Does the Internal Revenue Service have a Duty to Treat Similarly Situated Taxpayers Similarly?

Abstract:     
The Internal Revenue Service, the agency charged with the administration of the tax laws, is delegated significant discretion by Congress in managing this massive undertaking. The Internal Revenue Code is 2,600 provisions, 4,785 pages, and 1.4 million words and that does not even consider the additional 20,000 pages and 8 million words of regulations interpreting the Internal Revenue Code. Moreover, the Internal Revenue Service processes over 228 million tax returns, receives over 1.5 billion financial information documents, collects over $2 trillion in revenues, and disburses in excess of $253 billion in refunds. While consistency in the administration of the tax laws is a laudable goal, the Internal Revenue Service, at least in some instances, does not treat similarly-situated taxpayers consistently.

It has been twenty years since this issue was prominently featured in the academy. Since that time, an intervening statutory change and a number of significant cases have been filed involving hundreds of billions of dollars that primarily rely on a duty of consistency theory and have yet to be resolved. The result of these cases will likely change the entire landscape of tax practice and have an impact well beyond tax considerations, affecting how the Environmental Protection Agency resolves compliance matters to the manner in which the Department of Agriculture awards grants.

While the duty of consistency issue has earned a growing mention in tax circles and in the popular press, there has been virtually no academic attention paid to the argument that consistency should be elevated above substantive law. I conclude that there is no duty of consistency, but do not believe that the Internal Revenue Service has carte blanche to favor one taxpayer over another. Instead, I conclude that, with one relatively minor statutory change to remove an outdated remnant of the law, courts should review agency determinations under a abuse of discretion standard specifically authorized by Congress that will promote more uniformity that the imposition of a duty of consistency by a random modicum of courts.

Keywords: consistency, irs, Internal Revenue Service, 7805, Internal Revenue Code, abuse of discretion

JEL Classifications: k34

Accepted Paper Series