Answering tax questions: A primer on tax research

Business owners and their advisors can get tax advice from many places—blogs, the IRS's website, subscription databases, professional journals, and more.

Businesses must identify, analyze, and weigh the authority of various sources to answer tax questions. Ensuring you get your tax advice from reliable sources can help your company avoid penalties. This primer will explain how to conduct tax research and when to consult a professional.

Which tax research sources can your business rely on?

The most reliable sources of tax information are called "primary sources." Primary tax research sources include anything issued by the government. The IRS maintains links to most primary sources.

Your business can rely on certain primary sources if the IRS challenges or denies your company's tax position. These include:

• The Internal Revenue Code (IRC). When Congress enacts tax law, it goes into Title 26 of the United States Code, known as the IRC. The IRC carries great weight but often uses broad, vague definitions. Courts can invalidate part of the IRC only if the court deems that part unconstitutional.

• Treasury regulations. The Treasury Department issues Treasury Regulations to interpret the IRC. The IRC specifically authorizes some regulations. Those regulations carry the same authority as the IRC itself. The Treasury Department can also create regulations as it sees fit. Courts can invalidate such a regulation if the court finds it inconsistent with the IRC or Congress' intent. Your business and the IRS can both rely on final and temporary regulations, but not proposed regulations.

• Official IRS guidance. The IRS issues official guidance in the Internal Revenue Bulletin (IRB) to help taxpayers understand the IRS's view of the law. The IRB includes revenue rulings, revenue procedures, notices, and announcements. Privately issued but still official IRS guidance includes private letter rulings, determination letters, and technical advice memoranda. Your company can use official IRS guidance against the IRS. However, the IRS cannot cite its own guidance—which only represents the IRS's opinion, not law—in court.

• Case law. If your business and the IRS cannot agree on a tax issue, your company can take the IRS to court. A judge—or rarely a jury—will then interpret the IRC and treasury regulations to decide the case. Judges often consider what other courts have ruled—called precedent—when deciding a case. Likewise, the IRS may look at precedent to determine whether to contest a tax issue. A case within your business's jurisdiction matters more than one outside that jurisdiction.

Other tax research sources

Unofficial IRS documents hold no authority but can provide useful information for tax research. These documents include form instructions, publications, and the IRS website. A business that breaks tax law can face significant liability—even when following the IRS's instructions.

Secondary sources consist of guides, articles, and other publications created by third parties. These sources—such as LegalZoom's library of tax articles—often answer specific tax questions in more understandable terms than primary sources. However, your business cannot rely on secondary sources against the IRS or to avoid penalties.

Protection from tax penalties

Your company must carefully weigh all relevant, authoritative primary sources when considering a tax question.

Tax research documentation should include the tax question, relevant facts, the analysis of sources, and the conclusion reached. The analysis must cite authoritative primary sources.

Your business will face no underpayment penalty on most issues if the IRS or court determines “substantial authority" exists for the business's tax position. Whether a position has substantial authority depends on the strength of sources in favor of and against the position. Most tax professionals believe that substantial authority exists when a position has at least a 40% chance of winning a hypothetical trial.

A position disclosed on the related tax return only needs a “reasonable basis" for penalty protection. A reasonable basis exists when a position has at minimum a one in three chance of winning a hypothetical trial, according to many tax professionals.

Additionally, relying on the advice of a tax professional can exempt your company from underpayment penalties in certain circumstances.

Certified tax professionals often pay thousands of dollars per year for access to complete databases with powerful search tools. The knowledge and experience of a tax professional also make tax research more accurate and faster.

Consider hiring a tax professional when your tax question involves large amounts of money, the sources prove difficult to understand, or you lack the time to conduct thorough tax research.