Classifying Tax Guidance According to End Users

_{^a Internal Revenue Service, Numerical Finding List, 2018-52 I.R.B. ii–iii, 2018-26 I.R.B. ii–iii. Notably six Notices, one Revenue Ruling, and two Revenue Procedures were not published in the Internal Revenue Bulletin. The index at the end of Internal Revenue Bulletins 2018-26 and 2018-52 contained errors, including containing Notice 2018-25, 2018-26 I.R.B. at ii, and misstating Announcement 2018-09, 2018-52 I.R.B. at ii. The 230 items were down from the nearly 300 in 2013–2015 and the 500 from 2002–2008. U.S. Gov't Accountability Off., GAO-16-720, Regulatory Guidance Processes: Treasury and OMB Need to Reevaluate Long-Standing Exemptions of Tax Regulations and Guidance 10 (Sept. 2016).}

_{^b Internal Revenue Service, Numerical Finding List, 2008-52 I.R.B. ii–iii, 2008-26 I.R.B. ii–iii.}

_{^c Westlaw search FTX-PLR with search date range after 12/31/17 and before 1/1/19.}

_{^d Westlaw search FTX-PLR with search date range after 12/31/07 and before 1/1/09.}

_{^e Westlaw search FTX-TAM with search date range after 12/31/17 and before 1/1/19.}

_{^f Westlaw search FTX-TAM with search date range after 12/31/07 and before 1/1/09.}

In each category, less guidance has been produced—in some categories significantly less—as the government devotes fewer resources to creating guidance.

Understanding the many forms that tax guidance may take requires special knowledge that not all audiences can be expected to possess. Each form of tax guidance has a different amount of legal authority, and taxpayers may face penalties for ignoring some, but not all, types. Even the procedures used to create each form differ. Those features do not currently depend upon which of the three audiences is targeted: external audiences of taxpayers and tax planners, audiences internal to the government (namely Service agents), and members of the government or the public who seek information that is only tangentially tax-related.

These audiences have different needs and expectations from tax guidance that are not currently reflected directly in the guidance. For example, taxpayers need clear and detailed information to file their tax returns or to plan future tax events. Writing for taxpayers, in some guidance, the Service attempts to facilitate taxpayers’ claims to tax benefits and in others to reduce tax avoidance and evasion. For their own part, Service agents need information to respond to taxpayers’ questions and to audit tax returns. Examination of both the purpose of tax guidance and how its value differs depending upon who uses it, recognizes that tax guidance is a tool to be used with value only to the extent that it can be put to practical use.

Even though taxpayers are the primary audience for tax guidance, the differences between types of tax guidance are not tied to how reasonable it is for a taxpayer to view a particular item of tax guidance as authoritative. Under the Treasury Department’s existing system, classification of tax guidance is driven by the “content and nature” of the guidance and the characteristics the government wants to secure. Thus, a particular classification determines characteristics that are the basis for the choice of form. This system ignores taxpayers’ perspectives and what taxpayers need from particular information.

The potential mismatch between end-users’ expectations and the government’s choice of guidance form is not currently a hot topic, but it should be. Today, most debate centers on the procedures used to create guidance or the deference to which guidance is entitled from the courts. This misses the initial problem, that the government has under-theorized its schema for classifying guidance and does not link characteristics to that classification. Categorization occurs without comment. In the process, the government loses an opportunity to facilitate taxpayer relations and to create a theoretically consistent basis for the rules governing tax guidance. Despite this omission, the government does not create these various forms of guidance to confuse or trick taxpayers. It seeks to create a guidance system that “encourages public participation, fosters transparency, affords fair notice, and ensures adherence to the rule of law.” But by not explicitly focusing on end users, the government misses an opportunity to further these goals.

Potential confusion and frustration with features of tax guidance are worsened because, in practice, tax guidance is not organized according to the factors the government stipulates using. From an examination of the tax guidance published in the 2018 weekly Internal Revenue Bulletins that the Government Accountability Office (GAO) characterizes as “authoritative,” this Article finds little predictability in the classification other than consistency for particular threads of information. Thus, once a category is chosen for something, that category is used consistently, but why it was initially selected from those within the same level of guidance appears arbitrary.

This Article creates a schema for the thoughtful and public classification of the many forms of tax guidance. To that end, this Article proceeds in two major parts. Part II describes the current system of tax guidance, one that only a tax attorney can love. Part III reaches some conclusions about this system. First, the current system is a mess that taxpayers should not be expected to understand. Second, that mess needs to be cleaned up because there are real consequences when relying on the various forms of tax guidance. Third, when cleaning up the system, the Service should reframe its guidance around who is expected to use a particular piece of guidance. Classifying guidance with the focus on the end user signals to taxpayers, courts, and Congress the intended value of a particular piece of tax guidance. Focusing on taxpayers as an audience requires the additional recognition that guidance for taxpayers has different functions (e.g., to facilitate taxpayers’ claims to the tax benefits created by Congress, to reduce the abuse of those benefits, etc.). The function involved should have a role in the classification of guidance, a role that is currently ignored. This approach is consistent with the Administrative Conference’s recent recommendation that agencies “facilitate access to guidance documents by regulated entities and the public.”

Finally, Part III concludes by examining which of these features can be adopted by the Service without congressional or judicial action. Moving to a system in which the levels of procedure, deference, and enforcement depend on an analysis of what the guidance is intended to accomplish is a complicated move. The Administrative Procedure Act (APA) and provisions within the Code limit the tax administration’s power unless the legal framework is first changed. Nevertheless, despite not having unfettered freedom, the tax administration could change its focus to better align its guidance to the audience who uses that guidance.

Accepting, as Sir Francis Bacon said, that knowledge is power, knowing how the government interprets the law is a power. That power should be framed for its ultimate wielders and that frame should determine the way in which the interpretation is produced and the effect of that interpretation on taxpayers and Service agents. This reframes issues of procedure and deference away from labels to a purposeful system that highlights the guidance’s objective. Sacrificing the current façade of historical labels, this Article’s process would increase the government’s ability to accomplish its broader objectives of creating usable information that maximizes internal consistency and external compliance.

II. Current (Dis)organization

The language of the Code does not address every tax issue, which is why tax guidance is issued to explain and apply the law. Currently, there are many types of guidance. With this complexity, there is both overlap and uncertainty with respect to the required process for tax guidance’s creation, the deference it will receive in court, and appropriate penalties for taxpayers who ignore it. Recent efforts have been to force this complex web of tax guidance into molds used in other areas of administrative law. This effort is made difficult because the system of tax guidance evolved over more than a hundred years outside that mold.

Today, five broad groups of guidance exist, with subcategories in each. The most authoritative are Regulations. A second level is Revenue Rulings, Revenue Procedures, and Notices, which are used interchangeably. Private Letter Rulings (PLRs) and Technical Advice Memoranda (TAMs) are types of issue-specific guidance without precedential authority. The Service also issues Announcements (Announcements) and Actions on Decisions (AODs) and publishes forms, instructions, and other publications. All of these are available to the public, although some are available only because the Freedom of Information Act (FOIA) was extended to the Service in 1996, making less formal guidance publicly available.

A. Regulations

Treasury Regulations (Regulations) have the greatest legal authority, require a more formal administrative process for their creation, and impose potentially higher penalties on taxpayers than any other tax guidance; however, not all Regulations are the same. Within this group of guidance, Regulations can be legislative or interpretive, with the latter arguably, although possibly not practically, having lesser authority. Additionally, Regulations can be final, temporary, or proposed, with the latter having the least weight. Thus, there is a spectrum within this category of guidance.

Although Regulations can be issued with significant detail, they tend to cover larger statutory ambiguities or general rules of application. For example, in 2018, the Treasury Department issued a major Proposed Regulation addressing significant ambiguities in new section 199A, the 20% qualified business income deduction enacted in late December 2017. The Regulations contain many definitions and examples for the new provision, but ambiguities remain if only for “those business activities that are [sic] may be operating on the fringes of what’s defined.” Over time, Regulations are often amended to reflect new legislation.

The power to issue Regulations comes from two sources. First, Regulations may be issued under the Treasury Department’s general grant of authority, namely section 7805(a). This source of authority justifies the creation of Regulations on any topic, subject only to the judicial limitations imposed by Chevron U.S.A., Inc. v. Natural Resources Defense Council that require statutory ambiguity for the creation of regulatory guidance. Of the 33 Proposed and final Regulations promulgated in 2018, only one did not reference section 7805 as a source of authority.

Second, Regulations may be created under specific authority granted in Code provisions, and 17, or over 50%, of the 33 Regulations promulgated in 2018 claimed to be at least partially based in specific authority. Congress frames specific-authority Regulations either as a requirement that the Treasury Department act or as a grant of discretionary power. For example, section 1502 frames the requirement as “[t]he Secretary shall prescribe such regulations as he may deem necessary,” and section 269B(b) requires that “[t]he Secretary shall prescribe such regulations as may be necessary” in a more absolute sense. Alternatively, section 135(d)(4) provides that “[t]he Secretary may prescribe such regulations as may be necessary or appropriate to carry out this section,” and section 385 provides that “[t]he Secretary is authorized to prescribe such regulations as may be necessary or appropriate” to achieve the provision’s objective. Despite the differences in language, no noticeable difference has resulted in practice.

For most of tax history, the Treasury Department argued that the source of authority determined the nature of Regulations and the required procedure for their production; however, that is no longer the official position. In Mayo Foundation for Medical Education v. United States, the Treasury Department’s distinction on the source of authority was put in doubt. In 2018, the Treasury Department amended its Internal Revenue Manual, the Service’s internal guidelines, to conform its position regarding Regulations to Mayo but retained the distinction between interpretive and legislative Regulations. In March 2019, the Treasury Department seemed to go further, committing to use the APA’s notice-and-comment process for legislative rules for all forms of Regulations, possibly ending its historical division.

