IRS Guidance: Rely on It at Your Own Peril

Benjamin Peeler, JD, CPA, LL.M., at Eide Bailly
Benjamin Peeler, JD, CPA, LL.M., at Eide Bailly

A recent tax court case reminds us that not all published guidance from the IRS serves as an authoritative source of information to use in complying with our tax laws. Tax attorney Alvan Bobrow was challenged by the IRS on his handling of separate IRA rollovers occurring within one year, and an important issue emerged from the case that needs to be discussed.

Guidance without Authority

Mr. Bobrow followed a longstanding IRS interpretation when he filed his tax return, an interpretation that was contained in both a publication and a proposed regulation, that the “once per year” rollover rule in the tax code applies separately to “each IRA” owned by a taxpayer. For reasons that are not entirely clear, although there must have been a perception by the IRS of taxpayers abusing the “each IRA” rollover guidance, after Mr. Bobrow filed his return, the IRS decided that their prior “each IRA” interpretation was wrong, and assessed additional tax, interest and penalties against Mr. Bobrow. Going against their own published guidance, the IRS argued that the “once per year” limitation applies to all of a taxpayer’s IRAs taken together, rather than individually to “each IRA” separately. You might think the IRS would have some sympathy and restrain itself when a taxpayer follows IRS published guidance. Au contraire, mon ami! The IRS even assessed Mr. Bobrow penalties, in addition to tax and interest, for not having “substantial authority” for the way he treated the IRA rollovers in his tax return. To the surprise of some (especially Mr. Bobrow), the U.S. Tax Court agreed with the assessment of the tax, interest and penalties. In their decision, published, ironically, on April 15, Tax Court Judge Joseph W. Nega said the IRS’ published guidance “is not binding precedent” and that “taxpayers rely on IRS guidance at their own peril.”

Tread Carefully

This outcome emerged to remind us that not all guidance from the IRS is “authoritative” for purposes of interpreting the tax laws. The IRS issues many documents that vary in their usefulness and reliability. It gets a little technical here, but only Final Regulations carry the force and effect of law. But still, they are not law, and courts can strike them down if it is determined they conflict with the actual law. Temporary Regulations carry the approval of the Treasury Department. Proposed Regulations and Revenue Rulings are essentially the official position of the IRS, but may be strictly limited to the facts or scope considered. Then there are the other IRS publications, notices and announcements, like those Mr. Bobrow relied upon to file his return, which carry little, if any, authority in court and apparently with the IRS itself. Therefore, when taking positions in tax returns, you should consider the level of authority of the guidance being relied upon and gauge the prospect that the IRS, on examination, may attempt to impose penalties, in addition to tax and interest, on the reported item.

Come Prepared

However, it is more often the case that IRS instructions or publications interpret the tax laws “conservatively” to the detriment of taxpayers. IRS publications have been found to be in conflict with statutes many times, which essentially means the IRS interpretation was incorrect. Consequently, if you question the tax authority you are relying upon, be sure to consult a qualified tax advisor. You may be able to achieve a more favorable outcome or, at least, document the substantial authority for your position and lessen the risk of penalties. And, if you find yourself in an examination, make sure to check the authorities being used by the IRS to adjust your return—because if a taxpayer can’t use them to benefit their position, the IRS can’t use them against a taxpayer.

This is a guest article from Eide Bailly, written by Mac Stevens & Ben Peeler.