Tom Talks Taxes - October 15, 2021

IRS announces new guidelines on website frequently asked questions

I have been a frequent critic of the IRS policy of issuing informal guidance via website frequently asked questions (FAQs) versus guidance that taxpayers and practitioners can rely upon for tax return positions.

My three primary concerns with website FAQs include

  1. A lack of version control,

  2. The omission of legal reasoning in the published text, and

  3. No penalty protection for returns taking position based on FAQs.

The main benefit to the website FAQ process is that the IRS can get some type of guidance to taxpayers and practitioners more quickly by using an informal route.

In IR-2021-202, the IRS announced it is tightening up the website FAQ process. I believe these changes alleviate many of the concerns I had about the prior website FAQ process and provide for an overall positive impact on tax administration.

Per the above news release, here is the IRS’s new process for website FAQs:

Significant FAQs on newly enacted tax legislation, as well as any later updates or revisions to these FAQs, will now be announced in a news release and posted on IRS.gov in a separate Fact Sheet. These Fact Sheet FAQs will be dated to enable taxpayers to confirm the date on which any changes to the FAQs were made. Additionally, prior versions of Fact Sheet FAQs will be maintained on IRS.gov to ensure that, if a Fact Sheet FAQ is later changed, taxpayers can locate the version they relied on if they later need to do so. In addition to significant FAQs on new legislation, the IRS may apply this updated process in other contexts, such as when FAQs address emerging issues.

The IRS also published today General Overview of Taxpayer Reliance on Guidance Published in the Internal Revenue Bulletin and FAQs to supplement its position on how website FAQs fall in the authority hierarchy. Here is the key section from the above document:

Notwithstanding the non-precedential nature of FAQs, a taxpayer’s reasonable reliance on an FAQ (even one that is subsequently updated or modified) is relevant and will be considered in determining whether certain penalties apply. Taxpayers who show that they relied in good faith on an FAQ and that their reliance was reasonable based on all the facts and circumstances will not be subject to a penalty that provides a reasonable cause standard for relief, including a negligence penalty or other accuracy-related penalty, to the extent that reliance results in an underpayment of tax. See Treas. Reg. §1.6664-4(b) for more information. In addition, FAQs that are published in a Fact Sheet that is linked to an IRS news release are considered authority for purposes of the exception to accuracy-related penalties that applies when there is substantial authority for the treatment of an item on a return.  See Treas. Reg. §1.6662-4(d) for more information.

I discussed the issue of uncertain tax positions in a prior edition of this newsletter. In order to avoid either §6662 or §6694 penalties for a position taken on a tax return, a position must either have a reasonable basis with adequate disclosure or substantial authority. Authorities which factor into the reasonable basis or substantial authority determinations are the ones listed in Treas. Reg. §1.6662-4(d)(3)(iii):

  • Applicable provisions of the Internal Revenue Code and other statutory provisions,

  • Proposed, temporary and final regulations construing such statutes,

  • Revenue rulings and revenue procedures,

  • Tax treaties and regulations thereunder, and Treasury Department and other official explanations of such treaties,

  • Court cases,

  • Congressional intent as reflected in committee reports, joint explanatory statements of managers included in conference committee reports, and floor statements made prior to enactment by one of a bill's managers,

  • General Explanations of tax legislation prepared by the Joint Committee on Taxation (the Blue Book),

  • Private letter rulings and technical advice memoranda issued after October 31, 1976,

  • Actions on decisions and general counsel memoranda issued after March 12, 1981 (as well as general counsel memoranda published in pre-1955 volumes of the Cumulative Bulletin),

  • Internal Revenue Service information or press releases [emphasis added], and

  • Notices, announcements and other administrative pronouncements published by the Service in the Internal Revenue Bulletin.

Note that the next-to-last item in that list of authorities states that IRS press releases can serve as authority for determining whether or not there is a reasonable basis or substantial authority for a tax position. Therefore, by the IRS now publishing website FAQs as press releases, it allows them to be relied upon for penalty protection. In fact, solely using a website FAQ as authority for a position may now meet the reasonable basis standard as defined in Treas. Reg. §1.6662-3(b)(3):

If a return position is reasonably based on one or more of the authorities set forth in § 1.6662-4(d)(3)(iii) (taking into account the relevance and persuasiveness of the authorities, and subsequent developments), the return position will generally satisfy the reasonable basis standard… [emphasis added]

Here are a few closing thoughts I have on the website FAQ issue:

  • The fact the IRS takes a position on a tax matter does not automatically mean its position is correct. Ultimately the courts and Congress are the arbiters of what the Internal Revenue Code means. Website FAQs will continue to have a significant problem of not providing detailed legal reasoning unlike other IRS guidance sources; therefore, their correctness may be difficult to ascertain.

  • There can be a reasonable basis for multiple positions on the same tax matter. Your reasoning and analysis should consider multiple sources of tax authority when determining the best tax position for your client.

  • When using a position taken by a website FAQ as part of your tax research process, be sure to document to the file the copy of the website FAQ as it existed at the time you considered it. This also applies to any other source of tax authority as they can be modified at a later date.

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