRS entanglements.
A ruling that the IRS shirked its RFA responsibilities in Silver would signal the agency cannot disregard small business impacts. Compelling the IRS to generate RFA analyses would enhance transparency around tax rules’ actual compliance costs for small entities. It might spur the IRS to devise more small-business-friendly options when implementing complex new provisions.
The Takeaway
Though the ultimate outcome remains uncertain, the case emphasizes the importance of the IRS rigorously evaluating and justifying the compliance costs its increasingly elaborate rules foist upon small businesses. While this added step may stretch agency resources, it is indispensable to guaranteeing our tax system avoids gratuitously hamstringing small business vitality. The court’s eventual decision could significantly influence the IRS’s approach to tax rulemaking as the tax code reaches new levels of convolution.