Should the IRS Be Banned from Hiring Tax Attorneys to Assist with Audits?

In 2014, the Internal Revenue Service (IRS) stirred up controversy after hiring a private tax law firm to assist with an IRS tax audit of tech giant Microsoft, then under IRS scrutiny for its use of offshore subsidiaries. Microsoft fired back by suing the Service in 2015, contending in its lawsuit that the government’s use of private counsel was improper. The court ruled that, though not necessarily unlawful, the Service’s decision to retain private counsel was both unusual and problematic, raising questions about the merits of placing a formal ban on the tactic.

Court Criticizes IRS for Hiring Private Tax Attorneys in Microsoft Audit Case

It’s not unusual for a taxpayer to hire an experienced tax attorney when confronted with an IRS audit. The Tax Code, after all, is notoriously complex, and most taxpayers require legal guidance to level the playing field and ensure that their best interests are protected. At the Tax Law Office of David W. Klasing, our IRS tax audit lawyers have handled thousands of such cases, repeatedly achieving better outcomes than our clients would have experienced without the benefit of robust representation. 

It is both expected and encouraged for taxpayers, particularly those who own businesses, to retain private counsel when a tax controversy arises, such as a dispute resulting from a dentist tax audit, auto dealership tax audit, or foreign account tax audit.

But should the IRS be permitted to hire private attorneys of its own?

That was the question in focus in United States v. Microsoft Corp., W.D. Wash., No. 2:15-cv-00102 (2015). Though the court stopped short of finding a violation of law, the ruling nonetheless served as both a rebuke and warning to the Service. Despite noting that “Microsoft has failed to convince the Court that Section 7602, which empowers the Secretary to take certain actions, actually limits the IRS’ ability to delegate the asking of certain questions to contractors like Quinn Emanuel attorneys,” the court was also “troubled by Quinn Emanuel’s level of involvement in this audit,” adding, “The idea that the IRS can ‘farm out’ legal assistance to a private law firm is by no means established by prior practice, and this case may lead to further scrutiny by Congress.”

The case opened the door to ongoing debate, not only among tax professionals, but regulatory agencies with the power to prohibit the practice going forward.

On October 4, the U.S. Department of the Treasury issued a report proposing a ban on the use of private attorneys in tax audits, noting that amendments to current IRS regulations were under consideration. If implemented, the ban would generally prevent private attorneys from questioning witnesses or offering legal advice to the Service. However, the use of expert opinions would be permitted in certain cases.

A formal ban may not be needed, as the IRS has previously suggested that similar tactics would not be reused. According to one Bloomberg BNA report, in March 2016 then-IRS Chief Counsel William J. Wilkins, who would later resign, emphasized at a conference for tax executives that “IRS counsel and the agency’s Large Business & International Division are working together on allocating resources ‘to develop and litigate these [types of] cases properly.’” As Bloomberg BNA noted, “Wilkins’ announcement came following a wave of controversy surrounding the Internal Revenue Service’s decision to use outside legal counsel in the United States v. Microsoft Corp. case.”

Whether or not the Treasury Department’s proposal is ultimately committed to law, there are likely to be repercussions for both individual taxpayers and corporate entities. Skilled legal counsel will remain crucial for taxpayers faced with audits – particularly if the IRS retains the option of hiring its own attorneys.

Experienced IRS Tax Audit and Tax Defense Attorneys Serving Los Angeles and Orange County

If you or your business has been selected for an IRS tax audit, it is imperative that you contact a skilled and knowledgeable IRS tax audit attorney as soon as possible for further guidance. Though many audits are routine matters, with some taxpayers even being chosen at random by software, it is in your best interests to seek legal representation, particularly as the audit may yield findings with which you disagree. If the IRS makes an error, or uncovers evidence of criminal activity such as tax evasion, experienced representation is essential to controlling the damage, minimizing the penalties, and resolving the controversy efficiently.

The trusted tax audit attorneys at the Tax Law Office of David W. Klasing have decades of experience helping taxpayers manage every aspect of the audit process, including IRS appeals representation in cases where disputes arise. Should the IRS Criminal Investigation Division initiate an investigation or recommend prosecution as a result of the audit, our aggressive tax defense attorneys are ready to work tirelessly and zealously on your behalf. For a reduced-rate consultation concerning the audit and tax defense services we offer, contact the Tax Law Office of David W. Klasing online, or call (800) 681-1295.