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Senator Hatch Raises Concerns about Use of Private Law Firm in Microsoft Examination

Posted on May 15, 2015

This post appeared on May 13 on the Forbes PT site.

We wrote last November about the Freedom of Information Act (FOIA) brought by Microsoft to obtain information about the contract entered into between the IRS and a law firm, Quinn Emanuel, that it hired to assist it in the examination of Microsoft.  Since writing that post Microsoft has continued to battle with the IRS about the effect of the hiring of the private law firm as the case moved from FOIA litigation to summons enforcement.  Today, Senator Hatch, Chairman of the Senate Finance Committee entered the discussion of the use of the private law firm and, in a letter to the Commissioner of the IRS, has firmly positioned himself against the practice.

In the letter Senator Hatch raises three main concerns.  First he raises the concern that the temporary regulation the Treasury Department promulgated essentially at the same time as the hiring of Quinn Emanuel coupled with the contract the IRS entered into with the law firm give the law firm powers that the IRS may not give to a party outside of the federal government.  This issue was discussed in our initial post and continues to raise the primary concern.  Is the examination of a taxpayer and the taking of information from that taxpayer under oath an essential government activity such that it cannot be passed on to a private party?  Senator Hatch, citing several relevant code sections, thinks it is.  He expresses the view that the IRS has gone too far.  While his views do not bind the IRS, they do carry significant authority and influence.

He points out that when Congress expanded the IRS authority to use private collectors in 2004 it do so by passing specific legislation allowing it to do so.  The IRS regularly uses experts in developing issues and testifying.  The question here turns on whether allowing the expert or private contractor to actually ask the question of the taxpayer rather than to work with information developed by the IRS crosses a line into an essential government function.

Second, Senator Hatch raises a related issue of taxpayer protections.  The IRS has the right to give taxpayer information to the experts and contractors it hires.  This happens routinely because of the volume of situations in which the IRS needs expert assistance not available within the agency.  The information it gives to its experts has, up to this point, been information developed by the IRS using its statutory authority to gather and retain taxpayer information.  Prior to this case, the expert did not gather information directly from the taxpayer in a circumstance in which the taxpayer testified under oath and compulsion.  Senator Hatch raises the concern that this circumstance crosses a line and moves into space reserved for IRS examiners in their relationship with taxpayers.

Third, he raises a revenue concern which doubles as a resource concern.  He sees the IRS paying Quinn Emanuel $1,000 an hour and questions the wisdom of that expenditure both in absolute terms and because of the resources available to the IRS.  The IRS has its own lawyers who are part of the Treasury Department, Chief Counsel IRS lawyers, and it has lawyers at the Tax Division of the Department of Justice.  Senator Hatch compliments the lawyers from these two offices and questions why these resources need supplementing from private law firms.  This part of the discussion could form the basis of an interesting conversation between the Commissioner and the Senator.  The IRS resources have been dramatically cut over the past five years.  The number of attorneys in the Office of Chief Counsel, IRS has declined by almost one third from its zenith.  Perhaps, the Commissioner will respond that the hiring of outside lawyers must occur to supplement the dwindling resources provided through the budget.  The IRS can spend money on single case purchase of lawyers even when it fears to hire lawyers who will receive the benefits and protections of government employment.  Yet, both the Chief Counsel’s office and the Tax Division have many great lawyers still and the Senator raises an interesting point about the use of resources. The Ways and Mean Committee last month, in a Majority Staff Report, citing to a  Tax Notes article by former PT Guest Poster Stu Gibson, made a similar point.

Setting the resource issue to the side, I think the issue of hiring a private law firm to examine taxpayers under oath is an issue that deserves debate in a public setting and am happy Congress wants to take a look.  Hiring private collectors seems wrong and hiring private parties to participate in the examination process in this way, while not exactly the same, raises similar concerns.  Perhaps after a full discussion, Congress will decide to allow this practice and perhaps the discussion will cause it to look at IRS resources.  On the other hand, I am more comfortable with the traditional role of experts and contractors who take the information developed by the IRS, perhaps through questions submitted by the expert or contractor, and who do not directly engage with the taxpayer when the taxpayer testifies under oath.

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