Traditionally, the IRS uses FAQs to explain formal guidance to taxpayers in plain language or to issue non-binding guidance in an emergency. In some cases, Treasury and the IRS subsequently issue FAQs in more formal guidance (such as a notice, revenue ruling, or revenue procedure) that is binding on the IRS and that taxpayers can rely on. It is notable that regulations, revenue rulings, revenue procedures, notices, and announcements are all identified as types of 'published guidance' in the Internal Revenue Manual (IRM), but the IRM is silent on whether FAQs are also published guidance and what the processes are for drafting and reviewing FAQs. This silence should serve as a red flag to taxpayers that FAQs are different from regulations, revenue rulings, and other forms of published guidance. Taxpayers should proceed with caution when an FAQ is the only item the IRS has published interpreting a statute.
At the time of writing, the IRS has posted on its website at least 10 sets of FAQs, covering a wide range of key tax relief provisions from the CARES Act. Topics include economic impact payments, deferral of employment tax deposits and payments, the employee retention credit, Paycheck Protection Program loans, the use of paid leave credits, and special filing and payment relief. Most of these FAQs provide procedural guidance, such as the FAQs announcing temporary procedures that allow taxpayers to fax quick refund claims relating to net operating loss deductions and alternative minimum tax credits of corporations. This is a traditional and appropriate use of FAQs. However, some of the FAQs address more substantive issues, such as the relaxation of tax residency requirements for nonresident aliens and foreign businesses impacted by COVID-19 emergency travel disruptions. As an interim step and in the interest of getting information to taxpayers on an expedited basis, this may be a reasonable use of the FAQ format.
But FAQs can be a trap for the unwary. Indeed, FAQs that are posted on IRS.gov, like those interpreting the provisions in the CARES Act, generally are not considered binding on the IRS and do not provide taxpayers with penalty protection if the taxpayer relies on the FAQs. (Occasionally, the IRS issues a notice that contains a list of FAQs; those FAQs should be treated differently because notices are binding on the IRS and taxpayers are permitted to rely on notices). The IRS has, at times, been criticized for not explicitly stating whether taxpayers can rely on the FAQs posted on its website. See the Government Accountability Office Report, Virtual Currencies: Additional Information Reporting and Clarified Guidance Could Improve Tax Compliance, February 2020, GAO-20-188, p. 21. At least one set of the CARES Act FAQs warns taxpayers not to rely on the FAQs, as the answers to the questions only provide responses to general inquiries and "are not citable as legal authority."
As noted above, the IRM is silent on the drafting and review process for FAQs posted to the IRS website. Taxpayers may not be aware that, unlike published guidance, FAQs are not always drafted by attorneys in the Office of Chief Counsel. In fact, procedural FAQs — such as what form to file or where to send a form — are often not drafted by attorneys and are instead drafted by non-legal staff who ultimately report to the IRS Commissioner, not the IRS Chief Counsel. Moreover, there is no consistent review process that applies to vet all FAQs before they are posted to the IRS’s website. Occasionally, high-profile FAQs are reviewed by Treasury’s Office of Tax Policy, and we understand that the FAQs regarding the Employee Retention Credit were reviewed by Treasury. In our experience, most FAQs typically are not reviewed by the Treasury Department and are not subject to as many levels of review at the IRS as published guidance.
Another risk to relying on FAQs that taxpayers should be aware of is that the IRS can and does change (or update) them periodically by simply replacing the FAQs or taking the old FAQs down when the IRS updates its website. An example of these frequent changes just occurred — on 7 May, Secretary Mnuchin wrote a letter to Senators Grassley and Wyden and Congressman Neal, informing them that Treasury had reconsidered one of the FAQs relating to the Employee Retention Credit, due to correspondence they had sent to Treasury, and that the FAQ would be revised. The revised FAQ was posted on the IRS website on 8 May. As a result, unless a taxpayer regularly takes screenshots of the FAQs, there may not be any public record of old FAQ versions.
While this recent change benefits taxpayers, in a worst-case scenario, the IRS may change the answer to an FAQ unexpectedly to the detriment of taxpayers that have followed the original FAQ. One extreme example is the IRS’s use of FAQs to provide information to taxpayers and their advisors on participating in the Offshore Voluntary Disclosure Program (OVDP). Readers may recall that the OVDP allowed taxpayers to declare previously-undisclosed offshore accounts in exchange for reduced penalties. As the Taxpayer Advocate Service detailed in its Fiscal Year 2017 Objectives Report to Congress, the OVDP FAQs were issued in such haste and so poorly drafted that the IRS had to clarify them repeatedly, leading the IRS to treat similarly situated taxpayers inconsistently. The IRS also changed the OVDP FAQs regularly without providing any formal record of what changed and when. The Taxpayer Advocate found that, in six months in 2011, the IRS made 12 changes to the 2011 OVDP FAQs, which were entirely removed from the IRS’s website in 2016.
FAQs are traditionally intended to be a flexible method to communicate information to taxpayers and tax professionals quickly and in plain terms. As such, they are an important tool in the IRS’s toolkit. However, taxpayers should be mindful that FAQs are materially different from the other items published by the IRS to avoid the risk of negative consequences. Given the emergency and magnitude of the COVID-19 crisis, the IRS apparently has determined that issuing FAQs is necessary to provide immediate taxpayer relief. In general, taxpayers and their advisors have appreciated the quick release of information from the IRS, and remain hopeful that Treasury and the IRS will subsequently formalize the FAQs in published guidance. But considering the wide-reaching effect of the CARES Act FAQs, taxpayers should also be mindful of the limitations of FAQs and act accordingly.
