Page 2 - Tax Controversy Corner: Can Taxpayers Rely on Informal Guidance in Attempting to Comply with the TCJA?

Tax CoNTroversY CorNer

on the acts or statement of the party against whom the provides for a 20% accuracy penalty on the portion of an
estoppel is claimed, and (5) as a consequence of that underpayment of income tax attributable to (i) negligence
reliance, the party claiming the benefits of the estoppel or disregard of rules or regulations or (ii) a substantial
must be adversely affected by the acts or statements understatement of income tax. Once the IRS has met the
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of the party against whom the estoppel is claimed. 6 burden of production with regard to the accuracy penalty,
the taxpayer has the burden of proving any defenses, such
The first barrier to estopping the government based on a as that the position was based on substantial authority,
statement in an IRS form or instruction is to show that the or had a reasonable basis and was adequately disclosed,
IRS made a false representation. In Thompson-Perry, the or that the taxpayer should not be subject to penalties
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petitioner argued that the IRS provided him with mislead- because he or she acted with “reasonable cause” and
ing instructions as to how to petition to quash an admin- in “good faith.” “Reasonable cause” requires that the
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istrative summons. The court was highly skeptical that: taxpayer exercise ordinary business care and prudence as
to the disputed item. “Good faith” has been described
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[a]n erroneously or gratuitously sent form with as “(1) an honest belief and (2) the intent to perform all
preprinted instructions for filing a petition to quash lawful obligations.” 14
the summonses constituted affirmative misconduct Taxpayers have attempted to rely on IRS publications,
or a misrepresentation. However, even stretching to forms, and instructions as a defense to penalties by estab-
presume that this preprinted form did constitute affir- lishing that they are substantial authority or a reasonable
mative misconduct or a misrepresentation, Petitioners basis (when the position was adequately disclosed), or
cannot show that the government intended to induce that they form the basis for the reasonable cause and good
their reliance upon the preprinted form, especially faith defense.
when they were not entitled to notice under the We can quickly dispatch with the argument that sources
statute. 8 of informal guidance are substantial authority or provide
a reasonable basis for a position that has been adequately
Next, an erroneous statement in an IRS form or instruc- disclosed. Treasury Regulations define “substantial
tion is most likely going to be a mistake of law, not of fact. authority” as being limited to a lengthy list of authori-
And, courts will allow the IRS to take a position that varies ties, including the Code, Treasury Regulations, court
from its informal publications because “[t]he doctrine of cases, and more formal IRS guidance such as Revenue
equitable estoppel is not a bar to the correction by the Procedures and Revenue Rulings. Notably, IRS publica-
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Commissioner of a mistake of law.” 9 tions, forms, instructions, and FAQs are not included in
Finally, it is difficult to see where a taxpayer would be this list. As a result, courts have unanimously agreed that
damaged by relying on an IRS form or instruction. As informal publications such as instructions and forms are
noted above, the tax is the tax, and if the IRS form or not authoritative sources of federal tax law, and thus
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instruction misleads the taxpayer so that they pay less cannot be substantial authority. Similarly, the reasonable
tax, when that error is corrected, the taxpayer is put in basis standard generally requires that the position be based
the correct position, not a worse position (although the one or more of the authorities included in the definition
taxpayer may not perceive it this way). As explained by of substantial authority. 17
one commentator, it does not make sense to apply equi- Accordingly, a taxpayer who relies on informal guidance
table estoppel against the IRS because “there has been no to his or her detriment is left with reasonable cause as the
damage to anything other than expectations.” 10 only defense to penalties. The Tax Court, however, has not
The potential damage to the taxpayer would be in the been especially sympathetic, even where a taxpayer could
form of penalties. That leads us to the next question of show that they were misled by informal IRS guidance. For
whether reliance on IRS forms and instructions is a defense instance, in Miller, the Tax Court explained:
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to penalties.
Our review of the relevant IRS publications reveals
that the guidance given to taxpayers for the years at
Can Reliance on Informal guidance issue is less than clear and may even be misleading
Be a defense to Penalties? … Unfortunately, the fact that an IRS publication
is unclear or inaccurate does not help the taxpayer.
The most common penalties assessed on tax returns are Well-established precedent confirms that taxpayers
accuracy penalties under Code Sec. 6662. Code Sec. 6662 rely on such publications at their peril.

72 JOURNAL OF PASSTHROUGH ENTITIES SEPTEMBER–OCTOBER 2019