What is a Private Letter Ruling?

A private letter ruling refers to a written statement that the Internal Revenue Service (IRS) issues to taxpayers in response to their request for interpretation of some of their specific complex tax situations. In other words, taxpayers may seek guidance from the Tax Exempt and Government Entities Division regarding the form of tax treatment to expect from the IRS, including an explanation for taking that tax decision. So, the IRS usually responds to such requests using a PLR in which it gives an in-depth interpretation of specific tax laws as requested by the taxpayers.

How Does a Private Letter Ruling Work?

A letter of the ruling is mutually binding for both the requesting taxpayer and the IRS. So, in case there happens to be further litigation or dispute regarding the matter, then it only applies to the two parties and no one else. Keep in mind that a PLR is written to a specific taxpayer and not to all taxpayers. For this reason, other taxpayers may not rely on PLR as a precedent. However, the IRS can opt to redact the PLRs content and issue the letter as revenue ruling. In this case, the document will become binding on the IRS and all other taxpayers. Notably, where a large sum of money is involved, the tax law may not be clear. So, depending on how the IRS treats the transaction, there is bound to be considerable differences in tax liability. To ensure that there is no liability, a taxpayer who, in this case, is a business, will ask for a PLR so that it can remove any uncertainty related to the transaction. If the IRS happens to issue a letter of the ruling, it will only apply to that specific taxpayer and not the rest of the taxpayers. 

How to Request for a Private Letter of Ruling 

For taxpayers to be able to request a PLR, they should first consult from the First Revenue Procedure which is published at the beginning of each calendar year by the IRS. The first revenue procedure gives a detailed description of the updates and guidelines regarding the process. Also included are the sample request letter templates as well as checklists consisting of over 50 questions that one must answer. 

Charges Involved in Private Letter of Ruling 

Cost is one of the burdens involved in requesting a PLR. The fee is generally high, given that there has been a regular upward revision of PLR fees. For instance, as of 2018, the ruling prices ranged from $150 for less complicated requests to $50,000 for pre-filing contracts or extensive group submissions. Also, ruling costs for a specific transaction is usually $18,000, but it can go up to $30,000. 

How Long Does a PLR Ruling Take? 

The decision by the IRS on the private letter ruling takes about 60-90 days. However, the process might be extremely long if the process requires the IRS multiple brunches to review the PLR. Other extenuating situations that apply to the tax issue in question can also prolong the process. 

Private Letter of Ruling vs. Technical Advice Memorandum 

Generally, IRS issues rulings only on completed transactions whose tax returns filing is still pending. The reason is that the IRS requires the taxpayer to attach the approved PLR to the tax return. A Technical Advice Memorandum is, by contrast, similar to a PLR. The only difference is that the ruling on the completed transaction is issued after the returns have been filed and are under scrutiny by tax auditors.