The Bassin Law Firm submitted written comments and Stu Bassin provided live testimony at a recent hearing on proposed regulations which would authorize the IRS to hire outside lawyers to participate in development and litigation of tax disputes.
Until recently, the IRS had not hired outside lawyers to participate in development and litigation of tax disputes under any circumstances. During the past decade, however, the IRS decided to retain a prominent law firm (Quinn Emanuel) to assist it in developing a transfer pricing case involving Microsoft Corporation and issued regulations under Section 7602 (the agency’s statutory authority to conduct audits) as generally allowing the agency to hire the firm. That construction of Section 7602 survived a judicial challenge, but was widely criticized within the tax community and by members of Congress. The proposed regulations now under consideration interpreted Section 7602 as authorizing the IRS to hire outside law firms to advise it on pending audits and litigation under limited circumstances.
Stu Bassin’s comments, while not challenging the IRS construction of Section 7602, criticized the proposed regulations on a basis not addressed by the IRS in its notice of proposed rulemaking. As he explained, the IRS must also comply with the Section 6103 prohibition against disclosure of tax return information when it hires lawyers from outside the government to participate in audits. Apparently, the IRS had previously construed the Section 6103(n) authority for disclosure of return information to information technology contractors as permitting disclosures of return information to other contractors, including law firms. However, as Stu explained, bedrock principles of statutory construction and the legislative history of Section 6103(n) require a far narrower construction of the statute—one which would not allow disclosures of return information to outside law firms. As a result, the IRS lacks authority to disclose return information to law firms involved in audits and litigation, even if the proposed Section 7602 regulations authorized IRS to hire the firms. More importantly, absent disclosure authority, the government employees and law firms involved in such a disclosure of return information are subject to criminal prosecution and civil penalties under Sections 7213 and 7431.
Those comments drew considerable attention from the agency panel members at the hearing and in subsequent press reporting. The IRS must now consider the comments (and those submitted by other speakers) before it can issue final regulations at some future date.
An outline of Stu’s comments can be found here.