IRS FAQs: A Potential Shield for Taxpayers—Not a Sword for the Service

The IRS recently issued guidance on the utility of and weight to be afforded informal “frequently asked questions” (FAQs) published on its website—clarifications that became necessary given the IRS’s heavy reliance on FAQs as the preferred form of guidance throughout COVID-19 in its attempt to swiftly clarify and interpret standards of newly enacted relief programs often administered by the IRS and the US Department of the Treasury.

According to former IRS Chief Counsel Michael Desmond, “I don’t see [FAQs] as the ideal way to be delivering guidance, but they do serve a very important function for a number of taxpayers.” The reason the IRS views FAQs to be important and a valuable alternative to more formal guidance is that FAQs allow the IRS to more quickly communicate information and the agency’s views to the public. To be fair, FAQs have become a favored vehicle of the IRS for issuing interpretative guidance—particularly during the COVID-19 pandemic—because the FAQ drafting, approval, and publication processes are far less formal than the lengthy and technical processes that regulations, revenue procedures, and other substantial authority–level pronouncements follow. FAQs, in turn, have allowed the IRS to release important information about IRS views much sooner, in many instances to the benefit of the taxpaying public. [1]

Yet IRS FAQs’ relatively low position in the hierarchy of tax law authorities, as the Government Accountability Office noted in a 2016 report, has raised concerns among tax practitioners about whether FAQs can and should be relied upon by taxpayers— especially in recent times, as taxpayers grapple with whether and when they may qualify for any of the myriad of new COVID-19 tax relief programs.

Infographic - Datasource Item: Hierarchy-of-Authority-for-IRS-Guidance

Tax practitioners have identified several concerns with the IRS issuing substantive guidance through FAQs, namely, the following:

1. In the context of the weight of IRS-related authorities, the Treasury Regulations enumerate the authorities that a taxpayer can rely upon when taking a tax return position and relatedly for penalty defense purposes.[2] Even though issued by the IRS, FAQs do not qualify as “substantial authority” since historically FAQs are not issued as press releases and are not published in the Internal Revenue Bulletin.[3]
2. FAQs can be (and often have been) modified by the IRS without announcement, by mere update on the IRS website. Such changes to the FAQs—oftentimes the IRS’s most official guidance on key features of the Families First Coronavirus Response Act; Coronavirus Aid, Relief, and Economic Security Act; and American Rescue Plan Act of 2021 to date—could easily go unnoticed, complicating the taxpayer’s ability to make decisions aligned with evolving IRS positions.
3. FAQs historically have not been archived in any formal government publication, such as the Internal Revenue Bulletin or the Federal Register, which meant that finding previous versions of modified or removed FAQs could not be accomplished through any standard tax or legal research service.
4. Tax practitioners are concerned that IRS agents will assert additional tax and penalties based upon a taxpayer’s failure to comply with FAQ interpretations, despite FAQs not rising to the level of controlling authority.

For these reasons, taxpayers and tax practitioners have remained skeptical about relying too heavily on FAQs that have at times changed or disappeared.

IRS Clarifications

Issued on October 15, 2021, IR-2021-202 addressed each of the above tax practitioner concerns as follows:

1. FAQs lack the status of substantial authority: “Notwithstanding the non-precedential nature of FAQs, a taxpayer’s reasonable reliance on an FAQ (even one that is subsequently updated or modified) is relevant and will be considered in determining whether certain penalties apply. Taxpayers who show that they relied in good faith on an FAQ and that their reliance was reasonable based on all the facts and circumstances will have a valid reasonable cause defense and will not be subject to a negligence penalty or other accuracy-related penalty to the extent that reliance results in an underpayment of tax. See Treas. Reg. § 1.6664-4(b) for more information. In addition, FAQs that are published in a 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 return. See Treas. Reg. § 1.6662-4(d) for more information.”
2. FAQs can change without notice: “Significant FAQs on newly enacted tax legislation, as well as any later updates or revisions to these FAQs, will now be announced in a news release and posted on IRS.gov in a separate Fact Sheet. These Fact Sheet FAQs will be dated to enable taxpayers to confirm the date on which any changes to the FAQs were made. . . . Any later updates or modifications to these FAQs will be dated to enable taxpayers to confirm the date on which any changes to the FAQs were made.”
3. FAQs are not archived, making previous versions difficult to locate: “Additionally, prior versions of Fact Sheet FAQs will be maintained on IRS.gov to ensure that, if a Fact Sheet FAQ is later changed, taxpayers can locate the version they relied on if they later need to do so.”
4. IRS agents penalizing taxpayers who take positions contrary to an FAQ: “Because these FAQs have not been published in the Internal Revenue Bulletin, they will not be relied on or used by the IRS to resolve a case. . . . FAQs that have not been published in the Bulletin will not be relied on, used or cited as precedents by Service personnel in the disposition of cases.”

CONTACTS

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Boston
Sean Callaghan

New York
Mary (Handy) Hevener

Pittsburgh
Matthew Hawes

Washington, DC
Steve Johnson
Jonathan Zimmerman

[1] The IRS has also issued FAQs on more traditional areas of employee benefits, such as with respect to qualified retirement plans (e.g., recent changes under the SECURE Act), and health and welfare issues (e.g., healthcare information forms for individuals and for government entities regarding cafeteria plans).

[2]     Specifically, under Treas. Reg. 1.6662-4(d)(3)(iii), only the following are authority for purposes of determining whether there is a substantial authority for the tax treatment of an item: (1) the Internal Revenue Code; (2) regulations; (3) revenue rulings and revenue procedures; (4) tax treaties and regulations thereunder; (5) court cases; (6) congressional intent as reflected in committee reports, etc.; (7) general explanations of tax legislation prepared by the Joint Committee on Taxation (the Blue Book); (8) certain private letter rulings and technical advice memoranda; (9) certain actions on decisions and general counsel memoranda; (10) IRS information and press releases; (11) and notices, announcements and other administrative pronouncements published by the IRS in the Internal Revenue Bulletin.

[3]     The IRS has on occasion incorporated FAQs into a notice, thereby elevating the substance of the referenced FAQs to substantial authority status. See, e.g., IRS Notice 2021-20, concerning certain aspects of the Coronavirus Aid, Relief, and Economic Security Act employee retention credit relief program.