Welcome to Real Estate is Taxing, where we talk about all things real estate tax and break down complex concepts into understandable, entertaining tax topics. My name is Natalie Kalady, I'm your host, and I am so excited that you've decided to join me.
Hello. Hello everyone. Welcome to today's episode. I would like to start by taking you guys with me. On a little journey. Into Facebook. I've been in a Facebook group before for tax professionals. Where in response to a question. A another tax professional will provide something from the IRS website. Or I have been in Facebook groups for real estate investors. Where someone will ask a tax question that is. Incredibly complicated.
Only to be met with multiple responses of how easy this is and it walks you right through it. In an IRS publication. Well, these are both some type of guidance. Neither of these. Our authority. So in today's episode. I'm going to walk you guys through. What the various levels of authority are when it comes to taxes. And what you can rely on. When you're looking at all of these different forms of information. It's kind of like a game of rock, paper, scissors.
There's always something that trumps something else. So just because it might be easier to find a rock. Doesn't mean it's going to be paper.
So now that we've established that there is very much a hierarchy when it comes to guidance. Let's start at the top. When it comes to who creates these tax laws? It's the same people who create all of our laws. This all has to come from Congress. The IRS is not who writes or creates tax laws. All of the tax laws are combined. Into what we call the internal revenue code. The IRC. When you see part of the internal revenue code sighted, it's going to start with two little squiggly SS.
This is typically called a section mark or silk Crow mark. So it looks like two overlapped squiggly SS. And then it'll have a code section and some subsections. So it might be Silkroad, mark squigglies, 4 69. E three. Whatever those section is, and that's going to be. Your top, most authority on a tax matter. Is that literal code? Now. I don't know if you've ever tried to just read through laws as they're written, but it's not very intuitive. And it's a learned skill.
So even though the internal revenue code is your top source for proof. It's hard to interpret and read. And just apply to any normal day-to-day situation. That's why we then have these lower sources. Of guidance that while they're less authoritative. Break things down, farther and farther into everyday English.
The first source of this interpretation is going to be the U S treasury regulations. This is where the treasury department and the IRS goes in and they provide guidance. For this new legislation or for things that are passed in the tax code. They're typically published in the federal register. And opened up for public input first as a proposed regulation. And then eventually. They will lead to a final regulation or sometimes a temporary regulation. And then they republish that as well.
Treasury regulation is still considered authoritative. When it comes to something you can use to form a tax position. When you see a treasury regulation, it's going to look really similar to a citation from the internal revenue code, but it'll typically have a one dot. And then a code section. So instead of the double squiggle yes. That Silkroad symbol. And then. Code section 4 69 E three. It would be something like one dot 4 69. B seven.
These treasury regulations are going to give you a good place to read more expanded information on that code section. And they typically have several examples that walk through applications of that tax code section as well. when I'm saying whether something is authority or not, or if it can be relied upon. Anything you're putting on a tax return is a position you are taking a stance that you are allowed to do something. And something that is authority is what you are basing that position on.
So once we get past the internal revenue code, the treasury regulations that further expand on it, give some examples, explain it a little more clearly. We then have a lot of different courts. That we can use for some guidance. So historical authority from different court rulings, judicial authority. Gives us multiple areas that we can see. How the courts have interpreted these laws historically. And depending on how similar the facts are and if it is in the same circuit.
We can have different levels of reliability of the, those decisions. Obviously the highest court we have is the Supreme court. But more often what you're typically going to seek guidance come from. We'll be the U S tax court. you'll also see quite a bit come through in some district courts, but also through the court of appeals. So being able to look back at these court cases. And correctly apply facts and circumstances.
And the specifics of the case that led that court to rule one way or another, what facts they specifically focused on. What code sections, they referenced back to what earlier cases they referenced back to is going to help you substantiate and really define your position on something tax wise. Because it is based on judicial history, it is based on something that has been looked at and interpreted by the courts. And you have some guidance on how they feel about it.
