Hierarchy of Tax Authority: The Pecking Order

Why This Matters for the Exam

Understanding the hierarchy of tax authority is essential for Part 3 because it affects how you advise clients and defend positions. When the IRS challenges a return position, you need to know which authorities support your position and how much weight they carry.

Exam Note: For the May 2025 - February 2026 testing window, you are tested on tax law as amended through December 31, 2024 (Tax Year 2024). This includes the landmark Loper Bright decision from June 2024, which fundamentally changed how courts review Treasury Regulations.

The hierarchy also determines whether a position has "substantial authority"—the standard that protects preparers from accuracy-related penalties under IRC §6694.

Expect at least 2-4 questions testing your knowledge of which authority trumps another and which authorities can be cited as precedent.

The Complete Hierarchy

Tier 1: Constitutional Authority

The U.S. Constitution is the supreme law of the land. All tax law must be constitutional.

Key Provisions:

• 16th Amendment (1913): "The Congress shall have power to lay and collect taxes on incomes..." This amendment authorized the modern income tax.
• Article I, Section 8: Gives Congress the power to "lay and collect Taxes."
• Due Process Clause (5th Amendment): Protects taxpayers from arbitrary IRS action.

International Treaties: Tax treaties with other countries (e.g., US-UK Tax Treaty) have the same weight as the IRC. If a treaty conflicts with the Code, the "later in time" rule applies—whichever was enacted more recently prevails.

Tier 2: Statutory Authority (The IRC)

The Internal Revenue Code (Title 26 of the U.S. Code) is the primary source of federal tax law. It is enacted by Congress and signed by the President.

• All regulations, rulings, and court decisions interpret the Code.
• If the Code is clear, it trumps any conflicting regulation or IRS position.
• The IRS cannot create tax law—only Congress can.

Tier 3: Administrative Authority

Treasury Regulations are the Treasury Department's official interpretation of the Code. They carry significant weight but can be challenged in court (especially after Loper Bright in 2024).

Revenue Rulings and Procedures are published IRS positions. They are binding on the IRS but receive less judicial deference than regulations.

Tier 4: Judicial Authority

Court decisions interpret the Code and regulations. The hierarchy of courts matters:

The Golsen Rule: The Tax Court will follow the precedent of the Court of Appeals for the circuit where the taxpayer resides, even if the Tax Court disagrees with that circuit's ruling.

Tier 5: Private Guidance

Private Letter Rulings (PLRs): Issued to a specific taxpayer for a specific transaction. Cannot be cited as precedent by other taxpayers.

Technical Advice Memoranda (TAMs): Issued by the IRS National Office during an audit to resolve a disputed issue. Also cannot be cited as precedent.

IRS Publications and Instructions: Helpful for understanding IRS positions, but they are not legal authority. You cannot avoid penalties by citing an IRS publication if the Code says otherwise.

"Substantial Authority" and Penalty Protection

Under IRC §6662, taxpayers face a 20% accuracy-related penalty for substantial understatements. However, the penalty does not apply if the position has "substantial authority."

Authorities That Count:

• IRC, regulations, revenue rulings, revenue procedures, tax treaties, court cases, Congressional intent, proposed regulations (in some cases).

Authorities That Don't Count:

• Private Letter Rulings (to other taxpayers), IRS publications, IRS instructions, legal opinions.

Real-World Scenario

Scenario: A taxpayer takes a position on their return based on an IRS Publication. The IRS audits and disallows the deduction because the Code doesn't support it.

• Question: Can the taxpayer avoid the accuracy-related penalty by citing the Publication?
• Answer: No. IRS Publications are not legal authority. The taxpayer needed authority from the Code, regulations, or court cases.

On the Exam

Expect 2-4 questions on hierarchy, typically:

1. Ranking Questions: "Which of the following has the highest weight of authority?"
2. Precedent Questions: "Can a taxpayer cite a PLR issued to another taxpayer?"
3. Substantial Authority Questions: "Which of the following counts as substantial authority?"

The key is to remember: Constitution > IRC > Regulations > Revenue Rulings > PLRs (not citable).