The IRS announced it is updating its Frequently Asked Questions (FAQs) process for certain FAQs relating to newly enacted tax legislation. It also announced an update to its General Overview of Taxpayer Reliance on Guidance Published in the Internal Revenue Bulletin and FAQs, which will now include reliance on future and past FAQs as a reasonable cause defense to accuracy-related penalties.
The IRS made these changes to address concerns about transparency and the potential impact on taxpayers when FAQs are revised or updated. The new process will apply to significant FAQs on newly enacted tax legislation and future updates or revision to those FAQs. The IRS will now announce the FAQs, and revisions or updates in a news release, but also publish them in dated fact sheets posted on irs.gov. This will allow taxpayers to better confirm which version of FAQs or Fact Sheet they relied upon if they later need to do so. The IRS said prior versions will be maintained on the website. Although this procedural change is limited to significant newly enacted tax legislation, the IRS also said that it may apply this process in other contexts, such as newly emerging issues.
The announcement also provides a taxpayer friendly change to penalty abatement when a taxpayer relies on FAQs. The IRS did not change its policy that a taxpayer cannot rely upon FAQs that are not published in the Internal Revenue Bulletin or on FAQs that later turn out to be incorrect. However, the IRS added a clear statement that if taxpayers can demonstrate good faith reliance and the reliance was reasonable based on the facts and circumstances, then the IRS will consider this as a reasonable cause defense to negligence penalty or other accuracy-related penalties, to the extent that the reliance caused an underpayment of tax. This new policy will apply to existing FAQs, as well as future FAQs. Further, the IRS said that a taxpayer who relies on FAQs published in a fact sheet linked to an IRS news release may use this FAQ as ‘substantial authority’ for treatment of an item on a return as an exception to accuracy related penalties under Reg. section 1.6662-4(d).
The announcement is welcomed relief for taxpayers who have relied on FAQs in the past and provides clarity for reliance on future FAQs. Taxpayers facing accuracy-related penalties should contact their tax advisor if they believe they can demonstrate good faith and reasonable reliance on FAQs.