What Will Happen To Tax FAQs?

Publishing mostly procedural information on the IRS website in the form of FAQs has a relatively long history, and taxpayers and practitioners like to have more and speedier guidance. Neither the format nor the informal guidance itself is therefore likely to go away or decrease.

However, the IRS will probably be more circumspect about keeping substantive decisions in documents that undergo notice and comment rulemaking in the future.

The promise and perils of FAQs are unique among guidance because although they offer a relatively simple way to release guidance quickly, taxpayers can’t rely on them, and they are subject to change at any time without warning.

That’s a particular problem when the guidance in FAQs seems more interpretive and less like non-substantive, procedural information. And when the FAQs are the only guidance interpreting a recently enacted statute, the reliance problem becomes prominent. But the countervailing benefit of easily promulgated, generally faster guidance is especially important in addressing immediate needs caused by crises. 

What was once a nascent formatting style largely tucked into other types of guidance or information got a huge boost from the advent of widespread internet use.

When the IRS’s homepage debuted in 1996, the IRS posted information for taxpayers under the label “Frequently Asked Questions,” which were restatements of existing law and filing procedures, not interpretations or even novel information about procedures.

They were part of the “Taxpayer Help and Education” section of the site, which summarized different tax topics for the public. If anyone wondered whether those early FAQs presented administrative law problems, they did so in private.

The speedy issuance of guidance in Q&A form in response to a crisis dates back to at least 1990 — coincidentally, the same year the code for the World Wide Web browser was written — when the IRS issued a news release in the form of questions and answers on tax issues affecting reservists, regular military personnel, and civilians directly affected by Operation Desert Storm (IR-90-142).

The questions in those FAQs were urgent, as they addressed how a nondeployed spouse should sign tax forms for a suddenly deployed spouse and provided relief from requirements for the foreign earned income exclusion for taxpayers who had to unexpectedly leave areas in the Middle East.

Early experiments like this one in providing guidance in a Q&A format coalesced with the rise of the internet to result in the practice of issuing FAQs as a distinct type of informal guidance. 

From the early 2000s, the IRS seems to have viewed the web-based FAQs as helpful for addressing practical, mostly ministerial questions and sometimes even for engaging in a back-and-forth with taxpayers and practitioners that nodded to notice and comment procedures.

In 2001 the IRS asked taxpayers and practitioners to submit questions and comments on e-filing rules that would then be synthesized to provide guidance in the form of FAQs. That early experiment in public engagement on the content of FAQs never became an established routine, but taxpayers and practitioners in practice have encouraged the IRS to address problems in FAQs and to change already-issued FAQs, resulting in a de facto, if sporadic, comment procedure for them.

The offshore voluntary disclosure program in 2009 and the subsequent offshore voluntary disclosure initiative in 2011 were both exclusively creatures of FAQs, and their updates sometimes took public comments into account, such as by adding an opt-out procedure.

The rub, of course, is that the IRS is under no obligation to respond to comments on informal guidance such as FAQs.

The popularity of issuing guidance in online FAQs exploded early in the last decade.

A review published in Tax Notes in 2011 found that the IRS website returned more than 1,300 results in a search of the phrase “frequently asked questions”; the same search now returns 1,050 results, and “FAQs” returns 1,237.

In a forthcoming review of guidance for three major pieces of tax legislation — the Tax Reform Act of 1986, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), and the Tax Cuts and Jobs Act — Clinton G. Wallace of the University of South Carolina School of Law and Jeff Blaylock found that no FAQs were issued in the two-year period after TRA 1986 or after EGTRRA, and 20 were issued after the TCJA.

He noted that some Q&A-style guidance may have been released under different names, such as in news releases or announcements.

FAQs are typically a part of a more comprehensive guidance package that gives non-substantive compliance instructions. For example, the final section 163(j) business interest deduction regulations (T.D. 9905) were issued in conjunction with proposed regulations (REG-107911-18), as well as a notice on a proposed revenue procedure on a safe harbor for residential living facilities and FAQs on the basic operation of the aggregation rules. The preamble to the final regulations promised that the FAQs would be updated when guidance on affiliated service group rules is published.

But sometimes FAQs stand alone as the only guidance the IRS issues on critically important topics.

Following the UBS scandal in 2008, the OVDP in 2009 and the offshore voluntary disclosure initiative in 2011 relied on FAQs as their sole form of written guidance.

Changes to the FAQs frequently caused consternation, for example, when the IRS updated an answer to remove an explanation of its reasoning.

The resulting frustration was understandable, but administrative law doesn’t provide a remedy. Agency discretion to set enforcement priorities is subject to little judicial review.

The voluntary disclosure FAQs hewed closely to that exception for enforcement priorities, so although they caused practical difficulties for taxpayers and practitioners when they changed, they didn’t violate administrative law principles.

