Dont Rely On IRS Taxpayer Guidance- It Isnt Binding
RS guidance isn’t “binding precedent” or even sufficient “substantial authority” to get a taxpayer excused from penalties if he follows that guidance and the IRS’s interpretation of the tax law turns out to be wrong. So said U.S. Tax Court Judge Joseph W. Negra on April 15th 2014. “Taxpayers rely on IRS guidance at their own peril,” Judge Joseph W. Nega wrote. OK, this seems odd.
Tax lawyer Alvan L. Bobrow made an IRA rollover move that IRS Publication 590, Individual Retirement Arrangements (IRAs), says is allowed. When Judge Nega wrote that IRS guidance isn’t binding, he was denying a motion that he reconsider his earlier decision decision to penalize Mr. Bobrow.
Technically, Bobrow and his wife Elisa had already reached a settlement with the government, and therefore Nega denied the motion as moot. But the judge wrote in his order that IRS guidance isn’t “binding precedent” or even sufficient “substantial authority” to get a taxpayer excused from penalties if he follows that guidance and the IRS’s interpretation of the tax law turns out to be wrong.
If you think this is weird and even unfair, you aren’t alone. Some fine domestic tax lawyers think so too. In a friend of the court brief, the Board of Regents of the American College of Tax Counsel argued that it undermines public confidence in the tax system to tell taxpayers who have followed the IRS’ own guidance that they “have made an error with potentially catastrophic financial consequences.” Nega cited in his order Tax Court and Appeals Court decisions holding that IRS published guidance doesn’t count in court and added that he had been well aware of what Pub 590 said before his original ruling.
At issue in the Bobrows’ case is a decades old provision of the tax code that allows IRA owners, once a year, to withdraw funds from an IRA without having the money taxed or subjected to the 10% early withdrawal penalty so long as they redeposit the cash, or roll it over to a different IRA, within 60 days after the date of withdrawal. The IRS has consistently told taxpayers that the one-a-year restriction applies separately to each IRA in which the taxpayer takes possession of the funds- even if only for very short periods.
In 2008, Alvan Bobrow, a leader of Mayer Brown’s tax practice and former General Tax Counsel for CBS Inc., took $65,064 out of two separate IRAs and redeposited the same sum in each IRA within the 60 day window. On the Bobrows’ joint 2008 1040, Alvan treated both withdrawals as qualified rollovers and not taxable distributions.
Nega ruled that Alva Bobrow’s second 2008 withdrawal wasn’t a qualified rollover because the “plain language” of the law makes it clear that the once a-year rollover restriction applies to all of a taxpayer’s IRAs combined. So much for the IRS guidance. He also found the Bobrows liable for a 20% substantial underpayment penalty on the extra taxes that resulted from the failed second rollover.
The moral of the story, a qualified tax attorney is a better source of guidance than the IRS. If you have a tax challenge, please contact us, we can help.
– Peter Muzinich
Reicker, Pfau, Pyle & McRoy