The IRS updated its process for issuing guidance in the form of frequently asked questions (FAQs) on newly enacted tax legislation. To this end, the IRS posted a general overview document clarifying the ability of taxpayers to rely on FAQ guidance.
The updated process dictates that “significant” FAQs on newly enacted tax legislation, as well as any later updates or revisions, will be announced in a news release and posted on IRS.gov in a separate fact sheet.
The “Fact Sheet FAQs” will be dated, enabling taxpayers to distinguish between versions and to confirm when changes to the FAQs are made. The FAQs will also include a legend summarizing the extent to which taxpayers may rely on the FAQ for penalty relief. The IRS will maintain prior versions of Fact Sheet FAQs on IRS.gov to ensure that taxpayers can locate the version upon which they relied.
The general overview of taxpayer reliance states that FAQs are a valuable alternative to guidance published in the Internal Revenue Bulletin (IRB). They allow the IRS to more quickly disseminate information on topics of frequent interest and general applicability. Yet, it is essential to note that FAQs typically provide responses to general inquiries rather than any application of the law to the taxpayer’s specific circumstances. As a result, the FAQs may not reflect special rules or exceptions.
Taxpayers should also note that FAQs that have not been published in the IRB will not be relied on, used, or cited as precedents by the IRS. If a FAQ is an inaccurate statement of the law in a particular situation, the law controls and decides the issue of the taxpayer’s liability. Nevertheless, the IRS will consider a taxpayer’s reasonable reliance on an FAQ, including those that are subsequently updated or modified, in determining whether specific penalties apply to a taxpayer’s failure to observe the law.
If reliance on a FAQ results in an underpayment of tax, taxpayers who reasonably relied in good faith, based on all the facts and circumstances, on the FAQ, will not be subject to any negligence or other accuracy-related penalty that allows for relief under a “reasonable cause” standard. Also, Fact Sheet FAQs will be considered “authority” for purposes of the exception to accuracy-related penalties that is available when items on a return are based on substantial authority. Under IRS rules, the tax treatment of an item has “substantial authority” only if the weight of published cases, rules, and other legal and administrative authorities is substantial in relation to the weight of opposing authorities.
Tax professionals have considered FAQs cautiously since they are neither precedential nor binding on the IRS. These FAQs may be deleted or modified at any time without any official record of prior versions. Yet, FAQs provide crucial and timely guidance that may help taxpayers understand new tax laws. The announcement of a more formal process for issuing and tracking FAQ guidance, combined with the clarifying statement on reliance, is encouraging. However, cautious taxpayers and tax advisors should still save their personal copies of past versions of FAQ guidance.
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