At certain times, tax planning may involve taking a position on a tax return that is uncertain, or even controversial. If the position involves a potentially large liability, taxpayers may be left with the undesirable choices of either taking a risk in reporting the position or deciding not to and paying a much larger tax.
Thankfully, in some instances, the IRS allows for a way to receive clarification on a specific tax position for individual taxpayers, called Private Letter Rulings. The basic mechanism of obtaining a Private Letter Ruling is the essence of this essay.
Private Letter Rulings are issued by the National Office of the IRS upon request by individual taxpayers. Basically, Private Letter Rulings state how a specified tax position will be treated by the IRS if it is taken on a tax return. Hence, this process is one of the best ways to ensure proper, safe tax planning on otherwise potentially risky positions. The IRS will only issue letter rulings based upon actual transactions (even if they have not been completed yet); mere hypothetical scenarios will not qualify. While the IRS is not legally bound by letter rulings, in general, it has honored the determinations made to specific taxpayers.
A Private Letter Ruling that is issued to an individual taxpayer must be attached to the tax return filed for the year that the position in question is reported. In certain circumstances, the IRS may issue subsequent determinations to other taxpayers, based upon almost the same set of facts, that seem to contradict the earlier letter ruling. Generally, in such cases, the new ruling will not be applied retroactively to the original taxpayer who requested a letter ruling.
Furthermore, the IRS is required to make Private Letter Rulings available for the general public, with identifying individual details removed. In most cases, a Private Letter Ruling only applies to the individual taxpayer who request it. For the purposes of avoiding accuracy-related penalties, however, Private Letter Rulings issued after 1984 may be used as substantial authority by other non-requesting taxpayers.
Because a letter ruling represents the current IRS view of a tax issue, letter rulings may be superseded by new case law. Keep in mind, however, that there are limitations with respect to the IRS revocation or modification of a letter ruling sent to an individual taxpayer.
Of course, as most things in life, the benefits of a Private Letter Ruling come with certain costs. There is a fairly steep fee charged by the IRS for making a request. In addition, the legal fees involved in obtaining a Private Letter Ruling are often comparable to an administrative appeal or an arbitration case (depending on the complexity of your case). Also, there are certain prescribed areas of the law that the IRS will not rule on for Private Letter Purposes. The same applies to requests that involve only issues of fact. In fact, the complexity of obtaining the Private Ruling is such that your best course of action is to retain a tax attorney if you seek to minimize your potential tax liability and audit risk by requesting a letter ruling.
Contact Sherayzen Law Office For Help In Obtaining a Private Letter Ruling
Obtaining a Private Letter Ruling usually involves complex issues, and this articles only provides a very general background information that should not be relied upon in making the determination of your specific situation. Rather, if you would like to consider obtaining a Private Letter Ruling from the IRS, you should contact Sherayzen Law Office for legal help. Our experienced tax firm will help you determine whether your case qualifies for a Private Letter Ruling, whether this is the best course of action available, and provide rigorous, ethical and affordable IRS representation.