February 16, 2021
The IRS Increases Cost of a Private Letter Ruling (PLR) and Now a Fee for Estate Tax Closing Letters. The IRS Is Seeking Comments by March 1.
This is a topic that TAS has been vocal about for the last decade. As we discussed in our Annual Report to Congress in 2015, 2017, and 2018, having the IRS charge for tax-related services is problematic. For example, the idea that taxpayers have a “right” to quality service under the Taxpayer Bill of Rights (IRC § 7803(a)(3)(B)) seems inconsistent with requiring taxpayers to pay a fee for quality service. The IRS should not be selling rights only to those willing or able to pay. If some taxpayers are able to pay and others are not, then a fee may erode the right to a fair and just tax system. IRS services generally help people pay taxes, thereby raising government revenue and avoiding tax enforcement costs. If an IRS user fee discourages people from using these services, it could be very costly — reducing voluntary tax compliance or increasing tax enforcement costs.
The Internal Revenue Manual (IRM) is the primary and official source of instructions to employees relating to the organization, administration, and operation of the IRS. TAS worked with the IRS to update IRM 22.214.171.124, which directs IRS business units to evaluate and set user fees based on their effect on “tax administration” and to consider the:
This IRM also says, “[T]he IRS avoids fees that increase enforcement costs, reduce voluntary compliance or otherwise create difficulties in achieving the IRS’s mission.” However, the IRS does not apply these factors uniformly.
The IRS is looking for comments on how to solve its PLR user fee problem.
The National Taxpayer Advocate’s 2015 Annual Report discussed problems with a wide range of user fees. It observed:
[T]he Private Letter Ruling (PLR) fee increased from $10,000 to $28,300 in 2015 for an exempt organization (EO) with gross income of $1 million or more. If only some taxpayers who need guidance can afford a PLR, the PLR fee is inconsistent with the taxpayer right to a fair and just tax system, which includes the right to expect the tax system to “consider facts and circumstances that might affect their underlying liabilities.” Although lower PLR fees apply to those with lower gross income, when combined with the amount taxpayers have to pay to an advisor to help with a PLR submission, the PLR fee may discourage taxpayers from obtaining the information they need (i.e., a PLR) to voluntarily comply. According to some practitioners, for the first time in history the $28,000 PLR filing fee may now exceed the legal costs of preparing the PLR request. [Internal citations omitted].
Nonetheless, Rev. Proc. 2021-1 recently increased the fee for certain PLRs from $30,000 to $38,000, though taxpayers with gross income below $250,000 could be charged “just” $3,000. Even before this increase, advocates for low-income taxpayers observed that the reduced PLR fee for lower-income taxpayers still put PLRs out of reach for the low-income community.
On January 4, 2021, the IRS issued a “Counsel Statement and Invitation for Public Comment on PLR User Fee Increase,” which explains that the PLR fee increase is driven by:
the costing methodology utilized, a decline in the overall number of rulings issued, and an increase in the relative complexity of the rulings that are requested.
In other words, the IRS’s previous PLR fee increases prompted taxpayers to stop submitting easy PLR requests, and the cost of processing the fewer complicated ones that remained has driven up the average cost of each PLR. Because the fee is based on the IRS’s costs, the latest increase is likely to perpetuate a vicious cycle in which higher fees reduce the number of PLR requests, driving up the average cost per request and leading to still higher fees. According to Counsel, the PLR process plays:
a critical role in tax administration by providing taxpayers with up-front assurance on the treatment of an issue, thereby avoiding costly and time-consuming back-end compliance activity. The letter ruling process also helps the Service identify areas that require further explanation or guidance.
Recognizing these benefits, Counsel is asking the public for comments on how to set the PLR fee. We believe, that in applying the factors listed above, the IRS should reduce the PLR fee, especially the fee for low-income taxpayers. It could eliminate the fee for low-income taxpayers or apply the greatly reduced fee of $200 reflected in IRC § 7528(b)(3) and then charge others based on its marginal costs (e.g., excluding fixed costs) within whatever buckets are available.
Indeed, an IRS webpage says the IRS plans to continue its policy of reducing or eliminating user fees for low-income taxpayers. Such fee reductions would encourage taxpayers to submit more simple ruling requests, which would benefit tax administration (as Counsel described), drive down the average cost of the rulings, increase voluntary compliance, and give effect to various taxpayer rights (e.g., the right to be informed, the right to quality service, the right to finality, the right to pay no more than the correct amount of tax, and the right to a fair and just tax system).
If you have additional comments please send them to CC.PLR.email@example.com by March 1.
The IRS also requests comments on its new estate tax closing letter fee.
When the IRS finishes an income tax examination, it automatically sends a closing letter providing finality to taxpayers. However, in the case of an estate tax examination, that same closing letter will now cost you $67. Wouldn’t an executor also want finality? Doesn’t the executor need to resolve the affairs of the estate with finality? Where is the logic in charging for the same type of closing letter?
On December 31, 2020, the IRS issued proposed regulations that would establish a $67 user fee for estate tax closing letters (i.e., IRS Letter 627). This letter informs executors of estates that the IRS has accepted an estate tax return (i.e., Form 706) and has closed its examination of the return — information that serves several important functions in the administration of an estate.
Apparently, this fee will help taxpayers solve a problem that the IRS created. The IRS announced in 2015 that, due to budget cuts, it would only issue these letters upon request, rather than automatically, to every estate that filed a Form 706. Although executors can get some of the same information from the estate’s account transcript, for a wide range of reasons the American Institute of Certified Public Accountants (AICPA) and others have explained that taxpayers need these letters.
In the proposed regulations, the IRS acknowledges that the procedures adopted in 2015 for requesting an estate tax closing letter can be “inconvenient and burdensome.” Having created a problem for executors, the IRS proposes to charge a $67 fee to solve it. The preamble to the regulations says that for $67 an executor could use a one-step web-based procedure to request a copy of the estate tax closing letter.
But if the IRS’s mission is to provide taxpayers with “top quality service,” if the IRS is to “act in accord with taxpayer rights” listed in IRC § 7803(a)(3), including the “right” to “quality service” and “finality,” and if Section 1101 of the Taxpayer First Act requires the IRS to develop strategies to improve customer service, the question remains: Why should anyone have to pay for an examination closing letter that the IRS previously sent for free? And more important, if the IRS charges for this letter, where does it draw the line? If the IRS proceeds on this course, should other taxpayers expect the IRS to charge for any of the millions of other letters it sends each year?
We encourage you to submit comments by March 1 at http://www.regulations.gov (under IRS REG-114615-16).
The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.