One of the tools the IRS has used with increasing frequency to provide guidance has been the use of Frequently Asked Questions (FAQs) posted on the IRS website.  The IRS began using the tool heavily to provide guidance for various Tax Cut and Jobs Act provisions, and that use continued with guidance for various items found in the COVID relief bills.

However, tax professionals have expressed major concerns with the IRS reliance on such guidance.  First, it’s not clear what happens if the IRS discovers that an FAQ no longer agrees with what the agency and courts find to be the proper interpretation of the law.  Can the IRS assert a position contrary to a published FAQ against a taxpayer and if they succeed in doing so, do taxpayers face potential penalties for taking positions on a tax return relying upon the FAQ?

Second, the IRS has in the past often changed FAQs without making any public statement regarding the changes aside from updating the “Page Last Reviewed or Updated:” footer on the various pages. Advisers may not realize an FAQ was changed just before a taxpayer files a return based on the prior version of the FAQ unless the adviser goes to each of the multitude of IRS FAQs each day to see if any have changed.

The IRS has released a reliance web page[1] that addresses these issues along with a News Release[2] issued simultaneously.

News Release

The News Release begins by announcing:

Today, the Internal Revenue Service is updating its process for certain frequently asked questions (FAQs) on newly enacted tax legislation. The IRS is updating this process to address concerns regarding transparency and the potential impact on taxpayers when these FAQs are updated or revised. At the same time, the IRS is also addressing concerns regarding the potential application of penalties to taxpayers who rely on FAQs by providing clarity to taxpayers as to their ability to rely on FAQs for penalty protection.[3]

The IRS release provides that the IRS will now take the following actions for “significant FAQs” on newly enacted legislation:

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 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.[4]

While this seems to be an improvement, advisers should be concerned that this rule only covers “significant FAQs” without giving any guidance on what makes an FAQ significant.  Similarly, FAQs that aren’t related to new legislation are not covered by this policy and it’s not clear if even the American Recovery Program Act (ARPA) would still be treated as “new legislation” at this point based on the language of the news release.

The news release also describes the statement it is releasing on taxpayer reliance on the Internal Revenue Bulletin and FAQs:

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. For more information on taxpayer reliance, see the General Overview of Taxpayer Reliance on Guidance Published in the Internal Revenue Bulletin and FAQs.

Finally, the News Release provides that the following statement will be added to 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.[5]

IRS Statement on Reliance on the Internal Revenue Bulletin and FAQs

Included in the news release, as well as on its own page on irs.gov, is the promised statement, entitled “General Overview of Taxpayer Reliance on Guidance Published in the Internal Revenue Bulletin and FAQs.”

The guidance begins with a section outlining the status of items published in the Internal Revenue Bulletin (IRB).  The guidance first states that the IRB is where items with various levels of authority will be published

The Internal Revenue Bulletin (Bulletin) is the authoritative instrument of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service and for publishing Treasury Decisions, Executive Orders, Tax Conventions, legislation, court decisions, and other items of general interest.[6]

The statement then outlines the IRS’s policy of what items it will publish in the IRB:

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application of the tax laws, including all rulings that supersede, revoke, modify, or amend any of those previously published in the Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of internal practices and procedures that affect the rights and duties of taxpayers are published.[7]

The statement describes the class of items published in the IRB that are treated as Revenue Rulings:

Revenue rulings represent the conclusions of the Service on the application of the law to the pivotal facts stated in the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices, identifying details and information of a confidential nature are deleted to prevent unwarranted invasions of privacy and to comply with statutory requirements.[8]

The level of authority represented by items in the IRB is described in the final paragraph of the first section.

Rulings and procedures reported in the Bulletin do not have the force and effect of Treasury Department Regulations, but they may be used as precedents. Rulings not published in the Bulletin will not be relied on, used, or cited as precedents by Service personnel in the disposition of other cases.[9]

The statement points out that those looking to rely on such items published in the IRB do have to consider events occurring after publication of the item in the IRB—that is, the IRS has no obligation to update items published in the IRB for such changes or developments.

In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings and procedures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances are substantially the same.[10]

This portion of the statement is in line with what advisers have generally understood to be the level of reliance that can be placed on items found in the IRB and the due diligence to be performed to assure that the item has not been rendered void by later developments.

The relatively new material is found in the second portion of this document that informs taxpayers of how much reliance the taxpayer can place on items published not in the Internal Revenue Bulletin, but rather in FAQs.

The section begins by offering a justification for the IRS use of FAQs to provide guidance:

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.[11]

But this statement is immediately followed by a description of the severe limitations on any reliance on an FAQ:

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.[12]

Interestingly, in this case the guidance talks about FAQs that have not been published in the Internal Revenue Bulletin. It’s not clear if that is just a reminder that FAQs to date have not been published there, or if the IRS is considering publishing some types of FAQs in the IRB.