Once we've looked at all of these options. Now we're down to the area where the IRS really comes into play. And I've seen more than once. Where someone will post an internal revenue code section. Defining a matter and someone's rebuttal. Is like the IRS FAQ or the IRS publication on it. Again, it's a rock paper scissors scenario here. And if the internal revenue code is paper. An IRS publication is a rock. So you could not use it to argue against the highest guidance.
It's an interpretation of that. And it's pretty well watered down at that point. When you consider. That the us tax code is over 70,000 pages. There's obviously a dwindling down of the information. This is its purpose is to summarize. So taking the spark notes version of something. And using it to argue a very specific sentence from the actual book. Doesn't work. It doesn't work here either. Once we get into the layers of what the IRS provides. And their levels of authority.
At the top, we have revenue rulings. These are an official IRS interpretation of an internal revenue code. And these we can use as authority. Below that is a rev proc revenue procedure. And this is also an interpretation. But this is more on the how to, so this is how to comply with that law. And you can also use this as authority. So these are your two. Highest and best uses of IRS guidance that can still be relied upon. Once we get below that. We start to get a little hazier.
The IRS can also issue private letter rulings. And this is basically a written statement by the IRS to interpret a facts and circumstances of the law ahead of time. As it relates to a specific taxpayer it's something, a specific taxpayer submits to have done. And it is not something that you can rely on as authority. For any other person. they are made public after. Everything was issued. But it's just for informative purposes.
It's not something you can base your own position on your tax return about. So even if you find a private letter ruling online, that is the exact same circumstances as your tax situation. You can not rely on that for authority.
In kind of the same bucket. We also have technical advice memorandums. So these are provided by the office of chief counsel and it's of request or based on a request from an IRS director or something related to appeals in response to a specific technical issue where their deans to be more in depth guidance. So a very similar thing here. it's just overall guidance. So any of the items in this category, Like your private letter rulings, your technical advice, memos, your chief counsel memos.
These can't be leaned on as substantial authority. They're more just provided to give you insight to certain issues and they might reference back to items or court cases that could be substantial authority. So there are a great starting point. But you can't hang your hat on one of these IRS positions. It's not going to be authoritative for the position you are taking on your tax return. Then at the very, very, very bottom of the list. Is what we see most often referenced.
This area is going to be IRS forms. The form instructions. IRS publications. The FAQ's. Information that is provided on the IRS website. So any of this is only for guidance and it should not be your sole piece. Of information. Any of these items are a clarifying simplified spark notes version. Of multiple levels of specific law and higher interpretation and court cases. And once it is all pulled together. Into the recap. That's what the sources are.
So IRS publications are something that get referenced incredibly often and they are a great starting point. Or a great place to understand the basics of something. If it is a cut and dry, very standard scenario. It will not have coverage of every nuance of that tax code section. It won't even cover most of them. It's going to break out the simplest forms of each of these things. And it's going to highlight the steps to find out how to apply it.
And often there will be worksheets or graphics and things to really help someone who is not a legal expert. Figure out. The general. Intention of this code, what you generally can and can't do. So, well, IRS publications are fantastic and they are a great place to understand the big picture of what you're facing or a great starting place for your information. It is not substantial authority.
So if you are audited, And there have been multiple things, multiple situations I've come across where something in the tax code versus what's in the publication or what is on an IRS form. Instruction are different. Where something is outdated or where it oversimplified something. And if you say under audit that, well, I did it because this publication said I could. That's not going to be. Authority, you can base your position on, so that can be disallowed. Because again.
These publications are really just. The super simplified interpretation of the actual law. And so it's not your encompassing guide.
If you are a tax professional, listening to this. And you weren't aware at all of these various levels of authority. No shame. It is not common at all for this to be taught or emphasized at a lot of firms. And if you are a solo practitioner, you're someone who went out on your own. And you're new in the industry. You wouldn't know this without someone telling you.
