On Oct. 15, 2021, the IRS announced changes that allow taxpayers to argue reliance on Service-issued frequently asked questions pages (FAQs) in seeking relief from penalties that provide a reasonable-cause exception (see IRS News Release IR-2021-202). While taxpayers will still have to show that such reliance was in good faith and was reasonable based on all the facts and circumstances, the announcement represents a new era in penalty relief.
The change in the IRS's position applies to all penalties that provide for an exception due to reasonable cause. This includes the negligence penalty or other accuracy-related penalties imposed under Sec. 6662(a), to the extent that reliance results in an underpayment of tax (see Regs. Sec. 1.6664-4(b)). In addition, FAQs that are published in an IRS 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 tax return (see Regs. Sec. 1.6662-4(d)).
The announcement envisions a two-tiered system for FAQs. The first tier consists of significant FAQs relating to newly enacted tax legislation, as well as any later updates or revisions to these FAQs. These FAQs will be announced in a news release and posted on irs.gov in separate fact sheets. The prior fact sheet FAQs will be dated and maintained on the IRS website so that taxpayers can confirm the dates when changes were made and locate prior versions that they relied upon. In addition to FAQs relating to new legislation, the IRS may apply this fact sheet FAQ process in other contexts, such as when FAQs address emerging issues.
The second tier of FAQs consists of all other FAQs, such as those that are merely posted to the IRS website and not announced in a news release. These FAQs will not be maintained in the same manner as fact sheet FAQs. Thus, taxpayers and practitioners should retain copies of any non-fact sheet FAQs that they rely on.
The new policy took effect on the date of the announcement and applies to all FAQs, including those released by the IRS before the policy was announced. The Service updated its General Overview of Taxpayer Reliance on Guidance Published in the Internal Revenue Bulletin and FAQs webpage to reflect the new stance.
Prior to the announcement, reliance on FAQs did not constitute reasonable cause under the various Internal Revenue Code penalty provisions that afforded a reasonable-cause exception. This is because FAQs typically provide responses to general inquiries rather than applying the law to taxpayer-specific facts and thus may not reflect various special rules or exceptions that could apply in a particular case. FAQs have no precedential value and may not be relied on, used, or cited as precedent by Service personnel in the disposition of cases. Thus, in cases where an FAQ is an inaccurate statement of the law as applied to a particular taxpayer's case, federal tax law controls a taxpayer's tax liability.
Published in The Tax Adviser -
Mo Bell-Jacobs, J.D., is a senior manager with RSM US LLP.
For additional information about these items, contact Mike.Zima@rsmus.com.
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