Regulations are also distinguishable based on whether they are proposed and, thus, the beginning of the notice-and-comment process prescribed by the APA, are finalized upon completion of that process, or are temporary. In 2018, the Treasury Department issued no Temporary Regulations, 20 Proposed Regulations, and 13 final Regulations.

Under the Code, Temporary Regulations expire three years after issuance. Critics argue that Temporary Regulations should have no legal effect until they themselves complete notice and comment, unless they qualify for an exception in the APA. Despite this argument and even after one district court held that Temporary Regulations are not automatically exempt from the notice-and-comment process, the appellate section chief of the Tax Division of the Department of Justice remained convinced that Temporary Regulations are exempt and “until I lose that at every circuit and the Supreme Court, that is going to be the position of the government.” On the other hand, a 2019 policy statement indicates that the Treasury Department will include a statement of good cause when issuing Temporary Regulations to explain that they are exempt from notice and comment.

Failure to satisfy notice and comment results in the invalidation of final Regulations, although the standard that courts use in doing so is not always apparent. For example, in 2018 in Good Fortune Shipping SA v. Commissioner, the D.C. Circuit engaged in a hard look review of the section 883 Regulations governing a foreign shipping company’s claim to an exemption from U.S.-based income. The court did not invoke that standard by name but concluded that the Treasury Department had not engaged in reasoned decision making. Alternatively, the Third Circuit affirmed the Tax Court in SIH Partners LLLP v. Commissioner after the Tax Court upheld under a similar standard the section 956 Regulations that contain a broad rule governing controlled foreign corporations’ guarantors.

When properly produced, Regulations are given significant internal and external deference. Internally, Service agents are expected to follow all Regulations, including Proposed and Temporary Regulations. Externally, the Supreme Court wrote in 1920 that Regulations have the force and effect of law, unless they conflict with a statute, and that taxpayers challenging Regulations bear the burden of proof of that conflict. Today, courts base the deference given to Regulations on whether they are finalized in compliance with the APA and satisfy the test established in Chevron. With respect to final Regulations, courts give them significant deference, and Temporary Regulations have the same binding effect as final Regulations unless found to require notice and comment. Although the Treasury Department often extends the privilege to taxpayers to rely on Proposed Regulations, courts need not defer to them, in which case they only provide insight into the Treasury Department’s thinking.

Similarly, taxpayers risk penalties for failure to follow final and Temporary, but not Proposed Regulations. The Code provides a 20% penalty on taxpayers for any portion of an underpayment of tax attributable to negligence or disregard of “rules or regulations” and on tax return preparers for the “reckless or intentional disregard of rules or regulations.” Therefore, if a taxpayer negligently ignores a Regulation, depending upon how much tax is owed, the penalty can be steep. Taxpayers and tax return preparers do not risk accuracy-related penalties or other penalties for failing to follow Proposed Regulations.

Although penalties may be imposed, taxpayers are not always penalized for failing to follow final and Temporary Regulations. Civil penalties are not imposed if the taxpayer believes that the government’s interpretation of the law is incorrect, and the taxpayer either has a realistic possibility of winning in court or discloses the position on the return and the position has at least a five percent chance of winning in court. Thus, if the taxpayer disagrees with a Regulation and has a slim chance of winning, the taxpayer may avoid penalties.

Despite the difference between the type of Regulations for the imposition of a penalty, a taxpayer can use any type of Regulation, including a Proposed Regulation, to defend against the substantial understatement of a tax penalty. The 20% penalty can be mitigated if taxpayers prove they had (1) substantial authority for their reporting positions or (2) a reasonable basis for their reporting positions and the position is disclosed on the return. When determining whether there is substantial authority, courts use an objective standard, but all Regulations can be used to prove the existence of substantial authority or a reasonable basis.

B. Revenue Rulings, Revenue Procedures, and Notices

Revenue Rulings, Revenue Procedures, and Notices are the second most authoritative source of tax guidance. Revenue Rulings and Procedures are often lumped together, possibly because of the word “Revenue” leading their names or because they were created soon after each other, while Notices are sometimes relegated to a lower status—despite the government viewing Notices as equivalent to Revenue Rulings. The Service’s National Office creates these forms of guidance for “the information and guidance of taxpayers, Internal Revenue Service Officials, and others concerned.” Issued without public notice and comment, these forms of guidance are made with less consideration than are Regulations but are, nonetheless, the official position of the Service.

Published since 1953, Revenue Rulings are quintessentially presented in response to a hypothetical situation, which limits their precedential value to similar facts. This form highlights their origin as a way to publicize PLRs issued to taxpayers confronting particular factual situations at a time when PLRs were not widely released. That FOIA now requires the release of PLRs may explain the decline in the number of published rulings, and in 2018 only five of the 31 Revenue Rulings were issued using the traditional pattern responding to facts. Instead, more than 83% of the Revenue Rulings issued presented factual or ministerial information.

Published since 1955, Revenue Procedures are akin to Revenue Rulings but traditionally focused on procedural—rather than substantive—aspects of the tax system, such as inflation adjustments. In 2018, 71% of Revenue Procedures issued contained procedural or ministerial matters. The remaining Revenue Procedures contained substantive discussions of the law. Of those 17, 13 were facilitative in that they created safe harbors or extended means for remedial action. Only two solely increased burdens on taxpayers.

Traced back to 1976, Notices tend to be issued more quickly when the Service determines that a public concern requires a speedy response. As the most recent addition to the group, the potential speed in the publication of Notices may explain why they now dominate this group. Their number has increased dramatically, from 10 in 1980 to 94 in 2018. At the same time, the number of Revenue Rulings and Revenue Procedures issued annually fell from 355 and 60 in 1980 to 31 and 58 in 2018. In 2018, almost 63% of the Notices issued contained purely procedural or ministerial matters, 19% introduced Regulations or proposed regulatory language that taxpayers could rely upon, leaving 17 to make other announcements. This last group was broad, such as explaining the Service’s interpretation of the new section 7345 notification to the State Department of seriously delinquent tax debts, suspending withholding for some publicly-traded partnership interests, and offering guidance under new section 45A regarding the employer credit for family and medical leave.

Perhaps most notably, Notices are often used to announce policy changes. For example, the Service issued Notice 2018-76, which interpreted a change in the Tax Cuts and Jobs Act of 2017 permitting deductions for business meals and beverages not deductible to such an extent since 1962. Although people might argue this “totally misreads the 2017 legislation,” one benefit of the Notice is that the taxpaying public, commentators, and Congress are aware of the Service’s position. This levels the playing field among taxpayers and permits challenges to the Service’s interpretation. The alternative would require the Service to take a position on audit with which one might disagree but never hear.

As another example of the use of Notices to announce policy, Notices have increasingly been used to foretell future regulations. Seventeen such Notices were published in 2018 that explained future regulatory efforts. This approach may be beneficial to taxpayers to the extent they provide taxpayers with insight into the government’s thinking and an opportunity to comment. Planners need guidance when they apply new provisions. On the other hand, substantive guidance may constrain interpretations of the law without the benefit of the notice-and-comment process in developing that guidance.

Each of these lower forms of guidance are at risk of judicial invalidation because the Service does not use the notice-and-comment process in their creation. For example, in Cohen v. United States, the D.C. Circuit permitted such a challenge. In Cohen, taxpayers challenged Notice 2006-50 announcing certain refund procedures on the grounds that the Notice violated the APA. The court denied the tax an exemption from procedural challenges and, on remand, the district court determined that the Notice was binding (and substantive despite being a refund mechanism), and, therefore, invalid because it had not been submitted for notice and comment. Thus, the substance of the Notice required a heightened procedural review despite its labeling.

Notwithstanding the risk of invalidation, the tax administration must generally follow these forms of guidance unless they have been withdrawn or modified, and taxpayers may rely on these forms of guidance on audit. On the other hand, their precedential value with courts when taxpayers disagree is not always clear. Before the courts, the Department of Justice previously argued that these forms of tax guidance carry the force of law, similar to Regulations, entitling them to Chevron deference. Courts generally do not give such guidance the full weight of law but give them an unquantifiable amount of deference. For example, in United States v. Cleveland Indians Baseball Co., the Supreme Court refrained from deciding the appropriate level of deference to be given to Revenue Rulings but held that the Service’s interpretation in rulings “attracts substantial judicial deference.”

At times the government appears inconsistent in its goal for deference, partly because of the historic origins of these forms. The government argues that Revenue Procedures and Notices are entitled to deference, but also that Procedures “do not . . . typically address matters that affect the rights and duties of taxpayers” and “would generally not be useful to taxpayers in planning transactions or determining positions to be taken on returns.” With the latter position, the Service may be trying to stay out of the APA’s requirements for rules and, therefore, playing down the significance of some of this guidance.

Assuming that differences between forms remain, courts may be less trusting of Revenue Procedures and Notices than of Revenue Rulings. For example, the Tax Court generally argues that there needs to be an argument for and proof of a Revenue Procedure’s persuasiveness. The court was troubled that a Revenue Procedure “does not purport to be an official interpretation” and, therefore, is not subject to the same consideration as a Revenue Ruling. In contrast, the court in NPR Investments, L.L.C. ex rel Roach v. United States gave Notices deference even if only at a lesser level of authority.

As previously explained, Revenue Rulings, Revenue Procedures, and Notices have somewhat inconsistent precedential value. Similarly, taxpayers who negligently or recklessly disregard such guidance may face different monetary penalties. Revenue Rulings are always included as a rule or regulation for purposes of penalties. Revenue Procedures and Notices, however, are included for the imposition of penalties as rules or regulations only if they are of a substantive nature. Each of these forms of guidance can provide taxpayers a defense against penalties.

C. PLRs and TAMs

The Service also produces a range of advice applying the law to particular fact situations on behalf of taxpayers or Service agents. The Service has changed the labels and formats of this type of guidance, especially the internal variety, but PLRs and TAMs have been produced for decades. Responding to specific questions or narrow issues, these forms of guidance are only available to the public as a result of FOIA. When published by private services, identifying information is redacted. Although containing information about the Service’s specific treatment of issues, they are not authoritative, even if the Service sometimes fails to disclose that fact.

