Monte A. Jackel, a practitioner at Jackel Tax Law, Silver Spring, returns for a timely guest post on the IRS’s use of frequently asked questions (FAQ’s). The IRS’s growing use of FAQ’s, rather than guidance documents published in the Internal Revenue Bulletin or through regulations, has drawn attention in the past. See, for example, the former NTA Nina Olson’s blog post from a few years ago, IRS Frequently Asked Questions Can Be a Trap for the Unwary. The issue is getting renewed attention given the pressures on the IRS to push information out quickly as Congress passes fast moving tax legislation in response to the pandemic. Les
This FAQ is 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 said a recent update to the frequently asked questions (FAQs) with respect to the employee retention credit under the CARES Act. FAQs have been a frequent tool, most recently in relation to the CARES Act, to aid the government in issuing guidance to the public without going through the detailed, rigorous and time-consuming process of issuing regulations. With FAQs, gone are the headaches of soliciting comments from the public, of publishing proposed versions of the rules before finalizing them, and of making changes to the rules after initial issuance without input from the public.
This all seems like a good thing. And, provided that the public is advised of the limitations of FAQs, as the IRS has started to do, see above, the tax system would seem to be the better for it. The question at hand is whether this situation is acceptable or needs to be either modified or rejected.
read more...A recent report issued by the Government Accountability Office (GAO) states that the IRS should have added a disclaimer to the FAQs on virtual currency, stating that the FAQs “were not legally binding”. The GAO report states that “The Commissioner of Internal Revenue should update the FAQs issued in 2019 to include a statement that the FAQs may serve as a source of general information but cannot be relied upon by taxpayers as authoritative since they are not binding on the IRS.” To this, the IRS responded that “We disagree with this recommendation. The FAQs are illustrative of how longstanding tax principles apply to property transactions. Further, the IRS does not take positions contrary to public FAQs.”
How reassuring! I am sure that we have all heard the “trust us” slogan from the IRS and Treasury before.
Section 6662 imposes what is known as an accuracy related penalty for certain underpayments attributable to positions taken on a tax return. Generally, this penalty generally applies, absent reasonable cause and good faith, unless the position is either disclosed on the tax return (or deemed to be so disclosed) or there is what is known as “substantial authority” for the position taken.
Substantial authority exists for a position if the weight of authorities supporting the treatment is substantial in relation to the weight of authorities supporting the contrary treatment. The pertinent regulations list the types of authority that may be taken into account, including applicable provisions of the Internal Revenue Code, proposed, temporary and final regulations, revenue rulings and revenue procedures, court cases, legislative history to statutes, various forms of guidance published in the Internal Revenue Bulletin, and other enumerated items. FAQs are not one of the listed items of authority. FAQs can apparently be “authority” if incorporated into an IRS notice because the latter is published in the Internal Revenue Bulletin. Otherwise, tough luck.
Section 6011(a) provides that when required by the regulations, every person subject to tax shall make a return or statement “according to the forms and regulations prescribed”, and such person “shall include therein the information required by such forms or regulations”. Note that this regulation only requires that tax returns include information required either by regulations or by an IRS form. This should include instructions to that form.
FAQs are not listed in either the pertinent statute or the section 6011 regulations as information that must be included on a tax return. As such, a taxpayer can file a true, accurate and complete tax return without complying with any information putatively required by FAQs.
In a policy statement (Policy Statement) issued on March 5, 2019, the Treasury Department stated, with respect to so-called “sub-regulatory guidance”, that “Unlike statutes and regulations, sub-regulatory guidance does not have the force and effect of law. Taxpayers can have confidence, however, that the IRS will not take positions inconsistent with its sub-regulatory guidance when such guidance is in effect.” Once again, there is that “trust me” slogan again.
The Policy Statement defines sub-regulatory guidance so as to not include FAQs, which are not mentioned or even cited there because such guidance “means sub-regulatory guidance published in the Internal Revenue Bulletin.” Included in this list are revenue rulings, revenue procedures, notices, and announcements, but not FAQs.
Which raises the question…Are FAQs rules subject to prior notice and comment under section 553 of the Administrative Procedure Act (APA)? The APA makes a critical distinction between rules that must first be published for comment in the Federal Register before going into effect so as to obtain public comment first, and so-called “interpretative rules” where prior notice and comment are not required.
