Question

How does the IRS decide to handle grey area items? Is there any deciding factors that they look for or is it simply an each situation as it comes? Why?

Answer 1

For “gray area” items, the tax payer should have a basis in tax law to explain the reasoning behind the handling such items. IRS does not have a universal procedure to handle grey area items; and it is decide on situational basis. IRS is still struggling to clean up the mess and write rules which bring clarity on the gray items. Although the rules are evolving, often at glacial speed, courts and auditors in different jurisdictions wrestle with the details and usually reach to opposite conclusions. In certain cases, the confusion is compounded with IRS itself, when it issues guidance on conflicting.