Like Revenue Rulings, Revenue Procedures, and Notices, PLRs and TAMs are not produced using notice-and-comment procedures. Additionally, PLRs and TAMs are made without consideration by the Treasury Department. Therefore, their positions are more susceptible to change or challenge. PLRs are prepared by the Service’s National Office and issued to a taxpayer in response to a written request submitted prior to a transaction. Because PLRs are costly to the Service to produce, the Service restricted the scope of PLR requests it will entertain. Certainly fewer are being produced: the annual average was more than 5,500 in the 1980s and only 802 in 2018. TAMs are written by the Service’s Office of Associate Chief Counsel in response to requests by Service employees during audits, claims of refunds or credits, or other similar matters. They, too, have fallen in number from 1,127 in 1980 to only two in 2018.

Currently, the Code grants these forms of guidance no authority. Therefore, only the taxpayer requesting a PLR can rely upon the PLR and only if the facts presented in the request were accurate and complete and the actual transaction does not differ from that presented in the ruling request. For other taxpayers, PLRs can serve as “evidence of how the Commissioner has interpreted the law in the past” and, in the process, provide insight as to the Service’s position, but the Service is free to take a different one. Courts do not find them to have precedential value but might regard them as persuasive authority or the basis for a decision favorable to a taxpayer who would otherwise be denied relief granted to other taxpayers in similar circumstances.

Like PLRs, TAMs bind the Service in relation to the taxpayer who is the subject of the ruling, but they are not to be used as precedent. Although providing an indication of the Service’s position on issues at the time they were issued, they are “afforded little weight” in court. Therefore, taxpayers may use these forms of guidance to anticipate how the Service might interpret an issue but are unable to rely on that position in their reporting.

In addition to receiving little deference, PLRs and TAMs are not rules or regulations for purposes of accuracy-related penalties. Therefore, taxpayers cannot be punished for failing to follow them. Nonetheless, they are among the substantial authorities that can abate penalties if they provide a basis for a taxpayer’s position.

D. Announcements and Acquiescence

Announcements and an acquiescence are guidance narrowly targeted to particular situations. Announcements serve only to summarize the law without adding substantive interpretation and, in particular, have “only immediate or short-term value.” The Service may issue an “acquiescence or nonacquiescence” to judicial decisions involving tax matters. Issued as an AOD, the Office of Chief Counsel states whether the Service will follow a particular holding or whether it leaves open the door for further litigation on the same issue. Thus, neither form is intended to change the law.

Few Announcements and no AODs were issued in 2018. In 2018, Announcements were primarily used to alert interested parties of the fact that certain entities had lost their tax-exempt status and of those practitioners who had been sanctioned by the Service. Announcements also reported on an Advance Pricing Agreement program, required to be compiled by law, and the Service’s intention to issue opinion and advisory letters for certain defined benefit plans, although these might have better been published as Notices. In 2018, no AODs were issued, down from 17 in 1999. When issued, AODs are published in the Internal Revenue Bulletin and via the Electronic Reading Room on the Service website; these decisions may be issued immediately or significantly after a judicial decision, and they can be reversed.

Although Announcements and AODs have limited impact on the law and no influence in court, taxpayers likely see Announcements and AODs as authoritative. The Service treats them as such internally; Service agents are required to follow Announcements and AODs. The Service has not always done so, however. When the issue of the Service contravening an acquiescence arose in a tax case, the court noted that an acquiescence “may indicate that one would be likely to obtain a favorable ruling on a similar point” but proceeded to side with the Service against the taxpayer.

Announcements and AODs are rules and regulations for purposes of penalties, despite not being listed in the Regulations. Therefore, to the extent they are substantive, taxpayers who fail to follow these forms of guidance without good reason to do so risk monetary penalties. Announcements and AODs can also be relied upon by taxpayers to avoid penalties if consistent with the taxpayer’s reporting position.

E. Other Publications

Service publications, including forms and instructions, are possibly the most commonly used form of tax guidance as they are frequently used in the filing of tax returns and other compliance efforts. Available on the Service’s website, publications often explain the law in plain language. Publications “highlight changes in the law, provide examples illustrating Service positions, and include worksheets.” Currently, the Service’s website posts 2,211 files as forms, instructions, and different publications including Publication Circular 230 containing Regulations governing practice before the Service, Publication 521 on moving expenses, and Publication 5332 on estate tax returns for wealthy decedents. In other words, there are many publications on a wide range of topics.

The breadth of publications makes their categorization difficult, despite their being a critical tool for taxpayers. Particularly as a result of legislative changes, publications are often modified under time pressure for tax filing season. Forms and publications are rarely circulated as drafts for public comment, although details of forms are published to permit other organizations to publish compliant forms. Occasionally, the government will solicit comments when major changes may make a form controversial. For example, the 2018 Form 1040 was circulated as a draft with changes made to reflect the impact of the 2017 Tax Cuts and Jobs Act.

The formality of publications varies. Some are formal while others use FAQs, the latter particularly troubling the GAO. From 2013 to 2015, some FAQs were published as Notices and others were simply posted on the website. The GAO gives the example of the Service posting, and not publishing, its voluntary disclosure program that permits taxpayers to declare offshore bank accounts. The website posting made it difficult for taxpayers to note changes in the rules.

The lack of internal or public review in the creation of publications likely explains the limited amount of deference given to publications. Despite their importance to taxpayers, publications “are nonbinding on the Service and do not necessarily cover all positions for a given issue.” Thus, the instructions for the many forms and schedules that taxpayers file every year may generally be good work product but are not authoritative. Courts do not permit taxpayers to rely on instructions to justify a position that violates the underlying statute.

The limited deference given publications applies not only when the forms and instructions contain “ambiguity,” but also when they are incorrect. In Bobrow v. Commissioner, a taxpayer rolled over two IRAs within a one-year period on the basis of advice that section 408(d)(3)(B) applied per IRA. Although neither party mentioned a publication, Service Publication 590, Individual Retirement Arrangements, explicitly sanctioned the taxpayer’s interpretation. Nevertheless, the Service prevailed on the merits and penalties were imposed. The Service subsequently revised its publication. In an order denying reconsideration of its decision, the court warned that “taxpayers rely on [Service] guidance at their own peril.” Nonetheless, at least one court has permitted a taxpayer to avoid penalties because of reasonable reliance on an Instruction for Form 1040.

Although taxpayers are generally unable to rely on this form of guidance, publications, including instructions, are not rules or regulations for the purpose of imposing penalties. Thus, taxpayers are not punished for taking a position different from that presented in a publication. However, taxpayers are unlikely to abate accuracy-related penalties based on that reliance. Therefore, taxpayers are not required to follow instructions but, if they do, at least without a sympathetic judge, the reliance may be no excuse to avoid penalties or the tax.

III. Moving Toward Order

It is likely that taxpayers make use of tax guidance without much thought regarding the form of the guidance or its position within the guidance hierarchy. Having determined the government’s stance on an issue based on the available guidance, taxpayers might accept the guidance as given, plan around it, or challenge it. Only ignoring the government’s position carries risk. Because guidance gives taxpayers choices, even if taxpayers disagree with particular items of guidance, its value is generally accepted. Nevertheless, tax guidance’s impact on taxpayers and the tax system is imperfect. Much of this imperfection stems from the government’s creation of guidance without adequate consideration of how its end users will actually use the guidance.

A. Recognizing the Current System Is a Mess

The current system evolved over more than a century. During that time the rules imposed on agencies when creating guidance have changed dramatically. Within the tax world, the administration has only partially responded to these changes because much of tax guidance is viewed as sub-regulatory and thus within the power of the Service to develop. As a result an opaque process has developed that leaves the classification of guidance uncertain and unpredictable.

1. The Government’s Opaque Process

Although the government attempts to create a consistent and predictable system of guidance, how the government classifies its guidance is largely a mystery. The Service maintains a list of ten factors for choosing the “appropriate form of guidance and document[s] the decision to use that form.” The list includes “the purpose for the guidance and possible guidance alternatives,” “the scope of the guidance’s application,” and its “effect on taxpayer’s rights” and “duties.” This list, and the process by which it is used to allocate guidance, remains an opaque process operated behind closed doors.

The process begins when the Treasury Department annually solicits taxpayer input regarding the issues that should be addressed by guidance, but the process by which the Assistant Secretary of the Treasury for Tax Policy determines which proposals are adopted as part of the semiannual Guidance Priority Plan is not described, and new legislation or events might change listed priorities without notice. After being placed on the agenda, initiated projects are assigned to the Office of the Chief Counsel of the Service, effectively the Service’s internal law firm, to begin the drafting process. Throughout that internal process, the level of guidance to be used for a particular issue is not discussed publicly. The choice of guidance form is made internally as issues on the agenda are addressed, possibly late in the drafting process.

Thus, although the Service’s Internal Revenue Manual provides that proper classification is important and should be made according to the ten factors, how those factors are to be applied remains a mystery. It appears that categorization is based largely on the impetus for creating the guidance. This is a reactive approach to classification, rather than a proactive one that focuses on the end user.

Noticeably absent from the list of factors for consideration is the government’s cost of creating a particular form of guidance versus the amount of benefit a more authoritative level of guidance would provide. In a world of limited budgets, it is surprising that such a weighing does not occur. It is possible that the government has internalized the cost of issuing the various forms of guidance or that the cost is such a small percentage of the agency’s budget that it is not a factor. Sadly, if cost of production does influence choices, that calculus has not been made public.

