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 

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