IRS Gives Away Review and Enforcement Power to Private Entities

On June 17, 2015, the Washington U.S. District Judge Ricardo Martinez granted Microsoft’s motion for an evidentiary hearing to determine whether the Treasury Department and the Internal Revenue Service (IRS) may hire private lawyers to advise the government on corporate tax audits that may result in litigation.

In May 2014, the IRS penned a $2.2. million contract (about $1,000 an hour) with law firm Quinn Emanuel for a corporate audit of the Microsoft Corporation. Sen. Orrin Hatch (R-UT), chair of the Senate Finance Committee, wrote IRC Commissioner John Koskinen his concerns because the action:

1) appears to violate federal law and the express will of the Congress; 2) removes taxpayer protections by allowing the performance of inherently governmental functions by private contractors; and 3) calls into question the IRS’s use of its limited resources.

Microsoft points to language in the contract with Quinn Emanuel that would allow partners to step in as “special government employees” to litigate the tax case. Microsoft also claims the firm acted with autonomy in the audit as the IRS had no control over questioning witnesses, and the firm holds itself out as representing the IRS.

The IRS should be treading lightly when it comes to review and enforcement procedures given the recent scandals involving targeting Tea Party and conservative organizations as well as leaking legally-protected information. However, the IRS quietly promulgated a new temporary regulation allowing it to give parts of its review and enforcement powers to outside entities, such as law firms. This regulation is proposed as a formal rule and does not expire until 2017.

The IRS is getting away with this action because of its broad interpretation of regulatory exceptions that traditionally allow for contractors to work on things like a broken copier pursuant to IRC § 6101(n) or general activities involved in processing documents for handling, copying, and storing returns after they are filed pursuant to IRC § 7513. Thus, the catch-exception swallows the rule, if interpreted incorrectly the regulations read that any activities may be contracted out.

As Sen. Hatch hints, these regulations ironically occur at a time with the IRS claims it is underfunded, and other Congressmen agree that the IRS should be more cost effective with limited resources.