On May 6, 2020, the Internal Revenue Service published an FAQ which included, in
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| William Delaney, EA Westwood, MA |
Q&A 15, a position (with no particular reason noted or cited) which stated that individuals who were incarcerated were not eligible to receive EIP payment(s) under the CARES Act. If you will recall, there was an uproar when the public learned that the database used for issuing payments included criminals who were incarcerated. The IRS moved to demand a return of the payments.
What didn’t make the headlines in the same way was an Action, filed on behalf of those who were being denied an EIP as a result of the FAQ – Scholl v. Mnuchin, USDC ND CA, Case No. 4:20-cv-05309 (10/14/20).
The plaintiffs argued that the FAQ was incorrect, and that they had been harmed by
denial of an EIP payment. The Service argued that an FAQ is an informal publication
found on the agency’s web page, and that it was not subject to judicial review under the
federal Administrative Procedures Act (APA) since it was neither a final decision nor an
interpretation of law.
The Court looked to the conditions which must exist under the APA which would allow
the judiciary to take a look and it found that there are two requirements…
“First – the action must mark the consummation of the agency’s decision-making
process…Second – the action must be one by which the rights or obligations have been
determined, or from which legal consequences will flow.” Cited as authority: US Army
Corps of Engineers v. Hawkes Co, 136 S.Ct. 1807 (2016).
Did the guidelines, as laid out by the US Supreme Court in Hawkes, allow the Court in
Scholl to take a look? Here is what the Court determined…
The FAQ took the unequivocal position that incarcerated individuals were not eligible for
an EIP payment. (First requirement met)
The CARES Act requires the government to issue EIP payments to individuals who
meet the criteria specified by Congress (in the Act). By denying the incarcerated
individuals an EIP payment, and by relying on the FAQ as their authority for so doing
(no particular reason noted of cited), the government denied the payments to a specific
segment of the population. (Second requirement met)
Yes, the Court did have standing under the APA to review the FAQ and its attendant
consequences. “Accordingly, the court finds that the IRS’s determination that
incarcerated individuals are ineligible for an EIP is a final agency action.”
The eventual outcome in this case is not important to our discussion. What is important
is that the IRS went beyond where the typical FAQ is supposed to go, and turned it into
a “final agency action” as opposed to “…restatements of existing law and filing
procedures…” and not interpretations of statute or procedures. See IRS homepage
(1996) wherein the IRS posted FAQs on a web page for the first time.
FAQs, as we know them and notwithstanding the Scholl circumstances outlined above,
are not intended to be binding (final) guidance. According to the Internal Revenue
Manual (IRM) – see IRM §10.7.2.4 (1/10/18) “…FAQs that appear on IRS.gov but that
have not been published in the (Internal Revenue) Bulletin are not legal authority and
should not be used to sustain a position unless the items (e.g. FAQs) explicitly indicate
otherwise or the IRS indicates otherwise by press release or by notice or announcement
published in the Bulletin.”
This brings us back to what an FAQ is intended to be – guidance but not authority.
However, now comes the Internal Revenue Service [IR 2021-202 (10/12/21)] to tell us
that FAQs which we relied upon because they were posted on the IRS web site (but not
in the Internal Revenue Bulletin) will not result in the imposition of a negligence or other
accuracy related penalties if the “alternative to guidance published in the Bulletin” turns
out to be incorrect. This slightly upgrades the IRS FAQ. However, the IRS has again
reiterated that “FAQs typically provide responses to general inquiries rather than
applying the law to taxpayer-specific facts…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.”
What to take home from this reading---An FAQ is not authority; it is a cannot be relied
upon opinion as to what the law allows. Unfortunately, it has become more and more
the only “resource” available in certain tax situations because the IRS is unable to
devote the time needed to prepare more formal and authoritative guidance. Now we
have been given some protection from accuracy and negligence penalties if we FAQ
information in our practice and that information turns out to be less than accurate.