That the current process reacts to factual situations or ambiguous statutes with a schema based on the government’s perceived need and value does not make the system ill intentioned. Presumably, the government attempts to create a consistent and predictable system of guidance. Nevertheless, even if the system were perfect, the fact that it occurs behind closed doors may create a sense of irregularity and possible corruption of the government’s taxing power. The process needs to be opened to the public. The issues should be clear from the government’s agenda as well as the amount of resources that will be devoted to them and the level of comfort taxpayers will have with the final result.

2. Unpredictable Results

As the government’s process for choosing among the various forms of guidance is largely hidden, the reasons for classification are not always apparent to end users; but even public disclosure would not cure a classification’s aberrations. As this Article now confirms, Professor Kristin Hickman once posited that actual use of guidance “demonstrates both considerable functional overlap and routine deviation from tax community understandings of what each format represents.” Even with the best intentions, a system that lacks predictability as to classification of guidance can be seen as arbitrary.

To illustrate the prevailing confusion, recall that within the group of Revenue Rulings, Revenue Procedures, and Notices, the forms originated for different purposes but the distinction in forms has blurred over time, possibly eliminating any distinctiveness. In 2018, a Revenue Procedure provided the cost-of-living adjustments for several Code sections, a Notice provided the dollar amounts permitted under the section 45Q tax credit, and a Revenue Ruling provided the applicable federal interest rates. Despite each being a ministerial reporting of easily calculated information, the use of the different forms of guidance suggests a difference not readily apparent.

The fact that the government does not seek to cause confusion does not reduce the chance that people are misled. Thus, even when a particular form of guidance is chosen to provide a piece of information and that form is used consistently, taxpayers cannot credibly predict in the first instance the form through which that particular piece of information will be communicated. Currently, a good guess might be Notices because of their increase in number. The government has increased the use of Notices despite the public having less familiarity with the form. That the number of Notices has dramatically increased while the number of Revenue Rulings has decreased may indicate a shifting of forms without underlying substance. Because Revenue Rulings are often perceived as more authoritative than Notices, this shift should be explained to the public.

The choice between forms may also produce problems other than confusion. Consider the fact that the Service has issued lower levels of guidance with the import of higher levels. For example, Notice 98-5 on Foreign Tax Credit Abuse was issued in 1997 and cautioned multi-national corporations against entering into abusive transactions to acquire foreign tax credits. Taxpayers’ goal in engaging in these transactions was to shelter low-taxed foreign source income from higher U.S. tax by duplicating tax benefits in the U.S. and the foreign country or by effectively purchasing foreign tax credits. The Notice, without the notice-and-comment process required for Regulations, was intended to arrest that taxpayer behavior.

The format used in Notice 98-5, requesting public comments on language or ideas for future regulatory action, is not unusual with 25 calls for such comments in 2018. These calls provide an opportunity to increase public review of rules. Nonetheless, Regulations were not issued following Notice 98-5, and the Notice was withdrawn in 2004 when the Service admitted it did not intend to issue the anticipated Regulations. In 2019, the Treasury Department issued a policy statement that it will include statements in future Notices that if predicted guidance is not issued within 18 months of the Notice’s publication, the Treasury Department will not assert the Notice against taxpayers.

A second example is the use of Notices to permit the backdating of the effectiveness of final Regulations to the date the Notice was issued. Before 1996, the Code provided that all tax regulations applied retroactively. In 1996, Congress amended the Code so that no type of tax regulation for any statute enacted after 1996 can have an effective date before the earlier of (1) the date the final Regulation is published in the Federal Register; (2) the date any Notice substantially describing the Proposed, Temporary, or final Regulation is published; or (3) in case of a final Regulation, the date the Proposed or Temporary Regulation to which it relates is published, and earlier in the case of abusive transactions. Thus, Notices are effectively extending the application of Regulations to earlier periods despite not formally being part of the notice-and-comment period.

Similarly, the Service uses Notices to target tax planning that it does not like. Importantly, these Notices are issued pursuant to a Regulation, lending the authority of the Regulation to Notices despite the Notices not being subject to notice-and-comment review. The Regulation was promulgated under a 2004 provision that requires advisors, including attorneys, to disclose information regarding so-called “reportable transactions.” Two types of reportable transactions are listed transactions and transactions of interest. If taxpayers do not comply with the disclosure requirements for a listed transaction or a transaction of interest as described in a Notice, the penalties under the statute apply. Thus, a Notice describes the prohibited behavior, triggering potential penalties, despite the Notice’s lack of public review.

Another problem is the potential for unpredictable results when lower levels of guidance are used to contravene the Code because they may not withstand judicial or congressional scrutiny. For example, the Treasury Department issued a Proposed Regulation on interfamily gifts when the give giver and recipient are also in an employer-employee relationship. The Code provides that transfers between employers and employees are not treated as gifts for tax purposes; the Proposed Regulation carves out extraordinary interfamily transfers from that prohibition. This Regulation was initially proposed in 1989 and remains a Proposed Regulation. The alternative of taxing these transfers as compensation would likely be politically disastrous; however, because the clear wording of the statute, if not the legislative intent, provides no statutory basis for the Regulation, it remains in proposed form. Thus, despite not having the force and effect of law, a Proposed Regulation has altered the statute, and because it operates in favor of taxpayers, only Congress has the means to challenge the interpretation.

The use of the different forms of guidance also results in the appearance that lesser authority items are being used to override those that received public comment. For example, in Revenue Procedure 2018-38 the Service waived certain reporting requirements required by final Regulations for noncharity, tax-exempt organizations. Eliminating reporting will arguably make it harder for the government to determine who from these tax-exempt entities make large political contributions, popularly referred to as dark money. The fact that the Regulations requiring the reporting provide that “[t]he Commissioner may relieve any organization or class of organizations” of this obligation and that such an action may have been foreseen does not lessen the appearance that the Service is taking a politically motivated position without the heightened review required to modify the Regulations. Recently a federal district court judge invalidated Revenue Procedure 2018-38, as amending the Regulation in violation of the APA for not having complied with notice-and-comment procedures.

Despite current confusion and the risk of diminished taxpayer confidence in the tax system, the government cannot fix the problem by issuing all guidance in the form of Regulations. Issuing all guidance as a Regulation would put too great of a burden on the Treasury Department and would likely result in less guidance being issued. With Treasury Department resources limited and the tax law almost certain to contain ambiguities, the need to prioritize resources will not go away. And not all guidance would benefit from an increased review process. Some guidance needs to be produced quickly and some more deliberately; some guidance targets all taxpayers and some just a few. Having different forms of guidance is useful, but the differences need to be purposeful and appropriate for taxpayers.

Because the government exercises tremendous power through the decision to issue guidance and the form of that guidance, a system should be devised to properly classify guidance. The government should not default to making determinations without public oversight. The Guidance Priority Plan starts the process of incorporating the public into the guidance-making process, but it imprecisely lists desired topics without explaining how or why the various forms of guidance are chosen or the targeted audience of the response. Confusion occurs and the government could minimize that result.

B. Nevertheless, Consequences Flow from Classification

When taxpayers use tax guidance to plan future activities or to file their returns, they need to understand where the guidance fits within the hierarchy in order to know its practical value. That value derives from the consequences guidance are given. Different forms of guidance may trigger different levels of penalties for failure to follow them and may or may not abate penalties. Thus, taxpayers should understand that not all guidance is equal and only some will abate their taxes, tax penalties, or interest.

It is difficult for nonspecialist taxpayers to predict these consequences, in part because a side effect of the existing classification schema is that it does not provide a theory for guidance’s characteristics associated with the information the guidance provides. Even though more than 90% of all tax litigation begins in the specialized Tax Court, the task of wading through guidance remains daunting considering that the labels given guidance are often misleading. Courts are unlikely to be able to sort through each item of guidance to determine its substance. Instead, the government’s list of factors results in classification and, from that, the levels of process, deference, and penalties are imposed unless courts challenge these effects.

One consequence is that taxpayers may not know what guidance permits them to avoid tax or penalties. Arguably no guidance excuses taxes if the guidance incorrectly interprets a statute because only the statute creates the tax obligation. Therefore, taxpayers may be surprised to learn after the fact that their reliance on government guidance does not mitigate underpaid tax. If a taxpayer can convince the Service or a court that the guidance is accurate, the taxpayer can avoid taxes. Otherwise, taxpayers will owe the tax. Even interest is not abated due to reasonable cause, such as reliance on tax guidance. Thus, if guidance can establish the accuracy of a taxpayer’s position, it eliminates interest and the underlying tax itself.

Moreover, only some guidance abates a 20% (sometimes 40%) penalty on underpaid taxes for taxpayer misconduct, including a substantial understatement of tax. Because penalties compound unless tolled for litigation and interest is charged on penalties, these amounts can be steep. Therefore, if a taxpayer relies on an incorrect interpretation or statement in a publication, the taxpayer will owe not only the taxes the statute imposes but also accumulated interest and penalties.

To abate such a penalty, taxpayers may rely upon “substantial authority,” but for this purpose not all guidance is the same. The Treasury Department and Service allow taxpayers to use Regulations and Revenue Rulings to defend against the substantial-understatement-of-tax penalty, but not publications for that purpose. Thus, although the Code provides for the abatement of penalties if a taxpayer submits a specific written request to the Service for advice, the taxpayer receives a written response, and the taxpayer then reasonably relies upon it, relief under this provision is not available for taxpayers who rely on published guidance applicable to all taxpayers.

A second practical consequence of classification, the flip side of guidance potentially mitigating penalties, is that failure to follow some forms of guidance can itself lead to the imposition of penalties. For example, taxpayers risk a 20% penalty if they negligently disregard rules and regulations. Unfortunately, what constitutes a rule or regulation may not be clear to taxpayers. For example, as mentioned in Part III, taxpayers who fail to follow final and Temporary Regulations risk penalties, but those who fail to follow Proposed Regulations do not. The Regulations provide a definition of “rules or regulations” for this purpose which includes the Code, Temporary and final Regulations, Revenue Rulings, and Notices (that are not regarding proposed rulemaking) if published in the Internal Revenue Bulletin. Thus, Revenue Procedures, even those governing substantive matters, and lower level guidance do not carry the risk of penalties if disregarded.

