Privilege and Non-Disclosure
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BEWARE: Whistleblowers Can “Out” You to the IRS!

Not only should companies worry about the Internal Revenue Service (IRS) auditing their returns, but they also have to be aware of a potential assault from within. Indeed, current and former employees have an incentive to air all of your tax issues with the hope of being rewarded for the information. Section 7623(b) was added to the Internal Revenue Code (IRC) in 2005, and pays potentially large monetary rewards for so-called tax whistleblowers. To qualify for remuneration, a whistleblower must meet several conditions to qualify for the Section 7623(b) award program: (1) submit the confidential information under penalties of perjury to the IRS’s Whistleblower Office; (2) the information must relate to a tax issue for which the taxpayer (if the IRS found out) would be liable for tax, penalties and/or interest of more than $2 million; and (3) involve a taxpayer whose gross income exceeds $200,000 the tax year at issue. If the information substantially...

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Retaliation Claims By Corporate Whistleblowers – What Is Too Far?

This week, a French court announced an indictment against UBS related to its alleged treatment of Nicholas Forissier, a former audit manager who provided information to French authorities a decade ago in a tax evasion investigation of UBS.  According to at least one press account, the indictment alleges that Forissier was “forced to work under difficult conditions, including internal criticism and eventual dismissal for gross misconduct in 2009” in retaliation for his cooperation with French authorities. Forissier’s case is apparently one of several whistleblower retaliation claims percolating in the French courts against UBS regarding non-disclosure of offshore accounts for tax purposes. US law provides significant protections of potential whistleblowers for alleged tax violations. Revisions to IRC section 7623, effective from December 20, 2006, make whistleblower awards mandatory in some cases. The revised law has resulted in several large, public awards...

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National Taxpayer Advocate 2016 Report – Summons Enforcement

In its Annual Report to Congress, the Taxpayer Advocate Service (TAS) recently reported summons enforcement actions under Internal Revenue Code (Code) Sections 7602, 7604, and 7609 as one of the “Most Litigated Issues” this year. Below, we summarize the general law related to summons enforcements actions and the findings set forth in the Annual Report. Code Section 7602 authorizes the Internal Revenue Service (IRS) to issue a summons to examine taxpayers’ books and records or demand testimony under oath. The IRS’s authority to issue a summons to acquire information also extends to third parties. A summons is not self-enforcing; thus, the government must file suit in local district court to seek enforcement of a summons issued to the taxpayer.The taxpayer may then oppose enforcement and assert appropriate defenses. In circumstances dealing with third party summons, any person entitled to notice of the summons may petition to quash the summons and may intervene...

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Ethics in Tax Practice

On November 17, 2016, John Woodruff and Laura Gavioli gave a presentation to the Houston Chapter of the Tax Executives Institute (TEI) regarding the contours of privilege and work-product protection for in-house tax practitioners. Joining them on the panel were Paul Broman of BP and Susan Musch of Sasol. The group addressed potential waiver concerns over the life of a tax case, spanning from the reasons, pre-transaction, that a company may obtain a tax opinion to audit defense. McDermott greatly appreciates its relationship with TEI’s Houston Chapter and the opportunity to speak on these topics, which are of heightened interest in today’s tax enforcement environment.

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Final Section 385 Regulations May Pose Compliance Burdens and Raise Potential Challenges

On November 2, 2016, we participated in a panel discussion at TEI's Houston Global Tax Symposium regarding the effects of the newly-finalized section 385 regulations. Of interest from a controversy perspective, we discussed the potential compliance burdens and privilege concerns raised by the new documentation requirements in the rules, and the potential problems with the non-rebuttable per se presumption in the transaction rules. We also discussed how the Internal Revenue Service has endeavored, in the regulations' lengthy preamble, to address potential procedural challenges by responding to public comments and by providing justifications for the regulations, particularly in light of recent challenges to other regulations under the Administrative Procedure Act. It remains to be seen how the new 385 rules will affect businesses in practice, and how the IRS intends to apply them, consistent with its statutory mandate.

