Legal Academics Seek Withdrawal of Outside Counsel Regs

From: Victor Thuronyi

To: Notice Comments

Subject: REG-132434-17: comments and request for a public hearing

Date: Thursday, March 29, 2018 1:36:04 PM

The proposed regulation could be revised in various ways, but the simplest change would be to replace the words "perform the activities" in Prop. reg. 301.7602(b)(3)(ii) with the words "question a witness".

The reason I make this suggestion is that the Supplementary Information to the proposed regulation states the concern that there is a risk that the IRS may not be able to maintain full control over the actions of a non-government attorney when the attorney questions witnesses.

Since the concern relates only to the questioning of witnesses, the proposed regulation is overbroad and should be limited as I suggest above.

The proposed rule would prohibit the IRS from hiring attorneys to help it in investigations, particularly those where specialized tax knowledge can be of use to the IRS in winning complex cases. Why regulations should rule out such use of private attorneys in all situations is simply impossible to understand on a rational basis in the public interest. The main reason I can think of to motivate such a change is to deliberately undermine the IRS's ability to prevail in litigation over large companies, which have the resources to hire attorneys of the highest caliber.

I find it lamentable that political considerations would cause Treasury to propose regulations that hobble the IRS in its tax litigation.

I request a public hearing.

Victor Thuronyi
201 Hodges Lane
Takoma Park MD 20912
240-305-7339

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Outline of topics to be discussed by Victor Thuronyi¹ at a Public Hearing scheduled for July 31, 2018 10:00 a.m. re

Notice of Proposed Rulemaking REG-132434-17 (Certain Non-Government Attorneys Not Authorized to Participate in Examinations of Books and Witnesses as a Section 6103(n) contractor)

Summary

The proposed regulation would prevent the IRS from getting the help of outside counsel when it is up against multinational companies in complex cases.

The government has a lot of expertise in conducting tax litigation, but large private companies with deep pockets can hire top tax lawyers, which gives them an advantage in litigation, in cases where millions or even billions of dollars in tax are at stake. Inexplicably, the IRS would unilaterally disarm itself through the proposed regulation, prohibiting its auditing teams from hiring outside lawyers to help out in situations where needed.

The context: The IRS is outgunned

The regulation at issue concerns a small corner of tax procedure,² and will likely not affect many cases. However, those cases can be important. A single case can involve billions of dollars in revenue.³ Often, the IRS is outgunned in litigation. Private companies can hire the best litigation talent, while the IRS must rely on staff who are paid a fraction of what attorneys are paid in the private sector. IRS staff is dedicated, many are expert, and they often do reach good results even when up against private sector lawyers, but they do not have the resources that private companies do.

In the past several years, Congress has kept the IRS starved of funds. One result has been to decrease the scope and intensity of audits of wealthy taxpayers and companies. This means that more of the tax burden must be shouldered by the rest of us. This is the larger context of which this proposed regulation is a part.

With this regulation, the IRS proposes to examine complex returns with one hand tied behind its back: while private companies can hire all the legal talent they want, the IRS would be prohibited from doing so.

It is important to understand that the IRS does not routinely or frequently hire outside counsel to assist it in conducting audits. The IRS has subject matter expertise and in the vast majority of cases does not need an outside lawyer to help it make an assessment. The situations where an outside lawyer is needed will almost exclusively concern situations with a very complex factual backdrop, a high likelihood that the taxpayer will challenge the assessment in litigation, and very large amounts of potential tax liability — tens or hundreds of millions or billions of dollars. We are talking about transfer pricing cases or potentially other cases involving very complex international arrangements that are under scrutiny. If the IRS seeks outside help in such a case, it will be not only to help it arrive at an assessment that is warranted by the facts and law, but also to identify, organize, develop, and interpret the facts that are needed to persuade a court that the assessment should stand.

Core government functions should not be privatized

It makes sense for IRS staff to be in charge of examining returns and conducting litigation. As with tax collection, civil servants should be in charge of these functions and conduct them in a way that they are ultimately accountable for. Core government functions should not be privatized. This does not mean, though, that IRS staff should not get help from the private sector where needed and appropriate. The proposed regulation goes too far in restricting such help.

