The definition – a division into two mutually exclusive or contradictory groups.
Example 1: Willie Nelson said, “There are two kinds of men in this world. Those who have a crush on Linda Ronstadt and those who have never heard of her.” If you’re curious, I have heard of Linda Ronstadt.
Example 2: There are two kinds of users of tax information. Regular people who believe IRS frequently asked questions (FAQs) and tax experts who do not.
Taxpayers need help. IRS places FAQs on its website. Taxpayers read them. Taxpayers believe them to be true. IRS has issued more than 1,100 FAQs. Wouldn’t it be troubling if they could not be relied upon?
Raise your hand if you see where this is heading. The Tax Court has said, “informal guidance, such as the FAQs posted to the IRS’s website, is not an authoritative source of federal tax law.”
But it might even be worse. FAQs are not “published guidance” because they are not “published.” They appear only on the website. They can also disappear from that site. Without warning. And without a trace.
FAQs are generally not reviewed by the Treasury Department. The answers can change on a whim. But what if the FAQ is still on the website when you are audited and questioned about the treatment of an item?
You might, and I emphasize might, be able to sway an IRS agent by showing them the answer to the FAQ on the website. They don’t have to accept the answer. But, let’s say the sun is shining on your backside and they do accept it.
Next consider the person who relied on the FAQ, but by the time they are audited it has disappeared from the web. Let’s hope it was printed and retained.
The agent might be less willing to accept the FAQ, even if you kept it. After all, the IRS removed it from the web. There must have been a reason for that. Head’s up – we will not know the reason.
Still, at a minimum, keep some record of a FAQ you rely on. If you wait for the audit you might be singing the Springsteen song “Missing”: “I searched for something to explain, in the whispering rain, the trembling leaves, tell me baby where did you go, you were there just a moment ago.”
What kind of Treasury Department guidance do tax experts rely on? First, things that are “published.” Second, things that are subject to the notice and comment requirements of the Administrative Procedure Act (APA).
The APA provides rules for federal agencies that write rules intended to have the force of law. APA requires that notice be given before the rules are implemented and that a comment period apply.
APA provides advance warning of a change in the law and provides affected parties the ability to be heard. This notice and comment period improves the rule-making process.
Some FAQs are published. For tax rules this would mean in the Internal Revenue Bulletin. Such FAQs have weight to them. But they are not the norm.
Remember what the Tax Court said about FAQs. The First, Fourth, Sixth, and Eight Circuit Court of Appeals have said that FAQs about the Medicaid Act were legislative rules.
You might think that’s good news. But the Medicaid rules were different than what we see in the tax area. The good news might instead be when IRS is trying to use a FAQ to serve as a legislative rule but they fail to comply with the APA.
IRS did this with the qualification rules for economic impact payments. A FAQ claimed that prisoners did not qualify for the payments. This is not what the law said. A federal district court set aside the FAQ as being contrary to the statute.
To be a legislative rule the FAQ would need to comply with the APA. If you don’t like a FAQ your tax expert might then argue (1) it Is not authoritative or, (2) if it is intended to be authoritative it failed to comply with the APA.
And if you like a FAQ? Print it. But be careful. Be very careful.
Jim Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at firstname.lastname@example.org.