Understanding Private Letter Rulings and the IRS

When it comes to the IRS, the adage that it’s easier to ask for forgiveness than permission can have costly repercussions. Luckily, the IRS does offer a method whereby taxpayers can ask permission before they take a contemplated step that might later require forgiveness (which would rarely be forthcoming). These are known as private letter rulings.

What exactly is it?

A private letter ruling is issued to a taxpayer by the IRS and provides an interpretation of the tax laws to the taxpayer’s presented set of facts. They are often used by taxpayers seeking confirmation from the IRS that a proposed transaction will not violate the tax laws. They are private in that they can only be relied upon by the taxpayer who requested them. Other taxpayers and even IRS personnel cannot apply private letter rulings to other taxpayer situations.

The Process

The taxpayer who wishes to obtain a private letter ruling must first submit their request in writing. The request must have a complete statement of the facts at issue including identification of the parties at issue, annual accounting period, the method of accounting, description of the business operations of the taxpayer, and detailed information about the transaction at issue. In addition, the taxpayer must also include documents implicated in the transaction, including contracts, wills, instruments, or balance sheets and profit and loss statements for corporations.

The taxpayer must then provide an analysis of the facts and how they relate to the issue at hand. Where the taxpayer requests a particular outcome from the office, as opposed to asking for a general interpretation, the taxpayer must also include citations to supporting authorities as well as authorities that are contrary to the taxpayer’s view. Indeed, the taxpayer is required to be forthcoming and candid about any contrary authorities and address the implications of these contrary authorities on the taxpayer’s request.

Once you’ve finished the entire process, you must sign the letter under penalty of perjury, which means that you are agreeing that the facts you included in the letter are true, correct, and complete to the best of your knowledge. This means if you knowingly provide incorrect facts, the IRS can come after you for perjury (i.e. telling a lie under oath).

The letter, once it is finished by the IRS, will be released to the public, with your information and all, so while you are preparing your request, it is important to include a statement identifying the information that you want deleted from the public version.

When Private Letter Rulings Are Denied

The IRS will not issue private letter rulings in situations where:

  • The identical issue is already under examination by the office or the appeals office
  • The issue is the subject of ongoing litigation involving the taxpayer
  • The issue has been examined by the office or appeals, but the statute of limitations on the determination has not expired.

Private letter rulings are also not available for certain factual situations such as on one part of a larger transaction, for general inquiries regarding tax status or liability of the taxpayer, or regarding tax consequences of proposed legislation. Certain groups are also barred from seeking private letter rulings including foreign governments and business associations or groups.

As with just about everything involving interactions with the IRS, it is a very wise idea to have competent counsel assisting with the filing of a request for a private letter ruling. If you need to file a request for a private letter ruling, contact MaxwellDunn for assistance. Our attorneys can help you through all aspects of the process.