In the middle of October, the IRS updated its procedure for issuing guidance using frequently asked questions (FAQs) on any newly passed tax laws. The IRS released a document providing a general overview clarifying taxpayers’ ability to rely on guidance presented through FAQs. This updated procedure will present “significant” FAQs on newly enacted tax legislation with updates and revisions in news releases posted on IRS.gov in a separate fact sheet.
The IRS Fact Sheet FAQs will list the date of their postings so that taxpayers may distinguish different versions and confirm them when the IRS makes any changes to the FAQs. The FAQs will contain a summary indicating the extent to which taxpayers may rely on the FAQ if seeking relief from any tax penalties. The IRS plans to maintain prior versions of Fact Sheet FAQs on its website, IRS.gov, so that taxpayers can easily find any previous versions which were the basis of their reliance.
The IRS’s general overview of taxpayer reliance explains that FAQs are a valuable alternative to guidance published in the Internal Revenue Bulletin (IRB). The FAQs enable the IRS to disseminate information on hot tax topics generally applicable to most taxpayers in an expedient manner. It is crucial to note that the responses of FAQS are answers to general inquiries rather than any direct application of federal tax law to the taxpayer’s specific tax scenario. This may result in FAQS not containing information that addresses special rules or exceptions to the tax topic at hand.
Taxpayers should not rely on any FAQs that the IRS has cited as precedents that have not been published in the IRB. The law controls and determines whether a taxpayer has any liability when a FAQ makes an inaccurate statement of the law applied to a particular circumstance. Still, the IRS will consider any taxpayer’s reasonable reliance on an IRS FAQ, including those subsequently updated or modified, when deciding if specific penalties apply to a taxpayer’s failure to follow federal tax law.
If a taxpayer’s reliance on a FAQ causes the taxpayer to fail to pay some amount of tax, the IRS will not subject taxpayers to any negligence or other accuracy-related penalty that allows for relief under a “reasonable cause” standard. Provided that, under the taxpayer’s particular facts and circumstances, the taxpayer reasonably relied in good faith on the FAQ.
In addition, the IRS considers Fact Sheet FAQs “authority” for purposes of the exception to accuracy-related penalties available when items on a return are based on substantial authority. According to IRS regulations, the tax treatment of an item has “substantial authority” only if the weight of published cases, rules, and other legal and administrative authorities is substantial in relation to the weight of opposing authorities.
Many tax professionals treat FAQs with caution since they are neither precedential nor binding on the IRS. The IRS may delete or modify a FAQ at any time without any official record of prior versions. Nonetheless, FAQs provide helpful guidance on new tax laws for taxpayers. The recent IRS announcement of formalizing its process for issuing and tracking FAQ guidance, in tandem with the clarifying statement on reliance, is a step in the right direction. Yet, careful taxpayers and tax professionals would be wise to save their copies of past versions of IRS FAQ guidance.
If you live in the New York or the Tri-State area and have any questions about any tax-related issues, call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation, call 212-490-0704.
