Considering the problem of legal uncertainty and its consequences given the magnitude of tax disputes, most tax scholars see the advance tax ruling procedure as an indispensable tool in the modern world of tax administration and compliance.
In view of the importance attributed to the advance tax ruling procedure by tax scholars and practitioners, and the adoption of such procedures by many countries around the world, one would expect to see frequent use of advance tax rulings.
The direct cost of applying for an advance tax ruling includes the cost of preparing the request (the request fee and the lawyer's fee) and the waiting period.
Second, applying for an advance tax ruling significantly increases the probability of detection by the Service, since, even in industries where audit rates are very high, the taxpayer expects some of the legally ambiguous tax issues to go undetected.
Fourth, if a favorable interpretation of the law is expected to decrease future tax revenue, the Service will be more reluctant to adopt such an interpretation in an advance tax ruling than in a tax audit.
Fifth, carrying out the transaction without an advance tax ruling can, in some cases, guarantee a favorable interpretation in the tax audit.
There are also two strategic reasons a taxpayer may choose to apply for an advance tax ruling.
The Article proceeds as follows: Part I provides evidence of tax law uncertainty, which should give rise to a demand for advance tax rulings, and presents scholars' view of the importance of the advance tax ruling procedure for taxpayers; Part II provides data on the infrequent use of advance tax rulings in the United States; Part III discusses the cost of applying for an advance tax ruling; Part IV analyzes the taxpayer's strategic consideration when deciding whether to apply for an advance tax ruling; and Part V discusses the implications of the analysis in the Article for advance pricing agreements, presenting data on the infrequent use of these agreements.
The importance of advance tax ruling is evident both in the professional and the academic tax literature.