There are several reasons why taxpayers may need written tax advice.
- To supply legally supportable analysis and conclusions to the structure or reporting of a transaction either prior to the transaction, or in some cases, after the transaction has occured. One reason is that tax matters are often technical and the amount of tax can vary greatly based on nuances in the facts and our tax laws. Having a tax attorney prepare written advice that sets out the facts and explanation in deal, can help ensure that the law is being applied to the correct facts and, ultimately, that the tax advice will be upheld if challenged by the government.
- To persuade or educate an IRS Appeals Officer or a Judge. Another reason is that a third party may require the tax advice be put in writing, as when an IRS Appeals officer (who make decisions based on the hazards to the IRS of litigating a tax matter) or with a court in tax litigation, or a court that needs to understand the tax implications of a proposed class action settlement or a bank that needs certainty about the amount of tax exposure before extending credit.
- To avoid or minimize tax Penalties. Third, another reason why taxpayers should seek out written tax opinion letters is for penalty avoidance. Reliance on written advice from a tax attorney can, in some cases, relieve the taxpayer from penalties if the legal conclusions turn out to be wrong or the taxpayer loses at IRS Appeals or in court. There are a number of rules that apply in determining whether written advice from a tax attorney qualifies for this type of treatment, but the savings in terms of tax penalties is often substantial.
- To avoid misunderstandings. Someone once said oral legal opinions are not worth the paper they were written on. Of course, that is an oxymoron. But, in reality, tax law is complex and ever changing. The tax law is massive. It is contained in millions of pages of codes, regulations, cases, rulings and articles. Contrary to the opinion of some, there are usually no simple answers to any tax question because the law is a bramble bush of nuances. Tax conclusions and outcomes can depend on a mere word in the code or some judge’s decision in a case they decided. So, I do not give oral tax advice, and I do not give shoot from the hip advice. If I am engaged to answer a tax question, I will do the research and render a written opinion with citation to the law and how it applies to the facts I am presented with. That way there is no misunderstanding or confusion, or a later taxpayer claim that I said something different.