Treasury Intends to End Allowing Outside Counsel To Participate in Exams

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Last month Treasury issued Identifying and Reducing Regulatory Burdens in response to Executive Order 13789. In the report Treasury indicated that it plans to substantially revise regulations under Section 7602 that allowed the participation of private contractors to “participate fully” when the IRS interviewed taxpayers or witnesses who were summoned during an examination. In particular, Treasury has stated its intention to remove the power of private domestic attorneys to participate with IRS employees in interviewing witnesses summoned during an examination.

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The report Treasury issued was in response to an executive order that directed the Secretary of the Treasury to identify significant tax regulations that (i) impose an undue financial burden on U.S. taxpayers, (ii) add undue complexity to the Federal tax laws, or (iii) exceed the statutory authority of the IRS. In June, Treasury identified eight regulations, and the report issued last month discusses the plan to mitigate or eliminate the burdens.

One of the regulations discussed was the regulations under Section 7602 that gave IRS power to use outside contractors to assist in interviewing summoned witnesses in an exam. As Keith previously discussed the regulations have been controversial, and while in US v Microsoft district court in Washington found that Treasury had the authority to issue those regulations, the court was troubled by the outside firm participation in the IRS audit of Microsoft, and suggested that Congress may scale the practice back. There has been proposed legislation to do that, though it has not moved much since its introduction.

The Treasury report states that“[u]nder the amendment currently contemplated by Treasury and the IRS, outside attorneys would not be permitted to question witnesses on behalf of the IRS, nor would they be permitted to play a behind-the-scenes role, such as by reviewing summoned records or consulting on IRS legal strategy.” In explaining why, the report embraces the criticism of the practice:

When the IRS enlists outside attorneys to perform the investigative functions ordinarily performed by IRS employees, the government risks losing control of its own investigation. RS investigators wield significant power to question witnesses under oath, to receive and review books and records, and to make discretionary strategic judgments during an audit— with potentially serious consequences for the taxpayer. The current regulation requires the IRS to retain authority over important decisions, but the risk of a private attorney taking practical control may simply be too great. These powers should be exercised solely by government employees committed to serve the public interest, not by outside attorneys. These concerns outweigh any countervailing need for the IRS to contract with outside attorneys. Treasury remains confident that the core functions of questioning witnesses and conducting investigations are well within the expertise and ability of the IRS’s dedicated attorneys and examination agents.

The Executive Order notes however that Treasury intends to retain the power to allow outside experts who are not US lawyers to help with summons proceedings. The report mentions that subject matter experts, including economists, engineers or non US lawyers, may be necessary in a small subset of cases because of a possible “compelling need” to provide expertise that IRS employees may lack.

Conclusion

Treasury candidly discussed why the practice of bringing in outside counsel in summons proceedings was on balance not consistent with some of the key values that underlie sound tax administration. While IRS resources are spread thin, and at times the complexity of cases challenges even the most seasoned IRS employees, IRS does have at its disposal attorneys from the government, including DOJ attorneys who may be able to provide the perspective and expertise that can help ensure that IRS has what it needs to do its job properly in an exam. In addition, Congress should ensure that IRS has the resources it needs so it does not routinely feel that it is outgunned when examining taxpayers who by the nature of the businesses will present complex returns. Relying on the private sector to help with core tax functions in an exam (or collection for that matter, though that is another story) is not the way to sound tax administration, and this report refreshingly tells us why. It carries additional weight when the government itself acknowledges those costs.

 

Leslie Book About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

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