The stress of tax filing time had been on full throttle in April, and taxpayers abroad were scrambling to meet the tax filing deadline in June … many taxpayers are on extension until October. Here’s a familiar scenario: You need to find an answer to a tax question and turn to your good friend, Mr. Google, which turns up many promising search results, including links to information from the Internal Revenue Service (IRS). You find the answer to your question in one of the IRS online publications… and you feel safe and secure in finding the answer……
Your sense of security, however, is a false one. Read on and find out why!
The IRS had quietly acknowledged in an internal memorandum (Memorandum) that tax guidance published on its website holds no legal authority. Instead, binding rules can be found only in an obscure collection of more than 2000 pages per year – the Internal Revenue Bulletin (IRB).
What’s a taxpayer to do? As if the US tax rules are not confusing enough, it’s a sad situation when taxpayers cannot rely on information supplied by the IRS in the most commonly accessed and user-friendly formats – such as IRS Publications, “Frequently Asked Questions” (FAQs), news releases, videos and the like.
IRS Memorandum Issued May 18, 2017
On May 18, 2017 IRS issued a memorandum to all of its examiners reminding them that FAQs and other items posted on the IRS website that have not been published in the Internal Revenue Bulletin (IRB) are not legal authority. This memorandum has mysteriously disappeared from IRS website, but an archived version can be found here. Surprisingly, (or not), the IRS does not always make clear that taxpayers cannot rely on such information. Taxpayers are (more often than not) completely unaware that reliance is at the taxpayer’s peril with the possibility of penalties if they get it wrong.
The Government Accounting Office (GAO) has noted the problem (see pages 6-7) since at least 2016. The GAO’s research showed that many times FAQs published outside the IRB contain no disclaimer or explanatory language noting any limitations. If an FAQ is not published in the IRB, the IRS may change its position, or reinterpret the FAQ at any time. I do not think the IRS has done much (if anything at all) since issuance of the GAO report to make taxpayers and their advisors aware that they cannot rely on FAQs and similar items unless these are published in the IRB. (According to the IRS Memorandum, FAQs and other items cannot be used to sustain a position unless those items explicitly indicate otherwise or the IRS indicates otherwise by press release or by notice or announcement published weekly in the IRB.)
If you will, then, the IRB is the “official” source for reliable IRS tax information. If it’s not in the IRB, it’s legal weight is likely zilch. Given that each annual volume of the IRB contains about 2,000 pages, it’s small wonder that the average taxpayer does not use it (as if he has the time)!
So, What’s in the IRB and Why Is It Special?
Guidance published in the IRB goes through a multi-step clearance process at both the Department of the Treasury and the IRS. The clearance process involves review and approval by officials in a wide variety of Treasury and IRS offices. The weekly IRB is described as the “authoritative instrument” for publishing official IRS rulings and procedures and tax regulations. This distinction is important because, according to IRS officials, only guidance published in the IRB is binding on the IRS and can be relied upon by taxpayers as authoritative.
The five types of guidance published in the IRB are:
- Treasury Regulations
- IRS Revenue Rulings
- IRS Revenue Procedures
- IRS Notices, and
- IRS Announcements
How to Access the IRB
Given the importance of the IRB, taxpayers may want to become more familiar with it.
You can also subscribe to IRS e-news for email updates. If you look on the left corner of the news that the IRS sends you there is a menu containing a link to the IRB. That might remind you to look for it weekly. To subscribe please go to the e-News Subscriptions page on the IRS Web site. You can subscribe to the IRS Guidewire here.
Be Careful What You Rely On! Case in Point: OVDP
A good example of how serious the problem of “unofficial” IRS guidance can be is evidenced by the IRS “Offshore Voluntary Disclosure Program” (OVDP), which was accused of IRS “bait and switch” tactics. Taxpayers with offshore assets and those living abroad are likely very familiar with the OVDP. Even with the critical importance of the OVDP and its monumental impact on thousands of taxpayers, the OVDP (which is now officially closed) was governed only by a long series of FAQs (and much agency secrecy). These FAQs were not binding authority, even though the FAQs themselves did not indicate any warning to taxpayers or their advisors of this fact.
Prior to the OVDP settlement procedures which commenced in 2009, the IRS had published its settlement programs in the IRB after incorporating comments from stakeholders and obtaining approval from the Treasury Department. With the first OVDP in 2009, however, the IRS played a different game and issued an internal memorandum and a series of FAQs to promulgate the OVDP terms. These were not vetted by internal or external stakeholders nor were they approved by the Treasury Department. All subsequent OVDPs have been governed by FAQs posted to the IRS website, rather than published in the IRB. According to the National Taxpayer Advocate, Nina Olsen, the OVDP FAQs were “issued in such haste and so poorly drafted” that the IRS had to clarify them repeatedly. On account of the various reiterations of the FAQs, similarly-situated taxpayers were treated not only inconsistently, but unfairly.
Many Americans abroad and taxpayers with multiple nationalities who have spent most of their lives outside of the United States are a more vulnerable group when it comes to relying on IRS guidance. These groups often do not have the same access to tax advice as do those with more tax-sophistication and experience or those living State-side. As a result, they will generally lack access to more reliable sources of US tax information, to tax advisors who are knowledgeable (especially about foreign issues) and to competent tax return preparers. Due to a lack of practical access, these taxpayers will often more heavily rely on oral advice provided by the IRS or on information provided in instructions to the IRS tax forms, in IRS publications or videos, all of which (unless published in the IRB, or the IRS explicitly indicates otherwise) are worth ZILCH!
Practical Suggestion for Taxpayers and Advisors
The FAQ’s and other informational items which appear on the IRS website are not archived; changes to them are not announced by the IRS. If you are relying upon one of these “unofficial” resources, I strongly recommend that you print off the relevant information and retain it in your files. Even though the information is not legally binding, this may possibly assist in supporting the rationale for having taken the position on a tax return. As such, it may save the taxpayer and/or the tax advisor from penalties.
Taxpayer Bill of Rights
UPDATE September 26 2019 Temple University Law Professors Professor Alice G. Abreu and Richard K. Greenstein provide an interesting viewpoint on this problem. They suggest a possibly more compelling reason for upholding taxpayer reliance on IRS’ publications, FAQs and the like: the IRS’s adoption and the subsequent enactment by Congress of the Taxpayer Bill of Rights (“TBOR”). The TBOR contains as the very first taxpayer right, the right to be informed. Professors Abreu and Greenstein have developed ideas on the effect of the TBOR by focusing on its potential to change both the IRS’s position on the taxpayer’s ability to reasonably rely on written statements intended for their guidance, and the courts’ response to such reliance.
They also suggest that if the IRS persists in taking litigating positions in contravention of the statements it has made in its own publications and instructions to forms, taxpayers should ask the courts to “estop” the IRS from doing so. While they recognize that asserting equitable estoppel against the government is difficult, they believe that the enactment of the TBOR provides a basis for a change in the status quo.
Great points! Thank you Professors Abreu and Greenstein.
Posted July 25, 2019 (updated September 26, 2019)