Reasonable Tax Rules Advancing Process Values with Remedial Restraint

Abstract

The tax administration is at risk of an overcorrection with respect to its rulemaking process. Tax practitioners increasingly are mining the Administrative Procedure Act (APA) as well as chipping away at barriers to pre-enforcement review of tax rules. Tax rules include regulations, revenue rulings, revenue procedures, and more informal guidance to the public. APA-based challenges to tax rules have gained traction in the courts, typically alleging inadequate explanation or timing irregularities involving notice and comment. Such claims potentially pose major challenges for fair and efficient tax administration.

This Article integrates administrative law scholarship calling for a rule of reason with respect to remedies for inadequate explanation and postpromulgation comment. There is no conflict between the pushback against tax exceptionalism and an approach involving remedial restraint. The harmless error approach is rooted in the text of the APA, which requires a court to set aside agency action for “prejudicial” error. Judicial restraint is unlikely to chill robust participation by tax advisors and should promote the issuance of stable and reliable guidance, compliance with the tax law, and fair treatment of similarly situated taxpayers.