Tax Questions, User Fees, and Private Letter Rulings

Today we welcome first-time guest blogger Anna Gooch. An alum of the Villanova Federal Tax Clinic (and current Villanova LL.M. student), Anna is an International Tax Consultant at Deloitte in San Francisco. Despite her busy schedule, Anna continues to provide pro bono services through the Tax Clinic.

When taxpayers are frustrated with the IRS, they often turn to their Congressional representatives, who in turn ask the agency (or the Taxpayer Advocate Service) for help. In today’s post, Anna brings a historical perspective to bear on a recent exchange between Senator Marco Rubio’s office and the IRS. Christine

On September 25, 2020, the IRS released an information letter to Senator Marco Rubio regarding a request made by the Senator on behalf of one of his constituents. The constituent wanted help determining the tax treatment of a settlement received for a breach of contract claim and related emotional distress claim. The letter provides general information on sections 61 and 104, but it also gives information about private letter rulings (PLRs). As is the case with all information letters, nothing in this letter is specific to the constituent’s situation, nor is it binding on the constituent or the IRS. For that, this constituent must request a PLR.

An information letter can be useful for educating the public on general tax principles, especially if the taxpayer’s question is not particularly nuanced or unique. Additionally, the IRS issues information letters when a taxpayer fails to properly request a PLR.  Most significantly, information letters are free for all taxpayers, which is likely the reason that this constituent received an information letter rather than a PLR.

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Compared to other programs for which the IRS offers a reduced fee for low-income taxpayers, the “reduced” fee for PLR requests is still significant. Depending on the subject of the PLR, the standard user fee is between $6,000 and $30,000. For taxpayers with gross income of less than $250,000, a reduced user fee of $2,800 will usually apply. Assuming they qualified for the reduction, a PLR on this topic would likely cost Mr. Rubio’s constituent $2,800. This is a price many taxpayers simply cannot afford. Because so many taxpayers cannot afford even the reduced user fee, the only remaining option is to contact the taxpayer’s congressperson to request an information letter, which, as discussed below, will likely not be very helpful.

Because of their cost, very few PLRs are issued on topics that apply to low-income taxpayers. Earlier this year, I combed through every PLR and determination letter issued in 2015 (chosen for its relative neutrality) and tracked which code sections appeared the most frequently. One goal of this project was to identify how many PLRs were issued on topics that might be relevant to low-income taxpayers. One such section was section 104 , the relevant section for this information letter. Of the 1,510 PLRs released for publication in 2015, there were only two PLRs issued on section 104. For comparison, there were 150 PLRs issued that concerned section 4945’s Taxes on Taxable Expenditures, which is a topic whose relevance is limited to wealthier taxpayers.

There are two main advantages of receiving a PLR over an information letter. First, a PLR allows a taxpayer to receive tax advice specific to their situation. The second, and most important benefit, is that the PLR outlines the specific tax treatment of a particular situation or transaction, which is binding on the IRS as to that particular taxpayer. Without a PLR, the taxpayer risks facing an audit that may be too expensive or inconvenient to successfully defend.

A brief history of PLRs, user fees, and customer service at the IRS

The IRS has been answering taxpayer questions since the early 1900s, though with some variation from the current PLR system. In the beginning of the 20th century, the Bureau of Internal Revenue (BIR) had an informal policy of answering every question submitted to it, hypothetical or otherwise. With the increase of the number of Americans subject to income tax in the 1910s, the BIR was forced to narrow its policy to accommodate the increase in volume. In a set of provisions ($) released in 1919, the BIR stated, “It is impossible to answer every question which the invention or ingenuity of the inquirer may devise without neglecting the fundamental duty of determining of tax liability upon the basis of actual happenings.” Consequently, the BIR began to limit its responses to only actual, completed transactions.

Although the system evolved over time, user fee requirements for PLRs did not become part of the Internal Revenue Code until the passage of the Omnibus Budget Reconciliation Act of 1987 and the codification of section 7801. Since then, user fees have increased nearly every year.

Despite the general increase in fees, the IRS has carved out some topics that either have reduced fees or no fee at all. These include letters requesting extensions for making certain elections, changes in certain accounting periods, and letters requested under sections 6104(d)(4) and 514(b)(3). None of these topics are applicable to low-income individuals. There are also exemptions for federal agencies or departments and federal government employees requesting PLRs on withholding issues. Despite these carveouts, there is currently no exemption or reduced fee that would make PLRs accessible for low-income taxpayers.

Using past policies to inspire the future of IRS customer service

The mission of the IRS, which was rewritten in 1998, is to “[p]rovide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.” As part of the Taxpayer First Act of 2019, the IRS must develop a plan for improving customer service. The Taxpayer Bill of Rights, codified in 2015, guarantees taxpayers a right to quality service. Each of these initiatives demonstrates a shift in priority from revenue-focused to taxpayer-focused.

One of the most important facets of customer service is answering customer questions. However, the IRS’s services designed to answer these questions are flawed. In both 2018 and 2019, the National Taxpayer Advocate labeled the lack of access to quality service and education as a Most Serious Problem. In 2018, TAS conducted a study in which callers asked various tax law questions to test the IRS response. The study revealed serious shortcomings in the tax law phone advice offered by the IRS. Former NTA Nina Olson wrote:

TAS callers experienced inconsistent service, even when asking questions about changes under the TCJA, which the IRS previously indicated it would now answer year-round. Several callers reported the same script being read over the phone, telling the callers:

“There is no tax law personnel at this time due to budgetary cuts. This tax topic cannot be answered at this time. The employees that will be able to answer this question will be available beginning January 2, 2019 through April 15, 2019.”

This is particularly concerning given the IRS is supposed to be answering TCJA calls year-round. In one instance, a caller was told she needed to hire a paid professional to answer her question. On many calls, the employee told the caller the call would be transferred, and the transfer ended in a pre-recorded message telling the caller the question was out-of-scope and then disconnecting the call.

Without access to reliable information either online or through a phone line, taxpayers are left with few options. The only remaining free option for taxpayers is to contact their local representative, who only has the power to request an information letter on the taxpayer’s behalf. Of course, neither information provided by customer service representatives nor information letters offer taxpayers finality because they are not binding on the IRS.

To receive tax law advice that is binding on the taxpayer and the IRS, the taxpayer must request a PLR. However, the PLR system currently does not effectively serve all taxpayers. This violates the spirit of TBOR and the Taxpayer First Act. Given the IRS’s renewed focus on providing quality service to taxpayers, both internally and through Congressional direction, shouldn’t low-income taxpayers be able to receive PLRs just like taxpayers who can afford to pay?

The IRS could draw from its own history to implement a more accurate and more accessible system for answering taxpayer questions. Certainly, administrative costs will prevent the IRS from being able to issue a PLR for every question that it receives as it was able to until 1919. However, modeling a customer service plan on the IRS of the past might give some answers to the people like Senator Rubio’s constituent, who need yet cannot currently afford them.