Supreme Court Overturns Chevron - What That Means for IRS Rulings

Chevron U.S.A., Inc. v. Natural Resources Defense Counsel, Inc.

Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. was a landmark case in 1984 that birthed the doctrine of judicial deference given to administrative action known as “Chevron deference” (also known as the Chevron Doctrine). See 467 U.S. 837 (1984). For 40 years, the legal test has been in place for a federal court to defer to a government agency’s answer or interpretation of a statute, as long as the agency’s answer/interpretation was not unreasonable, and Congress had not spoken directly to the precise question at issue.[1]

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Overturning Chevron

However, in June 2024, the U.S. Supreme Court overturned the Chevron doctrine in Loper Bright Enterprises v Raimondo. See 603 U.S. ____ (2024). Because of this ruling, federal agencies will not (and should not) enjoy strong judicial deference moving forward. Instead, federal courts will interpret and decide what is the best reading of an ambiguous statute, rather than deferring to the interpretations held by the federal agencies.[2] That is, from now on, federal courts will not be required to defer to an agency's interpretation of the law when a statute is ambiguous.‍

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How this affects the IRS’s regulations

Because of the overruling of Chevron, more legal challenges may arise against the Department of the Treasury and the IRS’s interpretations of various sections of the Internal Revenue Code.[3] In the past, federal courts were required to defer to the IRS’s interpretations of the Code as long as they were permissible (i.e., reasonable). However, the courts now have more freedom to hold in favor of a taxpayer’s challenge to the interpretation of a given statute/regulation.[4] If the courts lean more favorably to the taxpayers, the Department of the Treasury will have less flexibility in creating tax policy changes through regulations.[5]

Other factors of the Loper decision that affect the IRS’s regulations include the application of decisions and the IRS’s authority to collect taxes. It is unknown how broadly a successful challenge to an IRS regulation will apply – whether it will also affect other taxpayers or just the individual taxpayer bringing the challenge. Also, challenging tax regulations after the IRS assesses a taxpayer’s federal tax can be tricky – sometimes requiring the taxpayer to pay the tax and then claim a refund.[6]‍

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Conclusion‍

While the overturning of Chevron is pivotal in the tax world (let alone administrative law at large), it does not affect a taxpayer’s duty of legal compliance – it does not give taxpayers the liberty to break the law. Taxpayers are still required to abide by regulations from the IRS. However, if a taxpayer decides to challenge an IRS regulation, the courts may be more receptive to the taxpayer’s arguments since agency deference is no longer required.

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[1] Chevron Deference, available at https://www.law.cornell.edu/wex/chevron_deference.

[2] Potential Tax Implications of the US Supreme Court Overruling the Chevron Doctrine, available at https://www.pwc.com/us/en/services/tax/library/potential-tax-implications-of-scotus-overruling-chevron.html#:~:text=In%20the%20tax%20context%2C%20the,IRS's%20interpretation%20of%20Code%20sections.

[3] Id.

[4] Id.

[5] Id.

[6] Rochelle Hodes & Adam Silva, Chevron Overruled: 5 Federal Tax Regulation Considerations, Crowe (July 2024), available at https://www.crowe.com/insights/tax-news-highlights/chevron-overruled-5-federal-tax-regulation-considerations.