The Supreme Court can limit the IRS

Washington Supreme Court, June 26.


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ELIZABETH FRANTZ/REUTERS

The Internal Revenue Code is replete with excessive penalties for what are often honest mistakes. This year, taxpayers must prepare to deal with a newly reinvigorated Internal Revenue Service, which Congress appropriated an additional $46 billion for enforcement. The Supreme Court has the option of protecting taxpayers by hearing one of three cases that could rule the most punitive IRS penalties as unconstitutional violations of the Eighth Amendment’s excessive fines.

Heavy IRS penalties can turn a simple tax mistake into a financial nightmare. For Americans living paycheck to paycheck, these sanctions can be devastating. For businesses, fear of sanctions can slow down productive transactions.

Companies that misprice their internal transactions with subsidiaries often face penalties of 40% of what the IRS deems a “mispriced” amount for failing to comply with the notoriously ambiguous “arm’s length standard” imposed on all internal transactions. For large companies, this can amount to billions of dollars in fines. Independent contractors have it just as bad, as they can face nasty penalties for filing their taxes annually instead of quarterly. Due to newly enacted reporting thresholds, many Americans are trying to comply with this rule for the first time and will receive a large penalty if they fail to file on tax day.

The Supreme Court has three cases before it that — if it chooses to hear them — could put an end to the worst IRS fines and protect taxpayers from state tax authorities.

The first is United States v. Toth, which concerns a $2 million foreign bank account fine the government imposed on an 82-year-old woman who failed to fill out a one-page form disclosing her foreign bank account.

The other two involve state property tax schemes that confiscate private homes for a few thousand dollars in unpaid taxes and return none of the excess proceeds to the former homeowner. IN Fair v. Continental Resources, a Nebraska statute authorized a private developer with no interest in the property to seize a home for $5,200 in unpaid property taxes and penalties. IN Tyler v. Hennepin County, Minnesota sold a property for $40,000 and kept the entire amount since the owner owed only $15,000 in taxes and penalties.

The justices should hear at least one of these cases and affirm the importance of the Eighth Amendment’s Excessive Fines Clause, which protects a fundamental right dating back to the Magna Carta. The Court has been slow to apply this doctrine, particularly to protect taxpayers. One of the first times the Court imposed a fine for violating the Excessive Fines Clause was in 1989, and the clause was only applied to state governments in 2019. It is long past time for the Supreme Court to reinstate this principle and provide a necessary check against greedy tax authorities at both the federal and state levels.

Mr. Nix studies tax law at Georgetown University Law Center.

Review and Outlook: Analysis by the Congressional Budget Office, Syracuse University and the National Taxpayer Advocate suggests that Democratic Party claims that only high earners will be squeezed in the IRS audit expansion are false. Images: Getty Images Composite: Mark Kelly

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Appeared in the print edition on 28 September 2022 as ‘The Justices Can Restrain the Taxman’.

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