How Heavy Is an IRS FAQ?
Just what is an IRS FAQ and how does it factor into a substantial authority analysis?
November 11, 2010
The Internal Revenue Service (IRS) has a wide range of information on its website. In addition to items that tax practitioners have been familiar with for years, such as publications, forms and Internal Revenue Bulletins (IRB), there are also such items as "headliners," tax tips, fact sheets and frequently asked questions (FAQs). The volume of economic stimulus legislation enacted since 2008 seems to have made it difficult for the IRS to issue formal guidance, such as revenue rulings and regulations, for all of the changes. In addition, the temporary nature of most of the changes makes it inefficient to issue regulations. Several recent changes, including the IRS initiative on paid-preparer registration, have been explained by using FAQ sets. Often, this is the only administrative guidance to help explain legislative changes and IRS initiatives.
This article raises the question of what weight of authority should be given to FAQs. An answer and additional observations about FAQs are offered.
At November 1, 2010, the home page of the IRS had references to the following sets of FAQs:
The new requirements for tax-return preparers also had regulations accompanying the FAQs, although some FAQs are not included in regulations. For example:
“2. Why couldn’t you authenticate my identity? (revised November 1, 2010)
For security purposes, the IRS verifies that information on your Preparer Tax Identification Number (PTIN) application matches information about you on other IRS systems. If any of the information is missing or does not match (including first and last name, Social Security number, date of birth and the address and filing status from your most recent Form 1040 income tax return), a PTIN cannot be issued. If you filed an amended return last year, be sure to use the information from your original return.
If you are using the online registration system, check the information entered, revise it and try again. Do not enter punctuation even if it was shown on the return. You can make up to three attempts per day. If you need to verify the information from your most recent Form 1040 income tax return, contact the IRS at 1-800-829-1040."
The Making Work Pay Credit (IRC §36A) has no regulations or revenue ruling, most likely owing to the fact that this credit is only in effect for 2009 and 2010. Thus, the FAQs play a key role in understanding how to claim the credit.
The FAQ example above illustrates an interesting feature of FAQs, namely that they can be revised. Apparently, such revision needs no formal announcement other than the notation in the parenthetical about the revision date. In contrast, a modification to a revenue ruling or revenue procedure would be in a newer ruling or procedure published in the Internal Revenue Bulletin.
Comparison to Other IRS and Treasury Guidance
The main type of guidance from Treasury and IRS are regulations. The IRS also issues revenue rulings, revenue procedures and notices. Regulations carry the highest weight of authority of any administrative guidance. Regulations are of broad applicability, go through an extensive review process and are subject to public comment.
Revenue rulings, procedures and notices carry less weight than regulations, yet are identified as "official interpretations" by the IRS and can be relied upon by taxpayers (Rev. Proc. 89-14). Revenue rulings and revenue procedure are published in the IRB "to promote uniform application of the tax laws by Service employees and to assist taxpayers in attaining maximum voluntary compliance by informing Service personnel and the public of National Office interpretations of the internal revenue laws, related statutes, treaties and regulations and statements of Service procedures affecting the rights and duties of taxpayers." (Rev. Proc. 89-14).
Generally, courts do not use revenue rulings in their analysis. However, they may on occasion give them deference. For example, in Aeroquip-Vickers, 347 F3d 173 (6th Cir. 2003), the court stated:
"When promulgating revenue rulings, the IRS does not invoke its authority to make rules with the force of law. Specifically, the IRS does not claim for revenue rulings “the force and effect of Treasury Department regulations.” Rev. Proc. 89–14, 1989–1 C.B. 814. In light of the Supreme Court's decisions in Christensen and Mead, we conclude that Revenue Ruling 82-20 should not be accorded Chevron deference. Revenue rulings do, however, constitute “precedents to be used in the disposition of other cases.” Rev. Proc. 89–14, 1989–1 C.B. 815. Revenue rulings also serve as “official interpretation[s]” by the IRS of the tax laws. Treas. Reg. § 601.201(a)(6). By noting only that revenue rulings “are not entitled to the deference accorded a statute or a Treasury Regulation,” without explicitly acknowledging that some deference to revenue rulings is proper, the Tax Court mischaracterized the degree of deference accorded to revenue rulings. ... Consequently, the level of deference to be accorded to Revenue Ruling 82-20 depends upon “the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements and all those factors which give it power to persuade, if lacking power to control.” Mead, 533 U.S. at 228 (quoting Skidmore, 323 U.S. at 140). Consideration of all of these factors leads us to conclude that some deference to Revenue Rule 82–20 is proper."
