NTA Blog Post On “Protecting the Rights of Taxpayers Who Rely on FAQs” Is Timely and Welcome, But Doesn’t Go Far Enough

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.

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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.

Reflections on the Impact of Nina Olson by Alice Abreu

We welcome Professor Alice Abreu. Alice teaches tax at Temple Law School. She is a great teacher and winner of many awards at Temple. She has long wanted to engage her students in practical learning about tax which led her to create what I believe was the first tax class at a law school designed to train the students to serve as volunteers for Volunteer Income Tax Assistance (VITA). Her students fan out across the Philadelphia region to assist low income filers. In class they not only learn practical lessons about how to fill out returns but how to deal with clients and they see the direct impact of tax policy. Keith

Nina Olson is a force of nature. Not only has she changed tax administration in this country but she has created an international movement for taxpayer rights. Her influence on the tax systems of both the United States and other jurisdictions is immeasurable. Her Annual Reports to Congress contain treasure troves of original research that only someone in her position could have conducted, and her Legislative Recommendations have provided Congress with a blueprint for more effective tax administration. I don’t know what Congress expected when it created the Office of the Taxpayer Advocate and the position of the National Taxpayer Advocate, but I’m pretty sure that few who were involved with the passage of the Internal Revenue Service Restructuring and Reform Act of 1998 imagined the vision, tenacity, dedication, and creativity with which Nina has performed her job for the past 18 years or could have foreseen what Nina has made of the Taxpayer Advocate Service and the position of National Taxpayer Advocate. She leaves behind a strong organization with a cadre of skilled and dedicated employees who will miss their leader mightily, but who have learned from her and are inspired and prepared to carry on her legacy. Kudos to all of the people who had the wisdom to make her appointment happen near the turn of the century. Taxpayers and the tax system are in your debt.

But readers of this blog know everything I’ve just said and have said much of it themselves in this series of tributes. I therefore want to offer an additional frame for Nina’s accomplishments. That frame is legal education. Through her advocacy on behalf of LITCs both before and after she became the NTA Nina transformed tax education in law schools. The increase in the number of LITCs that followed the availability of federal matching dollars not only had a deep impact on the taxpayers who were served by the new LITCs, as many have noted, but also affected the students who have worked in the academic clinics and for whom there are now more potential jobs working in the public interest. It also expanded the coverage of tax curricula; the many definitions of dependent, the EITC, offers in compromise, and the intricacies of tax procedure and administration—subjects rarely covered in any depth in the typical law school introductory tax course—are now well-known to the many students who have to master them in order to represent their clients in LITCs.

Moreover, the growth in academic LITCs likely increased the proportion of students who study tax, because an LITC can attract to the study of tax students who want to help low income individuals but who might have otherwise avoided tax. Even those of us who are not clinicians can point to students whose introduction to the tax system was through their work in an LITC and who almost certainly would not have become tax lawyers otherwise. In helping to expand dramatically the number of LITCs, Nina thereby changed the professional trajectory of many law students’ lives, and for reasons I’ve discussed elsewhere, this magnet effect might even help to increase the diversity of the tax bar.

More specifically and personally, Nina affected tax education at Temple and my own professional life in lasting ways. Her support was crucial to my ability to develop a course that has become a popular and important addition to our tax curriculum. Low Income Taxpayer Policy & Practice allows us to leverage VITA to provide students with an experience which differs from the LITC experience but which is similarly valuable. The course combines tax policy with public service and introduces students to the challenges of tax administration through close study of the current Annual Report to Congress. Developing and then teaching that course has been professionally transformative for me. Nina was a guest lecturer in its inaugural year and an inspiration for the nearly 200 students who came to hear her discuss her life’s work later that day. She thus launched what is now an eight-year-long tradition of bringing a current or former high ranking government official to deliver Temple’s Fogel Lecture. Last year, Nina was the keynote speaker at our annual Law Review Symposium, which focused on the U.S. Taxpayer Bill of Rights, a concept and a statutory provision which almost certainly would not exist without her. Our tax curriculum and our students’ education are stronger for her inspiration and participation.

So thank you Nina, for what you’ve done for taxpayers, for tax administration, for law students, and for those of us who have had the great privilege of knowing you and working with you. Here’s looking forward to what the next chapter of your life holds.