IRS Updates Process for Issuing FAQ Guidance and Clarifies Scope of Reliance

The IRS has updated its process for issuing guidance in the form of frequently asked questions (FAQs) on newly enacted tax legislation and posted a general overview document clarifying taxpayers’ ability to rely on FAQ guidance. Under the updated process, “significant” FAQs on newly enacted tax legislation, as well as any later updates or revisions, will be announced in a news release and posted on IRS.gov in a separate fact sheet. These “Fact Sheet FAQs” will be dated to enable taxpayers to confirm the date on which any changes to the FAQs are made, and they will include a legend summarizing the extent to which taxpayers may rely on the FAQ for penalty relief. Prior versions of Fact Sheet FAQs will be maintained on IRS.gov to ensure that taxpayers can locate the version they relied on.

According to the general overview of taxpayer reliance, FAQs are a valuable alternative to guidance published in the Internal Revenue Bulletin (IRB) because they allow the IRS to more quickly disseminate information on topics of frequent interest and general applicability. However, FAQs typically provide responses to general inquiries—rather than applying the law to taxpayer-specific facts—and may not reflect special rules or exceptions. The overview notes that FAQs that have not been published in the IRB will not be relied on, used, or cited as precedents by the IRS, and if an FAQ turns out to be an inaccurate statement of the law in a particular situation, the law will control the taxpayer’s liability. But a taxpayer’s reasonable reliance on an FAQ (even one that is subsequently updated or modified) will be considered in determining whether certain penalties apply. To the extent that reliance on an FAQ results in an underpayment of tax, taxpayers who—in good faith and based on all the facts and circumstances—reasonably relied on the FAQ will not be subject to a negligence or other accuracy-related penalty that allows for relief under a “reasonable cause” standard. In addition, Fact Sheet FAQs will be considered “authority” for purposes of the exception to accuracy-related penalties that is available when items on a return are based on substantial authority.

EBIA Comment: Although FAQs provide crucial and timely guidance that can help taxpayers understand new tax laws, tax professionals have viewed them with a degree of caution since they are neither precedential nor binding on the IRS, and they may be deleted or modified at any time without any official record of prior versions. This announcement of a more formal process for issuing and tracking FAQ guidance, combined with the clarifying statement on reliance, is a positive development. Also helpful is the IRS’s promise to retain past versions of FAQ guidance, but cautious taxpayers and their advisors should still save their own copies. For more information, see EBIA’s Cafeteria Plans manual at Section IV.B (“Types of Governing Law and Their Significance”). See also EBIA’s 401(k) Plans manual at Section III.C.4 (“IRS Rulings and Other Guidance”).

Contributing Editors: EBIA Staff.