IRS Guidance: Private Letter Rulings

A private letter ruling (PLR) is a written statement of the IRS which interprets the tax laws in response to a taxpayer’s request, usually to confirm that a specific tax strategy will be not be questioned afterwards by the IRS. Because it applies only to a specific set of facts, it is binding only on the taxpayer and the IRS, and cannot be used as precedent for other parties or in other circumstances. Note, however, that the IRS has the option of making a private letter ruling binding on all taxpayers (and on the IRS) by removing all personal content and reissuing it as a revenue ruling.

When a Private Letter Ruling may be issued

For the most part, the IRS will agree to respond to an individual’s or organization’s inquiries about their tax status and the effects of their current or intended taxable acts and transactions. Per Revenue Procedure 2016-1, a private letter ruling will generally be issued when the answer to the taxpayer’s question is clear or reasonably certain through application of the regulations or applicable case law. However, it may also be issued even if the answer is not reasonably certain if the IRS determines that issuance of the ruling is in the best interest of tax administration.

Requests must generally be made before the tax return is filed. An exception may be made in certain circumstances if the taxpayer has a compelling reason for requiring the ruling at a later time.

A Private Letter Ruling is provided by the various branches of the IRS Office of the Chief Counsel (namely the Corporate, Financial Institutions and Products, Income Tax and Accounting, International, Passthroughs and Special Industries, Procedure and Administration, and Tax Exempt and Government Entities divisions). Issues concerning alcohol, tobacco and firearms taxes, however, must be brought to the Treasury Department’s Alcohol and Tobacco Tax and Trade Bureau. Private Letter Rulings related to IRAs, qualified retirement plans and exempt organizations are issued by the Commissioner of the Tax Exempt and Government Entities Division.

When a Private Letter Ruling will not be issued

A private letter ruling will ordinarily not be issued in the following circumstances (among others):

• The issue is under examination by an IRS field office (e.g., audit) or is being appealed
• The issue is being litigated by the taxpayer or by a related taxpayer
• The issue constitutes only part of an integrated transaction
• The PLR is requested by a business, trade, or industrial association concerning the application of a tax issue to members of the group
• The PLR is requested by a foreign government
• The issue does not directly affect the tax status, liability, or reporting obligations of the taxpayer who is requesting the PLR
• The issue is a hypothetical situation
• The issue is deemed frivolous by the IRS
• The issue is listed in Revenue Procedure 2016-7, Section 3

The cost of a Private Letter Ruling

Under 26 U.S. Code 7528, the IRS can establish user fees for private letter rulings and similar requests. The current schedule of fees for Private Letter Rulings is published in Appendix A of Revenue Procedure 2016-1. The fees range from just a few hundred dollars to the tens of thousands, depending on the subject matter.

Taxpayers considering private letter rulings have the option of first requesting a pre-submission conference to determine whether a ruling is warranted.