Relying on Advice From the IRS

Published Categorized as Tax Returns
oral advice from the IRS

IRS employees often give bad and incorrect tax advice. There are numerous examples of this in reported tax cases.

Unlike advice provided by licensed professionals, such as tax attorneys, one generally cannot prevail in a malpractice suit against the IRS. That leaves the question as to whether bad or incorrect advice from the IRS can relieve the taxpayer from liability for their taxes.

The courts have addressed this numerous times, as the U.S. Tax Court did again in the Peak v. Commissioner, T.C. Memo. 2021-128, case.

Facts & Procedural History

This involved the 2017 tax year. The taxpayer received three small distributions from retirement accounts. The taxpayer received Forms 1099-R from the plan administrators.

When he completed his tax return for 2017, he reported the retirement distributions on Line 12a. But on line 12b, he did not list all of the distributions as being taxable.

Apparently, he had called the IRS and asked the IRS for help in determining how to report these amounts. The IRS may have advised the taxpayer that he did not need to report all of the distributions as being taxable. That advice could have been correct. For example, part of the retirement accounts may have been Roth contributions that are not taxable, for example.

The IRS sent the taxpayer a math error notice, and then eventually a statutory notice of deficiency for 2017. The taxpayer filed a petition with the U.S. Tax Court to contest the deficiency.

The taxpayer was not correct about the tax reporting, but the taxpayer asked the U.S. Tax Court to decide whether his interaction and erroneous advice from the IRS could relieve him of liability for the tax.

Reliance on Oral Advice

There is a concept with tax penalties that a taxpayer is not liable for penalties if they rely on the advice of a tax professional. This penalty relief also includes reliance on written advice from the IRS. Thus, if a tax professional provides advice or the IRS provides written advice, the taxpayer may be able to avoid penalties. This does not extend to the underlying tax liability.

The court, in this case, cites Atkin v. Commissioner, T.C. Memo. 2008-93. Atkin is similar to the current case. In Atkin, the dispute focused on a distribution from a SEP-IRA. There are numerous other cases that address this concept as well. The general rule set out in these cases is that oral statements by the IRS are not binding on the taxpayer.

This is why the tax court did not accept the taxpayer’s argument that:

he entered into an “implied [settlement] contract” with the IRS because he “agreed” to the terms of the Notice CP12 (i.e., the corrected refund of $182) by not responding to that notice [and the IRS’s] notice of deficiency was unlawful because the IRS breached that settlement contract when it sent him the deficiency notice.

This rule does not apply to others. There are legal doctrines such as promissory estoppel and implied contract and laws based on these concepts that apply to others. The taxpayer, in this case, may have had a valid argument if the other party was not the IRS.

As with this case, the existing court cases are why the IRS rarely provides anything in writing that can be construed as tax advice. The IRS tends to stick to its standard notices and sanitized letters to communicate with taxpayers. Other than these communications, almost all other communications are oral. The major exception to this is the IRS’s private letter ruling request process, which is an IRS function that taxpayers can use in some instances to get written advice from the IRS that they can rely on.

The Takeaway

Unlike almost everyone else, the IRS is not bound by its oral statements. This is true even if a taxpayer relies on the IRS’s oral statements to their detriment. Oral statements by the IRS are not even sufficient to avoid penalties imposed due to the IRS’s oral statements.

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