IRS News Release on Prepaid 2018 Property Taxes is a Position Statement, Not Policy

The legendary Hollywood producer and head of MGM Studios, Louis B. Mayer, once famously remarked that “an oral contract isn’t worth the paper it’s printed on.” This is just a memorable way of saying that certain statements are binding, while others are just words.

In the world of the Internal Revenue Service, the same holds true.

At the top of the verbal hierarchy is the Internal Revenue Code, the law enacted by Congress. If constitutional, its provisions are binding. At the bottom of the hierarchy are press releases – what the IRS calls “news releases” – which inform the public about what the IRS thinks. But they have no force of law.

Recently, one particular news release has sparked much confusion: the one that says the IRS thinks taxpayers cannot deduct prepaid 2018 property taxes on their 2017 tax returns.

Before it was amended by the Tax Cuts and Jobs Act of 2017, section 164(a) of the Internal Revenue Code allowed an itemized deduction for state and local taxes “for the taxable year within which paid or accrued.” The new law repealed section 164(a) for taxable years after December 31, 2017. The new law also expressly provided that prepayments of 2018 state and local income taxes made in 2017 would be treated as though made in 2018. But the act was silent as to the treatment of prepaid 2018 state and local property taxes.

Because of that silence, after analyzing section 164 in context, many tax professionals advised their clients who itemize (and are not subject to the Alternative Minimum Tax) to prepay their 2018 property taxes in 2017. Many state and local governments allowed such prepayments, and some even opened their local tax offices for extra hours to accommodate residents who wished to prepay. At the end of 2017, for example, Cook County, Ill., reported collecting $1 billion in prepaid property taxes, while Fairfax County, Va., reported collecting $16 million in just one day!

Unfortunately for taxpayers, on December 27, 2017, the IRS issued a news release – without citing any authority -- announcing that taxpayers could claim a deduction on their 2017 returns for prepaid 2018 local property taxes only if the local taxing authority had “assessed” those taxes in 2017.

The IRS news release is not a statute, a regulation, or even a revenue ruling. Moreover, the IRS cannot set policy in a news release. The news release can only announce the IRS’s position.

This has left many taxpayers wondering whether the IRS intends to follow through on its announced position, or is just trying to intimidate taxpayers into not claiming a deduction for prepaid property taxes. We will continue to monitor what the IRS does as the 2017 filing season swings into high gear.