Taxes are interpretive as much as they are hard facts. They have to be since there is no way that lawmakers can list every possible variation on a rule. And interpretations can vary so both sides of an issue can present a carefully thought out rational for their interpretation. So how can a taxpayer decide which interpretation to follow for their taxes? No, the one you like best is not a good choice. It might be correct, but you need a better rational than that.
It comes down to the authority of the different interpretations. The authority is the original sources that a taxpayer (preparer) bases their interpretation. But these authorities are not created equal. There is a hierarchy that must be followed:
- The Internal Revenue Code and other laws.
- Temporary and final regulations that the Treasury Department issue to explain the law.
- Revenue rulings are positions that the IRS/Treasury have taken on the regulations.
- Revenue procedures are the rules and guidelines for a specific tax action. Like the procedure for filing an injured spouse claim.
- Federal court cases with the Supreme Court being the highest authority. The courts can be tricky since different districts or tax courts can have different rulings on the same issue.
- Congressional intent and conference committee reports show what Congress was thinking the law will do.
- IRS Letter rulings, how they have responded to similar decisions, and finally other IRS notices and press releases.
So, if the deduction the client wants to take is specifically mentioned in the IRC as not deductible, it never will be deductible. Not specially mentioned there, I would next look at the Treasury regulations for a similar deduction and how it is handled. I would look for all rules and cases that come close to the deduction. Why do this? That is part of my job. My client has a question on an unique deduction without a clear or established answer and my research won’t change that but it will give us an indication on how related issues have fared. That will allow us to make an informed decision on using that deduction and to know that it might be questioned. The research doesn't need to be done on every issue but sometimes there are special circumstances that need special attention.
By the way, did you notice that the list of authorities did not include “this guy at work”, “my hairdresser”, “my realtor”, “my other preparer” or other backdoor experts. Just sayn’.