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IRS Changes Its Position on Frequently Asked Questions

Oct. 21, 2021, 8:45 AM

I have a love/hate relationship with the IRS website.

I love having tax information available to tax professionals and taxpayers, including forms and account information.

But I hate having material online that is complicated or outdated. Like this page focusing on the employee retention credit that clearly reads “This Page is Not Current,” even though updating a website to provide relevant information should not be a heavy lift.

Or this page—also on the ERC—filled with outdated FAQs and a list of “current guidance” by date. There are eight pieces of guidance listed—the first of which is 102 pages long—that taxpayers can’t reasonably be expected to review, process, and understand in context.

IRS.gov Is Not Legal Authority

But the very worst bit of the IRS website is that it isn’t reliable. The IRS has made clear that material that hasn’t been published in the Internal Revenue Bulletin doesn’t carry legal authority. That position was memorialized in a 2017 IRS memorandum emphasizing at the outset that FAQs “and other items posted on IRS.gov that have not been published in the Internal Revenue Bulletin are not legal authority . . . and should not be used to sustain a position unless the items (e.g., FAQs) explicitly indicate otherwise or the IRS indicates otherwise by press release or by notice or announcement published in the Bulletin.”

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That memorandum was eventually incorporated—verbatim—into the Internal Revenue Manual, which explicitly references it at IRM 4.10.7.

This meant, practically speaking, that the IRS could change its stance on issues posted on its website at any time. And, during episodes of rapid change—as we witnessed during the pandemic—it has done so.

FAQ Controversies

Consider the FAQs for Covid-related stimulus checks. The IRS wanted to get a great deal of information out to taxpayers relatively quickly during a shutdown. The website seemed like a perfect way to do this, and the IRS issued several FAQs, including this one: “A Payment made to someone who is incarcerated should be returned to the IRS by following the instructions about repayments.”

There was just one problem: There was no such limitation in the CARES Act. By the time the matter went to court, the plaintiffs noted that, “The numbers of the FAQs have changed several times since they were first published.” The FAQs for stimulus payments have since changed again, making clear that the IRS cannot deny payment to incarcerated people if they otherwise meet the criteria.

A similar issue was raised for cryptocurrency. On the 2020 Form 1040, the IRS asked taxpayers, “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” The instructions did not offer much additional information, noting, “If, in 2020, you engaged in any transaction involving virtual currency, check the “Yes” box next to the question on virtual currency on page 1 of Form 1040 or 1040-SR.”

In March of 2021, the IRS attempted to clarify the question on its website by noting, in an FAQ, “If your only transactions involving virtual currency during 2020 were purchases of virtual currency with real currency, you are not required to answer yes to the Form 1040 question.”

Many tax professionals, including me, were taken aback by this position. While it makes sense from a reporting perspective, the disconnect between the instructions and the FAQs—with a lack of formal guidance—was worrying. I was immediately reminded of problems that taxpayers have encountered with offshore reporting. Practitioners who worked with offshore voluntary disclosure programs, or OVDPs, will recall that those FAQs changed regularly—often with serious consequences.

Congress Gets an Earful

In 2017, then National Taxpayer Advocate Nina Olsen called attention to this problem in her testimony to Congress. She had previously noted on her blog that “OVDP FAQs were issued in such haste and so poorly drafted that the IRS had to clarify them repeatedly.” For example, she pointed out that between March 1, 2011, and August 29, 2011—a six-month time span—the IRS made twelve changes to the FAQs before removing them entirely from the IRS website in 2016.

This constant change puts taxpayers in a difficult situation. On the one hand, especially since it is virtually impossible to reach IRS personnel on the phone, informal guidance is generally appreciated. But if that guidance turned out to be wrong, any resulting consequences—including penalties—become the responsibility of the taxpayer.

That also makes it awkward for tax professionals who, when confronted with new legislation that is not yet officially interpreted, have to advise taxpayers, in some cases, with very little confidence. Even a tax lawyer can only offer up “it depends” so often.

Here’s What’s Changing

Fortunately, things are changing. This month, the IRS announced a new process for frequently asked questions (FAQs) on newly enacted tax legislation.

Specifically, the IRS says that significant FAQs on newly enacted tax legislation, as well as any later updates or revisions to these 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, and versions will be maintained on the IRS website.

The IRS has also made clear that if a taxpayer relies on any FAQ in good faith, and that reliance is reasonable, the taxpayer will have a “reasonable cause” defense against any negligence penalty or other accuracy-related (section 6662) penalty. This includes FAQs issued in prior years. The criteria, generally, for reasonable cause and good faith exceptions can be found at Treas. Reg. § 1.6664-4(b).

Confusingly, the IRS then refers taxpayers to a web page that begins, “The purpose of this Reliance Page is to confirm/explain that FAQs generally cannot be relied upon and describe authority that can be relied upon.” The law, explains the IRS, will control, and only guidance published in the bulletin will have precedential value.

Cautions and Caveats

But there’s a reason for that: It’s important to note that the IRS still takes the position that FAQs are a “valuable alternative” to guidance published in the Bulletin, not a replacement. Any FAQs not published in the bulletin still cannot be “relied on, used or cited as precedents by service personnel in the disposition of cases.”

Instead, the most recent change carves out an acknowledgment that despite this position, taxpayers are relying on this information. And when they do, there should be some kind of relief available.

The IRS suggested that it might also apply this updated process in other contexts, such as when FAQs address emerging issues. That could apply, for example, to questions on matters involving cryptocurrency.

These changes aren’t exactly what tax professionals, including Olsen, had hoped to see. But as the IRS continues to grapple with how to treat FAQs and other guidance, including form instructions, I think we can agree that it’s a start.

This is a weekly column from Kelly Phillips Erb, the Taxgirl. Erb offers commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl.

To contact the reporter on this story: Kelly Phillips Erb in Washington at kerb@bloombergindustry.com

To contact the editors responsible for this story: Rachael Daigle at rdaigle@bloombergindustry.com; David Jolly at djolly@bloombergindustry.com

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