June 2019 JD Supra
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Taxpayers can be Embarrassed when IRS Contacts a Third-Party was published by JD Supra on 6/18/19.

Under Internal Revenue Code (IRC), Subtitle F – Income Taxes, Chapter 78 – Discovery of Liability and Enforcement of Title, Subchapter A – Examination and Inspection – Section 7602, the IRS has the authority to  contact a Third-Party.

IRC Sections 7602(c) states that:

“An officer or employee of the Internal Revenue Service may not contact any person other than the taxpayer with respect to the determination or collection of the tax liability of such taxpayer without providing reasonable notice in advance to the taxpayer that contacts with persons other than the taxpayer may be made”.

What is a Third-Party Contact? A communication which:

  • Is initiated by an IRS employee
  • Is made with a person other than the taxpayer
  • Is made with respect to the determination of collection of a tax liability of such taxpayer
  • Discloses the taxpayer’s identity
  • Discloses the association of the IRS employee with the IRS

Why does IRS contact a Third-Party?

When the taxpayer is unable to provide the necessary information or when the examiner needs to verify information provided.

What obligations does IRS have if it is going to contact a Third-Party?

  • Provide advance notification to the taxpayer
  • Record each third party contacted
  • Provide a list to the taxpayer upon request of third parties contacted

IRS Required Advance Notification to Taxpayer

IRS must provide a pre-contact notice (Form 12175) to the Taxpayer before contacting a Third-Party. This notice lets the taxpayer know that a Third-Party contact may be made. Historically, IRS satisfies this requirement by providing a Taxpayer with Publication 1 (Your Rights as a Taxpayer) and documenting that IRS has provided the Publication to the Taxpayer.

Advance notice is critical to a Taxpayer as it provides a Taxpayer with an opportunity to volunteer information and avoid potential damage to a Taxpayer’s business and reputation.

A Taxpayer may request a list of contacts at any time. The request may be oral or written

An IRS Third-Party contact list may be requested at any time. IRS will usually respond as follows: “In response to your request, we are providing you with the following name(s) of the third party(ies) we contacted to help us correctly determine or collect your tax liability. We may or may not have obtained information during these contacts. We are providing this information to you in accordance with Section 7602(c)(2) of the Internal Revenue Code, which becomes effective for third party contacts made after January 18, 1999”.

Exceptions to the IRS Advance Notification to a Taxpayer

  • Contacts that the taxpayer has authorized
  • IRS believes, based on “good cause” shown, that a Taxpayer may take reprisal action
  • IRS has “good cause”, to believe that providing a Taxpayer with Notification may jeopardize the collection of any tax
  • Contacts made with a county clerk to obtain lien information
  • Contacts made with a clerk of the court to obtain publicly available court records
  • Contacts made with state officials to obtain corporate charters or other publicly available information regarding corporate taxpayers or exempt organizations
  • Contacts made with the U.S. Postal Service to obtain the taxpayer’s current address
  • Contacts made to respond to a request from a government of a foreign country
  • Unsolicited information received from a foreign country pursuant to an exchange of information clause within a tax convention between the United States and that foreign country

Reliance on Publication 1 does not always work for the IRS

On February 26, 2019, the Ninth Circuit Court of Appeals ruled in the case of J.B.; P.B. v. United States of America, No. 16-15999, CA9 that the IRS failed to provide the taxpayers with reasonable notice in advance of the agency’s intent to contact third parties as required by Section 7602. The ruling states that: “The IRS must comply with its statutory obligation to provide reasonable notice in advance of contacting third parties. Courts are not in the position to prescribe the exact form of notice that is reasonable in every circumstance. Under the circumstances here, however, reliance on Publication 1 was ruled unreasonable, and there are probably other circumstances where the IRS needs to take further steps to provide the reasonable and meaningful notice Congress mandated. When the IRS seeks information from an employer of a party with whom it is currently in litigation and much of the information sought is covered by common law and state-recognized privileges, additional reasonable measures must be taken to provide meaningful notice and an opportunity to respond, in order to avert the potential third-party contact”.

Don’t be a Victim of your Own Making

If you are a Taxpayer under Audit, a Taxpayer that has received Publication 1 or a Taxpayer that has been selected at random for a compliance research examination, as part of the IRS’s National Research Program, contact a specialized Tax Advisor. Taxpayer’s have rights.