On August 12, 2014, our blog discussed the Tax Court case of A. L. Bobrow regarding the rollover of Individual Rollover Accounts (IRAs). Bobrow was a tax attorney who relied upon IRS Publication 590 when filing his personal income tax return. The IRS argued that the taxpayer incorrectly filed his tax returns even though he followed the IRS’s interpretation of the tax law. Huh? Sounds unfair? Are we saying that the IRS challenged the correctness of a tax return that followed IRS instructions? We sure are.
Tax Court Judge Joseph W. Nega not only agreed with the IRS, but he also imposed penalties against the taxpayer for understating his tax liability. Judge Nega stated on April 15, 2014 (of all days) that IRS published guidance “is not binding precedent” and that “Taxpayers rely on IRS guidance at their own peril.” The judge further stated that IRS published guidance doesn’t count in court and added that he (the judge) was well aware of what Pub. 590 said before his original ruling. Interestingly, Pub. 590 has stated since 1984 that the position Bobrow took on his return was correct. In addition, the IRS had issued proposed regulations in 1981 stating that the action the taxpayer took was correct. It is important to note that the proposed regulation had never been finalized.
Has anything profoundly new been learned from this case aside from the IRS not following its own interpretation of the law? Absolutely nothing, except to remind taxpayers that not all guidance issued by the IRS is “authoritative”. The IRS has numerous pronouncements that carry different weights in the courts. Only IRS-issued final regulations carry the force and effect of the tax law, unless courts determine that such final regulations conflict with the actual law. While Temporary Regulations have been approved by the Treasury Department, Proposed Regulations and Revenue Rulings are limited to the specific facts or scope of the situation being analyzed. IRS Publications (such as Pub. 590), IRS notices and IRS announcements carry little, if any, authority within the Courts. When taking positions on tax returns, it is important that the level of authority be considered and whether a disclosure statement should be included with the filing of the return to avoid IRS penalties.
This case serves as a reminder of the importance of working with an experienced tax professional for your tax preparation and tax planning who will advice you as to whether you have substantial authority when taking a position on your return that is questionable and if a disclosure statement is needed to protect you from IRS penalties.
If you want to learn more about your personal tax situation, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
