If you think publications printed by the IRS offering tax guidance are a final authority, think again. In a recent tax court ruling, the judge reinforced that the “plain language” of the law trumps IRS proposed regulations or publications (Bobrow). Basically, IRS Publications, which provide specific tax instructions for various situations, have been ruled unreliable.
The facts of the case show that Alan Bobrow, a tax lawyer and former General Tax Counsel for CBS, rolled over two separate IRA accounts in one year. There is a limitation on multiple rollovers within one year, but according to IRS Publication 590 the limitation applies separately to each different IRA account. The tax court ruled that the limitation applies collectively to every IRA account owned by a taxpayer. In other words, Judge Joseph W. Nega determined that a taxpayer cannot roll over one of his IRA accounts and then later roll over a second, separate account in the same year.
In addition to the taxes, the court also charged Bobrow with a 20% substantial underpayment penalty. This penalty is charged when a taxpayer cannot demonstrate that they had “substantial authority” or “reasonable basis” for taking a certain position.
This ruling is a cautionary tale. As Janet Novack with Forbes points out, IRS audit manuals used to train auditors state that IRS publications cannot be relied on to sustain tax positions. The takeaway is that the text of the law outweighs whatever the IRS or any other agency might publish as guidance about the law. The IRS plans to update their Publication 590 to reflect the court’s decision in 2015.