Pros & Cons: IRS Private Letter Ruling

An IRS Private Letter Ruling, or PLR, is a written decisions by the IRS in response to taxpayer requests for guidance. This way, you know exactly how the IRS will rule on any given matter.


Why bother with a Private Letter Ruling?

Why not roll the dice and see if the IRS has a problem later? Any experienced tax practitioner can tell you at least two things about working the IRS. First, the IRS moves like a sloth (no offense, hardworking IRS employees). Second, the IRS has the power of a gorilla. Combining these two characteristics results in a problem. You may go down a tax planning path that you think is right, but by the time the IRS finds out and disagrees, you will have years of non-compliance that have compounded. This can leave you with a tax bill or controversy you were not prepared for.


Not so fast: Why you may not want to request an IRS Private Letter Ruling

Knowing how the IRS is going to rule on something with a Private Letter Ruling before you have any liability is typically a good thing. Sometimes, a Private Letter Ruling may not be the best idea. Consider the following downsides to an IRS Private Letter Ruling:


Cost: Here is a link to the schedule of IRS fees to Private Letter Rulings. The range is from $250 – $50,000. That's right, there is a $49,750 variance in Private Letter Ruling fees depending on what type of Private Letter Ruling you are seeking. Likewise, drafting a Private Letter Ruling request and actually securing a ruling involves a great amount of time and skill. Because a tax attorney or some other type of specialist usually prepares a taxpayer's ruling request, costly professional fees are the rule rather than the exception. 


Time:  Be prepared to wait for a requested ruling. Usually, the response will take between two and three months when one branch of the IRS is involved and three months or longer when the issues being ruled on are novel or complex, necessitating the involvement of multiple branches.


Facts present you wish weren't:  Requesting a Private Letter Ruling may also be undesirable if the taxpayer cannot alter the proposed transaction so as to meet a condition imposed by the IRS. The basic structure of many transactions may have already taken place before the Private Letter Ruling request was made, and now, much of the plan cannot be adjusted. One may prefer to avoid the official attention that a ruling request (and denial) may attract. When a ruling request is withdrawn, the Associate office will notify the appropriate IRS official in whose office the taxpayer's return has been or will be filed.


Not enough facts known: A taxpayer may decide against requesting a ruling if the facts of the transaction may differ materially from the facts described in the ruling request. A ruling is not binding with respect to a transaction if the transaction is not materially similar to the facts set forth in the ruling.


Privacy: All Private Letters Rulings are not "Private." Nope, they are all available for research. Many tax specialists spend a great deal of their time reviewing Private Letter Rulings for guidance. Requesting a Private Letter Ruling may expose information that you wish to remain confidential.


You can't: For certain issues, the IRS will not make any rulings. Here is a link to the current no-ruling list.


Should you request an IRS Private Letter Ruling? The Advantages

After determining that the IRS has not refused to issue ruling in your area of inquiry, you may want to consider whether to make a ruling request. Here are the main advantages to doing so:


First: As mentioned above, a Private Letter Ruling protects your expectation interests. A taxpayer who receives a favorable ruling on a prospective transaction is generally protected as to the transaction for which the ruling is issued even if the ruling is in error, the IRS subsequently changes its position, or agent attempts to contradict the ruling. That's pretty nice.


Second: Initiating a ruling request, if you have some flexibility, allows you to somewhat reverse the tables on the IRS. Instead of being attacked from any angle, you can pin the IRS' objections down and then see if you can overcome those objections. If you overcome all of the IRS' objections, how can they rule against you? A Private Letter Ruling allows you to go on offense, fish around a little to see what's bugging them, and then react positively by potentially restructuring the transaction to satisfy the IRS and get the ruling you seek which you may reasonably build expectations upon.


Contact us to see if a Private Letter Ruling would be helpful to your overall tax strategy. Call us at 888-727-8796 or email info@irsmedic.com; any information you share with us will be kept confidential.