Tax Law on Potential Transactions
Do you have a question about how to apply the tax law to a potential transaction? Wouldn’t it be great if you could get the IRS to give you an answer in advance of filing your tax return?
You may be able to do so by obtaining a private letter ruling (PLR) from the IRS.
You get a PLR by filing a request with the IRS National Office. The IRS is ordinarily bound by the answer it gives a taxpayer in a PLR. But PLRs may not be relied on by other taxpayers.
This sounds great in theory—but in practice, seeking a PLR is usually not a good idea.
There are many reasons why:
PLRs are expensive. The filing fee is $3,000 for the smallest businesses. Larger businesses must pay as much as $38,000. You’ll also need professional help to prepare a detailed PLR request.
A PLR may not be necessary. The IRS has automatic or simplified methods for obtaining its consent without a PLR for many common situations, including late S corporation elections, late IRA rollovers, and various changes in accounting method.
PLRs are unavailable for many types of tax questions, including those that are under IRS examination, were clearly answered in the past, or are too fact intensive.
PLRs can take a long time to obtain—six months or more for complex questions.
PLRs can backfire. Even if the IRS issues a favorable PLR, you will now be on the agency’s radar, which may increase your chances of an audit.
Given all these drawbacks, you should seek a PLR only when a cheaper alternative is unavailable—for example, when you need to do a late IRA rollover and don’t qualify for the streamlined IRS procedure.
In some instances, it’s wise to seek advance IRS approval of complex transactions involving substantial money. Obtaining a favorable PLR in such a case would assure you the transaction passes IRS muster. These instances, however, are rare.
If you have any questions or need my assistance with getting an answer from the IRS, please call Rick or I to book some time to discuss at 281-288-0909.
Dr. Jake Latimer / Partner