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Tax-avoidance case, suits against IRS get Supreme Court review

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The U.S. Supreme Court agreed to review a ruling that critics say would give the Treasury Department and Internal Revenue Service a sweeping shield from challenges to their regulations.

The justices said Monday they will hear arguments over a reporting requirement used by the IRS to police what it says are tax-avoidance schemes involving tiny insurance companies. The requirement includes a $50,000 penalty for noncompliance.

At issue is whether taxpayers and their advisers can challenge the reporting requirement, and others like it, without paying the penalty or waiting for the IRS to start enforcement proceedings.

A divided Cincinnati-based federal appeals court said the compliance penalty made the reporting requirement a tax, and insulated it from a preemptive legal attack. Under a law known as the Anti-Injunction Act, taxes generally can be challenged only after they are paid or the IRS has begun enforcement.

The justices will hear an appeal from CIC Services LLC, a Tennessee-based business that advises taxpayers on so-called micro-captive transactions, which use small insurance companies to reduce taxable income. The IRS says some of those transactions aren’t genuine insurance contracts.

CIC says it would also risk criminal liability if it didn’t comply with the reporting requirement.

Under the lower court ruling, “even patently unlawful IRS regulations can be insulated from review unless an individual is willing to risk the imposition of enormous fines and — in this case — prison time,” CIC argued in its appeal.

The company’s supporters at the Supreme Court include the U.S. Chamber of Commerce and Americans for Prosperity, the conservative advocacy group backed by businessman Charles Koch.

The Trump administration and the IRS urged the Supreme Court not to intervene. They said that when someone doesn’t report a micro-captive transaction, it’s fair to presume that “the suspicious transaction is in fact an instance of tax avoidance or evasion, and some tax liability should be imposed.”

The administration says taxpayers and advisers can decline to submit the report, pay the penalty and then sue for a refund.

The case, which the court will hear in the nine-month term that starts in October, is CIC Services v. Internal Revenue Service, 19-930.

Bloomberg News