Taxpayers often mistakenly believe that they can rely upon Internal Revenue Service (IRS) advice. After all, if the IRS is providing the advice, why would it challenge a taxpayer’s return that incorporated that advice? To the contrary, the IRS is seldom held accountable for the advice it provides to taxpayers. Let’s look at some of the more commonly-recognized IRS tax advice resources.
Oral Advice: Taxpayers can telephone the IRS or visit an IRS office (if you can find one that is open to the public) to obtain advice. Unfortunately, oral advice from the IRS is the least reliable type of guidance. As the saying goes, you get what you pay for. Taxpayers who depend upon IRS oral advice could find themselves subject to substantial taxes, interest and penalties. This is a good example of “pennywise, dollar foolish”. IRS Reg. Sec. 601.201(k)(2) states: “A taxpayer may, of course, seek oral technical assistance from a district office in the preparation of his return. . . . Such oral advice is advisory only and the Service is not bound to recognize it in the examination of the taxpayer’s return (emphasis added).”
Okay, let’s say you received oral advice from the IRS and knowing that you cannot depend upon it, you request that the IRS put its advice in writing. Doesn’t that sound reasonable? Well per IRS Rev. Proc. 2014-1, 2014-1 I.R.B. 8, “The Service does not respond to letters seeking to confirm the substance of oral discussions, and the absence of a response to such a letter is not a confirmation.”
IRS Publications: Many taxpayers are aware that the IRS website contains numerous publications to aid taxpayers. Since these publications are written to assist taxpayers with the preparation of their tax returns, surely a taxpayer can depend upon such written advice of the IRS. Not according to the IRS Audit Manual (Sec. 220.127.116.11.8) which states: “IRS Publications explain the law in plain language for taxpayers and their advisors. They typically highlight changes in the law, provide examples illustrating Service positions, and include worksheets. Publications are nonbinding on the Service and do not necessarily cover all positions for a given issue. While a good source of general information, publications should not be cited to sustain a position (emphasis added).” The Tax Court case of Bobrow v. Commissioner makes for interesting reading. The taxpayer was a very sophisticated tax attorney with a very large and influential law firm and also was the former general tax counsel for CBS. The taxpayer reported the tax consequences of IRA distributions consistent with IRS Publication 590. While the taxpayer’s position on his return was consistent with Publication 590, it was not consistent with the relevant statutory language. In addition to being assessed additional taxes, Bobrow was assessed over $10,000 in “accuracy –related” penalties. The Tax Court stated that the IRS publication was not “binding precedent” and that, “[t]axpayers rely on IRS guidance at their own peril.” Instructions to IRS tax forms fare no better. The Tax Court in Montgomery v. Commissioner, 127 T.C. 43, 65 (2006) found that ‘‘It is settled law that taxpayers cannot rely on [IRS] instructions to justify a reporting position otherwise inconsistent with controlling statutory provisions.’’
Private Letter Rulings (PLR): A PLR is a written statement issued to a taxpayer that interprets and applies the tax laws to the taxpayer’s specific set of facts. A PLR is issued to establish with certainty the federal tax consequences of a particular transaction before the transaction occurs or before the tax return is filed. A PLR is binding on the IRS if the taxpayer fully and accurately described the proposed transaction in the request and carries out the transaction as described. A PLR may not be relied on by other taxpayers or IRS personnel. Requesting a PLR can be a costly and time-consuming process as the IRS requires that a fee be paid to it and the filing of a PLR often requires the assistance of a tax professional.
Revenue Rulings or a Revenue Procedures: These are more formal types of IRS advice that a taxpayer may be able to rely upon. IRS personnel must follow Revenue Rulings and Revenue Procedures and taxpayers may rely on them. However, Revenue Rulings and Procedures are more complex and difficult for the layman to understand. The information is not that easy to follow and for the most part, tax professionals will more readily understand and use these types of resources.
Competent and experienced tax professionals offer more than tax preparation services, they offer peace of mind and the avoidance of costly IRS penalties.
If you want to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, 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.