Tax Guidance: What Can You Depend On?
By Beverly DeVeny, Chief IRA Analyst
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Guidance on the tax code takes many forms. Some are universal and apply to everyone. Others apply only to the taxpayer who asked for it. The following is the hierarchy of tax guidance and how it interacts with retirement plans.
Internal Revenue Code (IRC, the tax code, the code)
The Internal Revenue Code is enacted by Congress and can be found in Title 26 of the U.S. Code (26 U.S.C.). The IRC is applicable to anyone who must file a U.S. tax return.
There are various sections of the IRC that apply to retirement accounts.
Treasury Regulations (Treas. Reg. or the regs)
The regulations, which are issued by the IRS, are the road map showing how the rules of the tax code are to be administered. They fill in the details that are missing in the tax code. Many times there are proposed regulations in place while IRS is figuring out the actual process for implementing the tax code. The regulations are applicable to anyone who must file a U.S. tax return.
There are regulations in place for the sections of the tax code that apply to retirement accounts.
U.S. Supreme Court
The U.S. Supreme Court will rule on tax matters when lower courts do not agree on an interpretation of the code and regulations. A Supreme Court decision is binding on all taxpayers.
There have been Supreme Court decisions on beneficiary form designations and bankruptcy protection for inherited IRA.
Federal Courts (U.S. Circuit Courts of Appeals, U.S. District Courts, U.S. Tax Court, U.S. Court of Federal Claims)
Decisions made by these Courts will apply to taxpayers in the jurisdiction of that Court.
Many retirement account court cases are heard in the U.S. Tax Court.
Revenue Ruling (Rev. Rul.)
Revenue rulings are issued by IRS to answer questions on a specific type of transaction. They can be relied on by all taxpayers.
There are many revenue rulings that have been issued to answer questions on retirement topics.
Revenue Procedure (Rev. Proc.):
Revenue procedures are issued by IRS to clarify instructions for complying with the tax rules. They usually deal with items that should be public knowledge. Revenue procedures can be relied on by all taxpayers.
There are many revenue procedures in place for retirement accounts.
Private Letter Ruling (PLRs):
PLRs are issued by IRS in response to individual requests from taxpayers. There is a fee that must be paid to IRS for such a ruling that usually runs to thousands of dollars. Most taxpayers will also have to pay someone to prepare their ruling request. There is no guarantee of a favorable ruling from IRS and fees are non-refundable. PLRs can only be relied on by the taxpayer making the request.
There are thousands of retirement-account PLRs that have been issued over the years. The most frequent reasons for requesting a PLR generally involve an extension of time to complete a 60-day rollover and beneficiaries looking to move retirement assets out of an estate or a trust.
Technical Advice Memorandum (TAM):
Unlike the guidance listed above, a TAM is issued for a completed transaction. It is issued by IRS in response to a question from an IRS office on the tax treatment of a transaction. They apply only to the transaction in question and are made public after all identifying information has been deleted.
There have been a handful of TAMs issued for retirement account questions.
An IRS notice gives guidance on areas of the tax code where regulations may not be immediately available. Taxpayers should be cautious about relying on a notice as the guidance is only temporary.
There are many notices that have been issued regarding retirement accounts.
Announcements contain only short-term information. They may summarize new laws or regulations, contain information on regulations that are about to be released, or notify taxpayers of an upcoming deadline.
There are many announcements that have been released with information about retirement accounts. Taxpayers should only rely on recent announcements.