At least once a year, someone doesn’t like my answer to something and so they quote an IRS Publication as to why I’m wrong.
It happened this past week, so it’s early this year. Let’s review how tax law works. But before we do, I’ll cut to the chase. The IRS publications are often wrong. That’s well-documented and recognized by the IRS. That’s why if you try to use an IRS publication to prove your point in an audit or tax court case you’ll get laughed out of court. It does not have the rule of law. This is how it REALLY works.
Congress proposes an Act, which gets voted in and signed by the President. Now we have law! But that’s just the beginning.We may have the broad strokes of “what” the law says, but there is a lot of “how” that is not answered. That’s where Treasury Regulations come into play. The Treasury Regulations will take a few paragraphs of Tax Code and in pages and pages explain what to do in certain circumstances.
It’s often late, after the fact, and you’ve had to use new tax law on your tax return without any real guidance. (Hello, 2018) For example Section 199A, just one section of the massive Tax Cuts and Jobs Act has had two big releases of Treasury Regulations. And they don’t agree. The 2019 Regulations were effective back to 1/1/2018, but they gave you a chance to elect the 2018 ones or the 2019. There are pros and cons of each, but choose wisely. You can’t pick and choose between the two. It’s all or nothing on these regs. 2018 or 2019? You choose.
Then there usually is more information needed, often procedural info. That’s when the Revenue Procedures comes into play. We’ve already had those too, also on that much misunderstood Section 199A. There are also Revenue Rulings. So far, all of these have the effect of law.
At some point, someone will take a employ a loophole (someone like me) and maybe the IRS says “no”. It ends up in audit and if the client isn’t happy with the negotiation, it ends up in Tax Court. The Tax Court desidess and they don’t always rule in favor of the IRS. In fact, they often disagree with the position the IRS has taken. If the Tax Court decision is in your district (for example, I’m in District 9) you have some good evidence to support a certain position. If it’s another district, then your case isn’t as strong.
You still might not be happy with the decision after Tax Court and so you want to go to the US Supreme Court. That happens too. It may take several years, but when that happens the Court tells you what to do. That’s got pretty good law behind it too.
Another option is that you ask for a private letter ruling on a particular case. The IRS will answer you and publish the results, hiding your name and some of the contact info. Other people can read the private letter ruling to get a sense of how the IRS is thinking on a particular subject, but you can’t use those as a rule of law.
It really comes down to just the IRS Code, as interpreted by Treasury Regulations, Revenue Rulings, Revenue Procedure, Tax Court (provided it’s your federal district) and the US Supreme Court. And, if you get a private letter addressed to you personally, you can use that.
The publications? Nope. The IRS even tells you in the fine print that you can’t rely on them or use them as substantiation in case of audit. The fact is they are often wrong and/or outdated.
Know your sources. That’s the only way you can be sure the information you’re researching is going to hold up if you’re ever challenged.