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Saturday, November 26, 2011

Unofficial IRS Guidance and Transparency and Possible Solutions to This Taxpayer Rights Issue

An October 31, 2011 article in Tax Notes - "Olson Says Informal IRS Guidance Lacks Transparency" ties to an issue I've been highlighting for the past year. The issue is the growing amount of "guidance" being issued by the IRS that is not official guidance that could be relied upon to avoid taxpayer or preparer penalties. The items issued include FAQs and form instructions. In addition, some appear in Chief Counsel Advices (CCA) which is also not "authority" for purposes of, for example, having "substantial authority" to avoid penalties.*

Per the Tax Notes article, National Taxpayer Advocate Nina Olson observed that "the lack of high-level policy input can unintentionally harm taxpayers." (p. 564) She also observed that under the FAQ system, taxpayers do not know "what comments are submitted; there is no real deliberative process." Olson's comments were made at a panel presentation at the ABA Tax Section meeting in Denver.

Why does the informal guidance process continue? Can't Nina Olson raise this as a taxpayer's rights issue? IRS time spent on issuing informal guidance on substantive topics where there is no official guidance? Subsequent to writing an article, "How Heavy is an IRS FAQ?" in the AICPA Tax Insider in November 2010, I submitted the issue to the National Taxpayer Advocate website for submitting issues. I suggested they work to resolve this guidance problem with one way being to make the FAQs official guidance, such as by publishing them in the Internal Revenue Bulletin. The response was telling me basically, that such guidance does not avoid penalties - the exact issue I was raising. Hopefully Olson's comments at the ABA Tax Section meeting may mean that she is going to pursue this.

*The IRS website on Understanding IRS Guidance does not list FAQs or CCAs. It just lists IRS guidance that per Reg. 1.6662-4 is considered "authority" except the IRS website doesn't include General Counsel Memorandum (GCM) which the IRS hasn't issued in years. GCMs are included as authority in the regulation. I think the omission of CCAs from the website list is because they are not the same as GCMs. But it would be helpful for the IRS to clarify this. FAQs and CCAs are not mentioned in the Internal Revenue Manual (IRM) on researching the tax law.

I have heard that the IRS likes the FAQ approach because they can issue it quicker. That is because it is not getting the same deliberative attention and official documentation that proposed regs or revenue ruling revisions. But, this is like saying, my job is complicated and time consuming so I just skip the hard parts. Why is this tolerated?

  • Make the time to follow the revenue ruling process or regulations process to issue guidance. If the IRS is shorthanded, ask Congress for more resources (or to stop adding so many new provisions to the law). Seek the help of tax practitioner groups. The AICPA and ABA (and others) already devote a lot of practitioner volunteer time to commenting on proposed regs - use that brainpower and donated time to draft the guidance and critique the issues.
  • Make FAQs and CCAs with substantive guidance "official" by publishing them in the IRB.

What do you think?

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