When I started my career as a CPA, I was surprised to discover how fluid the tax law is. I had always thought that tax laws were black and white – you did what the IRS said, end of story. What I’ve learned in practice is that taking a position on a tax return is far from simple and the most accurate answer to almost any tax question is, “It depends.”
In meetings with your CPA, you may have had discussions about finding “appropriate authority” to support treating your income as ordinary income or capital gain, or whether to take a particular deduction on your tax return. Finding or relying on authority means that given your specific set of facts, your CPA is aware of (or will be aware of) pertinent Internal Revenue Code sections, how the IRS has interpreted the implementation of the code sections, and how the courts have interpreted the meaning of the code sections. It means that you and your CPA can convince an IRS auditor that the way you treated an item on a tax return is correct–or at least reasonable.
In general, there are three types and two sources of authority. The types of authority are statutory (enacted law), administrative (IRS rules and regulations on how to administer tax laws), and judicial (how the courts think enacted law should be applied). The two sources of authority are primary authority and secondary authority.
Primary sources are immediate, first-hand accounts of a topic from people who have a direct connection with it. Primary sources for tax include:
- Statutory: US Constitution, Internal Revenue Code, and various state laws
- Administrative: US Treasury Regulations, Revenue Rulings and Revenue Procedures
- Judicial: Decisions published by the Supreme Court of the United States, Courts of Appeal, District Courts, the US Tax Court. We refer to primary judicial sources as case law. In relying on case law, decisions rendered by some courts are only binding in and for the jurisdictions where they were decided. For example, Arizona court decisions cannot affect federal taxes or the taxes in other states. Many of the cases the US Supreme Court hears are meant to decide questions where opposing rulings have been reached by various lower courts in different jurisdictions.
One problem with primary sources is that they apply to a general set of circumstances but in real life, an infinite variety of exceptions can arise, and fact patterns may exist that do not fit neatly into the assumptions of the law. Another problem is that primary sources also tend to be hard to understand. There are precise definitions, not necessarily intuitive, for many of the words in the text. The way one word in a code section is defined can have major impact on how the section is applied. For example, what is a person? It can mean one human being, one adult human being, or in some cases, a corporation, or a trust. And what does “adult” mean? This leads us to secondary sources.
Secondary sources are unofficial sources of tax information that include IRS publications and press releases, content in tax research services, and tax journals and newsletters. They are plain-language explanations of what a particular code section means. We don’t ever want to base a decision solely on a secondary source, but secondary sources are invaluable in finding clues as to what primary source to use, how to interpret the meaning of a primary source, or how to structure a reasonable, convincing position.
Very few of the questions we have when we prepare your tax returns have a straightforward answer. That’s why we ask many questions, take time to think through the implications of a question, and sometimes do tax research to clarify our position. It’s why we say, “I’ll get back to you.” Putting the puzzle together in a way that makes sense is one of the fun things about being a CPA. Come see one of our tax professionals about making sense of your puzzle!
About this Author
Susan is experienced in tax research, not-for-profit taxation, trusts and estates, and sales tax. She has prepared tax returns for pubic charities, private foundations, and charitable trusts as well as unrelated business income tax returns for numerous charities.