A notice often provides guidance that will eventually be provided in regulations. Announcements tend to provide information of relevance only in the current year. Per Revenue Ruling 87–138, "Notices and Announcements are used when expeditious guidance is needed. Since Notices and Announcements that contain substantive or procedural guidance are intended to be relied on by taxpayers, they are the equivalent of revenue rulings and revenue procedures and, therefore, are “administrative pronouncements” as that term is used in section 1.6661–3(b)(2) of the regulations."
Reg. §1.6662–4(d)(3)(iii) explains what constitutes "authority" for the accuracy-related penalty on underpayments. Generally, only the following items are considered "authority" for purposes of determining if substantial authority exists for a particular position.
"applicable provisions of the Internal Revenue Code and other statutory provisions; proposed, temporary and final regulations construing such statutes; revenue rulings and revenue procedures; tax treaties and regulations thereunder and Treasury Department and other official explanations of such treaties; court cases; congressional intent as reflected in committee reports, joint explanatory statements of managers included in conference committee reports and floor statements made prior to enactment by one of a bill's managers; General Explanations of tax legislation prepared by the Joint Committee on Taxation (the Blue Book); private letter rulings and technical advice memoranda issued after October 31, 1976; actions on decisions and general counsel memoranda issued after March 12, 1981 (as well as general counsel memoranda published in pre-1955 volumes of the Cumulative Bulletin); Internal Revenue Service information or press releases; and notices, announcements and other administrative pronouncements published by the Service in the Internal Revenue Bulletin."
FAQs are not published in the IRB. They also do not appear to be part of an information or press release. The IRS web page with archived news releases does not list any that announce the release or revision of any FAQ for 2010 even though FAQs were issued and revised in 2010.
Many of the FAQs explain items that are in primary authority such as an internal revenue code (IRC) section, legislative history, regulation or a document published in the IRB. Thus, the information exists in some type of "authority" for §6662 purposes. However, some answers are not in primary authority. In such a situation, taxpayers and practitioners may be reluctant to follow an interpretation of an FAQ.
In addition to the IRS, many organizations find it useful to provide information to customers, employees and others using FAQs. The purpose is to share the answer to one person's question with a wider group that might have the same question. FAQs are usually posted on a website which enables users to access them 24/7 and to easily search in them. They can also be updated easily and at low cost because doing so only involves updating a website.
The benefits of an FAQ format make sense for the IRS to enable it to get information to taxpayers and practitioners in a timely and efficient manner. Also, because FAQ are not published by the IRS in written form, there is no need to either forego updates or issue inserts, as would be required, if the FAQ information was instead provided by the IRS via its traditional publications which are available both on the IRS website and in printed format.
The fact that some FAQs address topics for which there are no regulations, revenue rulings, revenue procedures, notices or announcements, indicates that the FAQs serve a purpose more similar to that of a revenue ruling or notice than to an IRS publication.
The IRS should broaden the list of §6662 authority to include the sets of FAQs that are designed to serve the same purpose as IRB documents (such as the FAQs on the payroll tax exemption, Making Work Pay Credit and preparer registration). Also, given the reality that taxpayers and practitioners rely more on the IRS website than on IRS paper documents, the IRS would serve users well by studying the best ways to issue and organize "authority." Perhaps they will discover that FAQs are preferable to other guidance, particularly if they constitute "authority."
Ideally, the IRS will clarify the status of FAQs in the guidance arena. In the meantime, when practitioners rely on an FAQ, they should consider whether there is "authority" backing it up and should make a copy of the FAQ for their tax file.
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Annette Nellen, CPA, Esq., is a tax professor and director of the MST Program at San José State University. Nellen is an active member of the tax sections of the ABA and AICPA. She serves on the AICPA’s Individual Income Taxation Technical Resource Panel. She has several reports on tax reform and a blog.