IRS Cautions Against Over-reliance On Its Website

National Taxpayer Advocate Nina Olson discussed the potential pitfalls of treating information on the IRS’s website, such as its FAQs pages, as authoritative. The Taxpayer Advocate is an independent office within the IRS tasked with helping people resolve tax issues with the IRS and recommending changes that will prevent future problems.

This particular issue is important because taxpayers, especially those with unique expat filing obligations, often have the misguided impression that any and all information published by the IRS on its website represents the final say on U.S. tax law. As Olson’s blog demonstrates, reliance on the IRS website has been particularly problematic for taxpayers trying to understand the rules of its tax amnesty programs.

Types of IRS Tax Guidance

In the blog, Ms. Olson outlines three general types of IRS guidance in terms of strength of authority:

Treasury Regulations – these are crafted by both the Treasury Department and IRS and are designed to expound on the Internal Revenue code. They are deemed binding on the IRS and taxpayers.Guidance published in the Internal Revenue Bulletin (IRB) – these include Revenue Rulings, Revenue Procedures, Notices, and Announcements (“published guidance”). These merely represent the IRS’s interpretation of the law (which can be challenged in court), but the IRS is generally required to follow its own published guidance. Certain guidance, such as Private Letter Rulings, are somewhat less authoritative because they only address a taxpayer’s specific set of facts, but they do offer a good reflection of the IRS’s position on an issue and can be used in certain instances as authority for purposes of protection against penalties.

Other “unpublished” guidance – these include tax forms and instructions, publications, and press releases. These are generally not reviewed by the Treasury Department and are sometimes not even subjected to an IRS internal review process. The IRS itself often asserts that taxpayers may not rely on this type of guidance and that the IRS may change its position laid out in the guidance at any time.

IRS Frequently Asked Questions (FAQs) Pages

Information found on the IRS website (that is not also published in the IRB), such as FAQs, fall into category 3 above and therefore should not be relied upon by taxpayers as an authoritative source. The IRS can change its mind at any time with respect to such information, even to the detriment of a taxpayer who may have relied on it.

Interestingly, to illustrate this point, Ms. Olson offered as an example the IRS’s FAQs issued with respect to the Offshore Voluntary Disclosure Programs (OVDPs), noting that they have been repeatedly changed over the years to reflect changes in the programs, but without any sort of formal record as to what changed and when. This, stated Olson, has resulted in inconsistent treatment of similarly situated taxpayers, which she argued is unfair.

It should also be noted that the IRS tax amnesty programs were not created via legislation or regulations, and there is only limited guidance or case law that addresses important aspects of the current programs. This makes the OVDP FAQs pages the only comprehensive guidance currently available and, as a result, practitioners often rely on these pages.

This problem, we feel, is further exacerbated by the fact that at the bottom of IRS web pages, you will often see the following statement, “Page Last Reviewed or Updated on…” A recent date is then included even if the page is describing a program or set of rules that applied previously but is no longer current law or currently applicable.

National Taxpayer Advocate’s Website Recommendation

To prevent further problems due to misguided reliance on its website, Ms. Olson recommended that the IRS convert its FAQs and other unpublished guidance into published guidance as quickly as possible whenever an issue affects a significant number of taxpayers or has continuing application. This would give the guidance a proper measure of finality and authority.

Further, Ms. Olson recommended that the IRS display a disclaimer with FAQs that says something like:

“Taxpayers may only rely on official guidance that is published in the Internal Revenue Bulletin. Various IRS functions try to provide unofficial guidance to taxpayers by posting Frequently Asked Questions (FAQs) and other information on IRS.gov. Unless otherwise indicated, however, this information is not binding, and taxpayers may not rely on it because it may not represent the IRS’s official position.”

Takeaway for U.S. Expats

Depending on the circumstances, filing tax returns can be a challenging process, especially for late filers looking to come into compliance with the IRS. Expat taxpayers are particularly susceptible to errors because of the complex international issues and additional reporting requirements that can significantly affect the tax return of a U.S. citizen living abroad and that penalties for non-compliance can be severe.

It certainly does not help that information disseminated online, even information on the IRS’s own website, is not necessarily reliable or authoritative. For this reason, if you’re a U.S. expat, we highly recommend using a professional expat tax firm to prepare your return.

Mr. Moss is a Tax partner in a boutique U.S. tax firm specializing in the areas of international taxation and expatriate taxation. The practice focuses on servicing U.S. individuals and small business located outside the U.S. with their U.S. and international tax matters and includes both tax planning as well as annual tax compliance (tax return preparation). He has extensive experience with filing delinquent returns under the IRS Streamlined procedure, FBARs, FATCA reporting (Form 8938), reporting interests in foreign corporations (Form 5471) and partnerships (Form 8865) as well as foreign trust reporting (Form 3520 and Form 3520/A). He works very closely with clients utilizing the various international tax treaties in order to maximize benefits through smart tax planning. Previously he held a senior position in the international tax practice of Ernst & Young. He is an attorney licensed in the State of New York.

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1 comment on “IRS Cautions Against Over-reliance On Its Website”

  • Yes, which brings to mind the infamous “bait and switch” (as described by some) in the 2009 OVDP program. FAQ 35 reads:

    “Q35. Will examiners have any discretion to settle cases? For example, if a penalty for failing to file a Form 5471 for 6 years is $10,000 per year, will that be compared to 20 percent of the corporation’s asset value? Would the lesser amount apply?

    A35. Voluntary disclosure examiners do not have discretion to settle cases for amounts less than what is properly due and owing. These examiners will compare the 20 percent offshore penalty to the total penalties that would otherwise apply to a particular taxpayer. Under no circumstances will a taxpayer be required to pay a penalty greater than what he would otherwise be liable for under existing statutes. If the taxpayer disagrees with the IRS’s determination, as set forth in the closing agreement, the taxpayer may request that the case be referred for a standard examination of all relevant years and issues. At the conclusion of this examination, all applicable penalties, including information return penalties and FBAR penalties, will be imposed. If, after the standard examination is concluded the case is closed unagreed, the taxpayer will have recourse to Appeals. See Q&A 34.”

    Note specifically the words:

    “Under no circumstances will a taxpayer be required to pay a penalty greater than what he would otherwise be liable for under existing statutes.”

    This language was understood by many practitioners to mean that “reasonable cause” would be considered in the context of the OVDP penalty assessment in order to determine the appropriateness and quantum of penalties. In other words that people could enter OVDP and use “reasonable cause” to abate all penalties.

    At some point the IRS clarified that “reasonable cause” could NOT be used to abate penalties in OVDP per se – that reasonable cause could be considered ONLY during the “standard audit”.

    This (possible) change in interpretation was considered to be changing the rules in the middle of the program.

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