The IRS Dials Up Its Opacity

irs-logoTax Analysts may be the most important magazine publisher you’ve never heard of. Founded in 1970, it publishes Tax Notes, a weekly compilation of tax news and analysis, and an indispensible read to tax practitioners, policymakers, and academics alike.[fn1]

For those of you not steeped in the world of tax practice and policy, that may not seem like such a big deal. But it is: in addition to reporting the news, Tax Analysts has had a real and significant impact on the public’s relationship to the IRS. 

For a long time, one of the arrows in the IRS’s administrative arsenal has been the private letter ruling. See, there’s a fair amount of ambiguity in the tax law. That ambiguity means that sometimes you can’t be sure what the tax consequences of a transaction you’re planning on doing will be. Enter the private letter ruling: essentially, a taxpayer writes to the IRS and says, This is what I’m planning to do. I believe that it should be treated like this for tax purposes. The IRS writes back and, if it agrees, says, For tax purposes, you will be treated like that.[fn2]

Prior to 1972, these private letter rulings from the IRS were, in fact, entirely private. The IRS sent its letter to the taxpayer who requested the letter and to nobody else. I’ve been told, by attorneys who practiced tax law in those days, that the private letter rulings would circulate among elite attorneys in the know, basically creating a world of private law available only to the in-crowd.

Actually, “private law” may be a bit of an overstatement. Private letter rulings have no precedential value—their analysis and holding apply only to the taxpayer who requested the ruling. Still, they signal how the IRS understands the tax law. Even if they can’t be cited to the IRS in an audit or to the court in a trial, a tax attorney can get more comfortable with a transaction if she knows that the IRS has blessed it in the past.

In 1972, Tax Analysts filed Freedom of Information Act requests, and ultimately filed suit, to get access to these private letter rulings. Eventually, Tax Analysts won. As a result, you can now find private letter rulings (redacted of identifying information) in basically any legal database and, in fact, on the web.[fn3] Little by little, Tax Analysts forced the IRS to disclose broader sets of written analysis it produced.

But the IRS seems to be rolling that transparency backward. Today, Tax Analysts reported that the IRS will no longer release exemption rulings to it or to the press at large.[fn4] An exemption ruling is the form letter the IRS provides to organizations that request a tax exemption granting them that tax exemption.

Since 1992, the IRS has by made exemption rulings available, along with the exempt organization’s application and any supporting documents, for 30 days after the exemption was granted at its Freedom of Information reading room in D.C.[fn5] But no more.

Quick aside here: generally speaking, your tax information is private, protected from governmental disclosure by the law. But tax-exempt organizations operate under a different set of rules: in return for their tax exemption, the public gets the right to inspect a reasonable amount of their financial information.

The new opacity policy is a travesty. The new opacity is not complete, of course: the IRS must still grant public access to these exemption rulings. But now, someone who wants to see an exemption ruling must file a request with the IRS. A separate request for each tax-exempt organization. And, in fact, if you want to see a tax-exempt organization’s application and exemption ruling, you have to know the tax-exempt organization exists. There isn’t a central, inspectable repository of all of the last 30 days’ exemption rulings.

The IRS claims its reasons for the change are innocusous: it’s moving its tax-exempt organizations headquarters from D.C. to Cincinatti. And that may, in fact, be its reason. But in doing so, it is unnecessarily eliminating an important source of transparency. I mean, a reading room in D.C. is the bare minimum—it really should be releasing these documents online, available directly to Tax Analysts and the taxpaying public in general.

So bravo to Tax Analysts on a fight well fought, a fight it continues to fight well.

And to the IRS: you’ve unnecessarily created a problem. The bad news is, this problem only serves to make you look bad.[fn6] The good news is, it’s an easy problem to fix.

So fix it.

[fn1] In addition to its flagship Tax Notes, Tax Analysts publishes State Tax Notes and International Tax Notes, as well as Tax Notes Today, a daily digest of tax news that I read every single weekday when I was in practice.

[fn2] Okay, so in real life, the actual correspondance will be more specific and precise.

[fn3] Actually reading them may not be as easy as finding them; private letter rulings are written in a technical tax language, and that language is quite frequently not the most scintillating in the world. Still, you can read them if you want and, perhaps more importantly, your tax advisor, who has been educated in that language, has access to them while advising you.

[fn4] Tax Analysts’s reportage is generally behind paywalls; if you have access to Lexis, though, you can find the story at 2015 TNT 48-1.

[fn5] IRS Notice 92-28.

[fn6] Tax Analysts name-checks the controversy surrounding the processing of Tea Party group exemption requests in its article.

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