In this podcast related to his column in the fall 2021 Pennsylvania CPA Journal, Barry Groebel, senior tax consultant for Herbein + Company in Reading, Pa., details his experience working on a private letter ruling request with the IRS during the height of the COVID-19 crisis. He provides context on what a private letter ruling request is, discusses how common it is for CPAs to handle such a task, and goes step-by-step into the process.
By: Bill Hayes, Pennsylvania CPA Journal Managing Editor
In the fall 2021 Pennsylvania CPA Journal, our guest today wrote the Federal Tax column on his experience working through a private letter ruling with the IRS during the struggles of the coronavirus pandemic. Today, he is with us to discuss exactly what a private letter ruling is, what the process of working on the request was like, developments that took place after his column in the magazine went to press, and more. We're happy to have on the program Barry Groebel, senior tax consultant for Herbein + Company Inc. in Reading.
The story you did in the fall 2021 Pennsylvania CPA Journal revolved around your involvement in an IRS private letter ruling and how it was affected by the pandemic or at least how it was conducted during the pandemic. What is an IRS private letter ruling, and under what circumstances does it become necessary?
[Groebel] Generally, a private letter ruling is a written opinion from the IRS regarding the federal income tax treatment of a proposed transaction that someone's going to be doing, the federal tax treatment of an accounting process. Our firm has been through that with some cooperative clients that we do, or in the case of this immediate taxpayer, that was the substance of my article, getting relief from missing a deadline for filing a federal tax extension.
Is it a rare thing, for a CPA to become involved in a private letter ruling? You've had an esteemed CPA career and it's the first one you were involved in, right?
[Groebel] That's right. I think it's not common for most CPAs to prepare a private letter ruling request. Since there's a filing fee that you have to pay with the IRS that is not insubstantial. It was over $10,000 in the case of my taxpayer. Plus, there could be considerable professional fees from either a CPA preparing and reviewing, or an attorney being involved. That cost can get up pretty high.
So, because of the substantial cost, you generally see private letter rulings being prepared by either big four firms or larger firms where their clients have more of the larger-income tax exposure at stake there. So, it is the larger the client, the larger the firm. That's when it's more often done.
What was the issue in this case? Can you describe some of the process you went through in fulfilling this request?
[Groebel] Our private letter ruling was request for relief from missing a deadline for making a federal tax election. It's interesting because several years ago when I was working on some other situation and I was actually talking to someone from a Big 4 firm, they talked about this process of requesting an extension of an election. He sort of compared it to getting root canal. It's a really difficult process because you have to go through it. It's available under Code Section 9100.
In our case, the taxpayer asserted that they had relied on their accountant to file the necessary election and that the missed deduction deadline was due to failure of the accountant to properly advise them of the process. We had to get affidavits from all the involved parties, including all the owners of the business, their CFO, and actually the former accountant gave us an affidavit sort of explaining that there was a lack of communication, and, as a result of that, the election was missed.
You have to explain that there is no other way that the taxpayer could get relief from this and in our situation there wasn't. Also, you have to prove or assert that the government's interests are not jeopardized in any way. For instance, by the government granting this extension of election, they wouldn't lose significant tax revenue. That was actually the case in our situation, too.
This process was a bit extended in your case, but maybe this is something that happens all the time? What do you think the reason was for the delay, if it was one? Is the IRS simply overloaded at this time, or maybe it’s sort of standard procedure from your knowledge?
[Groebel] I was aware from going in and talking to other CPAs that I knew that did these, that the process could take anywhere from six to 12 months, even in normal circumstances. But I think the biggest delay in our case was there was a question about whether the taxpayer had received certain notices from the IRS. We attempted to obtain a tax transcript from the IRS. This occurred mostly during 2020 at the height of the pandemic. There was a fax number that you can use because you really can't call anybody. No one's in the office. We didn't want to take the chance of sending something in the mail. I made numerous attempts to fax this transcript request to the IRS during the summer of 2020, and it never went through on their end. Finally, we consulted with all parties involved and said, well, let's just mail something in.
So we mailed in the transcript. It was probably in May or June. Then, finally in like October or November, we got a response back that, oh, we got your transcript request and the signature was wrong. We can't process it. That was really annoying. Then what we did at that point, we said, you know what, we're not going to worry about this anymore. We're going to proceed.
One thing we did to proceed, which took a little bit of time too, was the attorney we were consulting with on this said that you can sometimes call the IRS attorney who may be reviewing the ruling request ultimately, and get a feel for if they think it would work because you don't want to spend $10,000 filing fee if you know it's not going to work. I was able to go to this IRS directory that you can find online and narrow down the attorney's name that I think might be involved with this private letter ruling. I was able to call and actually get that person on the phone. I think they had probably been working remotely, but they had access to either the phones or they are being rerouted to them or whatever.
She was very helpful, initially. She said, “Oh, I think this sounds like it's sort of a familiar case. I'll follow up and get back to you.” But then months later … I mean, we probably had that discussion in October and I kept on calling and calling and following up. Then finally in early January, she said, “Oh yeah, I'm sorry for not getting back to you. I talked to my supervisor and I think we would accept this PLR request.” That's in January of 2021, we finally filed this.
