Reminder on Resources for Tax Answers

A Tax Court Summary Opinion of June 26 on the mortgage interest deduction for 2019 when the taxpayer's aggregate mortgage debt on their principal and second homes exceeded the debt limit included a subtle reminder about the role of IRS publications to support positions taken on tax returns. [McNamara, TC Summary Opinion 2023-22 (6/26/23)]

The taxpayer's second home was only owned for 5 months of the year but in calculating the allowable mortgage interest deduction, performed the calculation as if owned 12 months. The taxpayer said they relied on IRS Publication 936, Home Mortgage Interest Deduction. The court relied on IRC Section 163(h) and related regulations, which it found "unambiguous" in determining the deduction as the IRS determined. 

In noting that reliance on the IRS publication was "misguided," the court added: See Miller, 114 TC 184, 195 (2000) which explains "that administrative guidance is not binding on the Court when the plain meaning of a statute is clear." But the court did not include the quote on page 195 of that case. Here is is:

"Well-established precedent confirms that taxpayers rely on such publications at their peril. Administrative guidance contained in IRS publications is not binding on the Government, nor can it change the plain meaning of tax statutes."

A few observations and reminders about what can be relied upon to take a position on a return:

• IRS Publications, as well as tax forms and instructions, are not intended to be binding tax law interpretations or rules. They exist to help taxpayers better understand the law and comply with it. However, they might not present all possible rules and scenarios. Binding guidance is the IRC, regulations, and court cases (other than TC Summary Opinions which are not legally treated as precedent).
  
  
• Why did the Tax Court use the term "administrative guidance" in referring to a publication? I think it is because the word "guidance" is commonly used (and misused).  Personally, I prefer to use the term "IRS information" when referring to non-binding items from the IRS such as publications, websites and FAQs (unless the FAQs were released as an Information Release (IR) and Fact Sheet). A better use of "administrative guidance" would have been for anything published in the weekly Internal Revenue Bulletin (IRB) such as regulations, revenue rulings, revenue procedures, notices, and announcements. While only final and temporary regulations are binding on taxpayers and the courts, taxpayers need to be aware of all items in the IRB and if they decide anything is incorrect and they don't plan to follow it, they should have a strong argument and likely it is a good idea to include a Disclosure Statement with the return (Form 8275 or 8275-R).

So, should we read IRS publications? Yes, I think they are helpful in providing an overview to the law in the area covered by the publication. We need to bear in mind though that they are not precedential (for example, you can't take a position per page 7 of Pub. X), and they likely are not covering all of the law in a particular area so research in binding guidance is needed.

Perhaps all items from the IRS should state in a common place among documents whether the item is:

1. Binding guidance to avoid a penalty such as under Section 6662 or 6694 that can be relied on for taking a position on a return (after weighing all relevant binding guidance).
2. Binding guidance to avoid a penalty but not precedential for the taxpayer such as a PLR or TC Summary Opinion. For example, the taxpayer can't say they are taking a position per PLR XXXX (unless it was issued to them).
3. Non-binding information from the IRS

What do you think?

FAQ Observations and Cautions

FAQs published by the IRS seem to increase exponentially each year. Just for the advance child tax credit of the American Rescue Plan Act (P.L. 117-2, 3/11/21), the IRS has over 80 FAQs and continue to update them even 10 months after enactment (but then, it is a multi-facited somewhat complex provision).

On October 15, 2021, the IRS announced a modification to its FAQ process for those issued on newly enacted legilation and emerging issues (IR-2021-202). Those FAQs will be released in a news release along with a Fact Sheet. Later updates should result in an updated Fact Sheet and we should be able to find any deleted or modified FAQs in prior fact sheets. As a news releases these FAQs are "authority" under Reg. 1.6662-4, although a low level of authority.

Fact Sheet FAQs will also include a disclaimer which includes:

"Because these FAQs have not been published in the Internal Revenue Bulletin, they will not be relied on or used by the IRS to resolve a case. Similarly, if an FAQ turns out to be an inaccurate statement of the law as applied to a particular taxpayer's case, the law will control the taxpayer's tax liability. Nonetheless, a taxpayer who reasonably and in good faith relies on these FAQs 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."

Note that FAQs, even Fact Sheet ones released in a news release are not publishd in the Internal Revenue Bulletin (IRB) so are not binding law, as noted in the disclaimer. Also note the part about "the law will control..." another reminder that FAQs themselves are not the law.

When you find an FAQ that answers your question, you should find the underlying binding authority to be sure it exists and because that is what you need to rely on. I think probably 95% of IRS FAQs are just describing the Code, text from a Public Law, regs, or court cases, so are binding.  

If you can't find underlying binding law, proceed with caution. A few examples where you won't find underlying law: FAQs 39 - 41 for virtual currency and the extensive written documentation IRS calls for the FFCRA sick and family leave employment tax credit (as well as for self-employed individuals).