Given their lack of authority status, FAQs should not be treated as rules subject to the APA. Although I am not aware of any guidance that says so expressly, logically, a non-authority for purposes of section 6662 should not qualify as a rule, much less a legislative rule under the APA. This is so even if the IRS promises it will follow it and not revoke it retroactively.
But future developments in the courts could end up changing that conclusion. Two fairly recent court cases come to mind in this regard.
First, in Bullock v. IRS, 401 F. Supp. 1144 (Dist. Ct. Mt. 2019), the district court set aside an IRS revenue procedure that effectively amended the terms of a final regulation (as apparently authorized in that final regulation by granting the power to provide exceptions to the regulation to the IRS Commissioner) because the court deemed the revenue procedure to be a rule that was a legislative rule and not an interpretative rule. The court stated that “The APA requires federal agencies to follow the notice-and-comment rulemaking procedures before it creates or amends legislative rules and regulations. …An interpretive rule remains consistent with the regulation that it seeks to interpret….A legislative rule “effectively amends a prior legislative rule.” ….[The revenue procedure at issue] effectively amends the previous rule that required tax-exempt organizations to file substantial-contributor information annually….[The revenue procedure at issue]…, as a legislative rule, requires the IRS to follow the notice-and-comment procedures pursuant to the APA.” Setting aside a revenue procedure deemed to be a legislative rule because it amended a prior legislative rule (the regulations themselves) is not the only recent development of note pertaining to the APA and tax regulations and rules. Putting aside questions relating to standing, the second case I wanted to mention is a U.S. district court opinion in Texas. Chamber of Commerce v. IRS, No. 1:16-cv-00944 (Dist. Ct. W.D. TX., 2017), held that an immediately effective temporary regulation was invalid under the APA for failure to give prior notice and opportunity to comment to the public. [note: Les discussed the Chamber of Commerce litigation and linked to the case and PT’s prior coverage in Challenges to Regulations Update: Government Withdraws Appeal in Chamber of Commerce and New Oral Argument Set for Altera]
The case dealt with an immediately effective temporary regulation that was issued contemporaneously with proposed regulations, a common practice by the IRS. The court invalidated the regulation because it believed that the regulation at issue was a legislative or substantive rule, and not an interpretative rule, thus triggering the prior public notice and comment requirement of the APA. This was because the court believed that the regulation at issue affected substantive rights that expanded upon what was provided in the statute at issue.
True. FAQs are neither a revenue procedure or a temporary regulation or even sub-regulatory guidance. Still, the IRS has promised to follow them although recent caveats added to FAQs warns that they are not authoritative. That is a distinction that most average taxpayers will not understand.
To make matters worse. FAQs on a particular subject are not easy to find on IRS.gov. There is no subject matter or code section index with the limited exception of an easy to find listing of items relating specifically to the coronavirus pandemic. Why is there no separate database containing only FAQs that could be found on the IRS website? Also, when FAQs are changed the prior versions are no longer posted on IRS.gov. Only the date last reviewed is given.
Issuing FAQs, although easy and convenient for the IRS and providing fast guidance to taxpayers and their advisors, lack both prior public notice and prior public comment before the “rule” is issued to the public. FAQs are not even “sub-regulatory guidance” within the meaning of the Policy Statement. What gives?
Yes, issuing FAQs allows the IRS to get information out to the public in a very quick fashion and FAQs are easily changed, supplemented and amended, unlike regulations. Witness the IRS’s recent outstanding performance in getting out guidance under the CARES Act through the use, in substantial part, of FAQs.
But FAQs, unlike the traditional form of sub-regulatory guidance, are not “authority” under section 6662 and, if the practice of issuing FAQs is to be continued by the IRS, the regulations under section 6662 must be amended to count FAQs as authority under that section. At a minimum, a disclaimer about the limited usefulness of FAQs should be appended to each series of FAQs as a standardized practice of the IRS in issuing FAQs on a going forward basis.
Michael Desmond, IRS Chief Counsel, was recently quoted as saying during a May 6 Tax Analysts’ webinar that “The IRS isn’t planning to turn every FAQ on the Coronavirus Aid, Relief, and Economic Security Act….and the Families First Coronavirus Response Act….into a “full-blown notice or a Treasury decision or proposed regulation”….
