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Published: May 29, 2019   |   Last Updated: December 4, 2020

Why We Should Repeal the Flora Rule or Find Another Way to Give Taxpayers Who Cannot Pay the Same Access to Judicial Review as Those Who Can (Part 1 of 3)

Taxpayers have the right to appeal a decision of the IRS in an independent forum. Consistent with this right, in the 2018 Annual Report to Congress (ARC) I recommended legislation to provide all taxpayers with a realistic opportunity for judicial review of IRS determinations.

The so-called “Flora rule”—named after a Supreme Court case decided in 1960—limits access to judicial review by those who cannot “fully pay” what the IRS says they owe. In this blog, I explain how the rule is obsolete and harms low income taxpayers who were not part of the tax system in 1960. I also explain how the rule sometimes eliminates judicial review for those subject to “assessable penalties,” most of which did not exist in 1960.

What is the Flora rule?

In general, 28 U.S.C. § 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 I and again in 1960 in Flora II, however, the U.S. Supreme Court held that taxpayers must have “fully paid” an assessment (called the “Flora” or “full payment” rule) before doing so.

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 penalties for:  failure to file timely and accurate information returns (e.g., under Internal Revenue Code (IRC) §§ 6677, 6679, 6682, 6693, 6698, 6699, 6707, 6707A, 6710, and 6723), erroneous claims for refund (IRC § 6676), and failure to disclose various things to various people or for disclosing too much (e.g., under IRC §§ 6705, 6706, 6685, 6709, 6711, 6712, 6713, 6714, 6720C, 6721, 6722, and 6725). 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 applies to “divisible” taxes. When the assessment may be divisible into a tax on each transaction or event (e.g., excise taxes and the trust fund recovery penalty), 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. For example, IRC § 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 § 6700 and for aiding and abetting understatements under IRC § 6701. However, not all assessable penalties are divisible or subject to these special statutory provisions.

The Flora rule discriminates against those who cannot pay quickly, unless they are wealthy enough to owe estate taxes

Even if a taxpayer can pay in installments (or through offsets), by the time full payment occurs, it may be too late to recover the early payments. Taxpayers generally can only recover payments made more than two (or in some cases three) years before they file a refund claim (as described in IRC § 6511). They must file a refund claim with the IRS at least six months before filing suit. Thus, a taxpayer who is not affluent enough to pay his or her alleged liability within two (or three) years will lose the right to request a refund of his early payments, even if he eventually pays in full and the court agrees with him on the merits (i.e., he overpaid).

In contrast, those wealthy enough to have an estate tax liability get the benefit of a special exception to the Flora rule. IRC § 7422(j) says that the U.S. district courts and the U.S. Court of Federal Claims “shall not fail to have jurisdiction” to determine the “estate tax liability of such estate (or for any refund with respect thereto) solely because the full amount of such liability has not been paid by reason of an election under section 6166” to pay the liability in installments. No similar exception applies to low and middle income taxpayers who need to pay other taxes (or penalties) in installments.

Flora hurts more low and middle income taxpayers as Congress increasingly uses the tax system to distribute benefits to them

Low and middle income taxpayers did not have the same involvement in tax return filing and administration in 1960 when Flora II was decided. It was not until 1975 that Congress enacted the Earned Income Tax Credit (EITC) as a means-tested tax credit to assist the working poor, and the EITC remained the only refundable tax credit until the Child Tax Credit was enacted in 1997.

After 1997, Congress increasingly began using the tax system to distribute benefits to low and middle income taxpayers, such as Economic Stimulus Payments, the Making Work Pay Credit, the Health Coverage Tax Credit, the First-Time Homebuyer Credit, the COBRA Premium Assistance Credit, the American Opportunity Tax Credit, the Adoption Credit, the Small Business Health Care Tax Credit, and the Premium Assistance Tax Credit. In 2017, the maximum EITC was $6,318 and 27 million eligible workers and families received about $65 billion in EITC. Moreover, in 2017, Congress doubled the maximum Child Tax Credit to $2,000, further increasing interactions between low and middle income taxpayers and the tax system. As the IRS is increasingly assessing deficiencies against low and middle income taxpayers who are less likely to be able to pay, the fact that they do not have the same access to judicial review as wealthier taxpayers who can pay becomes more of a problem.

Flora harms more taxpayers as Congress enacts more assessable penalties

When Flora II was decided in 1960, there were only four assessable penalties: (1) the penalty for delaying Tax Court proceedings (IRC § 6673), (2) the penalty for furnishing a fraudulent statement to employees (IRC § 6674), (3) the trust fund recovery penalty (IRC § 6672), and (4) the penalty for excessive fuel tax refund claims (IRC § 6675). Moreover, the latter two penalties are divisible. Today, by contrast, Subchapter B of Chapter 68 contains over 50 different assessable penalties (i.e., the penalties between IRC §§ 6671 and 6725) and there are others scattered throughout the Code. As the number of assessable penalties has risen, the fact that they generally cannot be contested in court before they are assessed and fully paid has become more of a problem.

Next week we will discuss the policy justification for the Flora rule, why it has faded, and why the theoretical ability to petition other courts in limited circumstances does not solve the problem. Stay tuned!


The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.

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