Then, you can tell from when you see my article, you see we started this process initially in like March of 2020. So, it's quite a long process until we even got it filed.
Then we're in the wait-and-see situation. So, it did take until probably about six months before someone eventually got back to us with a couple of follow-up questions. Then, we recently got approval.
The next two questions will be pretty interesting because it speaks to the vagaries of the magazine process in some respect. But you had gotten a resolution before the magazine went to print, and then you got some news after the magazine went to print, so we'll handle those one at a time. As we're going to print on the fall 2021 Pennsylvania CPA Journal, you got what I believe was positive news in relation to this request. Am I right about that?
[Groebel] You are right. What I did was I got a voicemail message from the attorney involved, telling me the good news that our request was approved and that we would be getting written confirmation of that soon. That was good news. It was just verbal. I really wanted to get something written in my hand, but the verbal approval was very positive.
Then there were some subsequent developments after we had finalized the magazine. Is the matter at a close at this point? What's the status?
[Groebel] It looks good. What happened was, and it was inexplicable to me because we would fax items to the IRS all the time related to this ruling request, we didn't have such good luck on the transcript request, but whenever the attorney would ask for information, I would fax it to him. He would confirm that he got it. That was fine. In our firm, I guess like a lot of other firms these days, we send our faxes through computers. It's an e-fax system. We don't have a whole lot of those old standard, stand-alone fax machines.
We had given those fax numbers to the IRS and he called me and said the processing section of the IRS can't get through on these fax numbers. I said, "Really?" I said, "Well, let me test." I had my IT department test, and I tested it myself, and I got back to him and he said, "You know what? It's working on our end. Maybe it's something on your end." He asked a question. "Is that one of these e-fax systems? Or is it a stand-alone fax?" I said, "No, it's an e-fax system." We finally had to determine there was a copier in our office. It also is a stand-alone fax machine. We had them fax the documents there and that was successful.
After we received them and we sent them around to all the parties on our team – the clients, the attorney who was advising us, and one of my colleagues who was working on this client – and said, "Here's the approval letter. We have to answer a question about whether or not ..." What they do is, the PLR request eventually is published and it can be used by accountants. Not as a substantial authority, but it gives you an idea of where the IRS is headed on this. When they publish them, they redact all the sensitive names. They delete the client's name, some of the facts.
One of the things in the ruling request was to look at the redacted copy and make sure you agree with the deletions. If you don't, let us know within 30 days or something like that.
So we had everybody read the document to see if they were okay with that. Then my colleague got back to me and said, "Yeah, I'm okay with all that." He said, "There's a mistake in the facts." And I said, "Really?" What the issue was is that it was what type of election was filed, that that deadline was missed. The IRS got it right in the conclusion and granted us the relief for the right election that we made. But in the statement of facts, they stated the wrong election.
I called the IRS back and I said, "I'm sorry, but I think that the statement of facts is wrong. I don't think it affects the conclusion, but since this might be published, do you think we should probably correct that?" He agreed. They went through the whole process again, corrected it, and faxed it to us again. Now we have the corrected, approved one and everybody has that now.
The only next step is what our request gave us was the ability to file this election late. We now need to actually file the election. We're in the process of doing that. Once that's done, the whole process will be over.
What would be your advice to a CPA who's asked to work on a private letter ruling for the first time? What would you have them do?
[Groebel] What I did was I had a sense of this, but then it was directed to this by one of my CPA colleagues that I know who's done one before in another firm, is that every year the IRS publishes a revenue procedure, a blueprint about how to do private letter rulings. It's a fairly voluminous document. It's probably over 100 pages long. It's always published in early January.
What you can do is you go get this document and it even has, which was helpful for me, a suggested format of what the letter should look like. You have a sample letter in there and you can sort of just see what it's supposed to look like. There's a checklist that you have to fill out when you submit. It also goes through this whole list of all the possible filing fees you have to pay.
That's one thing that's really helpful. One thing that was interesting in our case is that we started the process in March of 2020. I was referring to the 2020 revenue procedure for this. Then we finished the process in January of 2021. So I had to update our letter ruling for some of the changes that had come out in the 2021 revenue ruling.
The other thing I would suggest is that, if you're lucky enough to have or know another CPA who's done one of these or an attorney that has done one, it's good to get that kind of consultation. Either to have them provide advice or maybe do a review of the document before you send it in. That's really helpful.
Also, I think it's important because of the filing fees to be mindful of those because they increase almost every year. In our situation, they send out the schedule or filing fees for this type of a ruling request and they were going to go up in February. We made sure we got ours in before the end of January to avoid the higher filing fee.
Then the other thing, too, is if it's possible to do what we did with contacting someone from the IRS and attorney beforehand, to get a feel of if your ruling request has any chance of being successful or not. I think I alluded to it possibly in the article in the CPA Journal, there's how to find this list of attorneys. It's not easy to find, but if you poke around, you can find it. It's broken down either by Code Section or type of issue. Ours was accounting method changes or accounting. We were able to call someone with that under that system. You actually talked to a real person who's knowledgeable in the area.