11 Aug Arguing with the IRS: You Need Tax Authority
Tax law makes the government (meaning the IRS) your partner for most business transactions. Partners sometimes disagree.
When you and the IRS have a disagreement, you need the law, a regulation, a ruling, a court case, or some other document that proves your point.
You’ll also need those same documents to avoid penalties if you lose your argument.
In this article, we focus on the Internal Revenue Code and the varying interpretations of it by the Treasury Department and the IRS, and how these documents help you comply with the tax laws.
Substantial authority is the gold standard for your tax deductions.
With substantial authority, you
- likely win your position in a dispute with the IRS,
- avoid accuracy-related audit penalties if the IRS finds a substantial understatement of tax,1 and
- help your tax professional avoid tax preparer penalties.2
For how substantial authority helps you and your tax professional avoid penalties, see Three Ways to Defeat Audit Penalties and Save Thousands and Are Tax Return Preparer Penalties Increasing Your Taxes?
There are three general types of substantial authority:
- the Internal Revenue Code,
- Treasury Department or IRS interpretations of the Internal Revenue Code, and court interpretations of the Internal Revenue Code.
In this article, we work with the first two only. We cover court interpretations in Part 2.
Internal Revenue Code
The Internal Revenue Code is the tax law as written by lawmakers. It is the best authority you can use to win your argument with the IRS.
All other authority is an interpretation of what the Internal Revenue Code means.
Treasury regulations are right below the Internal Revenue Code in their level of importance. The courts hold both final and temporary regulations in high regard, generally following them unless they are unreasonable or plainly inconsistent with the law.
The Treasury Department issues three types of regulations:
- Final regulations
- Temporary regulations
- Proposed regulations.
Final regulations start as proposed regulations, then undergo a comment and review period prescribed by the Administrative Procedures Act. Once finalized, after deliberation and input, the Treasury Department publishes them in the Federal Register.
Temporary regulations skip the Administrative Procedures Act. The Treasury Department issues them when a new provision of law needs immediate guidance. They are still authoritative even though they go under the name “temporary,” but that name does not do them justice since they are permanently in place.
Proposed regulations don’t carry much weight with the courts, but you can use them effectively when you meet with IRS personnel. The proposed regulations are the Treasury Department’s official position at the beginning of the regulation process, so they are instructive.
Solid footing. The regulations often contain many examples of how to apply the rules to a specific fact pattern. Read the examples! If your tax deduction or other position matches an example in the regulations, you are on solid footing to win your dispute with the IRS.
You’ll find official pronouncements from the IRS in the Internal Revenue Bulletin, which describes itself as “the authoritative instrument of the Commissioner of Internal Revenue for the publication of official rulings.”
Revenue Rulings. A revenue ruling is an official IRS interpretation of how the tax law applies to a specific set of facts. It explains how the IRS reached that conclusion and cites the tax code, regulations, and court cases in support of its conclusion.
The IRS often modifies, amplifies, supersedes, or revokes revenue rulings; thus, it is especially important to verify that the rulings are still applicable and authoritative before relying on them.
Revenue Procedures. A revenue procedure is an official statement from the IRS on how it will administer the tax law. For example, a revenue procedure you likely know about explains how you can deduct certain automobile expenses by applying a certain mileage rate in lieu of calculating actual operating expenses.3
Announcements and Notices. An announcement is a public pronouncement that has only immediate or short-term value. On the other hand, a notice is a public pronouncement that may contain guidance that involves substantive interpretations of the Internal Revenue Code or other provisions of the law.
Private Letter Rulings and Technical Advice Memoranda. A private letter ruling is a written statement that the IRS issues to a taxpayer, interpreting the tax laws and applying them to the taxpayer’s specific set of facts. The IRS issues the private letter ruling in response to a written request submitted by a taxpayer. The ruling is binding on the IRS if the taxpayer fully and accurately described the proposed transaction in the request and carries out the transaction as described.
Other taxpayers or IRS personnel may not rely on a private letter ruling as authority, though the IRS analysis in a private letter ruling can be instructive. You have to pay a substantial fee for a private letter ruling, so getting one for your situation likely makes sense only for a significant issue or transaction.
A technical advice memorandum is similar to a private letter ruling except that it’s issued for internal IRS use only. The memorandum is guidance furnished by the IRS Office of Chief Counsel upon the request of an IRS official in response to technical or procedural questions that develop during a proceeding. Like the private letter ruling, the memorandum is not authority, but the analysis is useful to develop your argument.
Insight. The Internal Revenue Manual (otherwise known as the IRS’s audit manual) tells IRS auditors, agents, and other personnel that private letter rulings provide insight to the IRS position on the law and serve as a guide, along with other research material, in formulating a position on an issue.4
What You Can’t Rely On
The items below aren’t substantial authority. Don’t use them with the IRS when trying to make your argument stick—focus on substantial authority.
IRS Form Instructions and Publications. Instructions merely tell you how to fill out an IRS form, and publications are an IRS summary of the tax law. You can’t rely on them, and the courts give them no weight.
IRS Website Information and Frequently Asked Questions. You’d think you can rely on what the IRS publishes on its own website, but you can’t—even if it is the only guidance out there!
The IRS recently reminded its audit staff of this fact.5 So, don’t print out the IRS website and bring it to an audit—the IRS website words won’t cut it.
Internal Revenue Manual. The Internal Revenue Manual is the IRS internal policy and procedure guide. It provides good explanations of tax law so it makes for good education, but you can’t cite it to support your position on a tax law matter. However, you can use it to know what the IRS procedures are and whether the IRS is or isn’t following them.
Possible path. One thing to know about publications, instructions, etc., is that the information in them has a good chance of originating from a substantial authority, so publications, instructions, etc. often provide clues on what search terms to use to find substantial authority.
If you have a dispute with the IRS over something on your tax return, you’ll need to show that the law supports what you did if you want to either win your argument or avoid penalties if you don’t win.
Obviously, support directly from the Internal Revenue Code is the best proof you can get.
You can also use Treasury Department or other IRS interpretations of the Internal Revenue Code to support your position, such as
- Treasury Regulations
- Revenue Rulings or Revenue Procedures
- Announcements and Notices.
A private letter ruling, while not authority unless you requested it for your situation, can be useful to show the IRS reasoning on a specific situation.
And, remember, don’t rely on IRS form instructions, IRS publications, the IRS website, or the Internal Revenue Manual. These are not authority. You might use them to help you find authority.
Your best bet to easily win disagreements with the IRS is to focus on the documents that are most persuasive.