Tax Position Paper
When filing taxes a business takes a position which defines their tax liability. Sometimes, a business may not be certain that they are taking the correct position. In these cases it is important to examine why the position is being taken and what laws, regulations, and so forth support the position being taken. This examination includes a review of the sources of tax laws relevant to the position, substantial authority, and how the IRS and the courts may come into play in the case of a dispute or audit.
According to the university of Texas website, primary sources of tax law include, “The Internal Revenue Code, which is Title 26 of the United States Code; Decisions of the United States Tax Court, district courts, Court of Federal Claims, federal circuit courts, and the United States Supreme Court. Treasury Regulations, located in Title 26 of the Code of Federal Regulations; Internal Revenue Service guidance published in the Internal Revenue Bulletin, including Revenue Rulings, Revenue Procedures, Notices, and Announcements; and other Internal Revenue Service material, including Private Letter Rulings and Technical Advice Memoranda” (Tarlton Law Library, 2013). Secondary sources are, “publications written by legal analysts, scholars and other tax professionals” (Tax Research: Understanding Sources of Tax Law). If there is a concern about the tax position taken by a company, using primary sources to defend the position is far more effective than using secondary sources. In layman’s terms, primary sources are those that come from the federal government in some capacity and secondary sources come from anywhere else. Given that federal tax law is at the core of any dispute or question, primary sources naturally are more important.
Substantial authority is an important concept in cases where the tax position is challenged. ” If there is substantial authority for a position taken on a tax return, neither the taxpayer nor the tax preparer will be subject to the penalty for underreporting income even if the IRS successfully challenges the position taken on the return” (Substantial authority and Judicial System for Tax Disputes). If there is a question about a position and substantial authority is possible it is determined by weighing the authority in support and the authority in contrary to the position. The authority in this case refers to the source of the supporting information. This could be a primary or secondary source and once the two sources are weighed against one another, substantial authority can be determined. If a company can establish substantial authority for their position they will not be required to pay a fee even if it is determined that the position taken was an understatement. Substantial authority does not, however, protect a company from having to pay the correct tax rate plus any accrued interest as a result for paying the balance late.
According to nolo.com, “There are thousands of situations where it is not clear exactly how the tax law should be applied. In these gray areas, disputes often arise between the IRS and the taxpayer” (Our Tax Laws - Understanding the Rules of the Game). This is the core of the