August 13, 2019 - Douglas Myser

The flora rule needs reform.Taxpayers have the right to appeal a decision of the IRS in an independent forum. This rule which was named after a 1960 U.S. Supreme Court case, limits access to judicial review by those who cannot fully tax their taxes. 28 U.S.C. Section 1346 (a)(1) authorizes a taxpayer to file suit in a U.S. District Court or the U.S. Court of Federal Claims to recover "any tax "any penalty", or any "sum". The statute places no explicit limits on how much the taxpayer must have paid before filing suit. In 1958 in Flora 1, and again in 1960 in Flora 2, the U.S. Supreme Court held that taxpayers must have "fully paid" an assessment before doing so. The flora rule needs reform.

The Flora rule even applies to so called "assessable penalties" which are assessed outside of the normal tax "deficiency procedures". Assessable penalties can be imposed against someone who does not have a tax deficiency. They include IRS penalties for failure to file timely and accurate information returns, erroneous claims for refund and failure to disclose various things to various people or for disclosing to much. Because the IRS may assess them without first giving the taxpayer an opportunity to petition the Tax Court, the Flora rule eliminates judicial review for those facing assessable penalties that are too large to pay--precisely the penalties that are most damaging if they are wrong.

A limited exception to the Flora rule apples to "divisible" taxes. When the assessment may be divisible into a tax on each transaction or event, the taxpayer need only "fully pay" the amount attributable to a single transaction or event under the Flora rule--often a small amount. There are also special statutory provisions that make other penalties somewhat divisible. IRS Section 6694 provides that certain preparer penalties can be contested in district court after paying just 15 percent. A similar rule applies to the penalties for promoting abusive tax shelters under IRC Section 6700 and for aiding and abetting understatements.

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