The U.S. Supreme Court on Monday ruled that a captive manager’s challenge to a reporting requirement for microcaptives is not barred by federal law, reversing a federal appeals court ruling in the case.

In CIC Services LLC v. Internal Revenue Service, which was heard by the 6th U.S. Court of Appeals in Cincinnati last year, Knoxville, Tennessee-based CIC sued to stop an IRS reporting requirement for microcaptives, which are often known as 831(b) captives.

Over the past several years, the IRS has won several court rulings where it alleged that microcaptives are not engaged in insurance and are instead used by wealthy individuals and family businesses to avoid taxes. As part of its investigations into microcaptives, in 2016 the IRS imposed rigorous reporting on captive managers involved with microcaptives that it suspected might be used for tax evasion. Managers that did not meet the reporting requirements faced stiff penalties.

CIC sued the IRS alleging that the reporting requirement violated the Administrative Procedure Act and the Congressional Review Act and it required congressional review before going into effect.

The IRS countersued arguing that CIC Services’ suit was barred by the Anti-Injunction Act, among other things. That law requires taxpayers to pay a disputed tax and then sue for a refund if it is later deemed invalid.

Writing for a unanimous Supreme Court, Associate Justice Elena Kagan said: “A reporting requirement is not a tax; and a suit brought to set aside such a rule is not one to enjoin a tax’s assessment or collection. That is so even if the reporting rule will help the IRS bring in future tax revenue — here, by identifying sham insurance transactions.”

And the penalties imposed for not complying with the reporting requirement are significant, she said.

“CIC estimates that it will have to spend ‘hundreds of hours of labor and in excess of $60,000 per year’ to comply with the Notice. … Costs of that kind may well exceed, or even dwarf, the tax penalties for a violation,” Justice Kagan wrote.

The case was remanded for further proceedings in light of the high court’s ruling.