If the IRS gives you instructions how to complete a tax
form, you can rely on them, right? You would think so. Yet, instructions are not actually part of the tax law. In fact,
there are many tax cases in which well-meaning taxpayers claim their tax
position is justified by IRS instructions or publications. In most
instances, taxpayers lose, even if they have a credible reading.
Call it the ultimate Catch-22. A long line of cases
says the only authoritative sources of tax law are official statutes,
regulations, and judicial decisions. Does this impressive weight of
authority mean taxpayers can never cite form
instructions? As is so common with blanket statements in our Byzantine tax
system, not always. That is important if you are a confused but well-meaning
taxpayer. First, let’s see what you are up against.
Usually, courts
reject attempts to rely on IRS instructions, including these:
·
Joe claimed a settlement payment was not subject to Social
Security taxes, because an IRS publication said settlement proceeds should be
reported as “Other Income” on line 21 of Form 1040. Joe lost.
·
Sally claimed her housekeeper was an independent contractor,
because an IRS publication stated that “individuals who furnish personal
attendance, companionship, or household care services to children,” and who are
not employees of a placement service, “are generally treated as self-employed
for all federal tax purposes.” Sally lost too.
·
Jose said that at the time he filed his return, an IRS publication
supported his position that a deduction for educational expenses did not have
to be reduced by benefits paid by the VA. Jose also lost.
·
Ellen claimed her contributions to an IRA were not subject to
excise taxes based on language in an IRS publication. It said you can
contribute to an IRA if you are not an active participant “during any part of
the tax year.” Ellen lost, and the excise tax applied.
·
Victor claimed he was a foreign resident despite living in the
United States, citing a Treasury Department Tax Guide for U.S. Citizens Abroad
that suggested all he needed was a clear intention to return to his country of
origin. Victor lost too.
·
David argued that an IRS handbook on Domestic International Sales
Corporation rules, published after the statute had gone into effect but before
the regulations had been issued, was controlling. The IRS won.
·
Frankie claimed that a court order regarding custody entitled her
to take a dependency exemption on her taxes. After all, the instructions to IRS
Forms 501 and 504 were “less than clear and may even be
misleading,” although the statute required the custodial parent to sign a
release. Frankie lost too.
This is a
daunting list. In fact, only a very few courts have held the IRS to what it
says in its instructions and publications. But think about the business world.
Could a toy manufacturer escape liability by arguing that its instructions how
to assemble a toy are not relevant and not part of the product? Hardly, and the
IRS should be held to the same standard.
A key taxpayer victory that may give you some hope is Wilkes v. United States, 50 F. Supp. 2d 1281, 1287 (M.D.
Fla. 1999). The case is more than 15 years old, but it has apparently never
actually been cited by another court on this point! The court stated that
“general principles of equity dictate that the IRS should not be allowed to
issue instructions for completing its forms and later disavow those
instructions.”
The Wilkes decision shows that the
IRS’s own instructions to its forms can sometimes be cited to support
a taxpayer’s position. Depending on the facts, it should be possible to hold
the IRS to its own forms and its own publications where one is reading them
reasonably. After all, shouldn’t the IRS be required to write reasonable
instructions, just like a toy manufacturer?
By Robert W. Wood. Source: http://www.forbes.com/sites/robertwood/2015/11/11/amazingly-irs-says-you-cant-rely-on-irs-instructions/
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