Taxpayers who rely on Internal Revenue Service (IRS) advice face certain challenges concerning the reliability of that advice. Often the taxpayer is unaware of the extent to which that advice can be relied upon, if at all. This is especially true for certain groups of taxpayers including many Americans abroad. As a practical matter, unsophisticated taxpayers, taxpayers who live and work overseas, and taxpayers with multiple nationalities who have spent most of their lives outside of the United States, do not have the same access to tax advice as do more sophisticated taxpayers or those taxpayers living State-side. As a result, they will generally lack access to more reliable sources of US tax information, to tax advisors who are knowledgeable (especially about foreign issues) and to competent tax return preparers. Due to a lack of practical access, these taxpayers will often more heavily rely on oral advice provided by the IRS or on information provided in instructions to the IRS tax forms or in IRS publications or videos.
IRS Oral Advice
The IRS issues different types of guidance to taxpayers – for example, oral advice may be provided over the telephone, taxpayers may turn to IRS publications and instructions related to the tax forms they must submit, they may apply for and receive private letter rulings, and they may turn to IRS revenue rulings and revenue procedures. It may come as a surprise to many that the extent to which taxpayers can rely on IRS guidance depends on the form in which that advice was provided by the IRS.
Unsophisticated taxpayers will frequently turn to the IRS Service centers or hotlines to obtain informal oral advice. Unfortunately, and unknown to many taxpayers, oral input from the IRS is the least reliable type of guidance. As the saying goes – Talk is cheap!
Treasury Regulation Section 601.201(k)(2) states: “A taxpayer may, of course, seek oral technical assistance from a district office in the preparation of his return. . . . Such oral advice is advisory only and the Service is not bound to recognize it in the examination of the taxpayer’s return.”
The IRS has made this clear in Revenue Procedure 2014-1 which states, for example: “At the discretion of the Service and as time permits, Service employees may also discuss substantive issues with taxpayers or their representatives. Such a discussion will not bind the Service or the Office of Chief Counsel …” and “A taxpayer may seek oral technical guidance from a taxpayer service representative in a Field office or Service Center when preparing a return . . . . Oral guidance is advisory only, and the Service is not bound by it, for example, when examining the taxpayer’s return.” Rev. Proc. 2014-1, 2014-1 I.R.B. 8. See “Oral Advice” at .05
Burned! A Taxpayer Abroad
A recent case involving a taxpayer working overseas, Alfred S. Co v. Commissioner, T.C. Memo 2016-19, demonstrates the very difficult challenges for taxpayers who rely on advice from IRS employees. As most Americans working abroad will know, the Section 911 “Foreign Earned Income Exclusion” (FEIE) is a very valuable tax provision and so it was for Mr. Co who detrimentally relied on an IRS employee’s erroneous decision that he was entitled to take the FEIE. Mind you, the advice given by the IRS employee was given in the course of an IRS audit of Mr. Co’s tax returns challenging his ability to use the FEIE. The IRS audit agent had concluded that he was entitled to the FEIE, but an audit in a later tax year on this same issue determined this advice was not correct. The IRS assessed not only the additional tax liability arising from the denial of the FEIE exclusion, but it also assessed accuracy-related penalties against Mr. Co! Fortunately for Mr. Co, the Tax Court more reasonably concluded that the taxpayer had acted with “reasonable cause” and in good faith and refused to permit the IRS’ assessment of accuracy-related penalties.
What About IRS Publications?
Well, as for IRS Publications, they appear to be worth less than the paper they are printed on. Many taxpayers are likely familiar with IRS publications. The IRS issues many of them; they contain information about a particular tax topic, the general intent of which is to assist taxpayers in preparing their tax returns.
Unfortunately for the unknowing taxpayer, the IRS has taken the position that taxpayers cannot rely on its publications! See 126.96.36.199.8 (01-01-2006): “IRS Publications explain the law in plain language for taxpayers and their advisors. They typically highlight changes in the law, provide examples illustrating Service positions, and include worksheets. Publications are nonbinding on the Service and do not necessarily cover all positions for a given issue. While a good source of general information, publications should not be cited to sustain a position.”
The Tax Court apparently agrees with this view. In Bobrow v. Commissioner, the taxpayer was a very sophisticated tax transactions partner in Mayer Brown and was the former general tax counsel for CBS. The taxpayer reported the tax consequences of IRA distributions in a manner that was consistent with IRS Publication 590, which provides taxpayers specifically with information for use in preparing their tax returns when IRAs are at issue. While the taxpayer’s position on his return was consistent with Publication 590, it was not consistent with the relevant statutory language. In addition to further income taxes due, the IRS assessed over $10,000 in “accuracy –related” penalties. The IRS and taxpayer later entered into a settlement and the Tax Court entered the settlement as a “stipulated judgment”. The taxpayer filed a motion for reconsideration, arguing that the IRS publication provided a basis for a defense against the asserted penalties. While the Tax Court denied the motion because the issue was raised too late, it nonetheless stated that the IRS publication was not “binding precedent” and that, “[t]axpayers rely on IRS guidance at their own peril.”
Instructions to the tax forms fare no better. See, e.g., Montgomery v. Commissioner, 127 T.C. 43, 65 (2006) (‘‘It is settled law that taxpayers cannot rely on [IRS] instructions to justify a reporting position otherwise inconsistent with controlling statutory provisions.’’).
The IRS does not provide any warning to unsuspecting taxpayers that they cannot rely on the aforementioned forms of IRS advice. Nothing I could find in the IRS Publications, IRS Instructions to various forms or regarding its telephone or walk-in assistance advises taxpayers about this fact. See for example, IRS Publication 17, Your Federal Income Tax at page 265 “How To Get Tax Help”.
As a practical matter, unsophisticated taxpayers, taxpayers living overseas, or taxpayers who are dual (or triple etc.) nationals who have lived abroad most of their lives will generally lack access to more reliable sources of US tax information. These taxpayers will often heavily rely on oral advice provided by the IRS or information on its tax forms or publications. It does not seem a reasonable expectation that this group of individuals will second-guess such advice provided by the IRS, especially when they have not been warned that the advice is unreliable!
Just like cancer-causing cigarettes, taxpayers should be advised in clear and unmistakable language, prominently posted (or announced) that they cannot rely on such forms of IRS advice.
More formal types of IRS advice can be relied upon to a greater extent, such as information provided in a Revenue Ruling or a Revenue Procedure. The purpose of Revenue Rulings and Revenue Procedures is to promote uniform application of the tax laws. IRS personnel must follow Revenue Rulings and Revenue Procedures and taxpayers may rely on them. However, Revenue Rulings and Procedures are more complex and difficult for the layman to understand. The information is not that easy to follow and for the most part, tax professionals will more readily understand and use these types of resources. An overview of the different types of US tax guidance can be found in the IRS Manual and in Revenue Procedure 89-14, Internal Revenue Service, 1989-1 C.B. 814.
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