An old German proverb states that "to change and to change for the better are two different things." As 2024 ends, the legal and business communities who must navigate government scrutiny are seeing the signs of change in the regulatory landscape on the horizon. The pencils for redrawing the lines of government involvement in economic activities were sharpened in 2024; in 2025 those pencils will be put to paper as a changing of the guard occurs at the presidential, congressional, and administrative agency levels. Businesses, individuals, trade organizations, and advocacy groups should remain watchful in 2025 to see that there is not only change, but change for the better.
The IRS Must Change Tax Enforcement Process
WASHINGTON, DC - APRIL 15: The Internal Revenue Service (IRS) building stands on April 15, 2019 in ... [+] Getty Images
One of the most significant changes to government oversight and enforcement occurred on June 28, 2024 when the United States Supreme Court overturned the decades old "Chevron deference" doctrine, in the case of Loper Bright Enterprises v. Raimondo. This decision expanded the ability of courts to review and reject certain interpretations of statutes by federal administrative agencies. With the death of this deference standard comes years of regulation and legal positions taken by the government that will be targets of litigation in 2025 and beyond. Importantly, this decision did not remove all agency deference just deference where the statute is either silent or ambiguous. Additionally, courts were merely given the right to exercise their own judgment but could still decide in favor of the government's interpretation and are still allowed to respect government interpretations under lesser deference standards (e.g. Skidmore deference).
It can be expected that all government agencies (including the IRS), knowing that the scales no longer tip in their favor, will be more conservative in both the amount and type of regulatory guidance they provide. My practice involves disputes over interpretations of tax statutes and regulations and other rules related to the emerging industry of digital assets and blockchain technology. Both areas often appreciate detailed guidance that will, hopefully, avoid costly and time-consuming litigation with the government in the future.
The removal of governmental deference may help level a playing field once an issue is in court but may also prevent certain guidance from being published that could avoid court altogether. Essentially, if guidance is at risk of court challenge, the IRS may simply just decide not to issue it at all and wait for a taxpayer challenge. Many tax disputes are dealt with administratively at the examination or IRS Appeals levels and so this could prevent any public information on an issue and that could be used to govern future behavior of other taxpayers. That lack of publicly available guidance may also leave more taxpayers guessing at the proper tax treatment of certain transactions and unable to proactively assess the viability of certain tax positions before including them on their tax returns. Overall, the removal of unchecked deference of ambiguities or unaddressed statutory issues is likely a good thing for taxpayers in the long run. In the short term, however, the amount of disputable tax issues without affirmative IRS guidance will almost certainly increase.
Tax Litigation By and Against the IRS Will Likely Increase
The idiom that "you can't fight city hall" implies that there is no way to win against the government. The death of Chevron deference, outlined above, shows that sentiment is not true. Another example is the recent preliminary injunction, issued by the U.S. District Court for the Eastern District of Texas, blocking the controversial beneficial ownership information (BOI) reporting required by the Corporate Transparency Act (CTA). However, just because a taxpayer can win, it doesn't mean that the win doesn't involve significant time and cost. Several significant battles on tax issues are poised for decisions by appellate courts in 2025 after long battles at the lower court level such as those involving the economic substance doctrine (Liberty Global Inc. v. United States) and the power of a bankruptcy trustee to avoid a debtor's tax payment to the United States (United States v. Miller).
The IRS also announced, at the beginning of 2024, its progress and future plans for the $80 billion in funding provided by the Inflation Reduction Act (IRA). The primary targets for tax enforcement were partnerships, corporations, and wealthy individual taxpayers. Near the end of 2024, the IRS announced that the new pass-through field unit had started working on focusing more attention on partnerships, S-Corporations and trusts they felt were "under-scrutinized." This new group was also funded through the money provided under the IRA. An additional $20 billion of the enforcement money is currently locked up in Congress and may never make it to the IRS depending on what the new administration and Congress does when they take office in 2025. However, the ability for increased IRS scrutiny is already in place, partially paid for, and the full impact of the additional staff and funding for scrutiny will be seen by taxpayers in 2025. There will certainly be more audits of partnerships, corporations, and high-net-worth individuals based on asserted priorities. Also, the IRS can be expected to assert more aggressive legal positions in 2025 with the additional funds to expand enforcement capabilities. For example, in a Tax Court case awaiting decision (Otay Project LP, et al. v. Comm'r, U.S. Tax Court 6819-20), the IRS included a penalty for a transaction lacking economic substance in the Tax Court proceedings that was not asserted by IRS examination. This seems to be an apparent attempt to increase the scope the penalty in the future.
Conclusion
Government oversight and enforcement is, of course, necessary to ensure that the legal standards passed by Congress are properly implemented and respected. However, that governmental authority and power cannot be unchecked and unlimited. As much as 2024 created an extensive dialog and important decisions on exactly how much deference, power, and enforcement is needed to ensure compliance with the law; 2025 has the messy job of implementing those principles. Lower court cases will expose ambiguities that will need to be resolved by the appellate courts above them, hopefully providing change for the better.
Originally published by Forbes.
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