Internal Revenue Manual

On September 7, 2017, the Treasury Inspector General for Tax Administration (TIGTA) issued a report about the Internal Revenue Service’s (IRS) Freedom of Information Act (FOIA) procedures. After reviewing a statistically valid sample of FOIA requests, TIGTA concluded that the IRS improperly withheld information 14.3 percent of the time—or approximately 1 in 7 FOIA requests.

TIGTA also found that at the end of Fiscal Year 2016, there were 334 backlogged information requests. Below is a chart from the report showing the IRS’s recent history of backlogged FOIA requests.

TIGTA’s findings are consistent with our experiences with FOIA requests. It is not unusual for the IRS to make repeated requests for extensions to respond. We note further that, during an examination, the IRS is statutorily authorized to provide taxpayers access to their administrative file. Indeed, the Internal Revenue Manual confirms this at section 4.2.5.7 (June 15, 2017). Yet the IRS examination team often requires a FOIA request.

Practice Point 1: As a result of the IRS’s FOIA backlog, some taxpayers have resorted to filing lawsuits in federal district court to enforce their FOIA rights. Because the IRS must respond to court deadlines, taxpayers are sometimes able to force a more expedient response and move to the front of the response line.

Practice Point 2: Taxpayers should attempt to tailor their FOIA requests, only requesting the information in which they are interested. In theory, this could make the IRS’s job easier and, in turn, responses more timely.

Practice Point 3: If taxpayers intend to seek information from the government through the FOIA process, they should do so as soon as possible (e.g., at the beginning of the examination process) so that they may get the information in time to be useful.

In October 2016, the Internal Revenue Service (IRS) revised the Internal Revenue Manual (Manual) 8.6.1.4.4 to provide IRS Appeals Division (Appeals) with discretion to invite representatives from the IRS Examination Division (Exam) and IRS Office of Chief Counsel (Counsel) to the Appeals conference. Many tax practitioners opposed this change, believing that it undermines the independence of Appeals and may lead to a breakdown in the settlement process.

In May 2017, the American Bar Association (ABA) Section of Taxation submitted comments recommending the reinstatement of the long-standing Manual provision regarding the limited circumstances for attendance by representatives from Exam and Counsel at settlement conferences. Additionally, the Tax Section’s comments were critical of the practice whereby some Appeals Team Case Leaders (ATCLs) in traditional Appeals cases are “strongly encouraging” IRS Exam and the taxpayer to conduct settlement negotiations similar to Rapid Appeals or Fast Track Settlement, such that many taxpayers do not feel they can decline such overtures. The Tax Section comments suggested that the use of Rapid Appeals Process and Fast Track Settlement should be a voluntary decision of both the taxpayer and IRS Exam and the use of these processes should be the exception rather than the rule. Continue Reading Appeals Large Case Pilot Program Draws Criticism

The Internal Revenue Service (IRS) has revised the Internal Revenue Manual (IRM) regarding Appeals Conferences.  Below is a summary of material changes to IRM 8.6.1, effective October 1, 2016:

  • The IRM was revised to reflect that most conferences in Appeals will be conducted by telephone.  The revision also provides guidance for when in-person conferences are appropriate (e.g., when there are substantial books and records to review that cannot be easily referenced with page numbers or indices, or when there are numerous conference participants that create a risk of an unauthorized disclosure or breach of confidentiality).
  • IRM 8.6.1.4.1.2, In-Person Conferences: Circuit Riding was added.  If the assigned Appeals employee is in a post of duty that conducts circuit riding, circuit riding will be permitted when the address of the taxpayer, representative or business (for business entities) is more than 100 miles from a customer-facing virtual conference site or 150 miles from the nearest Appeals Office.  Area Directors have the discretion to deviate from these mileage limitations.  Circuit riding will also be allowed if the nearest Appeals Office cannot take the case due to high inventories or lack of technical expertise, or if there is no convenient alternative.
  • Language was added in IRM 8.6.1.4.4 to state that Appeals has the discretion to invite Counsel and/or Compliance to the conference.  The IRM notes that the prohibition against ex parte communications must not be violated and references Rev. Proc. 2012-18.
  • The definition of a new issue was updated in IRM 8.6.1.6.1(2).  The IRM retains prior language stating that a new issue is a matter not raised during Compliance’s consideration and adds that any issue not raised by Compliance in the report (e.g., 30-Day Letter) or rebuttal and disputed by the taxpayer is a new issue.

The revised IRM 8.6.1 is available here.

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 questions.

Case law reflects that the unauthorized production of privileged materials by an ex-employee or by an employee without the authority to waive the privilege for the taxpayer should not be viewed as a waiver of the privilege. The problem is that taxpayers may not know that privileged materials have been provided to the IRS without the IRS’s consent and therefore would not be able to take steps to assert the privilege and request the return of such documents from the IRS. Taxpayers may want to make a request to the IRS at the beginning of an audit to provide it with a list of all materials received by third-parties so that the taxpayer can assess whether any privileged documents have been provided to the IRS without the taxpayer’s consent. If the IRS does not provide the list or refuses to acknowledge the taxpayer’s request, the taxpayer may have at least preserved its right to later assert privilege if it turns out privileged materials were provided to the IRS without the taxpayer’s consent.

If an IRS attorney receives privileged documents and does not return them to the taxpayer, this raises potential ethical issues. Attorneys who receive privileged documents where it is clear that such documents are privileged and were not intended to be disclosed by the taxpayer or the privilege was intended to be waived, may have a duty to not examine those materials and instead return them to the taxpayer. The IRS’s recent comment about reviewing and redacting what it believes is privileged before sending to the examining agent appears at odds with this duty.

In fact, since at least 2009, the IRS has demonstrated a growing awareness of the privilege concerns raised by whistleblowers that stand in a privileged relationship to a taxpayer, even while the IRS’s current policies have not fully addressed the problem. In August 2015, the Internal Revenue Manual was amended to provide that the IRS generally must assume that any “current employee whistleblower has access to information that may be subject to a privilege that has not been affirmatively waived by the taxpayer.” I.R.M. 25.2.2.4.4. That same section of the Manual and periodic TIGTA reports on the IRS Whistleblower Office recognize that the IRS’s ability to use whistleblower information in subsequent proceedings could be severely limited—if not prohibited outright—if that information was obtained in violation of the taxpayer’s attorney-client privilege.

The better, and probably more appropriate approach, in situations where an ex-employee or whistleblower provides documents to the IRS that may be privileged is for the IRS to immediately notify the taxpayer and provide it with the opportunity to assert any applicable privileges. Allowing the IRS to review the documents first and make its own privilege determinations is fundamentally contrary to the way in which privilege determinations are made. Taxpayers and their advisors should be aware of the IRS’s recent comments and plan accordingly by taking affirmative steps to protect against the IRS reviewing privileged materials without the taxpayer’s consent.