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Privileged Materials Provided Without Taxpayers’ Consent Should Not Waive Privilege

In today’s tax environment and with the potential monetary awards to whistleblowers under Internal Revenue Code (Code) Section 7623, taxpayers are facing the increased possibility that their confidential and privileged materials may be provided to the Internal Revenue Service (IRS) without the taxpayer’s consent. This raises serious privilege and ethical issues related to the attorney-client, work product and Code Section 7525 tax practitioner privileges. In a welcome development, Drita Tonuzi, Associate Chief Counsel (Procedure & Administration), stated at a DC Bar Association event on September 8, 2016, that if someone who is not authorized to release a taxpayer’s documents turns them over to the government, they will first be reviewed to determine if the information is protected by federal laws or the Code. The Whistleblower Office will then redact confidential information before releasing it to examination agents. However, this leaves some unanswered...

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Facebook Battles IRS In Summons Enforcement Case

Facebook is in a protracted battle with the IRS related to its off-shoring of IP to an Irish affiliate. Read more here. The IRS issued an administrative summons for the documents, and Facebook has refused to comply with the summons. The IRS is asking the court to enforce the summons and force Facebook to turn over the requested documents. The court agreed that on its face, the summons was issued for a legitimate purpose. Facebook will now have to tell the court why it refuses to turn over the documents. Review the court order here. Assumedly, Facebook is asserting that it is not required to disclose the requested materials based upon a claim of privilege. The case demonstrates that the IRS is aggressively seeking documents and information from taxpayers and their representatives in cases involving international tax issues.

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Protecting Confidential Taxpayer Information in Tax Court

Taxpayers value confidentiality, particularly if there is a dispute with the IRS that involves highly-sensitive trade secrets or other confidential information. Not surprisingly, complex tax litigation often raises the question of what confidential information has to be “made public”—through discovery responses or the introduction of exhibits or testimony in a deposition or at trial—so that a taxpayer can dispute IRS adjustments in court if administrative efforts to resolve the case are not successful. Fortunately, the Tax Court tends to protect highly-sensitive trade secrets or other confidential information from public disclosure even when the judge must review the information to decide the case. In the Tax Court, the general rule is that all evidence received by the Tax Court, including transcripts of hearings, are public records and available for public inspection. See Internal Revenue Code (Code) Section 7461(a). Code Section 7458 also provides that...

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Tax Court Order Indicates That E-Discovery and Predictive Coding Are Here to Stay

On July 13, 2016, Judge Buch of the US Tax Court denied an Internal Revenue Service (IRS) motion to compel the production of electronically stored information (ESI) by Dynamo Holdings Limited Partnership and Beekman Vista, Inc., which was not delivered as part of a discovery response based on the mutually agreed-upon use of “predictive coding.” Predictive coding is an electronic discovery method that permits an efficient and effective approach when reviewing for relevance a large amount of data and documents. It is a relatively new discovery method that is gaining acceptance by courts around the country as an alternative to the costly and laborious physical review of data and documents. Judge Buch previously authorized the use of predictive coding in Dynamo Holdings, Ltd. vs. Commissioner, 143 T.C. No. 9 (2014). The IRS and the taxpayers had agreed that the taxpayers would run a search for terms determined by the IRS on the potentially relevant documents. The...

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Tax Court (Again) Rejects IRS Use of Secret Subpoenas

On July 8, 2016, Judge Mark V. Holmes of the US Tax Court issued an order in Ernest S. Ryder & Associates, Inc., APLC, et al., v. Commissioner, ordering the Internal Revenue Service (IRS) to serve on the taxpayer all non-party subpoenas that he had issued in the case, together with all responses and documents that nonparties produced after receiving those subpoenas. The order mirrored a prior order issued by Judge Holmes almost a year ago in Kissling v. Commissioner, Dkt. No. 19857 (July 16, 2015). In both cases, the IRS served subpoenas on third parties (77 subpoenas in the most recent case) and argued to the court that there is no Tax Court rule that requires him to notify taxpayers about whom he is subpoenaing in a Tax Court case, and he would prefer to keep his pretrial preparation secret. Although Judge Holmes agreed that the Tax Court’s rules do not specifically require notice of non-party subpoenas, he disagreed with the IRS that this absence...

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