I found this statement by the IRS Chief Counsel to be both interesting and curious at the same time. IRS notices are documents that are subject to review before issuance. So are FAQs, which are reviewed before issuance.
It should be noted, however, that Internal Revenue Manual (IRM) 32.2.2, entitled “Summary of the Published Guidance Process”, does not discuss, cite or mention FAQs. There is now a subject matter listing for FAQs on the IRS website, but it does not discuss whether FAQs are authority or not and, as noted, FAQs do not make an appearance in the IRM discussion of what is the published guidance process. So, what does this say about FAQs?
FAQs are easily added to, changed and supplemented. Notices, on the other hand, need to be modified by other notices or perhaps by revenue rulings, revenue procedures or the like. FAQs do not leave a researchable trail of prior amendments and changes-only the latest version is available to the public on the IRS website.
Notices are authority under section 6662 but FAQs that are not incorporated in notices are not authority. Putting aside IRS motives one way or another in deciding between which of the two to issue, it seems that FAQs are preferred because they are very easily amendable, supplemented or replaced.
Originally issued guidance in a notice seems to be amenable to speed more or less the same way as FAQs are, except that the writing style of FAQs is easier to do whereas notices are more formalized. That makes FAQs faster to get out to the public.
But how much faster… because the cost of that speed is the lack of taxpayer reliance on the FAQs. And you can make legal errors in FAQs that are easily correctable, giving even more speed to the process. Given all of that, which one would you choose?In the end, the IRS and Treasury need to decide whether to keep FAQs, in which case I think that they need to be elevated to “authority” status. In addition, FAQs should be subject in some form to prior public notice and comment absent truly exceptional circumstances (such as the coronavirus pandemic).
Great concise analysis of the issue Monte. I believe that FAQs wouldn’t be so bad if there was discipline in revising and archiving, if the section 6662 regulations were amended to provide that FAQs are authority for penalty protection, and if the law were clear that the IRS is bound by the FAQ, but the taxpayer isn’t, much like an item published in the IRB. But wait–we have that already: Items published in the IRB are treated like this in all respects. And, publishing items in the IRB is relatively quick in that the IRS does early drops on a regular basis and controls the publication process. While publishing guidance in the Federal Register under rules that provide APA notice and comment is the ideal (note that the FAQ format was used in the past in temporary regulations to provide speedy guidance), the IRB is good (and tried and true) second best.
Rochelle Hodes
Rochelle. Without forcing the IRS to publish in the IRB instead of FAQs, I don’t think they will forego them. Too easy to post, update, change, etc.
Taking into account the difference between legislative and interpretive rules as you described, what are your thoughts about Notice 2020-32, which added a 75% payroll costs rule for use of PPP Loan proceeds and to avoid reduction of forgiveness of a PPP Loan. There’s no 75% rule in the statute, or any percentage rule. Seems legislative to me (indeed seems contrary to the statute, in fact), but Notice 2020-32 was issued with no notice and comment period. How strong do you think the argument is that the 75% rule is invalid under the APA for failure to give prior notice and opportunity to comment to the public?
Frankly, we know that the FAQ is not binding on the taxpayer or the IRS. And the 75% rule is not in the statute. I think there is at least a substantial authority position to disregard that rule. Maybe MLTN.
One more point. A case like the 75% rule is highly likely to be legislative. Likely a court would also say statute is clear. You can make a policy argument but arguing about what the law should be does not get you far. A double whammy against the government.
On the webinar call on which Keith and I (among others) were on about filing deadlines, IRS Deputy Commissioner Drita Tonuzi told us that the IRS was accepting the ruling in Guralnik, and that the prior day had put up a Q and A to that effect under COVID-19 guidance. She pointed out that the IRS never issued an acquiescence in Guralnik, though, since she said it wouldn’t be worth the paper it would be written on because the IRS can always change its mind. Isn’t it great that we know from the Q and A how the IRS views Guralnik now, but we can’t rely on the IRS taking that position in the future? Guralnik was never appealed, so even if the Tax Court follows it as binding precedent of the Tax Court, the IRS might appeal it to a Circuit court, where the DOJ will argue Guralnik was wrongly decided.
This is similar to the RR 91-32 litigation where the taxpayer won in TC and DC Circuit but still have plenty of circuits to go. If the IRS wants to piss away taxpayer money, so be it.