We welcome first time guest bloggers Alice G. Abreu and Richard K. Greenstein, both Professors of Law at Temple’s Beasley School of Law in Philadelphia. They offer their reactions to the recent blogpost in which the National Taxpayer Advocate, Erin Collins, addresses the issue of taxpayer reliance on frequently asked questions (FAQs) and makes several recommendations. The issue of taxpayer reliance on FAQs specifically, and subregulatory guidance more generally, is not new, but it has received increased attention given the accelerated pace of tax legislation in response to the COVID-19 pandemic and the IRS’s need to provide prompt guidance. Professors Abreu and Greenstein have spoken and are writing on the subject and here they not only offer their reactions to National Taxpayer Advocate’s recent post but also their own recommendations.
We have touched on this issue before here with an excellent post in May by Monte Jackel and PT Contributor Nina Olson blogged on this topic when she was the National Taxpayer Advocate. Keith
Kudos to NTA Erin Collins for taking on the issue of taxpayer reliance on IRS written guidance. Her blogpost, released on July 7, is spot-on in identifying an important problem. We particularly liked that she began by framing the issue clearly and persuasively: she described the plight of a taxpayer who goes to the IRS website for guidance on the deductibility of a particular item, finds a Frequently Asked Question (FAQ) on point, and takes the deduction, only to be audited and denied the deduction because the IRS changed its position, and is subjected to the 20 percent accuracy related penalty to boot. To make matters worse, the taxpayer can no longer access the FAQ because the IRS has removed it from its website, and no archive of removed FAQs exists.
read more...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.
But the unfairness depicted in the opening scenario of the NTA’s blogpost is far deeper than the post acknowledges. The core unfairness is that by refusing to stand by the positions it takes in written guidance intended for the specific purpose of informing taxpayers, the IRS is disrespecting the taxpayer’s reasonable reliance. And respect for the reliance interest is at the core of justice. Outside of the tax law, respect for reliance has led to the development of entirely new theories of obligation, such as promissory estoppel. As we have previously noted, by refusing to stand by its written statements the IRS is behaving like the Peanuts character Lucy: Lucy tormented Charlie Brown by repeatedly offering to hold a football for him to kick, only to pull it away just as he was going to kick it, which sent him up in the air and caused him to end up lying flat on his back. The IRS should not behave like Lucy, and taxpayers deserve to be treated better than Charlie Brown.
We therefore believe that the IRS, which itself adopted the Taxpayer Bill of Rights even before Congress made it a part of IRC § 7803(a)(3) in 2015, should change its position and respect taxpayer reliance on written guidance, whether that guidance is included in the Internal Revenue Bulletin or in publications, instructions to forms, FAQs, or other written guidance. Respecting reliance operationalizes the taxpayer’s right to be informed as well as the right to a fair and just tax system because respecting reliance is at the core of justice and due process.
We understand the IRS’s need for nimbleness in issuing guidance in the face of recently enacted and immediately effective legislation, and we agree with NTA Collins that “[b]ecause FAQ’s aren’t subject to thorough review, Treasury and the IRS may later decide some of them are wrong and change them.” Indeed, we believe that similar concerns apply to much subregulatory guidance, and we think it salutary for the IRS to remain open to alternative interpretations of legislative language and to change its position in light of further reflection and discussion. As Stanley Fish noted over three decades ago, “No text reads itself.” Stanley Fish, Consequences, 11 Critical Inquiry 433, 446 (1985) (“The semantic meaning of the text does not announce itself; it must be decided upon, that is, interpreted . . . . In short, no text reads itself . . . .”). The susceptibility of provisions of the Internal Revenue Code to reinterpretation is ongoing.
But neither the IRS’s need for nimbleness in issuing guidance nor its understandable desire for precision, which NTA Collins noted, require that it refuse to stand by the positions it takes in published documents it issues for the specific purpose of guiding taxpayer behavior. The IRS is entitled to change its position, but until it announces that it has done so it should stand by that position, and not assert a different position against taxpayers who have reasonably relied on its publicly issued written statement. While we agree with NTA Collins that FAQs and other written documents intended for taxpayer guidance should constitute substantial authority for penalty relief purposes, we don’t think her recommendation to classify FAQs as “’Internal Revenue Service information’” under Treasury Regulation § 1.6662-4(d)(3)(iii),” goes far enough. The IRS should stand by its all of its written, publicly announced, positions until it announces that it has changed positions, and it should do so for all purposes, not just for penalty protection. In other words, the IRS should apply the changed position prospectively only and not apply it to any taxpayer who has reasonably relied.
