Lost in Translation: A Journey Through the Bewildering Realm of IRS Interpretive Guidance
26 Pages Posted: 3 Mar 2015
Date Written: February 10, 2015
The primary source of Federal tax law is the Internal Revenue Code. However, where the Code is ambiguous or contains “gaps,” practitioners often must look to interpretive guidance issued by the Internal Revenue Service. When consulting IRS interpretive guidance, the practitioner may query, “What is the value (if any) of this guidance? Does it carry the force of law, or is it merely persuasive?”
This article offers a survey of various types of IRS guidance, providing a description of each type of guidance and an analysis of how the guidance is applied in practice. One aspect of IRS guidance is the level of precedential value each type of guidance is purported to have. Practitioners must be wary of “official” guidance which actually carries little precedential weight in practice. Another element is judicial deference to IRS guidance, which has been called the “force of law gray zone.” Courts vary in their treatment of IRS guidance, and this article touches on how various courts have treated certain types of IRS guidance. Irrespective of the precedential value or judicial deference (or lack thereof) attributed to various types of IRS guidance, most (but not all) IRS guidance is relevant in the context of accuracy-related underpayment penalties. Certain guidance can be used as a “sword” by the Service to assess an underpayment penalty on taxpayers based on “negligence or disregard of rules or regulations” or on preparers for “reckless or intentional disregard of rules or regulations.” Similarly, a taxpayer may be able to “shield” himself from the underpayment penalty found in I.R.C. § 6662(b)(2) by showing that there was “substantial authority” for the taxpayer’s position. It is important for taxpayers and advisors to recognize which sources fall within the definition of “rules or regulations” and which sources constitute “authority,” as well as understand how to properly conduct the “substantial authority” evaluation.
By examining IRS guidance in the context of its precedential value and judicial deference, as well as its role in the assessment and avoidance of accuracy-related penalties, this article answers the questions above and provides taxpayers with an increased familiarity with the utility and reliability of IRS interpretive guidance.
Keywords: tax, IRS Guidance, Revenue Ruling, Treasury Regulation, Revenue Procedure
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