IRS Letter Ruling, Defined

A letter ruling (sometimes termed a private letter ruling) is a written determination issued to a taxpayer by an IRS Associate Office in response to the taxpayer’s written inquiry, filed before the filing of returns or reports the tax laws require, about its status for tax purposes or the tax effects of its acts or transactions. 

A letter ruling interprets the tax laws and applies them to the taxpayer’s specific set of facts. A letter ruling is issued when appropriate in the interest of sound tax administration. 

One type of letter ruling is an Associate office’s response granting or denying a request for a change in a taxpayer’s method of accounting or accounting period. Once issued, a letter ruling may be revoked or modified for a number of reasons.  A letter ruling may be issued with a closing agreement, however, and a closing agreement is final unless fraud, malfeasance, or misrepresentation of a material fact can be shown.

Letter rulings are subject to exchange of information under U.S. tax treaties or tax information exchange agreements in accordance with the terms of such treaties and agreements (including terms regarding relevancy, confidentiality, and the protection of trade secrets).

In income and gift tax matters, an Associate office generally issues a letter ruling on a proposed transaction or on a completed transaction if the letter ruling request is submitted before a return containing a tax position on the completed transaction is filed.

An Associate office will not ordinarily issue a letter ruling on a completed transaction if the letter ruling request is submitted after a return containing a tax position on the completed transaction is filed. “Not ordinarily” means that unique and compelling reasons must be demonstrated to justify the issuance of a letter ruling submitted after the return is filed for the year in which the transaction is completed. The taxpayer must contact the field office having audit jurisdiction over their return and obtain the field’s consent to the issuance of such a letter ruling. 

Circumstances Under Which the IRS Does Not Issue a Letter Ruling 

The IRS ordinarily does not issue a letter ruling if, at the time of the request, the identical issue is involved in the taxpayer’s return for an earlier period and that issue:

1. is being examined by an IRS field office;
2. is being considered by an IRS Appeals office;
3. is pending in litigation in a case involving the taxpayer or a related party;
4. has been examined by a field office or considered by Appeals and the statutory period of limitations on assessment or on filing a claim for refund or credit of tax has not expired; or
5. has been examined by a field office or considered by Appeals and a closing agreement covering the issue or liability has not been entered into by a field office or by Appeals.

The IRS ordinarily does not issue letter rulings in certain areas because of the factual nature of the matter involved or for other reasons. 
Instead of issuing a letter ruling or determination letter, the IRS may, when it is considered appropriate and in the interest of sound tax administration, issue an information letter calling attention to well-established principles of tax law.