In January of 2018, the Internal Revenue Service (“IRS”) Tax-Exempt and Government Entities Division (“TE/GE”) issued Revenue Procedure 2018-5, which provided guidance with respect to an organization’s decision to seek relief from retroactive revocation or modification of a determination letter under Internal Revenue Code (“IRC”) §7805(b).
Revenue Procedures – In General
Revenue Procedures are official statements published in the Internal Revenue Bulletin (“IRB”) that either affect the rights or duties of taxpayers or other members of the public under the IRC and related statutes, treaties, and regulations. Alternatively, sometimes Revenue Procedures do not necessarily affect the rights and duties of the public, but are issued in order to be a matter of public knowledge.
Published on a weekly basis, the IRB acts as the authoritative instrument of the Commissioner for the announcement of official rulings and procedures of the IRS and for publishing treasury decisions, executive orders, tax conventions, legislation, court decisions and other items of general interest. IRBs aim to promote a uniform application of tax laws, including all rulings that supersede, revoke, modify or amend any rulings previously published. Additionally, all published rulings apply retroactively, unless otherwise indicated.
Relief Under IRC §7805
IRC §7805(b), and its related regulations, outline the rules and regulations used to determine the extent to which any ruling will be applied without retroactive effect. Prior to the Revenue Act of 1921, the IRS had no authority to ease any hardship by prospective application of the correction of a mistake of law. However, §1314 of the Revenue Act of 1921 provided the Commissioner with the discretion to apply reversals of regulations with only prospective effects.
Thereafter, §506 of the Revenue Act of 1934 permitted Revenue Rulings, Regulations or Treasury Decisions to be applied without retroactive effect. During this time, no standards were published or established with respect to the application of non-retroactive relief to rulings. Cases were considered on a case-by-case basis.
In 1954, the IRS issued Revenue Ruling 54-172 which, for the first time, set forth the authority, policy and procedures in issuing rulings to taxpayers. Since then, the general standards for applying IRC §7805(b) relief have been restated several times, generally in the form of Revenue Procedures.
Revenue Procedure 2018-5
Section 12.04 of Revenue Procedure 2018-5 provides that an organization may seek relief from retroactive revocation or modification of a determination letter under IRC §7805(b). This relief must be sought by submitting a written request to the agent or specialist prior to the issuance of the final adverse determination letter.
Thereafter, the agent/specialist reviews, with the group manager, the written request (including any attached supporting documentation that bears on the request). The group manager is responsible for recommending whether IRC §7805(b) relief should be granted. If the group manager believes the request should be denied or that further consideration is warranted to make an appropriate recommendation the request is forwarded to the appropriate TE/GE Division Counsel Area Counsel (“Area Counsel”). The Area Counsel reviews the information from the group and furnishes a memorandum to the group manager giving its legal opinion as to whether the determination letter should be “applied without retroactive effect” under IRC §7805(b)(8).
After the group manager decides whether or not IRC §7805(b) relief should be granted, a recommendation memorandum is prepared and transmitted to the Examinations or Rulings & Agreements Director, as appropriate. Subsequently, the appropriate Director reviews and signs the recommendation memorandum. If, however, the Director does not concur with the recommendation in the memorandum, the Director (if disagreeing with relief from retroactivity) raises the issue with the appropriate Area Counsel and indicates the decision on the memorandum, including an explanation in writing of the rationale, and signs and returns the memorandum to the agent/specialist and group manager. Finally, the specialist/agent notifies the taxpayer, in writing, whether or not retroactivity is limited under IRC §7805(b).
Conclusion
Retroactive application of an exempt status revocation can have detrimental financial effects on an organization. While the issuance of Revenue Procedure 2018-5 can potentially provide substantial relief, organizations should be aware that rulings and procedures reported in the IRB may be used as precedent but do not have the force and effect of Treasury Department Regulations. When relying on published rulings and procedures, organizations must consider the effect of subsequent legislation, regulations, court decisions, rulings and procedures.
Author: Hayley Shulman, CPA | [email protected]
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