So consider this your starting point that if going to the IRS website or going to publications to find your answers is your current standard. That that is not what you can actually base the tax returns on. And do you need to start being able to trace your way up the fact sheet going from those publications up into some of the court cases that interpret something.
Reading the treasury regulations and even going to the actual tax code, because those are going to be your substantial authority pieces. You need to be able to say. If a client's return is questioned. We took this position. I felt I could do this because of this code section says this, this and this, and in a similar court case, this court felt this way about it. Another case felt this. And this is all of my proof. Well, the publications and IRS website are great for simplified quick reference.
I understand that a lot of tax prepares focus on getting through a lot of tax returns during season, but this is the downside to that volume model. Is that you don't have time to do actual research without going deeper than the summary. And summaries are just that. And they easily miss unique situations. And you're always going to run into unique situations. We've worked our way from the top down. Congress makes the laws, those laws are in the internal revenue code.
That is your holy grail of tax guidance. From there, we have the treasury regulations. This is where the treasury department and IRS directly interprets that code expands on. It gives you examples. That is a fantastic place to get more guidance. We go down into court cases and how courts have looked at these issues historically. And then we go into that IRS simplified information. that is very broad and can't be relied on for proof. But we'll help guide you through how to handle things.
basically the spark notes version. Of that classic novel. So it is helpful and it gets you through the class. But you are missing a lot of the important information. At the very, very, very bottom that I shouldn't even have to mention, but I will. It's going to be things. Like. Blogs, YouTube videos, social media posts. Even CE classes, if you're a tax professional and you take a CE class to get your continuing education credits. That's not authority. It's a great way to learn.
But I have come across plenty of classes with mistakes in them. So you are best served to find classes that have actual citations in them. Or where the instructor provides a good supplement with citations, because that's what you need to rely on.
So if you come across, an article from, even if it's an accounting publication, or if you're an investor listening to this, and there's something posted on an investor website related to taxes, even if it is published by someone you would consider to be reputable, you can't lean on that at all. So a great starting point. If you come across a video, Where they say something interesting or it's something that tax wise you're like, oh, I didn't know. I could do that. Wonderful.
It's whole purpose should be to spark that piece of interest. And then you have to go find the actual sources that either prove or disprove what that person is saying. Remember that everyone making content. Has a motive. It's not always to put out the most clear, concise and accurate information. Sometimes it's to put out the most exciting 3%, even if it might be a little misleading. Because you're more likely to click on it.
So those things should only be your starting point to lead you back up these levels of actual authority for tax matters. And I will end this episode with just a note to tax professionals who might still be listening. That if you have a client come in. And they send you one of those videos or they bring in an article. Or they open their phone and show you a tick talk. I know a lot of professionals who blame everything on that. Bad social media advice. They heard this crazy thing on Tik TOK.
They need to stop Googling things and looking on the internet. They're just finding stuff on Instagram. And while some of that might be justified. Most of that bad information stems from something. So even if what they've shown you. Sounds so obscure. That you want to just dismiss it. There's a good chance that there's some amount of truth in that tax strategy or that creative thing, or whatever was said in that video. The idea of why they could do that came from somewhere.
So try to find out what that is. It might be something you don't know. Or it might be something where, what the video is saying, isn't quite right. But what it really means is this. And they could maybe use this tax strategy if they also did a, B and C. So just my final note, if you're a tax professional, don't be so quick to dismiss things. Clients find on social media. It all comes with some little tidbit of truth.
And I think it is our job to hunt it and figure out what that is so we can best help our clients. As always, I hope you guys found this helpful. If you can think of a nother tax professional who could benefit from this episode, someone who is new in their career, maybe, and they're trying to learn how to better research. Please share this with them. If you liked it, please subscribe. Give it a thumbs up, share it with people you think would also enjoy it. And as always.
I will talk to you guys next week.
Mhm.