When a taxpayer disagrees with an item of guidance, the taxpayer may avoid the imposition of penalties in a few instances. Civil penalties are not imposed if a taxpayer believes that the government’s interpretation of the law is incorrect and the taxpayer either has a realistic possibility of winning in court or discloses the position on the return and the position has at least a 5% chance of winning in court. Thus, if the taxpayer disagrees with guidance and has even a slim chance of winning on the substance, the taxpayer can avoid financial penalties.

A third consequence is that courts only defer to some types of guidance. Courts have devoted significant attention to the appropriate level of deference to be given to agency-created guidance. They have a long history of deferring to agencies because, as the Supreme Court has concluded, courts are “not at liberty to substitute [their] own discretion for that of administrative officers who have kept within the bounds of their administrative powers.” This results in significant deference to legislative final Regulations. It remains unclear the amount of deference that should be given other types of Regulations—interpretive, proposed, temporary—or other tax guidance.

Thus, Revenue Rulings, which give rise to penalties in the same way as Regulations, are not entitled to the same deference as Regulations. Rulings have less weight than Regulations but, according to the Service, “may be used as precedents” by both taxpayers and the Service. In 2014, in United States v. Quality Stores Inc., the taxpayer raised the deferential value of Revenue Rulings but the Supreme Court decided not to rule on the issue, finding a conclusion on the issue unnecessary to resolve the case. As such, the issue remains ripe for decision. Some deference is likely, but it is implausible that a clear standard will be developed.

The Service sometimes even warns of this problem in its lesser forms of tax guidance when it explicitly states that taxpayers may not rely on the guidance. For example, in Notice 2018-88, the Service stated that it intends to initiate the process of developing guidance regarding individual health insurance, and the Notice contains language of potential guidance. The Notice also provides that taxpayers may not rely upon it. It seems incongruous that the Service provides information that is intended to inform taxpayers but that taxpayers may not rely upon despite the information being issued by the tax authorities. In practice, however, in many instances the government permits taxpayers to rely upon guidance despite courts being unwilling to defer to this guidance.

Finally, a fourth important consequence is that taxpayers only have the ability to provide input on the content of some forms of guidance. As discussed above, only broad outlines of the procedures used to create tax guidance are made public, but it is clear that the Treasury Department receives varying amounts of internal and external input. The processes for receiving public feedback developed not out of the agency’s founding statute but from the Service’s need for information; but because the Treasury Department is a large organization with many functions, not everything that is currently produced is given extensive review. Only when the APA requires the use of notice and comment, which currently is required of Regulations, do taxpayers have the right to provide comments on the proposed guidance.

Although different consequences may arise as a result of the various forms of tax guidance, the link between these consequences and the particular forms of guidance may not be obvious to taxpayers. In fact, the consequences may be inverse to a taxpayer’s actual reliance on the guidance. To the extent a taxpayer finds guidance with a situation resembling her own, that form of guidance is less likely to be given deference. Thus, Regulations are the most general form of tax guidance but can be relied upon by taxpayers who face a high burden of proof in order to avoid penalties if ignored. Publications, PLRs, and TAMs are often fact specific, but they neither bind the government nor are subject to public comment in their creation. Under the current system, decision among the forms of guidance available is seemingly tied to whatever triggered the need for that guidance as seen by the government rather than how the guidance is likely to be used by taxpayers.

For example, a taxpayer might find a Regulation stating general principles, a Revenue Ruling applying those principles to a type of business transaction, and a PLR or TAM addressing a particular factual situation. In the context of section 183, the hobby loss rules, the question may arise whether a taxpayer has a sufficient profit motive to support deductions from a particular activity. The section 183 Regulations provide that the statutory reference to “an individual” includes estates and trusts. The Regulations make no reference to whether “an individual” also includes partnerships; however, a Revenue Ruling provides that section 183 does apply to the activities of a partnership at the partnership level. Finally, a TAM provides that a taxpayer engaged in racing horses through both a partnership and separately as a sole proprietor is considered engaged in two separate hobby activities. The more specific answer in the TAM may inform a taxpayer but is not authority for a reporting position.

The various forms of guidance also create difficulties for taxpayers when only lower forms of guidance are provided to the taxpaying public. For example, in the field of reproductive health, the only guidance available is Publication 502, updated in 2018, which references fertility enhancement expenses. Despite millions of taxpayers receiving fertility treatment, the only information the government provides to taxpayers regarding the deductibility of such expenses is a form of guidance created with little formal review and entitled to no deference. The only related Revenue Rulings in the field involve birth control, abortions, vasectomies, and sterilization. The only related PLRs permitted a deduction for the costs of an egg donation but denied a deduction for surrogacy costs. Despite the importance of these issues, made more common because of advances in medical technology, the government has not provided authoritative guidance.

As taxpayers move from general to more specific tax guidance, they may learn that the information is personally more relevant but no longer authoritative. The forms of guidance that abate penalties and that receive deference are not tied to the importance of particular information or the reasonableness of a taxpayer’s reliance. Thus, the consequences of the choice of form hinges not on the substance of the guidance but on the label the government chooses. And because labels do not always reflect the underlying material, as discussed above, basing important characteristics on those labels is particularly problematic.

The government may not always recognize the impact of the different forms of guidance for taxpayers. For example, members of the government have said that the Service produces fewer Revenue Rulings because of the publication of PLRs. In other words, more Revenue Rulings were produced when the government had to generalize the information from PLRs rather than simply releasing a redacted document. That shift, however, ignores important distinctions between the two forms. PLRs are produced with less procedural oversight and receive no deference in court. Thus, the reduction in Revenue Rulings, if based on the belief that a PLR will suffice, does not reflect the fact that the implications of a PLR differ from those of a Revenue Ruling. The government is effectively trading guidance with a greater level of deference and procedure for one with lesser levels.

Courts could attempt to match the consequences of tax guidance with its substance; however, only the tax administration can truly rectify the disorder of the current system. Because the classification of tax guidance is currently a mess, the consequences of the guidance cannot easily be matched to its form. A rationale for the classification of tax guidance should be thoughtfully created. The classification of guidance should be based on the substance of the guidance and not just its label in a manner that maximizes its benefit to the government and taxpayers.

C. Classification Should Focus on the Audience

Acknowledging that a problem exists with the unpredictable classification of guidance and that the failure of the current classification system has real world consequences does not alone dictate a solution. Although many approaches could be created to better produce predictable results, the government could best fulfill its objectives by basing classification on the intended audience of the guidance issued. The Taxpayer Bill of Rights recognizes the Service’s obligation to taxpayers, with the first right for taxpayers “to be informed.” According to the Service’s understanding, taxpayers “are entitled to clear explanations of the laws and Service procedures in all tax forms, instructions, publications, notices, and correspondence.” The Service’s mission statement reinforces this idea by providing that it will “help[] them understand and meet their tax responsibilities.” To help taxpayers understand the tax law, the Service needs to frame its tax guidance with taxpayers as the primary audience.

The importance of focusing on taxpayers as the primary audience stems from their unique use of tax guidance in understanding their obligations to the government and in planning future affairs. Taxpayers are required to comply with the law whether or not they understand it. In a nation with a complex tax regime, this obligation can only be met when taxpayers have assistance understanding the regime.

Framing guidance around the intended audience is needed even though almost all tax guidance is available to the public. That the taxpaying public can find most guidance does not mean it is produced or its characteristics determined with their needs in mind. Indeed, much of the guidance the public is likely to read and understand does not have precedential value and cannot be used to abate penalties. Instead, taxpayer needs should affect the classification and characteristics of the guidance.

Accepting that the government has an obligation to inform taxpayers, most guidance should target the taxpaying public and should recognize that taxpayers and tax advisors need different types of guidance. Some guidance covers how to complete returns in a ministerial or procedural fashion, such as providing inflation adjustments or filing locations. In 2018, 66% of guidance was procedural or ministerial.

This procedural or ministerial guidance aids taxpayers in filing returns and other tax documents and, by ensuring conformity, reduces administrative costs. Although this guidance likely has little impact on tax-planning behavior, its production likely improves taxpayer perception of the tax system. Under the current system, ministerial information has been published in many forms, as discussed in Part II, even though its purpose remains the same.

Taxpayers also need substantive guidance to aid them in understanding the tax consequences of their past actions and future choices. In 2018, 34% of all guidance was substantive in that it explained the law to help taxpayers understand their obligations and make tax efficient choices. Of the substantive guidance, almost half reduced burdens on taxpayers. This guidance is often produced after changes in the law or in response to particular types of taxpayer behavior.

Even when the Service creates substantive guidance for Service agents, in the form of TAMs and other internal advice, the guidance is published for the public pursuant to FOIA and shares a function with other substantive guidance of educating taxpayers on the law. Consequently, this substantive guidance should be framed for that external audience. Not only does this recognize the Service’s obligation to this audience, it makes it harder to abuse taxpayer protections by claiming guidance is for internal audiences.

By focusing on taxpayers as the proper audience for tax guidance, the likelihood of their reliance on the information and the reasonableness of that reliance should determine the guidance’s characteristics. It is reasonable to expect taxpayers to rely on information held out by the government, especially when framed in plain language, for the very reason it is meant to be assessable by taxpayers. Obviously, tax advisors may be needed to explain more complex forms of guidance, and those advisors can then serve to interpret that guidance for taxpayers. With a focus on reasonable reliance, there is no justification to treat taxpayers who are able to afford tax advisors differently from those who cannot. The reliance of well-advised taxpayers is similar to that of poorly advised taxpayers. Nonetheless, basing characteristics on reasonable reliance might lead to flipping today’s hierarchy with the guidance most relied on for “simple” or “everyday” transactions being given greater weight than the guidance used for more complex transactions because that is the form of guidance that most taxpayers directly, and with good reason, rely upon.