Something not noted in the October 15, 2021 announcement about the new FAQ process for those on newly enacted legislation and emerging issues, is that some FAQs might end up in a Notice published in the IRB so are binding guidance. For example, a good number of FAQs on the Employee Retention Credit enacted by the CARES Act and modified by two later laws, are in Notice 2021-20 and perhaps a few other notices.

For example, Q&A 31 in Notice 2021-20 on full-time employee, is exactly the same as FAQ #49 on the IRS website. But the FAQ website is not updated to note which FAQs have been published in the IRB making them binding authority - and more binding than Fact Sheet FAQs! So, one more thing to consider in using FAQs, even those not in a Fact Sheet - an FAQ may be more binding than expected.

A few additional points:

I have added FAQ Fact Sheets to the documents I maintain on items published in the IRB - here.

I have been raising issues about FAQs for over 10 years. For some prior blog posts, please search "FAQ" in my blog's search box. 

What do you think? And, do you think we should seek more FAQs or more binding guidance such as regs, revenue rulings and notices? And bear in mind that only regs are not generally retroactively effective (other types of guidance are retroactively effective) and only proposed regs require 

Federal Tax Guidance Considerations

To help figure out all of the COVID-19 tax law changes enacted since March 2020, we have seen a variety of guidance from the IRS. This includes FAQs and some items just posted to an IRS website. These are non-binding items. Some guidance was published in the weekly Internal Revenue Bulletin (revenue rulings, revenue procedure, notices and announcements) so is binding on the IRS.

Since these changes mostly expired in less than one year, there wasn't time for public comment and binding guidance for everything. Taxpayers and practitioners wanted insights as quickly as possible.

But what about other tax rules that are here for longer? Why aren't regulations used mroe often particularly for unclear areas where public comments would be useful. For example, some of the information on taxation of virtual currency are FAQs or a revenue ruling where there was no public comments and there are issues as to whether the guidance is correct.

I've got a short article in the AICPA Tax Adviser that delves into types of guidance and some current issues. As this excerpt notes, the National Taxpayer Advocate has concerns too. "FAQs can be renumbered, removed, or modified with no archival remnant to help in finding the original. That is, the IRS has no responsibility to archive FAQs and other items only published on its website. In contrast, items published in the IRB are in a permanent depository. In a July 7, 2020, blog post, available at taxpayeradvocate.irs.gov, National Taxpayer Advocate Erin M. Collins noted this FAQ problem and described it as a violation of the Taxpayer Bill of Rights, namely, the rights to be informed and to a fair and just tax system."

Please check it out as it explains various IRS pronouncements and their differences and issues, including a chart that I hope you find useful - here.

Taxpayer Advocate - FAQs are Trap for Unwary

The IRS National Taxpayer Advocate's  7/26/17 blog post notes that FAQs “can be a trap for the unwary.” She notes:

“my view is that the IRS should use FAQs when there is a need to provide guidance on an emergency or highly expedited basis. Examples include relief provided to victims of Hurricane Katrina or victims of the Bernard Madoff Ponzi scheme. However, my recommendation is that the IRS converts FAQs into published guidance as quickly as possible whenever an issue affects a significant number of taxpayers or will have continuing application. U.S. taxpayers are entitled to finality, and the prospect that the IRS may change its position and assess additional tax after a tax return has been filed in reliance on an IRS’s position is simply unfair.”

“In addition, to ensure taxpayers understand the limitations of FAQs and other unpublished guidance, we recommend the IRS prominently display a disclaimer near such guidance that says something along the following lines: “Taxpayers may only rely on official guidance that is published in the Internal Revenue Bulletin.  Various IRS functions try to provide unofficial guidance to taxpayers by posting Frequently Asked Questions (FAQs) and other information on IRS.gov. Unless otherwise indicated, however, this information is not binding, and taxpayers may not rely on it because it may not represent the IRS’s official position.”” [emphasis added]

The IRS recently reminded its examiners that FAQs aren't binding (see my 6/4/17 blog post).

Most FAQs are like IRS publications - just a summary of the law. It is the FAQs, such as those on the Offshore Voluntary Disclosure Program (OVDP), that are not summarizing binding guidance (statute, regulations, IRS rulings published in the IRB, court cases), that are problematic. They are not binding, but there is usually nothing else out there.

It is not just FAQs that are a concern. Chief Counsel Advice (CCA) are also issued where sometimes new interpretations of the law of noted. These are not considered "authority" for purposes of avoiding a taxpayer (Section 6662) or preparer (Section 6694) penalty. For example, CCA 201504011 on how unicap does not apply to a marijuana business in applying Section 280E that disallows deductions, but not cost of sales, for such businesses. Why wasn't this issued as a revenue ruling or as regulations under Section 280E (which has no regulations despite its enactment in 1982 and its increased importance when states started legalizing marijuana in the mid-1990s)? There are also some Information Letters that have not binding underlying authority.

What do you think?

IRS Says FAQs Not Legal Authority - Finally!

