Despite the Internal Revenue Service (IRS) recent announcement, it seems to me that the answer is still “Well, it depends!” Here’s my take on the what the IRS said, which to be honest, was just a bit more clear than mud.
Taxpayers and tax pros should always look first to whether the FAQ is published in the Internal Revenue Bulletin (IRB). If it is, it has very strong precedential value. If it is not so published, the taxpayer should look to whether the FAQs deal with “newly enacted tax legislation” and if it is specially announced by the IRS and posted on its website in a separate “Fact Sheet”. These “Fact Sheet FAQs” carry more weight than others according to the IRS’ October announcement.
Is it a “Fact Sheet FAQ?”
So-called “Fact Sheet FAQs” may help abate tax penalties even though not published in the IRB. The IRS stated that FAQs that are published in a Fact Sheet that is linked to an IRS news release will be considered authority for purposes of the exception to accuracy-related penalties that applies when there is substantial authority for the treatment of an item on a return. See Treas. Reg. § 1.6662-4(d) for more information.
This new policy is a step in the right direction since astute tax professionals have known for some time that unless an IRS pronouncement is published in the IRB, its legal weight is zero. That’s right, tax guidance published on IRS.gov, the official IRS 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. The IRS has been criticized for this stance for at least 5 years. Finally, the agency is taking some action, albeit in my view, not enough!
Criticism of the IRS Has Paid Off (a little)
Taxpayers and many professionals are often completely unaware that reliance on IRS information, FAQs, tax forms and tax instructions 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 reliance limitations. If an FAQ is not published in the IRB, the IRS may change its position, or reinterpret the FAQ at any time. The IRS has done so on various occasions, much to taxpayers’ detriment.
Similar concerns were raised more recently by National Taxpayer Advocate Erin Collins in her July 2020 blog post. Ms. Collins correctly pointed out that “It is neither fair nor reasonable for the government to impose a penalty against a taxpayer who follows information the government provides on its website.” The blog post recommended that the IRS (1) “should never assess a penalty against a taxpayer for taking a position consistent with an FAQ posted on the IRS website at the end of a taxpayer’s taxable year or at the time of return filing unless the IRS has convincing evidence the taxpayer knew the FAQ had been changed” and (2) “should include the versions and dates of each FAQ on its website or create an archive of obsolete or modified FAQs, including applicable dates, so that taxpayers can locate an FAQ that was in effect at the time they filed their returns.”
IRS Updated FAQ Process
The IRS announced it is updating its process for certain FAQs on “newly enacted tax legislation”. Significant FAQs on newly enacted tax legislation, as well as any later updates or revisions to those FAQs, will now be announced in a news release and posted on IRS.gov in a separate Fact Sheet. These “Fact Sheet FAQs” will be dated to enable taxpayers to confirm the date on which any changes to the FAQs were made. Additionally, prior versions of Fact Sheet FAQs will be maintained on IRS.gov to ensure that, if a Fact Sheet FAQ is later changed, taxpayers can locate the version they relied on if they later need to do so. In addition to significant FAQs on new legislation, the IRS may apply this updated process in other contexts, such as when FAQs address emerging issues. One area that clearly involves an “emerging issue” is cryptocurrency – so let’s be on the lookout if the updated process is applied to forthcoming FAQs dealing with virtual assets. (Based on the IRS announcement, reliance on old FAQs still counts for “something”. More on this below.)
Included in revision of the FAQ process, the IRS announced that the following legend will be added to such Fact Sheet FAQs:
These FAQs are being issued to provide general information to taxpayers and tax professionals as expeditiously as possible. Accordingly, these FAQs may not address any particular taxpayer’s specific facts and circumstances, and they may be updated or modified upon further review. 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. Any later updates or modifications to these FAQs will be dated to enable taxpayers to confirm the date on which any changes to the FAQs were made. Additionally, prior versions of these FAQs will be maintained on IRS.gov to ensure that taxpayers, who may have relied on a prior version, can locate that version if they later need to do so.
What about Other (Non-Fact Sheet) FAQs?
FAQs that are not “Fact Sheet FAQs” apparently get different treatment, “reasonable reliance” on them is “relevant” but of course, it’s not fully clear how the recent IRS guidance will be applied when assessing a penalty. Here is what the recent IRS announcement says about them:
FAQs are a valuable alternative to guidance published in the Bulletin because they allow the IRS to more quickly communicate information to the public on topics of frequent inquiry and general applicability. FAQs typically provide responses to general inquiries rather than applying the law to taxpayer-specific facts and may not reflect various special rules or exceptions that could apply in any particular case. FAQs that have not been published in the Bulletin will not be relied on, used or cited as precedents by Service personnel in the disposition of cases. 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. Only guidance that is published in the Bulletin has precedential value.
Notwithstanding the non-precedential nature of FAQs, a taxpayer’s reasonable reliance on an FAQ (even one that is subsequently updated or modified) is relevant and will be considered in determining whether certain penalties apply. Taxpayers who show that they relied in good faith on an FAQ and that their reliance was reasonable based on all the facts and circumstances will have a valid reasonable cause defense and will not be subject to a negligence penalty or other accuracy-related penalty to the extent that reliance results in an underpayment of tax. See Treas. Reg. § 1.6664-4(b) for more information.
IRS also said that reliance on old FAQs (e.g., the cryptocurrency FAQs), will count: To address concerns about the potential application of penalties to taxpayers who rely on an FAQ, the IRS is today releasing a statement clarifying that if a taxpayer relies on any FAQ (including FAQs released before today) in good faith and that reliance is reasonable, the taxpayer will have a “reasonable cause” defense against any negligence penalty or other accuracy-related penalty if it turns out the FAQ is not a correct statement of the law as applied to the taxpayer’s particular facts.
My earlier blog post gives you the skinny on the “reasonable cause” defense.
So, at the end of the day, the IRS big announcement is giving you “something”, but how much is anybody’s guess. The taxpayer must be aware that such FAQ reliance is really at his peril and is not a replacement for authority issued in the IRB.
Published October 28 2021
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