The fact that taxpayers should be the primary audience of tax guidance does not mean that all guidance is intended for taxpayers. Other audiences for tax guidance, such as those internal to the Service and Congress, seek guidance for nontax planning or filing purposes. These audiences have different needs from the tax guidance they review.

For Service agents, some guidance focuses on them as employees, namely in educating them about their role or their job requirements or both. For instance, employee matters and procedural rules aimed to provide consistent audits have an internal audience even if publicly available. The Internal Revenue Manual, which describes how agents are to proceed on a range of topics, is one form of internal guidance and is released on the Service’s website. This guidance preserves consistency in practice so that the almost 78,000 Service employees know how to enforce the law and advise taxpayers. Without that internal guidance, individual Service agents cannot fairly enforce the law across the nation and over time.

A final audience for tax guidance is the broader public and those operating in the public’s interest, either to oversee the tax administration or for nontax purposes. For this audience, the agency’s interpretation of the law, made public through publication or FOIA, shines light on Treasury Department and Service operations. Politicians and practitioners can then see how the law is being applied. Armed with that knowledge, they may challenge interpretations with which they disagree. Congress can, thereby, learn of the public’s concerns with Service operations and make adjustments as Congress sees fit.

The field of tax has a history of such challenges. Organizations, such as Tax Analysts, pressure the government to make information public so that everyone knows the workings of the Service. For example, Tax Analysts was listed as a plaintiff in 11 FOIA cases against the Service between 2000 and 2018. They also publish daily and weekly periodicals on tax legislation, tax cases, and tax administration, evaluating what is made public.

A subset of the public cares about tax guidance for “nontax” reasons because the tax system is used for more than raising revenue. In recent decades, many people have noted that Congress often provides for the administration of nontax, substantive programs through the tax system. This fact was well publicized with the Patient Protection and Affordable Care Act in 2010 but also occurs with less attention for programs that encourage such diverse activities as retirement and education savings and green energy. Congress has recruited the Service to administer government policies that are only tangentially related to raising revenue.

Exactly how much tax guidance targets the nontax audience is a matter for debate. Tax can be differentiated from other substantive areas by narrowly defining tax as revenue raising or by interpreting tax in a broader sense that includes the definition of income, such as U.S.-source rules that are more tax than other social policy. A narrow definition would exclude tax expenditures, or provisions that benefit specific activities or groups of taxpayers, because their purpose is, by definition, beyond revenue raising. Excluding tax expenditures’ operating rules is, however, almost certainly incorrect. Congress’s choice to put a nonrevenue-raising provision in the tax Code is the step that expands the role of the Service and Treasury Department, but once enacted many of the expenditure’s attendant rules must be put within the tax system to protect the revenue-raising function. Thus, rules that limit a tax expenditure are necessarily within the tax system.

Consider the deduction for the payment of state and local taxes, which is a tax expenditure that reduces federal tax revenue to facilitate state and local revenue raising. In 2017, Congress limited the deduction for the payment of state and local taxes, and in 2018, the Treasury Department issued Proposed Regulations restricting efforts to circumvent that limitation. Thus, the guidance was revenue related despite involving the definition or limitation of a tax expenditure. In 2018, the 25 potentially nontax-focused items of guidance primarily involved medical matters, retirement, and education, less than 11% of the total items of guidance issued.

Despite a focus on specific audiences in the classification of tax guidance, such guidance can appeal to more than one audience. Nonetheless, a workable matrix requires a simplified grouping. This simplification should maximize the Service’s focus on taxpayers as its mission attests unless guidance is only focused on internal or nontax groups. Under the existing list of factors, the classification of tax guidance is made without the explicit consideration of these audiences. If guidance was framed around its intended audience and the framing made explicit, the government could use the framing to determine the primary features of each form of guidance. By making the end user the primary focus of the classification system, the government can better ensure that the characteristics of issued guidance reasonably reflect what taxpayers need and can reasonably demand from the government.

D. Even for the Same Audience, the Service Has Different Purposes

Recognizing that the audience should drive the classification of guidance and its characteristics is a step toward ordering the tax guidance system. Nevertheless, for some audiences the government seeks to accomplish many different objectives. When explicitly defined, different purposes for tax guidance should further refine the guidance’s characteristics. By stating the purpose and tailoring the guidance to that purpose, taxpayers, courts, and Service agents would have a better understanding of how they are expected to use the guidance.

As the primary audience, taxpayers and tax planners receive both procedural or ministerial guidance and substantive guidance. Within the rubric of substantive guidance is guidance to facilitate taxpayers claiming tax benefits and to limit abuse of the tax system. These categories have different concerns and, therefore, should be treated differently in their classification and resulting consequences. Under current forms of tax guidance, such distinctions are not made. For example, Revenue Procedures contain both procedural and substantive guidance, as do Notices and Revenue Rulings. Their consequences flow more from their labels than their content. Instead, the distinction can be made meaningful with a focus on their purpose.

1. Procedural or Ministerial Guidance

Much guidance is noncontroversial because it is a straightforward conveyance of procedural or ministerial information. Other guidance, such as forms, may also be procedural but reviewed to determine how well it accomplishes its objective, which is often the collection of taxpayer information. This form of guidance, whether produced for Service agents or for taxpayers, often needs to be prepared quickly and efficiently, but that fact does not bely its importance.

For taxpayers and tax planners, procedural and ministerial guidance, such as forms and inflation-adjusted rates, is heavily relied upon by taxpayers as necessary for their compliance, especially after changes in the law. Taxpayers expect that forms will elicit all tax-relevant information to properly determine tax liability and that inflation-adjusted numbers are accurate. Moreover, taxpayers make choices based on the procedural rules the Service creates, so that fairness demands that those rules be sustained. For example, in 2018 the Service extended the time for reporting third-party information returns, and some taxpayers likely made choices based on this extension. Similarly, when the government said it was extending a safe harbor for fixing concrete foundations, taxpayers likely detrimentally relied on that Revenue Procedure, despite it not having been subject to notice-and-comment procedures.

For this information, which is not subject to interpretation, taxpayers reasonably rely on its accuracy. Recognizing taxpayer reliance, in 2018, in 20 Notices and six Proposed Regulations, some of which were substantive, the Service specifically provided that taxpayers could rely on the guidance despite its lack of enforceability under the law. Such an approach is not unreasonable for the Service because it can double check its work or make do with difficult procedural rules, at least in the short term.

In this instance, the balance of equities weighs in favor of taxpayer reliance on, and judicial deference to, such procedural or ministerial guidance. Making taxpayer reliance the top consideration pressures the government to produce these documents correctly in the first instance and ensures that taxpayers can rely on the government’s statements of fact. Nevertheless, because of its nature as either procedural or ministerial information, there is little value in increasing the cost of its production. Even under the APA, this type of information can be created without notice and comment, and it should continue to be so.

Some guidance may initially be thought of as ministerial but has substantive, law-describing components, which should be treated as substantive guidance. For example, instructions are arguably ministerial in that they facilitate the completion of forms, but they often contain substantive conclusions of the law. Fulfilling the duties laid out in the Taxpayer Bill of Rights and the Service’s mission statement of informing taxpayers of the tax law, instructions should be classified as substantive materials. If the government prefers to make instructions purely ministerial, instructions could cross-reference publications or other substantive guidance to assist taxpayers despite the fact that such an approach would lessen the value of instructions for taxpayers as a source of useful substantive guidance.

The creation of safe harbors that involve how the law is applied, as opposed to providing the mechanics of filing, could also be seen as procedural; however, when the intent behind such safe harbors is to change the application of the law, they are more properly viewed as substantive. Safe harbors rewarding or punishing choices intend to shift or validate particular taxpayer choices. For example, three Notices created or extended substantive safe harbors in 2018, involving credits for biodiesel and certain other alternative fuels, homeowner participation in the Housing Finance Agency Innovation Fund for the Hardest Hit Housing Markets, and rollover distributions from Roth accounts. These were adopted without notice and comment, but that limitation does not negate their importance or influence over taxpayer behavior. Although they have procedural elements, the intent and merit of safe harbors means they should be treated as substantive items.

For guidance targeted to Service agents, the only permissible purpose is to convey procedural or ministerial information because substantive guidance should properly be classified as having taxpayers for the audience. In the same way as for taxpayers, ministerial and procedural information must respond to changing law and changing policies. This guidance must be used and understood by thousands of agents across the nation in their daily tasks. It guides them to ensure consistency across taxpayers and over time. The tax administration must also recognize, however, that consistency cannot be the primary objective because of differences among taxpayers and their situations as well as those among the agents who review them. The better purpose is to create a workable regime in light of a diverse workforce and clientele.

For guidance to Service agents, the choice is how to balance the desire to create consistency in tax advice and enforcement with the recognition of agents’ individuality and taxpayer circumstances. The creation of enforceable taxpayer rights through guidance might decrease the amount of guidance produced because it increases the government’s risks of agent mistake. As an alternative, this form of guidance could be made easier to produce but receive no deference by courts either for taxpayers or the government. This compromise would not create a uniform administration of the tax regime, but such looser guidance would more likely be produced in the first place. Although imperfect, a nondeferential system recognizes that consistency is not an end in itself despite the fact that a perfect government would adopt consistent positions among similarly situated taxpayers.

This system for internal-procedural guidance is consistent with the way that much of today’s internal rules are produced and interpreted. For example, the Internal Revenue Manual is produced without public comment and receives no judicial deference and creates no rights. Other internal guidance is, however, created through the regulatory process. For example, in 2018 the Treasury Department issued Regulations governing the process to survey Service employees regarding employee satisfaction, the quality of supervision, and the adequacy of training and support services. Despite being an internal employment matter and only triggering one comment, which applauded the public process, this matter received the same process as other final Regulations. This was arguably not the best use of agency resources.

