Introduction

Most VITA questions are resolved by referring to information provided by the IRS in the form of publications, form instructions, information releases, and more recently, frequently asked questions (FAQs). Although not published in the weekly Internal Revenue Bulletin (Bulletin), these can be quite useful and represent a good effort by the IRS to present a complex tax law in a manner that can be read by most taxpayers. However, we always need to remember that the IRS presents the law as the IRS believes it should be applied. Others might legitimately disagree when they analyze the available authority; however, they need to be aware that absent a reasonable position and adequate disclosure, penalties can result.   

In Information Release 2021 – 202, dated Oct. 15, 2021, the IRS states, “FAQs that have not been published in the Bulletin will not be relied on, used, or cited as precedents by Service personnel in the disposition of cases. Similarly, if an FAQ turns out to be an inaccurate statement of the law as applied to a particular taxpayer's case, the law will control the taxpayer's tax liability. Only guidance that is published in the Bulletin has precedential value.” 

The IRS further adds, “Notwithstanding the non-precedential nature of FAQs, a taxpayer's reasonable reliance on an FAQ (even one that is subsequently updated or modified) is relevant and will be considered in determining whether certain penalties apply.” 

Reliance on tax authority from sources other than the IRS information noted above will arise more in Low Income Taxpayer Clinics (LITCs) than in VITA; however, it is not a bad idea for all individuals involved in tax preparation to have a general understanding of the sources of the tax law. A high-level discussion follows. Please note that the focus of this discussion is on current primary sources of the tax law. Secondary sources such as articles in periodicals are not authority but can be helpful.  

As most should recall from Civics 101, there are three branches of government, legislative, executive and judiciary, and all impact the tax law.  

Legislative Branch

The Internal Revenue Code of 1986 (Code), Title 26 of the United States Code, is the tax law as passed by Congress. A couple of provisions in the Constitution should be mentioned here. Note that under Article I, section 7, of the Constitution, all revenue bills must originate in the House of Representatives. However, many tax provisions originate in the Senate and are attached to House legislation in the form of amendments. Also, the 16th Amendment gives Congress the power to collect taxes on incomes without apportionment. Sometimes an issue arises on whether an item received is “income”.    

The Code is arranged by subtitles, chapters, subchapters, parts, and sections. The arrangement is important when applying the language of a Code section. You would not want to apply a definition that is limited to one subchapter to another subchapter. Fortunately, the Code sections are consecutively numbered. Note that some numbers are not present, and in other cases, capital letters are added; for example, 280A through 280H. A new tax provision passed by Congress is part of an Act. The language in the Act provision then almost always inserts the Act section into the Code by reference to the appropriate Code section. To complicate things, sometimes, but not often, an Act provision involving taxes is not incorporated into the Code. A good example is a provision useful in resolving a dispute involving employee vs. independent contractor status, Section 530 of the Revenue Act of 1978, that was not incorporated into the Code. You will find Section 530 in the Code; however, it deals with Coverdell Education Savings Accounts, added in 1997. 

For help in interpreting a Code section, Committee reports of the House Ways and Means Committee and the Senate Finance Committee as well as a Joint Conference Committee can be useful.  

Tax Treaties (also called tax conventions) can impact the tax law. A good example involves the standard deduction. Most nonresident aliens do not get one under Section 63 of the Code, but certain students from India are allowed one under our tax treaty with India. 

Executive Branch

The Treasury Department issues regulations to help interpret the Code. Sometimes, they are mandated by Congress and called legislative regulations, which have the force and effect of law.  Some are issued at Treasury’s discretion and are called interpretive regulations. It is important to remember that Treasury is providing its own position. Regulations, primarily interpretive regulations, have been successfully challenged (not easy to succeed but it has been done). New regulations are usually issued as proposed regulations with a process for public comment, before being issued in final form as Treasury Decisions. If Treasury wants to issue urgent guidance without public comment, it will issue temporary regulations. These are in effect when issued but will also be issued as proposed regulations and expire in three years.  

