IRS Written Advice – Legal Test | International Tax Lawyer & Attorney
IRS written advice can constitute a reasonable cause defense against an imposition of pretty much any tax penalty related to noncompliance that stemmed from that advice. This essay begins a series of articles with respect to various aspects of the IRS Written Advice Defense. Today, I will outline the statutory authority and the main legal test for the IRS Written Advice Defense as well as describe the penalties against which this Defense can be used.
IRS Written Advice Defense: Statutory Authority and Treasury Regulations
Pursuant to the Internal Revenue Code (“IRC”) Section 6404(f) and Treasury Regulations §301.6404-3, the IRS is required to abate any portion of any penalty attributable to erroneous IRS written advice furnished to the taxpayer by an officer or employee of the IRS acting in such officer’s or employee’s official capacity.
IRS Written Advice Defense: Penalties That Can Be Abated
I already mentioned above that the IRS Written Advice Defense may be applicable to pretty much any penalty that was imposed from that advice – this is obviously a simplification, but it is very close to reality. The regulations specify that the IRS Written Advice Defense applies to any penalty or addition to tax “imposed under subtitle F, chapter 68, subchapter A and subchapter B of the Internal Revenue Code, and the liabilities imposed by sections 6038(b), 6038(c), 6038A(d), 6038B(b), 6039E(c), and 6332(d)(2).” Treas. Reg. § 301.6404-3(c)(2).
Moreover, the IRS Written Advice Defense also applies to any liability “resulting from the application of other provisions of the Code where the Commissioner of Internal Revenue has designated by regulation, revenue ruling, or other guidance published in the Internal Revenue Bulletin that such provision shall be considered a penalty or addition to tax for purposes of section 6404(f).” Id.
Finally, the Defense will further apply to any “interest imposed with respect to any penalty or addition to tax.” Id.
It is important to point out that the IRS written advice may be a very important reasonable cause defense against FBAR, Form 5471 and Form 5472 penalties.
IRS Written Advice Defense: Legal Test
The Treasury Regulations describe all three prongs of the legal test that must be satisfied before relief from tax penalties is granted based on the IRS Written Advice Defense:
(i) The written advice was reasonably relied upon by the taxpayer;
(ii) The advice was issued in response to a specific written request for advice by the taxpayer; and
(iii) The taxpayer requesting advice provided adequate and accurate information.
In subsequent articles I will explore each prong of this legal test in more detail.
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