Therefore, under the approach proffered in this Article, some of the consequences of procedural or ministerial rules would differ depending on the intended audience, although all could be produced quickly and without APA-level notice and comment. External guidance would bind the government because of taxpayer reliance whereas internal guidance would remain an employment matter rather than rise to the level of an agency rule. The intended audience of the guidance drives and justifies the distinction.

2. Substantive Guidance

Unlike procedural or ministerial guidance, substantive guidance interprets the law, sometimes reaching obvious conclusions but sometimes drawing nuanced distinctions. Taking a published position on uncertain issues increases the cost to produce the guidance as well as the risk of judicial disagreement, but it fills a significant taxpayer need. In addition to assisting taxpayers to understand the law, the government may satisfy at least two other objectives in issuing guidance through an open process. First, the government issues guidance to facilitate taxpayers claiming tax benefits intended for the public (facilitative guidance). Second, guidance is issued to reduce tax-planning opportunities and curtail abuse and evasion (limiting guidance). The line between these two objectives can be thin and, at times, artificial, but it operates as a signal of a purpose that has interpretive value for an end user.

For facilitative guidance, the goal is to aid taxpayers who may be entitled to claim tax benefits targeted by Congress to specific activities or events. With facilitative guidance, taxpayers are told how a change in law or interpretation applies to them. In 2018 for example, the Service created new procedures permitting taxpayers to change their method of accounting. This guidance explained that the changes were made to conform with rule changes made by the Financial Account Standards Board rules. In 2018, 25% of substantive guidance was facilitative.

With limiting guidance, the Treasury Department seeks to prevent taxpayers from unduly claiming tax benefits or from minimizing tax burdens. Sometimes the government is express with this motive, as when it used explicit anti-avoidance language in five parts of the 2018 Proposed Regulations on section 199A. At other times the anti-avoidance language of limiting guidance is less apparent. For example, when the Treasury Department limited taxpayers’ ability to claim charitable contribution deductions for contributions to state and local governments, even though the government clearly intended to limit avoidance, the government noted obliquely that, “as a result of the new limit on the deductibility of state and local taxes,” the government chose to “review the question.”

To date, the two purposes are often combined in the same form of guidance. Such an approach would work if all guidance described a functioning system rather than operated to create one. Unfortunately, taxpayers are left to determine for themselves when they are being encouraged or discouraged and when the government is targeting forms of abuse. More explicit information would be helpful as taxpayers navigate the complex tax system. The bifurcation of purpose would also underscore the Treasury Department’s objectives for both taxpayers and the courts.

For example, in the proposed section 199A Regulations, the Treasury Department both facilitates taxpayers claiming the new 20% tax deduction for business income and limits their ability to abuse the deduction within the same subsections. The Treasury Department divides the six new subsections of Regulations based on subject matter, each with facilitating and anti-avoidance rules. Although a logical descriptive system, this division neither clearly encourages the take up of the congressionally-created tax benefit nor targets areas the government already suspects will be abused.

With respect to substantive guidance, the existence of these two objectives, both facilitating tax benefits and reducing tax avoidance, should require that the government recognize the distinction and state it clearly. Therefore, shaping guidance to promote one or the other objective narrows what a particular item of guidance attempts to do, with the result that guidance would be framed differently than it is today. Moreover, the explicit objective involved should affect the extent to which courts defer to the guidance, the potential penalties that attach for noncompliance, and the required procedure for its creation.

This system does not impose a universal deference rule even if taxpayers reasonably expect the government to be held to the same standards as the taxpayers using its substantive guidance; however, important differences exist if the government is trying to facilitate the claiming of a tax benefit or to reduce tax avoidance. A division is warranted because of practicalities in accomplishing these legitimate government objectives. Some individual inequities may result that could justify adjustment of guidance in a particular instance; however, the goal should be to maintain a coherent system of guidance.

Because the goal for facilitative guidance should be to encourage taxpayer activity, taxpayers need clear information quickly and a proposed form of that guidance, with a corresponding delay in any notice-and-comment process, may be appropriate. Some review procedure and opportunity for comment would be beneficial to ensure that taxpayers understand the tax benefit. Nonetheless, this guidance, even if only proposed, should bind the Service because taxpayers are acting as the government directs in order to enjoy a benefit extended by the government. Punishment for failing to follow such guidance should only be permissible when taxpayers seek to abuse the tax benefit, which should result in the production of limiting guidance. Therefore, if a taxpayer believes that the statutory language permits a benefit in a manner not described by facilitative guidance, the taxpayer should be able to apply his own interpretation without fear of penalties unless the government has issued limiting guidance to prevent it.

Using a sports analogy, facilitative guidance can be thought of as establishing a football game’s field of play: the 100 yard playing field, the end zones, and the sidelines. Referees cannot arbitrarily shrink or enlarge the field during a game. Similarly, the government should not be able to change the rules for claiming a tax benefit without appropriate notice. This basic concept of fairness should apply to facilitative guidance for low-income, poorly advised taxpayers and wealthy, well-advised taxpayers. There is nothing inherently different between groups that would permit the government to more easily change the rules for one group rather than the other.

Limiting guidance is in many ways the flip side of facilitative guidance. As the goal of limiting guidance is to prevent the unfair exploitation of an ambiguity (unfair if only because not all taxpayers can exploit it equally), the government should be entitled to create rules quickly and with significant punishment for those who ignore those limiting rules. Speed in the production of this type of guidance is important to respond to taxpayer planning opportunities, and punishment for failure to comply with the guidance is necessary for such guidance to be effective.

Continuing with the sports analogy, limiting guidance is akin to rules limiting or defining abuses to the rules establishing the game. For example, football has rules regarding the number of hands that must be on the ball for a touchdown and how control of the ball is defined. These rules evolved with the game as new situations arose or players adopted new moves with respect to existing limiting guidance. Similarly, the government must be free to respond to new situations and changes in taxpayer activities.

Because of the need to respond to taxpayer behavior, the balance of equities in the production of limiting guidance tilts away from strict adherence to proceduralism because of the countervailing needs of good government. Moreover, guidance to limit tax avoidance should enjoy maximum deference to bind taxpayers. Even with such deference, taxpayers should retain the ability to challenge the agency’s interpretation of the law, and Congress retains the power to overrule any form of tax guidance.

With its focus on abuse, the need for speed in production and enforceability of limiting guidance exists regardless of a taxpayer’s sophistication, although how the limiting guidance itself is framed would likely differ depending on the sophistication of the intended audience. One reason is that government-issued guidance helps level the playing field. In the absence of guidance, aggressive taxpayers and advisors have the upper hand in reducing their own taxes or soliciting clients. For example, one lawyer may refuse to issue a strong opinion because of ambiguity in the law, while a more aggressive one might take the work. This might be one reason that there has been little uproar from tax attorneys over the abbreviated procedure used to create guidance. As one critic of the Treasury Department’s procedures for adopting tax guidance noted, “Most members of the tax community believe that Treasury does a decent job in drafting regulations and instead focus their grumbling on issues where guidance is lacking.” While uncertainty can thwart the aggressive behavior of those who seek to comply with the law, it opens the door for those who are risk takers or those who anticipate their ability to hide tax planning from the government.

For those taxpayers who cannot afford tax advisors, however, they are unlikely to be on an equal or superior footing to the government. Rules created with less opportunity for public input and stiff punishments may unduly burden this group and potentially discourage these taxpayers from claiming tax benefits. Of course, this concern is not limited to tax guidance but is part of a larger problem with the absence of a voice for those least capable of influencing the government. This proposal does not address this problem but likely does not aggravate it from the system that exists today.

Despite the appearance of potential conflicts between groups of taxpayers, all taxpayers need information and the information should be framed to maximize its value to taxpayers and the government. Framing guidance around the type of message the government seeks to convey—facilitating or limiting—fulfills that goal. Characteristics should flow from that distinction, including the speed of production, the level of judicial deference, and the imposition of taxpayer penalties.

3. Other Audiences

For other external audiences focused on tax for nonfiling or tax-planning purposes, the government must help operationalize nonrevenue-raising systems as required by Congress. For example, in 2018, the bulk of Regulations were promulgated to comply with the Affordable Care Act. In these instances, it is best practice, and currently required, that the tax administration use prevailing administrative law. Just because Congress chooses the tax system to administer nontax provisions does not mean that the relevant authority in the other substantive area should be shunted aside. Nonetheless, courts should exercise caution when designating items within this final group. An expansive reading of the nontax group might cripple the tax system’s ability to satisfy the other audiences.

4. What Such a System Might Look Like

A system that focuses on audiences and, for each audience, the government’s purpose behind issuing a particular piece of guidance would be less messy than the system that exists today. With a purposeful choice among guidance forms, classification would reflect consideration of intent rather than attempt to balance amorphous factors directed at consequences. It could, but would not necessarily, lead to the reduction in the types of guidance produced. Those forms that are produced would have consequences based on their substance rather than their label.

Thus, this proposal would flip the consideration so that the audience and then purpose drive the consequences of guidance, including judicial deference, potential penalties, and procedural requirements, rather than, under the current system, consequences largely flowing from classification and secondarily from the substance of the guidance. The characteristics of guidance issued under this approach, as discussed in the prior subparts, is described in Table 2. By categorizing guidance by its intended audience, the other requirements flow logically, rather than being imposed in a vacuum. The context of how the guidance is used becomes its defining characteristic.

Table 2: Characteristics of Suggested Forms of Guidance

^{a The Service could admit a mistake with limiting guidance even if doing so operates to the disadvantage of taxpayers.}

This approach would not prevent the Service from issuing various levels of guidance within any of the categories. The Service would, however, be required to issue the various levels of guidance in compliance with the overall classification. In other words, the Service could issue targeted guidance to taxpayers for facilitative purposes, but the Service would need to meet higher levels of proceduralism and face the same requirement to follow it. This would be a change from the current system, at times increasing the government’s burdens and other times reducing them. In each case, the burdens are tied to the audience and purpose of what is produced.

