Tax Notes logo

IRS Relying More on Unreliable Guidance to Keep Up With Workload

Posted on July 24, 2020

An IRS practice intended to help taxpayers navigate tough questions on forms has instead become an increasingly used, but potentially problematic tool to sidestep the normal regulatory process. 

Nearly 500 coronavirus-related items have been posted throughout the IRS website as frequently asked questions, an informal way for the agency to deliver information to taxpayers.

Tax professionals told Tax Notes that, among other problems, not enough FAQs come with a disclaimer noting that the advice cannot be considered legally binding if there is a challenge that ends up in court, unlike more formal types of guidance that have undergone a strict review process. 

It’s an especially big problem when the FAQs are all the guidance the IRS gives some taxpayers. Employers, for instance, have only the FAQs to help them understand how the agency interprets the ambiguities in the employee retention credit, according to Alexandra Minkovich of Baker McKenzie.

Minkovich, who was an associate tax legislative counsel at the Treasury Office of Tax Policy, said FAQs aren’t usually meant to provide taxpayers or tax pros with legal guidance, but rather instructions for forms and schedules. 

“I think it’s really challenging,” Minkovich said. “It puts a lot of burden on the taxpayer to decide how comfortable they are in relying on that FAQ.”

Some of those FAQs interpret ambiguities in the coronavirus relief legislation’s statutory language — more like authoritative, rather than informal guidance, Minkovich said.

More Frequent, More Aggressive 

“They’re providing the kind of guidance that I would expect to normally be provided in subregulatory guidance like a notice or a revenue ruling, and Treasury is deeply involved in those processes,” Minkovich said.

Still, Minkovich added, “I was rather surprised when those FAQs were published only as FAQs.”

FAQs are also more typically a follow-up rather than a prelude to regulation, said Lisa M. Zarlenga of Steptoe & Johnson LLP, who was tax legislative counsel at Treasury. In the past, the IRS issued FAQs before or in tandem with regulations for qualified Opportunity Zones and virtual currencies, she said. 

“I think it’s all coming to a head, because [FAQs] are being used more frequently and more aggressively,” said Nina Olson, executive director of the Center for Taxpayer Rights. 

Olson, the former national taxpayer advocate, noted that the Trump administration’s order requiring the removal of two regulations for every new one issued has led to “an emphasis on subregulatory guidance, because you can get it out quickly and maybe it’s not subject to as much review.” 

The downside of FAQs, aside from the nonbinding nature of the guidance, is they aren’t subject to the notice and comment requirements under the Administrative Procedure Act, denying the public an opportunity to recommend changes. It’s also harder to know how long the IRS will stand by its advice or when its position changes. 

Unlike with other types of subregulatory guidance, such as notices, revenue procedures, revenue rulings, and Treasury decisions, the agency doesn’t maintain a consistent numbering convention that attorneys can use to refer FAQs to clients. It also doesn’t time-stamp changes that can be made to FAQs without notice to taxpayers and practitioners. There's no online archive of the proliferating number of FAQs, and they aren’t published in the Internal Revenue Bulletin. Some just vanish from the website, tax attorneys told Tax Notes

Annette Nellen, a tax professor at San Jose State University, said, “We seem to be seeing more nonbinding guidance and less binding guidance” in recent years. 

Disappearing Act

Nellen said she’s been compiling data by year on the types of documents issued in the Internal Revenue Bulletin, adding, “It’s difficult to count the number of FAQs issued annually because of the volume, and the dating process, and the disappearance possibility.”

By the Taxpayer Advocate Service’s count, the IRS has issued at least 94 FAQs on the employee retention tax credit, 93 on the Families First Coronavirus Response Act (P.L. 116-127), 69 on economic impact payments from the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), 67 on coronavirus-related tax credits, and 40 on payment and filing deadlines. For comparison, only about two dozen items of formal guidance have been released over that same period based on a Tax Notes review of regulatory actions.

“As of this moment, the only substantive guidance as to the IRS position about CARES Act provisions that impact hundreds of millions of taxpayers is contained in online FAQs that can change on a whim — and in fact have changed on a whim,” Olson said. “These FAQs are what the IRS is basing its current actions on.” 

In a July 21 statement, the IRS said it recognized that some recent FAQs, including for the CARES Act, include substantive interpretations of law, rather than simply mechanical filing and compliance instructions.

The agency said it’s considering follow-up guidance to be published in the Internal Revenue Bulletin, but didn’t specify on which issues or guidance documents.

IRS Chief Counsel Michael J. Desmond said during a May 6 Tax Analysts webinar that while the agency is open to suggestions, “I don’t think we’re going to take every FAQ and turn that into a full-blown notice or certainly a Treasury decision or proposed regulation.”

For Robert Kerr of the National Association of Enrolled Agents, the larger issue is one of permanence: “Even so-called mechanical guidance could be here today and gone tomorrow.”

Copy RID