A Ban on Outside Lawyers in IRS Audits Is Past Due, Lawyers Say

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By Alison Bennett

The possibility of a Treasury Department proposal to keep private-sector counsel out of tax examinations is getting mixed reviews.

The idea, announced in an Oct. 4 report, calls attention to one of the most closely watched issues in the tax-law community: Should the Internal Revenue Service be allowed to get help from outside law firms?

The ban would eliminate a practice the IRS employed in a complicated Microsoft Corp. audit, when the agency hired a team of lawyers to augment its own resources. Microsoft sued the IRS over it, and while the company didn’t win, the agency was strongly discouraged from hiring outside firms again.

Some attorneys praised the ban. Others called it unnecessary.

On the “good news” side, “I think Treasury and the IRS will be doing the right thing by abandoning this experiment in its entirety,” said Thomas V. Linguanti, a partner at Morgan, Lewis & Bockius LLP.

‘Nail in the Coffin’

But the ban might not even be needed, said Stuart Bassin, who runs Bassin Law Firm PLLC, a boutique tax controversy practice. “This is one more nail in the coffin of an idea that never should have been born and is long since dead,” he told Bloomberg BNA.

In the Treasury report, the department said it is considering an amendment to existing IRS regulations that would only apply going forward. The provision was one of eight items related to tax regulations issued in 2016 that Treasury identified for withdrawal or amendment.

The ban Treasury is considering would generally preclude the IRS from hiring attorneys for audits. Private-sector lawyers wouldn’t be allowed to question witnesses on behalf of the IRS. Nor could they play a “behind-the-scenes” role, such as offering the IRS advice on legal strategies or reviewing records obtained through a summons. The only outsiders permitted would be subject matter experts, under narrow circumstances.

Bad Idea?

Whether the ban is needed now or not, practitioners said the furor over the Microsoft case highlights one thing, in their view: Outside attorneys on audits are a bad idea.

Bassin, who was a Tax Division litigator at the Department of Justice for 20 years, said the uproar ensured that the experiment would be a “one-time thing,” and the agency isn’t likely to try it again.

Linguanti, who specializes in tax controversy and tax litigation at Morgan Lewis, pointed out that not only did the IRS end up in court, but the Senate Finance Committee subsequently approved a measure that would have banned the agency from using private contractors for any reason.

Linguanti said he understands the IRS is short on resources, but “the credibility of the entire tax system was put at serious risk” by this ‘farming’ out of legal representation to private lawyers.”

Microsoft Controversy

In the 2015 case, Microsoft sued the IRS in federal court after the agency brought in top-flight litigation firm Quinn Emanuel Urquhart & Sullivan, based in Los Angeles. The IRS was seeking help in a complex audit of some of the technology giant’s offshore deals.

Microsoft argued that the IRS improperly delegated a governmental function to outside lawyers, while the government contended the deal was a legal use of outside help for a complex investigation.

The court ultimately said the agency had the legal authority to enlist outside help, but criticized the IRS for doing it, saying it was “by no means established by prior practice.” The judge also cautioned that Congress might scrutinize the IRS for hiring private attorneys ( United States v. Microsoft Corp., W.D. Wash., No. 2:15-cv-00102, order 11/20/15 ).

John Hildy, a partner in Mayer Brown LLP’s tax controversy practice, called Treasury’s work on a ban “a welcome development.”

Hildy said some companies worry about information going too many places. “The arguments that taxpayers have advanced surround a control of the process,” he said. “Their concerns get back to issues surrounding confidentiality.”

With trade secrets and other commercially confidential data in the balance, Hildy said, “the aim is to keep the number of people who have access to your information as limited as possible.”

The IRS and Quinn Emanuel couldn’t be reached for comment by press time.

To contact the reporter on this story: Alison Bennett in Washington at abennett@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

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