IRS Overstepped Constitutional Bounds by Rewriting Tax Law Through Enforcement Notices
The Gist
The Constitution gives only Congress the power to make tax law, but the IRS used informal enforcement notices—skipping the formal rulemaking process—to impose brand-new legal obligations on conservation-easement taxpayers, and courts have already ruled that this overstepped the agency's authority.
Conclusion
The IRS does not have lawmaking authority—only Congress does—yet the agency effectively rewrote tax policy through enforcement notices.
Premises
- Article I, Section 8 of the U.S. Constitution vests all legislative powers, including the power to lay and collect taxes, exclusively in Congress.
- The IRS is an administrative agency within the Executive Branch, created and empowered by statute solely to interpret and enforce the Internal Revenue Code, not to originate substantive tax law.
- Under the Administrative Procedure Act and controlling case law, agency pronouncements that impose new legal obligations or penalties must go through formal notice-and-comment rulemaking to have the force of law, rather than being issued as unilateral guidance.
- IRS Notice 2017-10 and related enforcement notices designated syndicated conservation-easement transactions as 'listed transactions,' imposing new valuation standards, disclosure duties, and penalty exposure without undergoing notice-and-comment rulemaking.
- Federal courts, including the Sixth Circuit in Mann Construction and the Eleventh Circuit in Green Valley Investors, have held that such IRS notices exceeded the agency's statutory and constitutional authority precisely because they functioned as substantive law without proper procedural authorization.
- When an executive agency's guidance produces binding legal consequences functionally indistinguishable from statutory law, it constitutes an exercise of lawmaking power reserved to Congress.
Assumptions
- Agency guidance that has the practical effect of altering taxpayer rights and liabilities is functionally equivalent to lawmaking, regardless of its formal label as 'guidance' or a 'notice.'
- Congress had not previously and explicitly authorized the IRS to reclassify conservation-easement transactions in the specific manner adopted by these notices.
- Judicial rulings invalidating similar IRS notices reflect a broader, generalizable constitutional principle rather than narrow, case-specific technical defects.