As we observed in a PT post a few days after NTA Collins posted her recommendations, those recommendations did not go far enough to address the problem of taxpayer reliance on IRS informal guidance, and protect taxpayer rights. NTA Collins began by positing a taxpayer who wants to know whether an expense is deductible and finds an FAQ on the IRS website saying it is, only to discover when audited that the IRS has changed its position and the examining agent not only denies the deduction but imposes a penalty. As we explained,
We agree with NTA Collins that “[i]f the Taxpayer Bill of Rights is to be given meaning, this scenario violates ‘The Right to Informed’ and ‘The Right to a Fair and Just Tax System.’” We also emphatically agree that “[i]t is neither fair nor reasonable for the government to impose a penalty against a taxpayer who follows information the government provides on its website.” But we think that by focusing on the penalty, NTA Collins understates the unfairness faced by the taxpayer in this scenario. Of course it is unfair for a taxpayer to be penalized for doing what the IRS itself said she could do, in a document specifically intended to guide taxpayer actions. And it is also unfair for the IRS to take down the document so that the taxpayer cannot offer it in support of a claim that she had “reasonable cause” for the position that resulted in the alleged underpayment, as provided by IRC § 6664(c)(1), which should allow her to avoid the penalty without reaching the question of whether the FAQ constitutes substantial authority for the taxpayer’s position. Indeed, removing an FAQ from the IRS website after a taxpayer has relied on it may also violate the taxpayer’s “Right to Challenge the IRS’s Position and Be Heard” because the IRS is thereby interfering with the taxpayer’s ability to provide adequate documentation for her position. We therefore heartily endorse the NTA’s recommendation that the IRS create and maintain an archive of all FAQs issued.
Because the IRS’s recent announcement follows two of the NTA’s recommendations, both our endorsement and our criticisms of those recommendations apply to the announcement as well. First, the announcement does too little, because it respects taxpayer reliance for penalty purposes only. As we develop in a forthcoming article, the argument that a taxpayer who relies on statements made by the IRS in a writing issued for the purpose of guiding taxpayers should not be penalized for so doing, is so robust that to state it is to win it. While it is nice for the IRS to confirm that, in a document on which taxpayers can rely, it is hardly something that taxpayers should be popping champagne corks over.
Second, despite its positive movement on the penalty issue, by refusing to stand by the words it has written to guide taxpayers, the IRS is continuing to behave like the Peanuts character Lucy, who entices Charlie Brown to kick the football, only to pull it away just as he is about to do it. Its behavior violates the taxpayer’s rights to be informed and to a fair and just tax system and impugns the legitimacy of both the agency and the tax system it administers. While we would have preferred that the NTA had recommended that “examining agents not retain the authority . . . to challenge taxpayer return positions if an FAQ has been changed,” we welcomed her recommendation that such authority be retained “in limited circumstances” only (emphasis in original), and that, in such cases “examining agents should be required to consider previously issued FAQs.” We therefore wish the recent announcement had followed that recommendation as well. For us, that recommendation was too tentative, but for taxpayers, the IRS’s following it would have been an improvement over its continuing to behave like Lucy.
The IRS’s recent announcement is also too narrow: it applies only to written statements the IRS makes in FAQs, whereas the fundamental problem addressed by the NTA—taxpayers relying on IRS written information intended for their guidance—extends far beyond FAQs. FAQs captured the limelight because the onslaught of pandemic-relief legislation effective upon enactment led to the need to issue interpretive guidance as close to immediately as possible, causing FAQs to multiply exponentially. But the same reliance problem raised by FAQs arises whenever a taxpayer relies on a statement the IRS makes in one of its publications, instructions to forms, Fact Sheets, and even in correspondence or other documents addressed specifically to the taxpayer.
Despite the recent proliferation of FAQs, the amount of all of this other informal guidance must be greater than the number of FAQs. The scant comfort provided by the recent announcement should have applied to other forms of informal guidance as well. Despite the foregoing criticisms, the recent announcement does make progress toward increasing the legitimacy of the IRS: it shows the IRS as capable of responding to criticism even in the absence of a specific NTA recommendation. In her July 7, 2020 blog post NTA Collins criticized the disclaimers included in some FAQs, which stated that “These FAQs are not included in the Internal Revenue Bulletin, and therefore may not be relied upon as legal authority. This means that the information cannot be used to support a legal argument in a court case.” See, e.g. IRC § 199A FAQ. As NTA Collins pithily observed in her blog post, “Why should taxpayers even bother reading and following FAQs if they can’t rely on them and if the IRS can change its position at any time and assess both tax and penalties?” Even though the blog post did not make any specific recommendation regarding disclaimers, the IRS’s recent announcement retreats from the arrogant “we’ve said it but it won’t help you in court” stance of current disclaimers. Henceforth, the IRS will include a “legend” in Fact Sheet FAQs explaining that the FAQ
may not address any particular taxpayer’s specific facts and they may be updated or modified upon further review. 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. Similarly, if an FAQ turns out to be an inaccurate statement of the law as applied to a particular taxpayer’s case, the law will control the taxpayer’s tax liability.
The change from “it won’t help you” to “we won’t use it against you” may be subtle, but it is not insignificant. Although we would have preferred a change to “you may rely on it,” and perhaps NTA Collins would have as well, by not dismissing reliance in its entirety, the new language is a step in what we think is the right direction. Thank you, Acting Chief Counsel Paul.