July 19, 2023
The IRS has been active in the past decade seeking to close what is called the “Tax Gap,” which is the difference between what the IRS estimates as the 'true' tax liability of all taxpayers and the amount of tax that is ultimately collected. The agency has been closing that gap by requiring corporations and financial institutions to issue numerous income reporting forms (such as Forms 1099) that are sent to both the IRS and individual taxpayers. Whenever the IRS sees underreported income, by comparing the income shown on Form 1099 with the income included on a taxpayer’s returns, the agency will issue notices to collect taxes on the underreported income. These notices are typically computer generated.
However, not all tax filing positions taken on a tax return are as simple as transferring a number to a form. There are many areas of tax law that are subject to interpretation and are not easily reduced to a simple number transfer. In those cases, tax professionals can conduct research using the tax code, regulations, revenue rulings, revenue procedures, technical advice memoranda, notices, private letter rulings, and court cases to support a filing position on a tax return.
If a taxpayer is not comfortable taking a filing position after conducting thorough research, it might make sense to request a private letter ruling from the IRS. Private letter rulings apply to individual taxpayer based upon their unique circumstances and cannot be cited as binding precedent by other taxpayers. Requests for private letter rulings are expensive and are normally prepared by experienced tax professionals, but if the tax issue has a significant economic impact, the request might be worth it.
Fulcrum Wealth Advisors can help our clients determine whether a tax filing position is supported by their facts and the law and advise whether a private letter ruling will be advantageous.
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