IRS addresses taxpayer reliance on FAQs

The IRS announced in October that if a taxpayer relies in good faith on frequently asked questions (FAQs) that the Service posts to its website, and if that reliance is reasonable, then the taxpayer will have a reasonable-cause defense against any negligence penalty or other accuracy-related penalty if it turns out that the FAQ does not correctly state the law as it applies to the taxpayer’s situation. This new policy applies to all FAQs, including those released by the IRS before the policy was announced.

The IRS updated its “General Overview of Taxpayer Reliance on Guidance Published in the Internal Revenue Bulletin and FAQs” webpage (available at www.irs.gov) to reflect this new stance.

The IRS also says that it plans to append this lengthy disclaimer to all FAQs:

These FAQs are being issued to provide general information to taxpayers and tax professionals as expeditiously as possible. Accordingly, these FAQs may not address any particular taxpayer’s specific facts and circumstances, and they may be updated or modified upon further review. Because these FAQs have not been published in the Internal Revenue Bulletin, they will not be relied on or used by the IRS to resolve a case. Similarly, if an FAQ turns out to be an inaccurate statement of the law as applied to a particular taxpayer’s case, the law will control the taxpayer’s tax liability. Nonetheless, a taxpayer who reasonably and in good faith relies on these FAQs will not be subject to a penalty that provides a reasonable cause standard for relief, including a negligence penalty or other accuracy-related penalty, to the extent that reliance results in an underpayment of tax. Any later updates or modifications to these FAQs will be dated to enable taxpayers to confirm the date on which any changes to the FAQs were made. Additionally, prior versions of these FAQs will be maintained on IRS.gov to ensure that taxpayers, who may have relied on a prior version, can locate that version if they later need to do so.

FAQ archive and transparency about changes

The IRS also announced that it is updating its process for issuing FAQs following the enactment of new tax legislation. Under the new process, FAQs addressing new legislation, as well as any revisions or updates to those FAQs, will be announced in an IRS news release and posted on the IRS website in a separate fact sheet. Older versions of FAQ fact sheets will be kept on irs.gov so that taxpayers can refer to any prior version that they may have relied on. The IRS says this process addresses taxpayer concerns about transparency and the potential impact on taxpayers when FAQs are amended.

Some of those taxpayer concerns were voiced by National Taxpayer Advocate Erin Collins in a July blogpost (available at www.taxpayeradvocate.irs.gov), in which she recommended that the IRS (1) “should never assess a penalty against a taxpayer for taking a position consistent with an FAQ posted on the IRS website at the end of a taxpayer’s taxable year or at the time of return filing unless the IRS has convincing evidence the taxpayer knew the FAQ had been changed” and (2) “should include the versions and dates of each FAQ on its website or create an archive of obsolete or modified FAQs, including applicable dates, so that taxpayers can locate an FAQ that was in effect at the time they filed their returns.”

The new IRS policy addresses those recommendations.    

• IRS News Release IR-2021-202

By Alistair M. Nevius, J.D., the JofA‘s editor-in-chief, tax.