On March 28, 2018, the Treasury Department and Internal Revenue Service (IRS) published Proposed Regulation § 301.7601-1(b)(3)(i) and (ii) which permits the IRS to hire outside specialists to assist in determining the correctness of a taxpayer’s tax liability. The Proposed Regulation also contains an exception specifically prohibiting the IRS from hiring outside attorneys to review summoned information or question witnesses providing testimony under oath.
The participation of outside attorneys became controversial during the audit of a large technology company when the IRS hired an outside law firm to augment its own resources for the transfer pricing audit of the company. On October 16, 2017, in response to the requirements of Executive Order 13789, requiring the Secretary of the Treasury to review all regulations issued after January 1, 2016, the Treasury Department and the IRS announced that they were considering proposing an amendment to Treas. Reg. § 301.7602-1(b)(3) in order to narrow the scope with respect to non-government attorneys. See our prior coverage here.
Proposed Regulation § 301.7601-1(b)(3)(ii) prohibits non-government attorneys from participating in the review of summoned information. Under this proposed regulation non-government attorneys are prohibited from: reviewing summoned books, papers, records or other data or questioning witnesses on behalf of the IRS unless the attorney is hired by the IRS for a permitted purpose. A limited exception to that prohibition permits the IRS to hire a non-government attorney if the attorney is being hired for specialized substantive subject matter expertise in an area other than federal tax law (e.g., knowledge of foreign, state or local law, patent law, property law or environmental law).
Practice Point: It is a good practice to request a list of all third-parties that the IRS contacts during an examination, including outside contractors that are being consulted.