The IRS says a new proposal curtailing the its ability to hire and share information with outside contractors during tax audits goes beyond requirements imposed under a 2019 reform law.
The Taxpayer First Act (Pub. L. 116-25), signed into law last summer, bars the IRS from sharing any books, papers, records, or other data obtained by summons with contractors, except when the contractor needs that information for the sole purpose of providing “expert evaluation and assistance” to the agency. The law also says only IRS or Office of Chief Counsel employees can question a summoned witness under oath.
The agency in the proposed regulations (REG-132434-17; RIN 1545-B012) released Thursday notes several areas where it plans to restrict its own abilities beyond what is required by the Taxpayer First Act “in the interests of sound tax administration.” Even so, attorneys said they expect taxpayers to take issue with parts of the regulations, including a provision allowing contractors to continue informally questioning taxpayers, their employees, or certain third parties when they aren’t under oath.
“I could see some people saying, ‘We’re not comfortable with that,’” said Michael D. Kummer, a partner at Morgan, Lewis & Bockius LLP.
The intent behind the changes under new tax code Section 7602(f) were to address concerns over “the IRS’s ability to hire outside attorneys as contractors and have them question witnesses during a summons interview,” according to a House Ways and Means Committee report for an earlier iteration of the Taxpayer First Act.
One specific instance that raised eyebrows on Capitol Hill was the IRS’s decision in 2014 to enter into a contract with the law firm Quinn Emanuel Urquhart & Sullivan LLP to aid with the income tax audit and investigation of tech giant Microsoft Corp., including conducting sworn interviews.
Former Sen. Orrin Hatch (R-Utah), who was chairman of the Senate Finance Committee at the time, criticized the move in a 2015 letter, saying it “removes taxpayer protections by allowing the performance of inherently governmental functions by private contractors.”
Beyond the Scope
The proposed rules would prohibit the IRS from hiring federal tax lawyers and U.S. civil litigators to assist with examinations—a provision it says goes beyond what it is required to do by law.
The IRS noted that its internal workforce already possesses the expertise that those outside consultants would bring.
The regulations also would bar IRS contractors from asking a summoned person’s representative to clarify an objection or assertion of privilege in a summons interview, even though the prohibition is also not required by the 2019 law.
Kummer said the second provision isn’t as generous as it may seem because IRS employees are typically the ones who would ask that question anyway.
“It’d be an odd circumstance where you’d have expert economist, for instance, piping up and asking somebody to clarify an objection or assertion of privilege,” he said.
The IRS cites the Ways and Means report in its proposed regulations to explain the reasoning behind certain provisions. It notes that the report, in addition to one from the Joint Committee on Taxation, supports a broad interpretation of the terms “expert evaluation and assistance.”
But Saul Mezei, also a partner at Morgan, Lewis & Bockius, said it’s not actually clear that the report intends for a broad reading. The report says the law’s restrictions aren’t “intended to restrict the Office of Chief Counsel’s ability to use court reporters, translators or interpreters, photocopy services, and other similar ancillary contractors.”
However, the agency applies the expert evaluation and assistance terms to two additional categories: persons with specialized expertise in certain substantive areas, including economists, engineers, and attorneys specializing in areas relevant to an audit, such as patent or environmental law; and whistleblower-related contractors.
Furthermore, while the IRS elaborates on the types of people who might provide expert evaluation and assistance, it doesn’t elaborate on when providing information to those people is done for the sole purpose of allowing them to provide assistance, Kummer said.
“I could see that being an area of potential challenge,” he said.
In the regulations, the IRS also proposes some exceptions to the rule that contractors can’t question summoned witnesses under oath, including court reporters “asking a summoned witness the types of typical housekeeping questions which are an essential part of their jobs” and contractors translating questions asked by an IRS or Office of Chief Counsel employee to a summoned witness.