Imagine this: You have a pressing tax question and, like many, you turn to Google. Among the plethora of results, you spot information from the IRS, including its official online publications. Confident in your find, you proceed, believing you have solid guidance.
But hold on—that sense of security might be deceptive. Here’s why.
In a less-publicized move, the IRS revealed in an internal memorandum that its online tax guidance doesn’t carry legal weight. The only authoritative source is the Internal Revenue Bulletin, a voluminous and little-known collection published weekly.
What Should Taxpayers Do?
Navigating the labyrinth of U.S. tax rules is already challenging. The fact that taxpayers cannot depend on the IRS’ easily accessible formats such as its instructions, publications, FAQs, and news releases complicates matters further. Some years back the IRS issued a memorandum to its examiners, highlighting that any guidance not published in the Internal Revenue Bulletin isn’t legally binding. This memo has since vanished from the IRS website, though archived versions are available. Alarmingly, the IRS often doesn’t clarify that reliance on such unofficial information is risky, potentially leading to penalties for taxpayers who get it wrong.
The Government Accountability Office flagged this issue as early as 2016, noting that many IRS FAQs and other IRS online content lacked disclaimers about their limitations. Since then the IRS appears to have done little to inform taxpayers and their advisors about the non-binding nature of such information. Furthermore, courts have ruled that taxpayers cannot rely on IRS documents published outside the IRB to support a position.
The IRB: The Taxpayer’s Reliable Source
The IRB is the gold standard for reliable and authoritative IRS tax information. Guidance published in the IRB undergoes a rigorous clearance process involving multiple reviews and approvals within the Treasury and IRS. This ensures that the information is authoritative and legally binding. The IRB includes various items of highly technical tax information including Treasury Regulations, IRS Revenue Rulings, Revenue Procedures, Notices and Announcements.
The IRB can be accessed online. Given its importance, but also the complexity of the tax information it contains, it is a lofty ideal to expect that taxpayers familiarize themselves with the IRB. Unfortunately, many tax practitioners are not familiar with the IRB and they often rely on the “unreliable” IRS resources.
For legally binding guidance, one must refer to the IRB. Given its confounding nature, taxpayers must make sure to use a reliable and informed tax professional who understands the tax law and digs into the Internal Revenue Code, Treasury Regulations and resources in the IRB. There simply is no substitute.
With a complicated tax matter, avoiding tax penalties is critical. Many individuals do not realize that penalties can be assessed unless the taxpayer has engaged a professional who is qualified to assist with their particular tax situation. Not just any tax advisor will do when it comes to avoiding penalties for tax mistakes.
A Cautionary Tale: The OVDP
The Offshore Voluntary Disclosure Program serves as a stark reminder of the pitfalls of unofficial IRS guidance. Governed by FAQs rather than IRB publications, the OVDP led to inconsistent results and perceived unfair treatment of some taxpayers. National Taxpayer Advocate Nina Olsen criticized the OVDP FAQs for being hastily and poorly drafted, leading to multiple clarifications and confusion.
Overseas Americans: A Vulnerable Group
Americans living abroad are particularly susceptible to these issues. With limited access to expert tax advice, they often rely heavily on IRS publications and online information, which, unless published in the IRB, holds no legal authority.
Practical Advice for Taxpayers and Advisors
Given the ephemeral nature of FAQs and other IRS website content, it’s wise to print and archive any information relied on. While not legally binding, having a record could help justify a tax position in the event of an audit, potentially mitigating penalties.
The Taxpayer Bill of Rights
This unfortunate situation seemingly conflicts with the Taxpayer Bill of Rights, which enshrines the right to be informed as a fundamental taxpayer right. The TBOR was adopted by the IRS in 2014 and the following year, Congress made it part of the U.S. tax law by actually inserting it into the Internal Revenue Code. Neither taxpayers nor practitioners have paid much attention to it, which is unfortunate since the TBOR has great potential to reshape the administration of the tax laws. For example, taxpayers might argue that the TBOR’s right to be informed permits a court to estop the IRS from contradicting its own publications and instructions. While challenging, the TBOR might provide a legal basis for pushing back against the IRS shifting positions.
The Takeaway
In conclusion, while IRS online resources are useful, they are not infallible. IRS online resources offer a convenient starting point, but they can mislead taxpayers into a false sense of security. For definitive guidance, always consult the IRB. Given its complexity, seeking advice from a seasoned tax professional is a wise move. Staying informed and cautious, with expert help, can help avoid costly mistakes and ensure that tax positions are backed by authoritative sources.
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