FAQs used recently by the IRS to address hot-button tax issues are doing little to build confidence among cryptocurrency users and foreign banks facing new U.S. reporting requirements.
The IRS has used this informal type of guidance to address tax consequences of cryptocurrency transactions, questions on foreign asset reporting obligations, and provisions enacted in the 2017 tax overhaul—at times appearing to create new policy.
That can be a problem because FAQs can’t be relied on in legal conflicts or to avoid penalties, aren’t vetted as thoroughly as other types of guidance, and can change at any moment without notice. The average person using the IRS’s website likely doesn’t recognize these weaknesses, tax professionals said.
“FAQs can be a perfect storm for taxpayers to get something wrong,” former National Taxpayer Advocate Nina Olson said. Olson now works at the Center for Taxpayer Rights, a nonprofit she founded after leaving government last summer.
Even professionals must stay on their toes to make sure they know the IRS’s latest stance. Many will take pictures or print hard copies of website FAQs to maintain detailed record of any changes, practitioners said.
Denise Hintzke, managing director in the Global Information Reporting practice at Deloitte Tax LLP, said there are members of her team who are responsible for monitoring the IRS’s FAQs on the Foreign Account Tax Compliance Act because they have been expanded and modified a number of times over the last several years.
The IRS’s internal employee guidelines say FAQs that aren’t published in the Internal Revenue Bulletin—an agency publication announcing rulings and procedures—shouldn’t be used to back a tax position unless they “explicitly indicate otherwise.”
That hasn’t stopped the agency from using FAQs to provide significant guidance on several issues, including a one-time tax on offshore earnings, known as the repatriation tax.
FAQs in April 2018 said companies that elected to pay the tax over an eight-year period and overpaid the first installment wouldn’t be able to get a refund or elect to credit that excess amount to their 2018 estimated taxes. Instead, that overpayment would be applied to future annual repatriation tax installments—resulting in liquidity issues for some companies who had been betting on being able to get a refund or credit.
The agency’s stance drew backlash from those companies and their advisers—some said the position seemed inconsistent from FAQs released a month earlier. Eventually, the IRS clarified the case law and code sections it had used to support its position.
Practitioners have also said parts of the cryptocurrency FAQs released in October contain policies that historically would be placed in more formal guidance.
“Many of the topics addressed in the FAQs are economically and technologically complex, and have not been previously addressed by the IRS,” the American Institute of CPAs said in a Feb. 28 letter to the IRS.
The Council of the European Union in a December letter to the Treasury Department criticized the department’s decision to use nonbinding FAQs to ease a requirement of the Foreign Account Tax Compliance Act that foreign banks report the taxpayer identification numbers of U.S. account holders.
No Notice, Comment
Part of the issue with addressing substantive issues in FAQs is that they don’t undergo a normal notice-and-comment period or require the standard approvals from IRS and Treasury leadership, said Rochelle Hodes, a principal in the Washington National Tax Office at Crowe LLP. Hodes previously worked as associate tax legislative counsel at Treasury.
Hintzke recalled a client who wanted to get a private letter ruling from the IRS on a particular topic but the agency decided to address the issue in FAQs because it felt that guidance could benefit the industry as a whole.
The problem, however, is that the position the IRS took was based on the circumstances of a single taxpayer, she said.
That could have had “very negative ramifications at the end of the day if you had clients within an industry that were not aligned,” she said.
Need for Speed
FAQs are useful in situations where the IRS has to get guidance out quickly.
This was the case with the repatriation provision, which required payment in April 2018—just a few months after the 2017 tax law was enacted.
“That didn’t necessarily give the IRS sufficient time to introduce proposed regulations, receive notice and comment, or even do some of the subregulatory guidance that comes from IRS,” said Shamik Trivedi, senior manager in Grant Thornton LLP’s Washington National Tax Office.
FAQs worked well in the aftermath of the Bernie Madoff Ponzi scheme scandal that defrauded thousands of investors out of billions of dollars, Olson said. The IRS informed victims how to claim losses resulting from the scheme.
“I would hate to see FAQs abandoned as at least a short-term, fill-the-gap kind of remedy,” said Mike Dolan, national director of IRS policies and dispute resolution in the Washington National Tax practice of KPMG LLP. Dolan is a former IRS deputy commissioner and served two extended appointments as acting commissioner.
But that doesn’t mean there isn’t room for improvement.
Tax professionals said they would like the IRS to develop standards for alerting people when changes have been made to FAQs and to mark those changes more clearly by, for example, redlining them on the webpage.
The agency in December quietly updated the October cryptocurrency FAQs to include two new questions about charities that accept cryptocurrency donations. The bottom of the webpage noted that the page was last updated in December, and the agency eventually added a date next to the two new questions. But taxpayers and their advisers wouldn’t have known about the changes unless they were closely monitoring the page.
Some practitioners thought it would be a good idea for the agency to put a disclaimer on every FAQ webpage informing taxpayers that the guidance isn’t legally binding.
The agency already does this in some circumstances but it recently rejected a U.S. Government Accountability Office recommendation to add a disclaimer to the cryptocurrency FAQs, saying that the guidance reflects long-standing tax principles and the IRS doesn’t take positions contrary to public FAQs.
Hodes said she would like the IRS to update existing regulations to say FAQs are authority for purposes of getting penalty relief under tax code Section 6662.
But more importantly, she would just like the IRS to use more formal guidance when dealing with potentially new or substantive policies.
“I’m more of a fan of actually putting the document into a form of authoritative guidance,” Hodes said.