By Liz White
The rising use of informal guidance by the Internal Revenue Service and the complications of the regulation process have triggered a range of questions—often unanswerable—for taxpayers and their advisers, practitioners said at a roundtable discussion in Washington, D.C., July 22.
At a discussion hosted by Tax Analysts about problems with IRS guidance, former government officials and tax practitioners debated the issues facing taxpayers and advisers because of unclear regulations from the government. Rules surrounding IRS guidance that does not meet formal definitions under the Internal Revenue Code are increasingly unclear.
Informal Guidance Has Ups and Downs
These types of guidance, like FAQs, are released without going through the rigorous guidance process that can take months or years. Problems surrounding informal guidance continue to rise as IRS increasingly relies on it, panelists said.
Informal guidance is also not subject to external comments or an internal process, and can be released without other government officials knowing about it, said Michael Desmond, partner at Bingham McCuthen LLP in Washington, D.C., and former tax legislative counsel for the Treasury Department.
“Certainly having an FAQ out there is better than having nothing, but there are some drawbacks as well,” Desmond said. In the past, IRS has had to backtrack on released FAQs, said Christopher Rizek, partner at Caplin & Drysdale in Washington, D.C., and former associate tax legislative counsel at Treasury.
However, this type of IRS guidance can be released at a faster pace, making it easier to meet the demands of stakeholders, who are increasingly relying on “real-time” information, said Linda Stiff, managing director at PricewaterhouseCoopers LLP in Washington, D.C., and former IRS commissioner. The formal process for guidance is not equipped to meet the real-time demands of the industry, she said.
Practitioners question the reliability of this kind of guidance, which is not mentioned as having authority under federal regulations. Informal guidance may be helpful, but questions remain about what kind of protections it offers for taxpayers who want to abide by it and what options exist for those who wish to challenge it, said Phillip Pillar, partner at Greenberg Traurig LLP in Washington, D.C.
“As helpful as they are, there is a disconnect there,” Desmond said. “Not only can you not rely on them substantially, arguably you can't rely on them for penalty protection because they aren't listed in” regulations.
In the future, IRS will most likely continue to use these types of guidance, and if trends continue, usage will increase. Therefore, IRS will need to consider the role of this guidance, Rizek said.
Formal Process Slow but Reliable
While some practitioners criticize the formal process followed by IRS and Treasury for releasing official guidance as being too slow, others say the process works well at times. The process is challenging because it involves numerous people from across the department, some who are not involved in the original drafting, slowing the process further, said Desmond. Formal guidance can take months and sometimes years to become final, particularly when it has an impact across a variety of areas, he said.
In 2010, IRS issued about 86 notices and 54 revenue procedures. The official guidance that is released goes through multiple levels of review and is usually accurate, he said. Also, community stakeholders get a say in the process, so it is mostly fair, he said.
In the last year, IRS has issued comprehensive guidance and a phased implementation for the Foreign Account Tax Compliance Act, said Pillar. Also, guidance on the return preparer penalties is commendable, he said.
Changes Necessary to Process
Now may be the time to make changes in the guidance process because of how much tax policy and tax stakeholders have changed, Stiff said.
The use of the revenue procedures could be significantly expanded to a much greater extent because the revenue procedures define what IRS will not accept and what safe harbors exist, she said. With revenue procedures, there is not as much pressure to put out the “right interpretive rule.” Instead, they allow IRS to acknowledge the rules are not perfect, Stiff said.
Similarly, IRS could use informal guidance to craft rules in case taxpayers rely on the informal information, she said.
Congress is unlikely to take action to improve or change the guidance process, Stiff said. However, practitioners should continue to push for such changes, panelists said. Likewise, Treasury will not see an increase in resources to handle guidance, Stiff said.
Although it is unlikely that Treasury will have more resources to invest in the guidance process, putting more money toward the process could save money in the future as it could lead to fewer lawsuits or a decrease in continued resources used to clarify confusing guidance, said Desmond.
The complete text of this article can be found in the BNA Daily Tax Report, July 25, 2011.