Moreover, the IRS’s inclusion of a non-reliance disclaimer in some FAQs, like many courts’ assertion that “[i]t is hornbook law that informal publications all the way up to revenue rulings are simply guides to taxpayers, and a taxpayer relies on them at his peril,” Caterpillar Tractor Co. v. United States, 218 Ct. Cl. 517 (1978) (citing, Carpenter v. United States, 495 F.2d 175 (5th Cir. 1974)), while arguably well intentioned, only serves to undermine the agency’s legitimacy. As NTA Collins pithily observed, “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?” The same question can be asked with respect to publications and instructions to forms.
We publicly expressed our views on taxpayers’ right to rely on statements in IRS written guidance in May, 2019, at the 4th International Taxpayer Rights Conference in Minneapolis when we participated in a panel discussion at a session on “The Virtues of Tax Authority Advice.” A recording of that panel discussion is available here and archived materials from the Conference can be found here. (Information on future International Taxpayer Rights Conferences to be held in Pretoria, South Africa, and Athens Greece, can be found here.) Our Conference presentation is now a draft article which we expect to be able to post on SSRN in a few weeks; its working title is Stand by your Words: Operationalizing Taxpayer Right to be Informed. In addition to fleshing out the positions articulated here and explaining why the change in the IRS’s stance on taxpayer reliance should not result in weaponizing IRS written guidance, we also argue that if the IRS persists in behaving as depicted by the opening scenario of the NTA’s blog, courts should apply the doctrine of equitable estoppel to protect taxpayers from harm. We recognize that asserting equitable estoppel against the government is extraordinarily difficult, but, again, we believe that enactment of the TBOR and its adoption by the IRS provide a basis for a change in the status quo.
I agree, subject to four comments:
1. There are rare times when the issue is genuinely up in the air, and when the DO NOT RELY note is fair warning.
2. On the other hand, where the only effect of the change in guidance is to increase the amount of tax due, and, as if the NTA recommends, the IRS is not seeking penalties, interest should be waived and a taxpayer should be given more time to pay. It is only where the taxpayer can show detrimental reliance, for example reporting an item in ine year rather than in another year that then becomes closed, or making a commercial decision that he would not have made had the revised guidance been available, that it is compelling to allow the taxpayer to rely on the original guidance for the substantive tax calculation. An example might be if the IRS had announced that a particular fact pattern qualified under the QOZ program or for a tax credit, the taxpayer made the investment, and then the IRS changed its mind.
3. The original guidance, if relied upon, should be accorded whatever level of deference the IRS would seek if it were defending the interpretation (Skidmore, Auer, Chevron). For the record, I personally do not believe that any of these deference doctrines should exist, but as long as they do exist, the Supreme Court has the authority to direct that taxpayers be allowed to invoke them.
4. Taxpayers should take a case out of the Never-Trumper play book, and consistently challenge any changes of position as having failed full-blown APA review.
“Guidance Regarding the Transition Tax Under Section 965 and Related Provisions” published in the Federal Register (Vol. 83, No. 154 / Thursday, August 9, 2018) offered the following advice on page 39537:
“For the 2017 tax year, instructions for how and when to properly report section 965-related amounts and file returns reporting such amounts, as well as instructions for how and when to make payments with respect to a net tax liability under section 965, were provided in Frequently Asked Questions (FAQs) that are available at the IRS website. The FAQs were posted on March 13, 2018, and updated on April 13, 2018, and June 4, 2018.”
I believe this was inserted because at the time, for the 2017 tax year, which was the first year the transition tax was implemented, there were no instructions available until 2019, well after returns were due.
The URL to that FAQ page is here: https://www.irs.gov/newsroom/questions-and-answers-about-reporting-related-to-section-965-on-2017-tax-returns . It has been substantially changed since it was published (earlier versions can be found using the Wayback Machine). The instructions given here are woefully incomplete. And the disclaimer at the bottom says:
“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.”
So in this case, the guidance published in the Federal Registry directs taxpayers to use an FAQ page, and the FAQ page says the information on this webpage cannot be relied upon.
3rd round of stimulus payments- our family is well below income limits and has been for the last 8 years AGI around $43,500 family of 4. Should have received $5600 from this last round and the GET MY PAYMENT tool indicates that funds were sent to correct bank account on March 17th. Bank states they only received $2800. We have no personal debt due other than child support average which was not supposed to be withheld from these payments. I am one of SEVERAL families experiencing this issue, some with no injured spouse or debts at all. There seems to be no rhyme or reason but I belong to a Facebook page that now has about 3500 members mostly claiming the same has happened to them and the IRS can give no answers. My concern is if we have to wait until next year to claim this on our taxes as a recovery rebate credit it will be garnished for support. Does anyone have any insight into this issue or ideas on how to resolve?