The regulation essentially is designed to foreclose IRS access to external expert litigation skills. There is no justification for distinguishing substantive matter expertise from litigation expertise. This expertise can be just as specialized as substantive matter expertise, which is evidenced by the fact that trial litigators' private sector billing rates often exceed those for tax lawyers from the same firm. For this reason and others that follow, the proposed regulation should be withdrawn and not re-issued.

If the regulation is to be retained at all, it should do no more than confirm that outside counsel is subordinate to the supervising IRS agent or attorney. This keeps IRS staff in charge.

The articulated rationale for the proposed regulation does not support the rule

The main rationale given by the IRS for the regulations is that “there is a perceived risk that the IRS may not be able to maintain full control over the actions of a non-government attorney hired by the IRS when such an attorney . . . questions witnesses. The actions of the non-governmental attorney while questioning witnesses could foreclose IRS officials from independently exercising their judgment.”

The proposed regulation does not introduce any evidence that this speculated risk has occurred in fact. Attorneys are professionally trained to serve clients, not to substitute their judgment for that of the client. No evidence has been presented that this risk is worth the cost to the taxpaying public of denying the IRS potential access to attorneys who are expert in litigation skills directed at achieving client objectives in litigation. Moreover, no meaningful basis has been presented to distinguish substantive subject matter expertise from litigation expertise for the purpose of conducting examinations. The only purpose of this regulation is to satisfy a narrow group of large corporates, many with current or pending IRS controversies, and deny litigation expertise to the IRS.

The preamble to the proposed regulations also does not explain what would be the concern with an outside attorney being present at a witness interview or reviewing documents that are summonsed, and it is difficult to see what would be the problem with this. If the regulation is to be retained at all, the concern about the IRS losing control would be satisfied by providing that only IRS officials — not an outside attorney — may question witnesses. The proposed regulation could be amended by prohibiting an outside attorney from questioning witnesses, and the rest of the material in proposed reg. section 301.7601(b)(3)(ii) deleted.

The proposed regulation introduces new complexity

Executive Order 13789 directs review of regulations that “add undue complexity to the Federal tax laws.” Compared with the existing regulation (or the existing regulation amended as suggested above) the proposed regulation introduces new complexity. This arises from the exception for hiring an attorney “as a specialist in foreign, state, or local law, including tax law, or in non-tax substantive law that is relevant to an issue in the examination, such as patent law, property law, or environmental law, or is hired for knowledge, skills, or abilities other than providing legal services as an attorney.” If an outside attorney meets this exception, that person can question witnesses and review documents. It would be complex in some cases to determine for what purpose an attorney is being hired under this standard, and one can envisage that if the IRS hires a lawyer under this exception, this could be challenged by the taxpayer under examination, with resulting litigation.

This potential for complexity is entirely unnecessary because the regulation is unnecessary. If the regulation is to be retained at all, it would be preferable to adopt a simple rule that prohibits outside lawyers from interviewing witnesses, while allowing them to perform all other functions requested by the supervising IRS agent or attorney, such as reviewing documents, developing examination and possible litigation strategy, drafting interrogatories and preparing memoranda and briefs. This would draw a clear line with little potential for confusion and dispute. The proposed regulation is lengthier and more complex than the regulation it would replace.

The proposed regulation is not in the public interest

The proposed regulation supports the private interest of large corporations that are subject to complex IRS audits, and which might pay more tax if the IRS were able to hire the help it needed. The regulation allowing the IRS to use outside counsel does not impose a regulatory burden on taxpayers, it simply allows the IRS to conduct examinations more effectively. Responsible and experienced litigators after reviewing facts in detail may recommend against pursuing litigation, which would be counsel's ethical obligation even if counsel is retained in a case designated by the IRS for litigation. The public interest calls for large companies to pay their fair share of tax as required by the law, and enforced by the IRS and, where needed, the courts.

When should the IRS hire outside legal help?

A decision by the IRS to hire outside counsel or other experts is a management decision. Most likely, outside lawyers will be hired rarely, in part because they are expensive. The legal framework of which the regulations in question are a part should allow the IRS to take such action, but how often the IRS avails itself of this opportunity should be for them to determine within the scope of their budget and needs.

Conclusion

We recommend that the regulation be withdrawn because it does not achieve any proper purpose other than to support the private interest of large corporations that are subject to complex IRS audits. There is a pretense that the regulation would protect taxpayer rights, but that pretext is without substance. The regulation adds complexity and burden for no reason. It undermines rather than supports an important governmental function of conducting effective examination of complex tax cases.