AIA Files Amicus Brief to Curb IRS Overreach in Harty v. Commissioner

By Chuck Flint, AIA CEO

The Alliance for IRS Accountability (AIA) has filed an amicus brief in Harty V. Commissioner to defend taxpayers’ rights and challenge the IRS’s increasingly aggressive misuse of the economic substance doctrine (ESD).

The doctrine allows the IRS to disregard transactions undertaken mainly to generate tax savings rather than to serve a legitimate business purpose. In theory, it was created as a narrow safeguard against abusive tax avoidance schemes. Congress never intended it to become a catch-all tool that allows the IRS to second-guess legitimate business decisions or retroactively invalidate transactions simply because they generate tax benefits. Yet that is exactly how the agency has increasingly used it.  

Taxpayers who follow the law should not have to wonder years later whether the IRS will decide their transactions lacked sufficient “economic substance.” That uncertainty imposes real costs — costly audits, legal fees, and the threat of steep penalties — that leave taxpayers guessing rather than relying on clear rules established by Congress.

Section 7701(o) requires a rigorous two-part analysis of whether a transaction meaningfully changes a taxpayer’s economic position and serves a substantial non-tax business purpose before the doctrine applies. Critically, that analysis is not triggered automatically. The statute requires a determination that the doctrine is even relevant to the transaction at hand, but the IRS has instead collapsed that threshold into a blanket presumption: if a transaction produces tax benefits, it becomes a target.

Harty V. Commissioner demonstrates the consequences of that approach and what happens when agency discretion eclipses the limits Congress carefully established, giving unelected bureaucrats sweeping authority to circumvent the rules under the guise of “tax enforcement.”

This case is bigger than one transaction. It reflects a broader pattern of an agency that treats statutory limits as suggestions and expands its own authority whenever courts allow it. AIA exists precisely for moments like this. When the IRS stretches a doctrine beyond what Congress authorized, someone must push back — in court, on the record, where it counts. Accountability demands a response.

Read the Amicus Brief here.