Let’s say that the Tax Code (which is law) said, “Every tax return must be signed in red ink.” If that were the case, we’d all be using red ink to sign returns. The Tax Code is law, passed by Congress; until a court overrules it (a court that has precedential authority) or Congress changes the Code, we must follow it. The Tax Code and court decisions are the highest form of guidance: They are akin to Thou shalt do this.
The next lower level of rules in tax are Treasury Regulations (the IRS is housed in the Department of the Treasury). Congress, when they write laws, usually states that The Secretary of the Treasury or his designate will develop regulations to implement [something]. Regulations have the force of law. Regulations are written and then published in the Federal Register. After initial publication, there’s a period for public comment. After that, the comments are addressed in the Federal Register, and the final regulation is published. After a waiting period (usually 90 days), the regulation becomes final.
Regulations can be challenged in Court (see the Loving case). The US Supreme Court has held that in most instances agencies are to be given deference in their regulations. That means successful regulatory challenges are rare. As stated above, regulations have the force of law.
That brings me to the point of this post: What happens when a regulation applies to all taxpayers but an IRS publication limits it to just some taxpayers? The answer is that IRS publications are not legal guidance; the regulation would apply to all taxpayers. Why do I bring this up? Because the IRS appears to be having a problem with individuals outside of the United States on the April tax due date.
IRS Publication 54 is titled “Tax Guide for US Citizens and Resident Aliens Abroad.” As you may be aware, there’s an automatic two-month extension available to certain taxpayers. Publication 54 states,
Automatic 2-month extension. You are allowed an automatic 2-month extension to file your return and pay federal income tax if you are a U.S. citizen or resident alien, and on the regular due date of your return:
- You are living outside the United States and Puerto Rico and your main place of business or post of duty is outside the United States and Puerto Rico, or
- You are in military or naval service on duty outside the United States and Puerto Rico.
That would seem to imply you need to be outside of the United States for work (be it employment or self-employment). One of my clients filed her tax return in late April, taking advantage of this extension. The IRS assessed the late filing penalty (but not the late payment penalty) even though a statement was attached to the return noting the two-month extension. Before I wrote a letter to IRS Appeals, I looked up the actual law behind the rule. It’s Treasury Regulation, 26 CFR § 1.6073-4 (c):
(c) Residents outside the United States. In the case of a U.S. resident living or traveling outside the United States and Puerto Rico on the 15th day of the 4th month of a taxable year beginning after December 31, 1978, an extension of time for filing the declaration of estimated tax otherwise due on or before the 15th day of the 4th month of the taxable year is granted to and including the 15th day of the 6th month of the taxable year.
Well, it appears that while what is stated in Publication 54 is true, anyone outside of the United States on April 15th is eligible for the automatic two-month extension. That’s the plain language of 26 CFR § 1.6073-4 (c). Yet my client was told she’s ineligible for the automatic two-month extension. (My client was outside of the United States for purposes of self-employment, too.) We’re heading to IRS Appeals where I’m nearly 100% certain we’ll prevail. Still, my client must spend time and money on fighting something that she shouldn’t have to.