But for those FAQs not published in the IRB, the statement makes clear that a taxpayer will not be able to hold the IRS to a position found in the FAQ if it is determined to be at odds with the law, even if the position stated in the FAQ is more favorable to the taxpayer than the one the IRS is now asserting is required by the law.

Despite this statement, taxpayers may find that the IRS faces a practical problem going against such informal, but widely disseminated, guidance if it affects a large number of taxpayers.  In 2014, the IRS prevailed in the case of Bobrow v. Commissioner (TC Memo 2014-21) with the Tax Court agreeing that a taxpayer could only have one rollover per year for all of his/her IRAs.  The taxpayer argued that the limit applied on a per IRA account basis.  However, the Tax Court did not accept that view, effectively treating all IRAs of the taxpayer as one for the rollover rule.

But advisers reading the decision quickly pointed out that IRS Publication 590, Individual Retirement Arrangements (IRAs) at the time specifically allowed applying the rule on a per account basis, as Mr. Bobrow had done.

In reaction to this situation, the IRS released Announcement 2014-15 where the agency agreed to allow an account by account test for rollovers through the end of 2014, and that the agency would not challenge any such rollovers taking place before the deadline in 2014 or prior years.  But taxpayers should note that if their issue is more obscure, there may not be the hue and cry that led the IRS to back off on applying the law rather than their non-binding guidance to transactions for a number of months.

The statement continues noting that while taxpayers will not be saved from the consequences of law that is contrary to the FAQ for the taxes and interest due on the understatement, the agency will consider reliance on such FAQs in determining if the taxpayers had a reasonable basis for taking the position:

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 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. See Treas. Reg. § 1.6664-4(b) for more information. In addition, FAQs that are published in a Fact Sheet that is linked to an IRS news release are 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.[13]

Essentially, the IRS is stating that they will not require a taxpayer to demonstrate that the position outlined in the FAQ they relied upon was disclosed on a Form 8275 and had a reasonable basis under the law to avoid an accuracy related penalty under IRC §6662.  Rather, the position will be deemed to have substantial authority even though it was not found to be the ultimately correct answer.

As you may realize, as a practical matter the IRS is treating positions based on an FAQ similarly to positions based on an IRS Publication that is later held to be at odds with the law.

[1] “General Overview of Taxpayer Reliance on Guidance Published in the Internal Revenue Bulletin and FAQs,” IRS website, October 15, 2021 (last updated), https://www.irs.gov/newsroom/general-overview-of-taxpayer-reliance-on-guidance-published-in-the-internal-revenue-bulletin-and-faqs (retrieved October 15, 2021)

[2] “IRS updates process for frequently asked questions on new tax legislation and addresses reliance concerns,” IRS News Release IR-2021-202, October 15, 2021, https://www.irs.gov/newsroom/irs-updates-process-for-frequently-asked-questions-on-new-tax-legislation-and-addresses-reliance-concerns (retrieved October 15, 2021)

[3] “IRS updates process for frequently asked questions on new tax legislation and addresses reliance concerns,” IRS News Release IR-2021-202, October 15, 2021

[4] “IRS updates process for frequently asked questions on new tax legislation and addresses reliance concerns,” IRS News Release IR-2021-202, October 15, 2021

[5] “IRS updates process for frequently asked questions on new tax legislation and addresses reliance concerns,” IRS News Release IR-2021-202, October 15, 2021

[6] “General Overview of Taxpayer Reliance on Guidance Published in the Internal Revenue Bulletin and FAQs,” IRS website, October 15, 2021 (last updated)

[7] “General Overview of Taxpayer Reliance on Guidance Published in the Internal Revenue Bulletin and FAQs,” IRS website, October 15, 2021 (last updated)

[8] “General Overview of Taxpayer Reliance on Guidance Published in the Internal Revenue Bulletin and FAQs,” IRS website, October 15, 2021 (last updated)

[9] “General Overview of Taxpayer Reliance on Guidance Published in the Internal Revenue Bulletin and FAQs,” IRS website, October 15, 2021 (last updated)

[10] “General Overview of Taxpayer Reliance on Guidance Published in the Internal Revenue Bulletin and FAQs,” IRS website, October 15, 2021 (last updated)

[11] “General Overview of Taxpayer Reliance on Guidance Published in the Internal Revenue Bulletin and FAQs,” IRS website, October 15, 2021 (last updated)

[12] “General Overview of Taxpayer Reliance on Guidance Published in the Internal Revenue Bulletin and FAQs,” IRS website, October 15, 2021 (last updated)

[13] “General Overview of Taxpayer Reliance on Guidance Published in the Internal Revenue Bulletin and FAQs,” IRS website, October 15, 2021 (last updated)