As a consequence, how guidance would be framed must change. For example, guidance on home offices, currently contained in Publication 587 would be bifurcated between facilitative information and concerns with abuse, possibly with some overlap of content but different framing. As one possibility, Publication 587A, could focus on the facilitative purpose, including the requirement of the exclusive and regular use of the space as the principal place of business, but Publication 587B, with a focus on limits and government concerns, would discuss possible abuses of the separate room requirement and how the government distinguishes apparent conflicts. These two publications could be published together with an “A” and a “B,” but separating the two parts would highlight their different purposes for the reader.

Continuing with the example, Publication 587A would need to proceed through notice and comment so that it would operate for a period as a proposed publication. Publication 587B, discussing limits and government concerns, would not need to complete notice and comment, although the government might receive information from the notice-and-comment period of 587A and incorporate it as changes to 587B. Taxpayers would not face penalties for a failure to follow the guidance in 587A (in other words, not deducting the expenses or claiming the deduction under other principles) but would face penalties if they failed to comply with the guidance in 587B and abused the deduction.

With this revised approach to classifying guidance, the government would recognize the different purposes behind its guidance. Of course, the government must still follow appropriate standards when issuing guidance. This approach merely adjusts the standards to the audience and purpose of the guidance. Therefore, this approach does not rely on agency ineptitude or budget limitations as the justification for the proposed changes. Instead, the recognition of these different purposes permits the government to provide more effectively the assistance that taxpayers need and to better explain the concerns of government. For the government to demarcate the facilitative versus limiting objectives signals an intent that would improve the understanding of the guidance itself.

E. What the Service Can Do Today

If the tax administration accepts the premise of this Article, significant changes would need to be made with respect to the classification and consequences of tax guidance. The government has the authority to change its classification to achieve consistency and clarity; however, it would require acts of Congress and decisions from the judiciary to change the consequences. Therefore, the tax administration should begin the process with the understanding that it needs cooperation with the other branches of government to improve its tax guidance.

As to classification, the Treasury Department and Service have latitude in framing guidance, with only the requirement that guidance be produced. To simplify tax guidance around the audience and purpose, fewer forms of guidance should be issued and their labels should clearly indicate the government’s objective. For instance, Revenue Procedures could be retained for all external-procedural or ministerial guidance. If guidance is, or might be interpreted as, substantive, it should not be issued as a Revenue Procedure. Substantive guidance would use other labels, possibly differentiating between who requests the guidance or whether it has a limiting or facilitating purpose or both.

Without the tax administration simplifying its guidance structure, courts could create greater order by interpreting tax guidance based on its substance, thereby forcing some version of order from the outside. In this way courts could apply the consequences of guidance independent of its labels, something it seems inclined to do. Unfortunately, the current lack of coherence in the designation of guidance makes this a difficult task. In particular, when cases are heard by nonspecialist courts, judges may struggle to decipher the intricacies of guidance for which classification is muddled. Even if judges succeed, the fact that courts evaluate guidance as part of litigation means the evaluation produces little benefit for taxpayers who need this information when filing their tax returns.

Turning to the characteristics that flow from the various forms of guidance, even if the tax administration simplifies its structure, not all characteristics could be altered without the involvement of the legislative and judicial branches. As discussed in greater detail below, statutory and judicial changes are needed to alter the level of procedure, deference, and penalties applicable to each form of guidance. Currently, the APA determines procedural requirements, unless guidance is excepted from the APA. In addition, section 6110(k) denies deference to some forms of guidance, and the courts determine the level of deference for others. Therefore, in order to adjust the characteristics of guidance to conform to the new end-user approach, Congress and the courts would also need to adopt the new approach.

These branches may be willing to do so because it would reduce some current problems with tax guidance. Parties have been unsuccessful at shoehorning existing forms of tax guidance into the APA mold and doing so would not adequately provide an awareness of tax guidance’s users. And while section 6110(k) and its Regulations reduce the cost to the Service of issuing publications and determination letters, they do so at the risk of frustrating taxpayers and uniform tax compliance. Instead of those limits, this proposal builds on a well-developed, hundred-plus year system but recognizes that its labels have lost their distinctiveness. Recategorizing tax guidance can revitalize the system consistent with the Service’s mission.

Breaking down the characteristics, first, the procedures generally required for creating guidance are provided in the APA. Unless guidance fits within an exception, notice and comment is required of all guidance that rises to the level of “rules.” Although a discussion of APA principles is beyond the scope of this Article, sufficient ambiguity and current debate exist that Congress should expressly exempt tax guidance from the APA in order to implement a more purposeful regime. By creating an exception for tax guidance, Congress could then impose a different process to better reflect the needs of the intended audience and the government’s goals, rather than reacting to the guidance’s label with a rare look at the substance of the guidance.

Second, with respect to deference, courts impose standards of deference based on the level of guidance and how that guidance fits within the larger matrix of deference. Courts have devoted significant attention to the question of the appropriate level of deference to be given to agency-created guidance. These standards have evolved in fits and starts over the years, which leaves agencies, courts, and taxpayers struggling to determine the level of deference that will apply in a given situation. From Skidmore v. Swift & Co. to Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., the Court now requires deference to an agency’s reasonable interpretation of an ambiguous statute.

Notwithstanding Chevron’s broad language, courts do not clearly or consistently apply Chevron or any of the other deference standards, and scholars debate the effect of deference on the outcome of cases. For example, under the lesser Skidmore test, empirical studies have found that agency actions were upheld between 30% and 60% of the time. On the other hand, when using Chevron review, courts upheld agency actions between 60% and 70% of the time. Although he did not focus on tax guidance, Professor David Zaring argues that different standards of review can really be boiled down to the reasonableness of the agency’s guidance.

Thus, today courts apply different standards of deference to various forms of tax guidance; Regulations are the only form of guidance to receive significant deference but even that amount of deference is difficult to quantify. Courts are unlikely to significantly revise this understanding for a reworked, purposeful regime. If Congress spells out a new standard, courts are more likely to adopt standards of deference to reflect the new intent. As an additional change, Congress could amend section 6110(k) that currently denies precedential value to lower levels of guidance, including PLRs and TAMs, so that deference follows purpose rather than form.

Finally, the civil and criminal penalties taxpayers may face for failure to comply with the various forms of guidance are imposed by statute. Because Congress created the system, it can modify the forms of guidance with respect to which taxpayers risk penalties and those that can be relied upon to avoid penalties. Congress could eliminate penalties if taxpayers reasonably rely on stipulated guidance, but this is not the current standard.

Even if Congress could be persuaded to change its policy on penalties, it is politically unlikely that Congress would permit reliance on tax guidance to eliminate the tax itself, and this might raise issues for taxpayers who have errors with respect to tax credits. When taxes are owed after the taxpayer claimed a tax credit, the taxpayer may have to repay money already received and, likely, spent. This repayment obligation may be viewed as a penalty, even though it is not one statutorily. It is beyond the scope of this Article to do more than raise the issue for future discussion when, and if, Congress restructures the penalty regime.

Although the adoption of the key characteristics of deference, procedure, and penalties requires the cooperation of the legislative and judicial branches of the federal government, the Service could attempt a limited change itself but doing so would be problematic. The Service could defer to its own guidance, thereby eliminating the possible application of statutory penalties or adjudication raising issues of deference. If, however, the guidance is an incorrect interpretation of the law, this deference permits the Service or Treasury Department to override an act of Congress. Without a congressional mandate, the separation of powers is clearly violated, and even if Congress granted the tax administration this deferential power, it may raise questions of the constitutional delegation of power. Because this Article focuses on a proposal that avoids these problems, they are beyond the scope of this work.

With the cooperation of the three branches of government, the purposeful classification of tax guidance with its characteristics flowing from that purpose would create a better functioning tax system. Moreover, it would raise an opportunity for the tax system to connect with taxpayers. Creating a system of tax guidance focused on those using the information builds and validates bonds between the government and taxpayers. In doing so, it explicitly recognizes the importance of having taxpayers turn to the Service for tax assistance. Creating an explicit link between government and taxpayers rather than the government and tax planners who can navigate tax guidance would likely increase compliance and satisfaction with the taxing authority.

IV. Conclusion

The existence of tax guidance is a taxpayer right and its creation an obligation of the tax administration. Guidance allows everyone to operate with the same information and makes the law and its enforcement transparent. Nonetheless, not all guidance is the same, and differences as between the types of tax guidance can confuse even tax practitioners. The current classification of tax guidance grew organically into a multi-level behemoth, with significant changes in the types of guidance over time. It is time for order to be re-introduced to the system of tax guidance with the order focused on the end users of that guidance.

Today under increased judicial review of tax’s proceduralism, the tax guidance system, without being organized, is being shoehorned into the APA and its rules of administrative law. Focusing the tax guidance regime on how guidance is used rather than how or why it is produced will result in a more coherent system and its implications. The government should tailor information for its particular audiences and the classification of guidance should be based on the intended audience. Moreover, the audience for each piece of guidance should be explicitly defined. The rules for guidance—from the process to deference to penalties—should flow from that classification as the government tailors information to its audience.

When the intended audience of guidance is overlooked, the use of the various forms of guidance becomes muddled, as it has in practice, because there is little justification for the use of one form versus another. Faced with budgetary pressures and a rising cost of production, the government may also reduce the production of guidance for fear of improper classification. To encourage the production of the most useful guidance, Congress should limit the additional burdens imposed on the government and taxpayers to the guidance that would most benefit. Basing classification on audience and purpose ties the required procedure for the production of guidance and the amount of internal and external deference it should be given to who reads it.

Appendix

I thank Kristin Hickman, Jennifer Byrd-Pollan, Wendy Wagner, and the participants of the Fourth Annual Taxpayers Rights Conference hosted by the University of Minnesota Law School, the Law and Society Annual Conference 2019, and the SEALS 2019 Annual Meeting for all of their comments on earlier drafts and the Harold C. Schott Foundation for financial support.