The IRS Private Letter Ruling: When 100% Tax Certainty (or 100% Tax Relief) is a Must
A structured transaction with lots of zeros behind the dollar sign? A fatal planning misstep discovered too little too late? Or an IRS election that everyone thought was made but somehow slipped through the cracks? Enter the IRS private letter ruling.
What is a private letter ruling?
A private letter ruling (PLR) is a written decision by the IRS in response to a taxpayer’s request for guidance or relief. It is issued by the IRS Office of Chief Counsel or if applicable the Tax Exempt/Government Entities Division. The IRS will interpret and apply the tax laws to certain “assumed” facts – i.e., those facts represented as true by the taxpayer. The PLR can only be relied upon by the requesting taxpayer, and while the IRS reserves the right to modify or revoke a PLR it later determines to be incorrect or inconsistent with current IRS thinking, for all practical purposes the ruling is binding on the IRS. And in instance of a taxpayer seeking relief, the IRS is bound by its determination so long as the facts presented by the taxpayer are true and correct.
What will the IRS rule on?
The answer is most tax issues. The IRS will not issue “comfort” rulings – i.e., rulings on issues that are squarely addressed by applicable tax law. There are also areas in which IRS will not issue rulings because the issues are inherently factual or because the IRS simply does not want to. The IRS publishes guidance setting out these “no-rule” areas from time to time and incorporates them annually into a Revenue Procedure. For a current list of no-rule areas, see Rev. Proc. 2019-3 (domestic “no rule” areas) and Rev. Proc. 2019-7 (international "no rule" areas).
How do I apply for a PLR?
As a threshold matter, a review should be conducted to confirm that the IRS has not already issued guidance providing automatic consent for certain relief or providing a simplified method for securing the IRS’ blessing. Assuming there is not an easier path forward, the steps to secure a PLR are well defined. The procedures and user fees for obtaining a letter ruling are published annually in the first revenue procedure of each calendar year; see Revenue Procedure 2019-1.
What’s the catch?
The list of requirements for a PLR request is long, and crafting a good narrative – i.e., truthful but compelling story – can be time consuming. In additional to professional fees, the IRS charges a user fee for a private letter ruling. The fees vary by subject matter and size of the taxpayer, but they can be as much as $30,000. This fee is paid at the time of submission and with no guarantee of a favorable ruling. If the IRS decides not to rule on the request, the taxpayer may request a refund of the user fee which is at the discretion of the IRS (anecdotally, the IRS often issues a refund in these circumstances).
Any practice tips?
As the old adage goes, there is no second chance to make a first impression. A well-crafted, persuasive PLR request is key. Also, a little reconnaissance yield dividends. The IRS publishes the contact information for the Chief Counsel attorneys responsible for issuing rulings in various areas. Before applying for a ruling, consider calling the IRS attorney and anonymously describing the facts. The IRS attorney may sway you to seek other options, or in many cases, offer you important insights that will steer the manner in which you present the issues in the PLR request. Finally, the PLR process does not stop at the submission of the PLR request. The IRS attorney handling the request will have questions. Be prepared.
But I have more questions!