November 8, 2021
IRS updates process for certain FAQs and will allow good-faith reliance on FAQs as defense against penalties
On October 15, 2021, the IRS announced (IR-2021-202) that it has created a new process for issuing significant frequently asked questions (FAQs) on newly enacted tax legislation. In addition, the IRS said it will include the date on certain FAQs and keep old ones on the IRS website so taxpayers can access them. In the same announcement, the IRS also said that taxpayers who reasonably rely on any IRS FAQ in good faith can use this as a defense against negligence or other accuracy-related penalties.
The IRS said it is changing its FAQs process to address concerns regarding (1) transparency and the potential impact on taxpayers when FAQs are updated or revised and (2) penalties that could apply to taxpayers who rely on FAQs.
Fact Sheet FAQ
The IRS said in the release that significant FAQs on new and updated tax legislation will be posted on the IRS website in a news release with a dated fact sheet (Fact Sheet FAQs). The IRS will keep earlier versions of Fact Sheet FAQs on IRS.gov so taxpayers can locate the version on which they relied, if necessary. The IRS may also apply this new process in other contexts, such as when FAQs address emerging issues.
For all FAQs, the IRS clarified that taxpayers that reasonably rely on any FAQ in good faith will have a "reasonable cause" defense against any negligence or other accuracy-related penalty if the FAQ is later found to not be a correct statement of the law as applied to the taxpayer's facts. The law, however, will still control the taxpayer's tax liability.
The IRS has created a two-tiered system for FAQs. Fact Sheet FAQs will be announced in a "news release" and maintained on IRS.gov so taxpayers can locate prior versions that support their position. All other FAQs, such as those which are merely posted to IRS.gov and not announced in a news release, will not be maintained in that manner. As such, taxpayers and practitioners should pay attention to the class into which an FAQ falls and continue to retain copies if they relied on non-Fact Sheet FAQs.
The IRS's clarification that taxpayers can use good-faith reliance on all FAQs for a "reasonable cause" defense against negligence and other accuracy-related penalties is important for taxpayers trying to comply with new tax laws prior to guidance being published in the Internal Revenue Bulletin.