A private letter ruling, or PLR, is a written document issued to a taxpayer by the IRS to interpret and apply the tax laws. In a nutshell, a private letter ruling is intended to interpret the U.S. tax code as it pertains to a specific situation upon the taxpayer's request.
In a request for a private letter ruling, the taxpayer states the relevant facts as well as the issues they're having with interpreting the tax laws and asks the IRS to make a determination on the tax implications of the situation. The IRS then sends a determination letter that pertains to the specific tax situation.
Once a private letter ruling has been issued, it is binding. In other words, if the taxpayer complies with the private letter ruling and is later audited, the IRS will adhere to the guidance it issued in the ruling.
Why are private letter rulings important?
To put it mildly, there is significant gray area in the U.S. tax code.
For an example from a real estate perspective, we know that the IRS allows you to deduct mortgage interest on as much as $750,000 of qualified personal residence debt, which can include your primary or second home. Let's say that you own your primary home outright and that you borrow $750,000 to help buy a yacht, which you live on for three weeks each year. Would the interest on your yacht loan be tax-deductible?
Of course, this is just a fun example that may not necessarily warrant a private letter ruling (and the IRS has allowed this deduction in some situations), but these and other situations where the the irs guidance on parts of the tax code isn't particularly clear illustrate the need for a way for taxpayers to get individual guidance from the IRS.
What a private letter ruling is, and what it isn't
A private letter ruling is between the IRS and the requesting taxpayer. It only binds the IRS to act according to the ruling with that individual taxpayer. It is not tax law. Therefore, although all PLRs issued since 1997 are publicly available, a favorable private letter ruling cannot be used as precedent by another taxpayer or relied upon when it comes to a tax situation, even if the situation is virtually identical to the one from the ruling. In fact, the IRS can choose to deliberately go against a previous private letter ruling if it wants to. (Also keep in mind that your private letter ruling will be publicly available, although your identifying information will be removed.)
Having said that, private letter rulings are generally a good barometer of the IRS's feelings about a certain tax issue or the tax treatment of a particular situation. So, while someone else's private letter ruling can't be used to defend a deduction or other income tax break, looking through the publicly available private letter rulings of the past can be a good place to start before you go through the procedure of making a ruling request of your own.
If the IRS decides to issue a revenue ruling, that is a non-personal determination that applies to all taxpayers.
How to request a private letter ruling
The IRS updates its private letter ruling procedures and the associated fees annually. And while the revenue procedure document that contains the guidance is more than 100 pages long, here are the broad strokes:
- Provide the facts: Each request for an irs ruling must contain a thorough statement of the relevant facts to the situation.
- Provide documentation: Relevant documentation can include income documentation, lists of assets, relevant contracts, wills, deeds, foreign laws, and more.
- Analyze the facts: A request must be accompanied by an analysis of the material facts. You must also disclose whether the same situation has come up in previous years' tax returns that you've filed and if it has been previously ruled on.
- Statements of supporting authorities: Requests can be accompanied by any documentation that supports your position, as well as any pending legislation that could affect the outcome.
- Signatures: Requests must be signed by the taxpayer or their authorized representative, and a signed penalty of perjury statement must also be included.
Of course, this is just a very high-level overview. If you're thinking of requesting an IRS private letter ruling, be sure to check out the IRS's latest guidance, which includes a useful checklist as well as a sample format for a request. Plus, there are some areas of the tax code where the IRS won't issue a private letter ruling, so be sure your request is eligible before you spend any more time on it.
Once you've requested a private letter ruling from the IRS, expect to wait at least a couple of months to receive the ruling. This can be significantly longer if your situation is unusually complex.
Is a private letter ruling right for you?
Finally, it's worth mentioning that a private letter ruling request can be a complex process, so it's generally a good idea to hire a tax professional to help you through the process. Plus, IRS private letter rulings are expensive. Fees to obtain a private letter ruling start at $275 but can be as much as $50,000 in certain situations. Fees in the thousands are very common. And that's on top of any advisory fee you might have to pay to a lawyer or tax professional.
Because of the complexity and expense involved, it's important to determine whether the IRS is likely to rule in your favor before you decide to pursue this route. An experienced tax attorney can often give you a good idea of whether you're likely to get the response you're looking for before you start the process.