What if you have a client with a complicated, ambiguous or unusual situation, or a client who has made a procedural error when filing taxes? That client might end up entering into the universe of taxpayers who seek private letter rulings from the Internal Revenue Service. Here’s a little of what you need to know to understand how seeking that ruling might work.
In spite of the voluminous Internal Revenue Code, Treasury Regulations, Revenue Rulings, Revenue Procedures, and the like, in many instances a taxpayer may be uncertain as to the tax consequences of a particular transaction either contemplated or already consummated.
In those instances, particularly if adverse tax consequences could result in a significant tax liability, the taxpayer should consider requesting a private letter ruling from the Internal Revenue Service.
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Also, should the taxpayer make a procedural mistake, such as a late S corporation filing or some other mistake that may be corrected pursuant to Treasury Regulation section 301.9100, the taxpayer may be compelled to submit a request for a private letter ruling in order to get relief from the IRS.
Submitting a private letter request is much more than a making written request for relief. For this reason, each calendar year, in the first issued revenue procedure, the IRS sets forth in great detail the requirements for a private letter ruling submission. It also includes a sample format for a private letter request that can be used as a template.
1. Framing the Pertinent Issues in a Private Letter Ruling Request
Sequentially, in the private letter ruling request, the taxpayer must first set forth the pertinent facts of the transaction. Next, the taxpayer identifies the issues and requests the IRS to rule on the tax consequences of the transaction (hoping for a favorable decision).
The taxpayer can rely on a favorable ruling from the IRS, So, if a taxpayer is subsequently audited and the issue is raised by the revenue agent, the IRS will honor the ruling.
2. The Consequences of a Private Letter Ruling
Although, as illustrated by the last example, the recipient taxpayer of a private letter ruling may rely on it, other taxpayers cannot.
In fact, even with a favorable ruling, there is no absolute guarantee as to the tax consequences. This is because the IRS can revoke or modify a previously issued private letter ruling if the IRS determines that the ruling was incorrect or not consistent with the current position of the IRS.
In most cases, however, a revocation or modification is prospective. Retroactive revocations are usually not issued by the IRS provided:
(i) there has been no misstatement or omission of material facts,
(ii) the facts at the time of the transaction are not materially different from the facts on which the letter ruling was based,
(iii) there has been no change in the applicable law,
(iv) the letter ruling was originally issued for a proposed transaction, and
(v) the taxpayer directly involved in the letter ruling acted in good faith in relying on the ruling and revoking the ruling would be to the detriment of the taxpayer.
So, if the taxpayer meets all of the above stated conditions, the ruling will not be retroactively revoked or affected by the issuance of subsequent regulations.
IRS (Photo: Shutterstock)
Finally, if the IRS decides to rule against the taxpayer’s position, the taxpayer will be notified in advance. In that case, the taxpayer can either accept the ruling or withdraw the request. However, even if the taxpayer withdraws the request, the IRS will forward the file to the taxpayer’s local IRS office.
3. The Proper Procedural Submission of a Private Letter Ruling Request
As detailed in the first revenue procedure issued by the IRS each calendar year, the requesting taxpayer must attach copies of all pertinent documents to the request.
Additionally, the submission must include the complete factual details of the transaction as well as any related relevant facts, names and addresses, and the social security or tax identification number of the taxpayer.
Beyond that, the taxpayer must address the history of the issue, analysis, detail of any similar or pending request, as well as any supporting and/or contrary authority for the taxpayer’s position.
Original signatures of the taxpayer, a penalty of perjury statement, and signatures of an authorized representative, if there is one, are required.
Importantly, Appendix C of the revenue procedure is a multi-page checklist of over 50 questions that must be answered. The completed checklist must be included on the top of the package to be submitted to the IRS along with the applicable user fee. Although the user fee tends to be hefty, there are provisions for reduced user fees for low income taxpayers.
4. What Happens During the Period in Which the Private Letter Request is Under Consideration
Obviously, there is a time lag between the submission of the private letter ruling request and the IRS ruling.
During this period, the taxpayer must report relevant developments to the IRS, such as an audit examination of a pertinent return to which the request relates or the requirement of filing a return that is the focus of the private letter ruling.
Also, the taxpayer may request a telephone or in person conference. Any informal opinion expressed by the IRS during such a conference is not binding.
As mentioned above, if the IRS indicates the likelihood of an adverse opinion, the taxpayer may withdraw the request.
If the IRS requests additional information, the taxpayer has 21 days to provide it unless the IRS grants an extension. Failure to provide additional information in a timely fashion may result in the request being closed with no private letter ruling issued.
5. The Consequences of Not Following IRS Procedure May Require the Submission of a Private Letter Ruling for Relief
In general, the IRS provides taxpayers with detailed procedural steps with respect to making elections and the like in revenue procedures. So, if a taxpayer fails to follows those steps, the IRS would likely not honor the election. In that case, the taxpayer’s only recourse may be the submission of a private letter ruling for relief.
6. Use and Reliance of Private Letter Rulings by Other Taxpayers
All private letter rulings are published and are accessible by the general public.
However, all taxpayer identifying information is deleted to ensure the privacy of the requesting taxpayer.
Although the holding of a private letter ruling is non-binding to any taxpayer other than the recipient taxpayer, practitioners often view the holdings as an indication of the IRS position on a certain issue. This is particularly true with respect to an issue that has not been addressed in case law or other binding authority and there are numerous private letter rulings with similar facts and similar results.
Because of the nonbinding effect of a private letter ruling, however, practitioners who rely on the IRS holdings do so at their own peril.
7. Last Word on Private Letter Rulings
In deciding to submit a private letter ruling, the following considerations should be taken into account:
- Tax practitioner fees
- User fees
- Likelihood of favorable ruling
- Amount of potential tax liability or tax savings
- Time lag between submission and receipt of the IRS ruling
As detailed in this chapter, submitting a private letter request can be a time consuming and complicated process. Therefore, to make a proper submission, a taxpayer may be compelled to hire a tax practitioner. Professional fees added to the user fee could be an expensive proposition.
In addition, a taxpayer should weigh the likelihood of a favorable ruling with the amount of the potential tax liability or tax savings at stake.
Finally, with IRS budget cuts and dwindling personnel hours devoted to private letter rulings, there may be a significant time lag between the submission and receipt of the ruling. During that time lag, there is always the possibility of a change in the Internal Revenue Code and/or regulations or the IRS taking a position on an issue that precludes a favorable ruling.
Based on these considerations, submitting a private letter request may be a risky proposition that in the end is not cost effective, particularly if it results in an adverse ruling.
On the other hand, if a taxpayer decides to seek a private letter ruling involving a complex issue, the taxpayer should hire a competent tax professional and be diligent in following the submission requirements set forth in the revenue procedure (including the attachment of all required documents) so as to prevent any unnecessary delays. Although there are no guarantees, an organized well-written ruling request supported with legal authority as well as persuasive arguments distinguishing relevant negative authority can make the difference between a positive and a negative ruling.
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