The Treasury Inspector General for Tax Administration (TIGTA) recently summarized several critical deficiencies in how the IRS handles electronically stored federal records in a recent report, available here. The lapses identified by TIGTA may affect the availability of those electronic records for future Freedom of Information Act (FOIA) requests, litigation and Congressional review. The report does not address the IRS’s retention policy for physical documents.

Federal law mandates the retention of the government’s federal records. Unfortunately, prior to May 22, 2013, IRS electronic asset disposal policies included instructions to “wipe” and “reimage” computer hard drives that were no longer needed by IRS users. If those computers were the only repository for electronically stored federal records, that information would be lost. TIGTA noted that, even though the IRS revisited those policies several times, computers were still being wiped and reimaged as part of the IRS’s migration to Windows 7 through January 14, 2016. This also affects email retention since users are often required to manually identify and store or print their email records. An upgraded email solution that will permit the automatic retention and storage of email records is being implemented.

Further, TIGTA determined the IRS’ storage and retention policies for computers that were not wiped or reimaged were ineffective. For example, TIGTA found that the IRS has approximately 32,000 laptops and desktops in storage, but an inventory report identifying the number and location of computing devices currently in storage from specific employees could not be readily produced, rendering electronic federal records on those devices essentially unavailable.

These inadequate electronic record retention policies have resulted in the destruction of material subject to litigation holds, delays in the FOIA process, and the unavailability of responsive documents for FOIA requests. TIGTA made the following recommendations, which the IRS agreed to:

  • An enterprise email system should be implemented that enables the IRS to comply with federal records management requirements.
  • A methodology for developing one list of executives for the permanent and 15-year email retention groups should be documented.
  • The newly issued policy on the collection and preservation of federal records associated with separated employees should be disseminated broadly within the agency.
  • The director should ensure that the policy for documenting search efforts is followed by all employees involved in responding to FOIA requests.
  • The director should develop a consistent policy for the search of federal records associated with separated employees.

Practice Point: When drafting FOIA requests and discovery requests for electronic records, practitioners should be aware of record-retention challenges facing the IRS since they will impact the IRS’s ability to fully respond to FOIA requests and adequately implement litigation holds for years to come.

Discovery in tax litigation can take many different forms, including informal discovery requests (in the US Tax Court), request for admissions, interrogatories and depositions. In addition to obtaining facts, litigants frequently want to know the legal authorities on which the other side intends to rely. Over the years, we have seen numerous requests, both during examinations and in litigation, where the Internal Revenue Service (IRS) requests a listing of the legal authorities supporting a taxpayer’s position.

Sometimes it is beneficial for a taxpayer to disclose those authorities. For example, in some IRS audits it may be worthwhile to point out to the IRS agent the applicable authority and cases that directly support the taxpayer’s position. However, once a case progresses to litigation, it is clear that the parties disagree and that simply pointing out relevant authorities will not help the IRS to concede the case. This raises the question of how to respond to such a request while in litigation.

The Tax Court recently addressed this issue in a pending case involving issues under Internal Revenue Code Section 482 (see here). The IRS issued interrogatories that requested information seeking to obtain the taxpayer’s legal arguments. The taxpayer objected on the grounds that this was inappropriate. The Tax Court, in an unpublished order, agreed:

Tax Court Rule 70(b) does not require a party to disclose the legal authorities on which he relies for his positions.  See Zaentz v. Commissioner, 73 T.C. 469, 477 (1970). Other courts have held that interrogatories requiring a party to disclose legal analyses and conclusions of law are impermissible. See, e.g., Perez v. KDE Equine, LLC, 2017 WL 56616 at *6 (W.D. Kentucky Jan. 4, 2017); In re Rail Freight Fuel Surcharge Antitrust Litigation, 281 F.R.D. 1, 11 (D.D.C. Nov. 17, 2011).

Practice Point:  Although this unpublished order technically reflects only the view of the issuing Judge, it is an important point that litigants should remember. There are numerous ways to determine an adversary’s legal position. Generally, however, discovery requests directly asking for an opponent’s supporting legal authorities are not an appropriate technique. Techniques to make that determination include: issuing requests for admissions relating to the elements of potential legal theories, filing a dispositive motion like summary judgment which will invoke a response from the other side, and discussing with your opponent whether the case should be submitted (in Tax Court) fully stipulated. And sometimes the most efficient way to get the information is to pick up the phone and just ask. Typically, litigants are wary of putting their legal theories down in writing and pinning themselves down early in a case. But most lawyers love to hear themselves talk!

Due to the enormous amount of electronic data stored by companies in the modern era, discovery requests can involve millions of documents which need to be reviewed prior to being turned over to the opposing party.  In conducting their analysis of this overwhelming quantity of information, litigants must, amongst other things, detect and exclude any privileged material.  Should a party inadvertently fail to do so before such records reach the hands of the opposing counsel, he/she will be deemed to waive privilege in many jurisdictions.  Given the massive quantity of data, however, such mistakes are practically unavoidable.

Federal Rule of Evidence (FRE) 502 was enacted in 2008 in an attempt to combat the issue of inevitable human error and the costs associated with parties’ efforts to avoid it.  FRE 502(d) allows parties to request the court to grant an order stipulating that a disclosure of privileged material does not waive any claims of privilege with respect to those documents.  If the court agrees to enter the order, it is controlling on third parties and in any other federal or state proceeding.

FRE 502(d) has led to the possibility of “quick peek” agreements where the parties give over all or a portion of their documents to opposing counsel without any privilege review whatsoever so that the recipient can identify which material he would like to retain.  The recipient, in turn, agrees not to assert a waiver claim on any document that the producing party intends to withhold from the requested documents as privileged.  These arrangements can dramatically ease the temporal and financial burdens of conducting a privilege review because they allow the producing party to focus only on those documents desired by the recipient while at the same time preserving their right to claim privilege on such documents. Continue Reading Two Current Tax Controversies Utilize ‘Quick Peek’ Agreements to Resolve Privilege Disputes