Challenging Times for FAQs

The practice of issuing FAQs on the IRS’s website has long sat at the uneasy intersection of procedure and substance, although most FAQs are helpful, easily digestible guidance.

Certainly the IRS could have more clearly announced when it updated some FAQs in the past, and it would be helpful for it to establish a regular internal review process for FAQs so that the line between purely procedural guidance and substantive interpretations isn’t crossed.

But before the pandemic-related FAQs, there had been no formal challenge to FAQ issuance as a potential violation of administrative law.

The problem the IRS encountered stemmed from the pressing need to get guidance out quickly on the economic impact payments and stimulus measures in the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136).

To the agency’s credit, it released a lot of guidance, putting out FAQs on the employee retention credit within days of its enactment and releasing FAQs on leave credits under the Families First Coronavirus Response Act (P.L. 116-127) shortly after that bill’s enactment.

FAQ drafters should be careful not to go beyond procedure and existing legal interpretations to provide novel legal interpretations in informal guidance.

The IRS let its guard down in the FAQs that resulted in the prisoner class action in Scholl v. Mnuchin, No. 4:20-cv-05309 (N.D. Cal. 2020). The plaintiffs assert an immediate injury resulting from rights and responsibilities established in the FAQ — namely, the denial of economic impact payments.

The district court in Scholl found that the FAQ announcing that incarcerated individuals were ineligible for distributions was a final agency action, and it enjoined the IRS from withholding payments from prisoners.

The broader impact of the litigation is still far from settled, but it seems likely to become a cautionary tale about ensuring that substantive questions are addressed in guidance other than FAQs.

“The question that I have is whether or not [Scholl] is going to prompt more rigor around the FAQ process,” said Rochelle Hodes of Crowe LLP. She added that that would include establishing a sign-off process and when IRS lawyers must review FAQs before publication.

“If they do determine that more rigor should be put around FAQs, that could address some of the concerns that people have about FAQs in the first instance,” she said.

Those concerns include the temporary nature of FAQs and the absence of any archiving or indexing of them. Hodes said the litigation may help the IRS improve FAQ practices.

Not Just FAQs

The Q&A format isn’t limited to informal guidance designated as FAQs; sometimes it’s used in formal guidance.

Several current tax regulations use that format to convey information, and it’s a popular choice for employee benefits rules. For example, regulations under section 280G on golden parachute payments published in 2003 (T.D. 9083) were written as questions and answers.

Reg. section 1.132-9 also adopted a Q&A format for providing formal guidance on qualified transportation fringe benefits.

“In substance, they are exactly what you’d expect to find in published regulations — a serious interpretation of complicated legal issues,” Wallace said. “The IRS has found the construct of a question followed by an answer helpful to communicate information.”

Both of those final regulations were written nearly 20 years ago — reg. section 1.280G-1 was published in 2003, and reg. section 1.132-9 was published in 2001. But the IRS had used Q&As in regulations long before that.

A set of temporary regulations on lines of business under section 4977 (T.D. 8004) was published in a Q&A format in 1985. That style is also sometimes used illustratively in a regulation with more standard formatting, as in reg. section 301.6330-1(a)(3), in which the Q&A explains the procedures referenced in a previous subsection.

Let’s Make It Official?

One of the main problems with FAQs is that taxpayers can’t rely on them, but one easy fix for items in FAQs so that taxpayers could rely on them is to include them in formal subregulatory guidance, such as a notice.

Formalizing some FAQs seems to be on the table. IRS Chief Counsel Michael J. Desmond said during a May 6 Tax Analysts webinar that the IRS is considering additional guidance to be published in the Internal Revenue Bulletin that would follow up on guidance in FAQs.

Formalizing FAQs across the board would defeat their purpose in providing relatively fast procedural answers to taxpayer questions in many cases.

And the history of FAQs suggests they mostly don’t need to be formal, because they either are restating something that is already in formal guidance elsewhere — but may be difficult to find — or are purely procedural.

The IRS’s ambivalence toward putting FAQs on the track to publication in the Internal Revenue Bulletin is often warranted, particularly given its long-standing resource constraints.

However, there’s already a procedure under the Administrative Procedure Act for parties to try to prompt an agency to submit guidance issued informally, like a set of FAQs, to the notice and comment rulemaking process without running into problems from a broad interpretation of the Anti-Injunction Act, Wallace said.

Under 5 U.S.C. section 553(e), agencies must allow parties to petition for “the issuance, amendment, or repeal of a rule.” If the agency denies the petition, it must provide a brief statement of the reasons why under 5 U.S.C. section 555(e), and that denial could be contested in court.

This Administrative Procedure Act process would apply to challenges to FAQs. “It’s not a well-traveled route, but it exists,” Wallace said.