The Scary Truth About Navigating IRS Tax Guidance

My article is copied in full below. It first appeared on Forbes July 24, 2024 – link here.  You can follow me on Forbes for free.

 

Imagine this: You have a pressing tax question and, like many, you turn to Google. Among the plethora of results, you spot information from the IRS, including its official online publications. Confident in your find, you proceed, believing you have solid guidance.

But hold on—that sense of security might be deceptive. Here’s why.

In a less-publicized move, the IRS revealed in a 2017 internal memorandum that its online tax guidance doesn’t carry legal weight. This memo apparently is no longer available on the IRS website, though archived versions are available. The Internal Revenue Bulletin is the only authoritative source for tax guidance, a voluminous and little-known collection published weekly.

An IRS announcement from 2021 and updated this year contains a general reliance page confirming that its FAQs generally cannot be relied upon and describes authority that can be relied upon. Unfortunately many taxpayers and professionals are unaware of this information.

The National Taxpayer Advocate has suggested that IRS prominently display a disclaimer near all unofficial guidance. This would advise taxpayers that they may not rely on the information which is not binding since it is not published in the IRB.

What Should Taxpayers Do?

Navigating the labyrinth of U.S. tax rules is already challenging. The fact that taxpayers cannot depend on the IRS’ easily accessible formats such as its instructions, publications, FAQs, and news releases complicates matters further. Alarmingly, the IRS often doesn’t clarify that reliance on information that is not published in the IRB is risky, potentially leading to penalties for taxpayers who get it wrong.

The Government Accountability Office flagged this issue as early as 2016, noting that many IRS FAQs and other IRS online content lacked disclaimers about their limitations. Since then the IRS appears to have done little to inform taxpayers and their advisors about the nonbinding nature of such information. Furthermore, courts have ruled that taxpayers cannot rely on IRS documents published outside the IRB to support a position.

The IRB Is The Taxpayer’s Reliable Source

The IRB is the gold standard for reliable and authoritative IRS tax information. Guidance published in the IRB undergoes a rigorous clearance process involving multiple reviews and approvals within the Treasury and IRS, ensuring the information is authoritative and legally binding. The IRB includes various items of highly technical tax information including Treasury regulations, IRS revenue rulings, revenue procedures, notices and announcements.

The IRB can be accessed online. Given its importance, but also the complexity of the tax information it contains, it would take a lot of work and an in-depth understanding of tax law for taxpayers to familiarize themselves with the IRB. Unfortunately, many tax practitioners are not familiar with the IRB and they often rely on other IRS resources that are not authoritative.

Choice Of Tax Advisors

For legally binding guidance, one must refer to the IRB. Given its confounding nature, taxpayers must make sure to use a reliable and informed tax professional who understands the tax law and digs into the Internal Revenue Code, Treasury regulations and resources in the IRB. There simply is no substitute.

With a complicated tax matter, avoiding tax penalties is critical. Many individuals do not realize that penalties can be assessed unless the taxpayer has engaged a professional who is qualified to assist with their particular tax situation.  Not just any tax advisor will do when it comes to avoiding penalties for tax mistakes.

A Cautionary Tale: The OVDP

The Offshore Voluntary Disclosure Program serves as a stark reminder of the pitfalls of unofficial IRS guidance. Governed by FAQs rather than IRB publications, the OVDP led to inconsistent results and perceived unfair treatment of some taxpayers. The National Taxpayer Advocate criticized the OVDP FAQs for being hastily and poorly drafted, leading to multiple clarifications and confusion.

Overseas Americans: A Vulnerable Group

Americans living abroad are particularly susceptible to these issues. With limited access to expert tax advice, they often rely heavily on IRS publications and online information, which, unless published in the IRB, holds no legal authority.

Practical Advice For Taxpayers And Advisors

Given the ephemeral nature of FAQs and other IRS website content, it’s wise to print and archive any information relied on. While not legally binding, having a record could help justify a tax position in the event of an audit, potentially mitigating penalties.

The Taxpayer Bill Of Rights

This unfortunate situation seemingly conflicts with the Taxpayer Bill of Rights, which enshrines the right to be informed as a fundamental taxpayer right. The TBOR was adopted by the IRS in 2014 and the following year, Congress made it part of the U.S. tax law by actually inserting it into the Internal Revenue Code. Neither taxpayers nor their advisors have paid much attention to it, which is unfortunate since the TBOR has great potential to reshape the administration of the tax laws. For example, taxpayers might argue that the TBOR’s right to be informed permits a court to prevent the IRS from contradicting its own publications and instructions. While challenging, the TBOR might provide a legal basis for pushing back against the IRS shifting positions.

The Takeaway

In conclusion, while IRS online resources are useful, they are not infallible. IRS online resources offer a convenient starting point, but taxpayers should not be lulled into a false sense of security. For definitive guidance, always consult the IRB. Given its complexity, seeking advice from a seasoned tax professional is a wise move. Staying informed and cautious, with expert help, can help avoid costly mistakes and ensure that tax positions are backed by legally binding sources.

I help with tax matters around the globe. Reach me at vljeker@us-taxes.org

Posted August 8, 2024

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