The IRS issues Revenue Rulings, which are published in the Internal Revenue Bulletin, Letter Rulings, determinations, and internal memoranda. Most are fact specific. Revenue Rulings can be relied on by any taxpayer with identical facts; reliance on the others is limited to a specific taxpayer, except in some cases to avoid certain penalties. Revenue Procedures, also published in the Bulletin, provide guidance on issues such as how to file for a ruling or determination and how to file amended returns due to a law change.  

In the Information Release cited previously, the IRS states, “The Internal Revenue Bulletin (Bulletin) is the authoritative instrument of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service and for publishing Treasury Decisions, Executive Orders, Tax Conventions, legislation, court decisions and other items of general interest.” 

“Rulings and procedures reported in the Bulletin do not have the force and effect of Treasury Department Regulations, but they may be used as precedents. Rulings not published in the Bulletin will not be relied on, used, or cited as precedents by Service personnel in the disposition of other cases.”  

Another useful IRS source is the Internal Revenue Manual, which provides guidance to IRS personnel. It can be quite useful to LITCs, especially in resolving collection issues. All the IRS issuances provide guidance that can be useful; however, the courts have been known to disregard them. 

Judiciary Branch

Taxpayers have the right to litigate a tax dispute. Most cases are litigated in the U.S. Tax Court (Tax Court), as the taxpayer does not have to pay the tax first. Decisions of the Tax Court are issued as Regular decisions, published by the U.S. government, or in cases involving more routine issues, as Memorandum decisions, published by commercial publishers.  Appeals by either the taxpayer or the IRS would go to the Court of Appeals for the appropriate Circuit based on the taxpayer’s residence. Note that if the IRS loses in Tax Court, they might not appeal for several reasons, including looking for a better case to try. If they do not appeal, they might indicate they will not follow the decision by publishing a nonacquiescence in the Internal Revenue Bulletin, agree to follow it by publishing an acquiescence, or not say anything. There is a small tax case procedure for cases involving amounts not over $50,000 in a single year. There is no appeal and while published, the decisions are not precedential.  

Taxpayers might elect to pay the tax first and go to the other trial courts, also referred to as courts of original jurisdiction, the U.S. District Court or the Court of Federal Claims based on a specific litigation strategy. For example, while the Tax Court will follow its own previous decisions, if the Circuit to which the case would be appealed has decided otherwise, the Tax Court will follow the Circuit’s decision. This policy is referred to as the Golsen Rule. In the event of a previous adverse Circuit Court decision, the Court of Federal Claims might be a better option. A jury trial is available only in the U.S. District Court. That might be an option if there are compelling facts for the jury to decide. The appeal from the U.S. District Court and the Court of Federal Claims is also to a Circuit Court of Appeals. If the IRS loses in any trial court or Circuit Court of Appeals and does not appeal, Chief Counsel may prepare an Action on Decision to provide guidance to IRS personnel. Decisions of the Circuit Courts of Appeals are more authoritative than trial court decisions. 

If a taxpayer or the government loses in a Circuit Court Appeals, they can request that the Supreme Court consider their case by filing a Writ of Certiorari. However, the Supreme Court does not have to accept the case and usually will only get involved in a tax dispute if there is a conflict between Circuits. It is interesting to note that while we have an income tax at the federal level, taxpayers living in various parts of the country might be taxed differently on a specific item in the event of such a conflict until it is resolved.  

Decisions of the Supreme Court are binding on all. However, Congress might step in and change the Code Section involved if not satisfied with the result. A good example involves the deduction for Office in Home (out of scope for VITA). The Supreme Court denied a deduction to an anesthesiologist as the Court agreed with the IRS that his principal place of business was not his home office even though he had to perform his administrative duties there. Congress later added a provision to Section 280A to specifically allow a place of business used for administrative duties to be considered a principal place of business.  

Conclusion

In conclusion, the tax law has many sources, some more authoritative than others. While too costly for most volunteers, a commercial tax research database is especially useful in determining appropriate and current authority. One option is a college or university library, especially one offering a tax course, for a volunteer with a relationship to the institution. Many LITCs will have access to at least one service. The IRS provides access to the Code, Regulations and the weekly Bulletins in the Tax Pros section of www.irs.gov.