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.