Congress enacts laws governing the assessment and collection of taxes, but it is the IRS that takes these laws and translates them into regulations, rules, and procedures. The taxpayer does not deal with the Congress, but with the IRS.
As a part of this process, the IRS produces several types of documents that provide guidance to taxpayers (and non-taxpayers, such as charitable groups). So while it may be important to know the actual tax statutes (the specific laws enacted by Congress), it is often more important to be conversant with these various IRS publications. Here is a brief primer on some of these documents:
- The Internal Revenue Code. This is the starting point logically, though not always in practice. It is Title 26 of the United States Code, and contains the actual statutes enacted by Congress. This is THE LAW, if you will, though there are statutes in other places that may have an impact on a particular question. Further, it must be considered in conjunction with court rulings that have upheld, stricken, modified, and/or interpreted these statutes.
- Revenue Ruling. This is an official interpretation by the IRS of the Internal Revenue Code or related statutes, etc. as they apply to specific sets of facts. Revenue Rulings are published in the Internal Revenue Bulletin and provide valuable guidance in many situations. Revenue Rulings may be relied upon as precedent by taxpayers who correctly follow the ruling.
Taxpayer Advice Memorandum (TAM)– Also a Technical Advice Memorandum, a TAM is guidance offered by the Chief Counsel of the IRS at the request of others in the agency. A TAM addresses a specific question that arose as a result of the IRS’s scrutiny of a completed transaction and, generally, in response to the examination of a taxpayer’s return or claim. It provides the IRS’s interpretation of applicable law, regulations, revenue rulings and other precedents. A TAM constitutes a final determination of the position of the IRS with respect to the specific issue within the context of the specific fact pattern of the case in which the Memorandum was issued. As such, a TAM may be relied upon but with caution: caution that your fact pattern is really the same was the one in the TAM, and recognizing the risk that the IRS could argue differently. When a TAM is made public, which happens on a regular basis, all personally identifiable information about the particular taxpayer is removed.
Private Letter Ruling (PLR)– A PLR is a written statement issued to a particular taxpayer regarding that taxpayer’s situation. A PLR is generally sought in advance of a particular transaction, course of conduct, or the filing of a return. A taxpayer may seek a PLR by written request. In essence, it is the response to a taxpayer’s question: “If I do thus-and-so, what are the tax consequences?”. It provides the IRS’s interpretation of tax law as it applies to a particular set of facts. It is binding on the IRS with respect to the taxpayer to whom it was issued if (and only if) the taxpayer completely and accurately described the facts of the situation. While it provides insight on IRS ‘thinking’ on a question, a PLR may not be relied upon as precedent by other taxpayers. When a PLR is published all personally identifiable information about the taxpayer is removed.
Determination Letter– A determination letter is also a written statement issued to a particular taxpayer regarding a particular situation, in response to a formal request. A determination letter details the IRS’s determination of the tax consequences of a past transaction, or of the applicable taxes, deductions, claims, or exemptions applicable in a situation. Determination letters are issued to tax exempt organizations, for example, showing the determination of the IRS that the organization is indeed tax exempt and which provision of the tax code is the basis for the exemption. The determination letter is binding on the IRS so long as the facts and law underlying the determination remain in place. If the taxpayers facts or the law changes, the letter may no longer be valid. Other taxpayers may not rely upon determination letters.