IRS FAQs Can Be a Trap for the Unwary
Article Published by: taxpayeradvocate.irs.gov
At a recent hearing before the Subcommittee on Oversight of the Committee on Ways and Means, I was asked a seemingly simple question about what types of guidance taxpayers can rely on. Unfortunately, the answer is not simple at all.
Generally speaking, there are three buckets of tax guidance:
- Regulations – Treasury (tax) regulations are subject to a public notice-and-comment period pursuant to the Administrative Procedures Act (APA). Accordingly, Treasury regulations are deemed to be binding on both the IRS and taxpayers, except in rare instances where a taxpayer is able to persuade a court to invalidate the regulation. Treasury (tax) regulations are published in the Federal Register.
- Other “Official” Tax Guidance – The IRS publishes various forms of guidance in the Internal Revenue Bulletin (IRB). This is referred to as “published guidance” and includes revenue rulings, revenue procedures, notices, and announcements. Documents published in the IRB generally do not go through a notice-and-comment process. The IRS is generally required to follow published guidance and to administer the law in accordance with it. However, it represents merely the IRS’s interpretation of the law, so taxpayers may challenge the position in court and seek to persuade a judge that their own interpretation of the law is correct.
- Other “Unpublished” Guidance – The IRS provides guidance in many other forms. It issues tax forms and instructions as well as publications. It issues press releases. And it posts Frequently Asked Questions (FAQs) and answers on IRS.gov. These forms of guidance are generally not reviewed by the Treasury Department, and sometimes do not even go through an internal review process. For that reason, the IRS takes the position that taxpayers may not rely on them and that the IRS may change its position at any time.
Many tax FAQs are posted on IRS.gov and therefore are not considered to be “published guidance.” However, some FAQs are published in the IRB and are considered binding on the IRS. For example, the IRS virtual currency guidance instructing taxpayers to treat virtual currencies as property was only issued in FAQ form. These FAQs were included as part of a notice that was published in the IRB. Accordingly, they represent the official position of the IRS, and the IRS is bound to maintain the position taken in the virtual currency FAQs unless and until it publishes further guidance in the IRB modifying or revoking them.
If an FAQ is not published in the IRB, the IRS may change its position at any time. Indeed, the IRS recently reminded its examiners that FAQs “and other items posted on IRS.gov that have not been published in the Internal Revenue Bulletin are not legal authority . . . and should not be used to sustain a position unless the items (e.g., FAQs) explicitly indicate otherwise or the IRS indicates otherwise by press release or by notice or announcement published in the Bulletin.” However, the fact that an FAQ had been posted may provide taxpayers with some degree of protection from penalties. In general, under IRC section 6662(d) and related regulations, a taxpayer may avoid penalties if it is determined he or she had “substantial authority” for the position taken, and “IRS information or press releases” are considered “authorities” for this purpose. But note the “in general” caveat, because the regulations regarding “substantial authority” are too complex to cover in a blog posting. Read the full article here.
ABOUT MICHAEL SMERIGLIO:
Mike Smeriglio III is a financial specialist. A licensed CPA since 1985, Mike has been providing tax preparation services to individuals and businesses for more than 30 years through his firm located in Greenwich, CT.