Commencing in 2015, the IRS established new enforcement initiatives for employment taxes. One initiative has focused on criminal enforcement, resulting in a significant increase in criminal cases against business owners who fail to withhold and to pay over employment taxes.
A second initiative has focused on civil injunction actions against businesses that are repeat offenders. The Internal Revenue Code grants jurisdiction to district courts to provide equitable relief in favor of the government:
The district courts of the United States at the instance of the United States shall have such jurisdiction to make and issue in civil actions, writs and orders of injunction, and of ne exeat republica, orders appointing receivers, and such other orders and processes, and to render such judgments and decrees as may be necessary or appropriate for the enforcement of the internal revenue laws. The remedies hereby provided are in addition to and not exclusive of any and all other remedies of the United States in such courts or otherwise to enforce such laws.
I.R.C. § 7402(a).
Injunctive relief, however, is not automatic, as “courts of equity should not act . . . when the moving party has an adequate remedy at law and will not suffer irreparable injury if denied equitable relief.” Younger v. Harris, 401 U.S. 37, 43-44 (1971). Since the IRS is in the business of collecting money, there is some tension between its statutory right to seek injunctive relief and the basic principle that an adequate legal remedy bars injunctive relief. A recent Eleventh Circuit case demonstrates that the government does not need to seek collection continually from scofflaws, holding that injunctive relief was available against an employer with an established record of noncompliance. United States v. Askins & Miller Orthopaedics, P.A., No. 18-11434, 2019 U.S. App. LEXIS 15264 (11th Cir. May, 23, 2019).
As its name suggests, Askins & Miller is a medical practice; it is run by two brothers (Roland and Philip) in Sarasota, Florida. Id. at *2. The medical practice was a chronic employment tax delinquent: Twenty-seven in-person meetings with IRS personnel failed to secure voluntary compliance. Id. at *3. After two separate installment agreements resulted in default, the IRS adopted sterner measures, issuing levies to over twenty different entities in an effort to collect. Id. That didn’t work either, as the two brothers shuffled money between entities and accounts. Id. at *3-*4.
The government then assessed the brothers with the trust fund recovery penalty and began to pursue their personal assets. After issuing fifteen levies to entities associated with Roland, the IRS recouped the penalty assessment, but it was still falling further behind because of continued noncompliance. Meanwhile, six levies directed at entities associated with Philip yielded $2,000. Id. at *4-*5.
The government shifted tactics, filing a civil action in 2017 that sought injunctive relief intended to force the brothers to comply with their employment tax obligations and also sought to collect the past due taxes. Id. at *5-*6. The government requested a preliminary injunction, but that initial effort was rejected because the supporting declaration was considered “conclusory” by the district court, which also expressed concern at what it considered an “obey-the-law” injunction. Id. at *6. When the government filed a new motion with more detailed evidence, the district court ruled against it again, holding that the IRS had an adequate remedy at law, even though the company appeared to be judgment-proof. Id. at *6-*7. The district court also reiterated its concern that the injunction was an improper “obey-the-law” injunction.
When the Eleventh Circuit considered the case, it framed the issue this way:
The IRS says it needs a preliminary injunction against Askins & Miller Orthopaedics—a serial employment-tax delinquent—to ensure that it gets its due as taxes continue to pile up. It could just wait for nonpayment and later seek a money judgment, but if past is prologue, the money will be long gone before the IRS can collect. Given the alternative of a valid but potentially useless action for damages, does the IRS necessarily have an “adequate” remedy at law that puts an injunction out of the question?
Id. at *1. As the tone of the question suggests, the Eleventh Circuit’s answer was no.
Before reaching the merits, however, the Court of Appeals had to consider whether the case was moot. When the brothers stopped paying their lawyers, the lawyers moved to withdraw, asserting that Askins & Miller was out of business. Id. at *11-*12. While the brothers and their lawyers patched up their differences, the incident led the court to request briefing on its jurisdiction. After considering whether the record supported a determination that the voluntary cessation of the brothers’ conduct made the case moot, the Court of Appeals concluded that it did not, noting that the conduct at issue was deliberate, that it could readily be resumed, and that the brothers continued to refuse to pay. Id. at *12-*18.
On reaching the merits, the Eleventh Circuit quickly summarized its position on the adequacy of the government’s legal remedies, observing that “the IRS’s ability to sit on its hands until the defendants fail to pay their taxes (again) and only then bring an action for money damages does not qualify as an ‘adequate’ legal remedy.” Id. at *20. In the court’s view, “the collectability of a future money judgment to redress future harms is relevant in determining whether legal remedies are ‘adequate’ such that they preclude injunctive relief under § 7402(a).” Id. at *21. Accordingly, the Eleventh Circuit rejected the district court’s view that the theoretical availability of a damage remedy precluded injunctive relief. Id. at *22-*23.
The Court of Appeals also emphasized that the IRS was attempting to avoid future losses, and its position as an involuntary creditor meant it lacked any means to avoid future losses. Id. at *23. In that context, the Eleventh Circuit noted the district court’s findings that “Askins & Miller had a ‘proclivity for unlawful conduct’” and that it was “‘likely to continue ignoring’ its employment tax obligations.” Id. at *24.
The court then quickly disposed of the district court’s alternative holding that the government’s proposed remedy was an improper “obey-the-law” injunction, noting that the proposed injunction would impose specific requirements on the two brothers, who were “well aware of the conduct the proposed injunction addresses.” Id. at *29.
This is a solidly-reasoned opinion properly recognizing that injunctive relief is needed in some situations to permit the IRS to enforce the law. By the same token, it emphasizes that injunctive relief is extraordinary and should apply to situations involving ongoing, egregious conduct. That’s a fair balance.