In May 2017, the IRS Small Business Division issued a memo to field directors to remind them that FAQs and other items posted to the IRS website are not legal authority unless published in the Internal Revenue Bulletin (IRB)! [SBSE-04-0517-0030 (5/18/17); this memo seems to have been removed from the IRS website, but I found it using the Wayback Machine and have posted it for us all]

Finally!!

I've been writing about this issue since at least 2010 and in 2012 had the opportunity to discuss the issue with IRS, Treasury and congressional staff.

See:

• Nellen, How Heavy is an IRS FAQ?, AICPA Tax Insider, 11/11/10
• Horwitz and Nellen, FAQs: Problems with InformalGuidance from the IRS (2012) by Horwitz and Nellen, presented to staff of House Ways & Means, Senate Finance, Joint Committee on Taxation, IRS Chief Counsel, Treasury, as well as to National Taxpayer Advocate Nina Olson and her staff, as part of the California Bar Tax Section DC Delegation activity of May 2012.

My concern with so many FAQs (see the paper above with Robert Horwitz) is that it means less time is spent on issuing binding guidance. There are numerous examples, such as CCA 201504011 (1/23/15) that holds that in measuring cost of sales for a marijuana business, the inventory rules in existence when IRC Section 280E was enacted (1982) apply rather than current rules, such as Section 263A. Section 280E is the provision that disallows expense deductions for marijuana businesses, but does allow cost of sales. Some try to lessen the impact of this rule by using the Unicap rules of Section 263A to treat more type of costs as inventoriable rather than as period costs. Why wasn't the CCA issued as a revenue ruling to be binding. Yes, more IRS and Treasury time would have been required, but it would have greater effect.

What do you think?

Top Ten Items of Tax Policy Interest for 2015 - #6

Continuing with my list of ten news items and activities from 2015 that I think have particular tax policy relevance.  Today, for my sixth item is yet one more year with lots of informal, non-binding documents issued by the IRS in comparison to binding guidance.  Per my count aided by RIA Checkpoint, the IRS website and the US Tax Court website, is some data comparing 2015 and 1995 in terms of various administrative and judicial guidance issued.  It is missing cases by other federal courts, regulations and statutory (IRC) changes for these years. I may pursue all of this more later. Also, because I have not found a way to count them and it might not be possible, is how many new FAQs the IRS issued for 2015 and how many prior ones they modified. [For more on FAQs, see this paper by Robert Horwitz and me from 2012 which we presented to folks at IRS, Treasury, Nina Olson, and congressional tax staff in May 2012.]

Comparisons:

Document	2015	1995
Action on Decision (AOD)	2	16
General Counsel Memorandum (GCM)	0	3
Chief Counsel Advice (CCA)*	186	2
Field Service Advice (FSA)	0	185
Revenue Ruling	26	83**
Revenue Procedure	57	55
Notice	87	67
Fact Sheet	27	2
Regular Tax Court decision	31	64
Tax Court Memorandum decision	246	610
TC Summary Opinion	75	0

  *Does not include 5 Legal Advice Issued by Associate Chief Counsel, 31 Legal Advice Issued by Field Attorneys, and 21 Legal Advice Issued to Program Managers. The number noted is of CCAs released to the public. Per this IRS report for 2014, if 2015 is similar, there might be over 3,000 more CCAs that were not released such as due to privilege and confidentiality reasons. The number is not too helpful because perhaps prior year CCAs were sent to agents if pertinent to their question.

  **In 1985, there were 200 revenue rulings and for 1975, there were 568!

While the number of revenue rulings has dropped since 1995, the informal guidance  (CCAs and FSAs) is about the same.  But too many, particularly when they address something not otherwise addressed in binding guidance.

 

My focus is on the IRS. I included the Tax Court for additional comparisons of differences between 2015 and 1995.  Why so many more Tax Court rulings in 1995?  Perhaps because there were more audits by the IRS in 1995?  Perhaps there were fewer tax cases in District Court and Court of Federal Claims that year?  More research is needed here.

Policy concerns: Many of the CCAs involve legal areas where there is no other binding guidance. Yet, CCAs are not binding and can't be relied upon to avoid a penalty. The law section of the CCAs typically uses the IRC, regulations and cases which are binding and that might be helpful.  But if many of the CCAs could instead be revenue rulings or regulations, that would be very helpful to taxpayers and practitioners.  Here are a few from 2015 where something more binding would be helpful:

• §469(c)(7) Clarification – CCA 201504010 (1/23/15)
• Marijuana Business and §280E – Cost of Sales versus Period Expenses – CCA 201504011 (1/23/15)  
• Treatment of Excise Taxes Paid by Marijuana Business - CCA 201531016 (7/31/15)
• ERP Software and §174 – In CCA 201549024 (12/4/15) 

What do you think?

My list so far of news and activities of 2015 with tax policy relevance (no ranking involved):

1. Congress can alter our tax system via a lot of non-tax bills - here
2. IRS funding challenges - here 
3. Justice Kennedy called for a review of the 1992 Quill decision - here 
4. IRS disagreeing with a court decision via a proposed regulation - here 
5. Why not let the Internet Tax Freedom Act just expire - here