TAXPAYER ADVOCATE DISAPPROVES OF IRS POLICY ON TAXPAYER RELIANCE ON IRS FAQS

15 July 2020

NTA Blog: Protecting the Rights of Taxpayers Who Rely on IRS “Frequently Asked Questions” (FAQs) (July 7, 2020)

In a blog post, the Taxpayer Advocate Service (TAS) discusses the issues involved with a taxpayer taking a tax position that relied on an IRS frequently asked question (FAQ) posted on the IRS website that is subsequently changed or removed.

Background. Reg. § 1.6662-4(d)(1) provides that a taxpayer may avoid an accuracy-related penalty for substantial understatements of income tax if there is “substantial authority” for the taxpayer’s return position. Reg. § 1.6662-4(d)(3)(iii) says that reliance on “Internal Revenue Service information or press releases” is considered to meet that substantial authority standard.

The Internal Revenue Manual says, “Internal Revenue Service employees must follow items published in the [Internal Revenue] Bulletin, and taxpayers may rely on them. Some items, such as frequently asked questions (FAQs), can be found on IRS.gov but have not been published in the Bulletin. FAQs that appear on IRS.gov but that have not been published in the 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.” (Internal Revenue Manual 4.10.7.2.4 (Jan. 10, 2018))

The TAS points out that the IRS has posted nearly 500 COVID-19-related FAQs on its website, including 94 on the employee retention credit, 93 on the Families First Coronavirus Response Act, 69 on Economic Impact Payments, 67 on COVID 19-related tax credits, and 40 on filing and payment deadlines.

And, the TAS also points out, the FAQs are frequently changed and updated. There is no formal archive of older FAQs.

Issue. What if a taxpayer followed an FAQ and now finds that:

 

  • The IRS is taking the opposite position on audit;
  • The IRS is imposing an accuracy-related penalty on the taxpayer for taking the position the FAQ had advised; and
  • The taxpayer can’t locate the original FAQ because the IRS has changed it and removed the initial FAQ from its website? Can the taxpayer argue that he had substantial authority for his position?

 

Advice. The TAS says that under current law, the taxpayer would probably be subject to the accuracy-related penalty.

The TAS advocates that the IRS should clarify that the information presented in FAQs constitutes “Internal Revenue Service information” under Reg. § 1.6662-4(d)(3)(iii). Further, the IRS should never assess a penalty against a taxpayer for taking a position consistent with an FAQ posted on the IRS website at the end of a taxpayer’s taxable year or at the time of return filing unless the IRS has convincing evidence the taxpayer knew the FAQ had been changed.

The TAS also advocates that the IRS should include the versions and dates of each FAQ on its website or create an archive of obsolete or modified FAQs, including applicable dates, so that taxpayers can locate an FAQ that was in effect at the time they filed their returns.