IRS contacts with DOJ generally are not third-party contacts

Plain-English summary

IRS Chief Counsel advised that requests to the Department of Justice for documents or verbal information about a non-tax settlement generally are government contacts excluded from section 7602(c)’s third-party-contact procedures. The narrow exception applies when the contact concerns the taxpayer’s own employment by or business contract with DOJ. The same rule applies to documentary requests and verbal discussions; separate rules cover passive use of online research services where no person is contacted.

Ruling snapshot

• Question: Are IRS documentary or verbal inquiries to DOJ about a taxpayer’s non-tax government settlement third-party contacts under section 7602(c)?
• Outcome: Advice (generally no, unless the matter concerns the taxpayer’s employment by or contract with DOJ)
• Key authorities: IRC § 7602(c); Treas. Reg. § 301.7602-2; Taxpayer First Act of 2019

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       Memorandum
       Number: 202013015
       Release Date: 3/27/2020
       CC:PA:BR6
       POSTN-102315-20

UILC: 7602.00-00

date: February 27, 2020

 to:   Daniel P. Longhi
       IRS DOJ Government Settlement Liaison
       (Large Business & International)

from: William V. Spatz
Senior Counsel, Branch 6
(Procedure & Administration)

subject: The Application of I.R.C. § 7602(c) to Government Contacts in the Context of
Department of Justice (DOJ) Settlements with a Taxpayer

       This Chief Counsel Advice responds to your request for assistance. This advice may
       not be used or cited as precedent.


       ISSUES

       1. Whether an IRS request to the Department of Justice (DOJ) for documentary
       information – including, but not limited to, a Financial Management Information Systems
       (FMIS) report, correspondence, memoranda, or external or internal emails – concerning
       DOJ’s settlement discussions with a taxpayer against whom the government had a non-
       tax cause of action is considered a third-party contact for purposes of I.R.C. § 7602(c).

       2. Whether the answer to the first question is any different if an IRS agent asks the
       DOJ attorney who handled and/or settled the government’s non-tax cause of action
       against the taxpayer a series of verbal questions about any of DOJ’s discussions with
       the taxpayer (or the taxpayer’s representatives) concerning the government’s assertion
       of penalties.

POSTN-102315-20 2

CONCLUSIONS

1. Generally, IRS contacts with non-IRS federal, state, local, or foreign government
   agencies or their employees are not considered third-party contacts, under Treas. Reg.
   § 301.7602-2(f)(5). An exception to this general rule exists if the IRS contact with
   another government agency concerns that other government agency’s business (such
   as a taxpayer contract with or employment by the other agency) with the taxpayer. So
   long as the subject matter of the government’s cause of action is not the taxpayer’s
   employment by or contract with DOJ, the exception to the general rule does not apply,
   meaning third-party contact procedures would not apply to the contact.

2. No. The general exception that IRS contacts with a non-IRS government employee
   are not considered third-party contacts applies equally to IRS verbal discussions with
   the non-IRS government employee as to a formal request for documentary information.
   The very limited, in context, exception to this general rule for when the subject matter of
   the government’s cause of action concerned the taxpayer’s employment by or business
   contract with the DOJ here, would also be applied the same way.

FACTS

Generally, under I.R.C. § 162(f), a taxpayer may not deduct from taxable income any
amount paid or incurred (whether by suit, agreement, or otherwise) to, or at the direction
of, a government or governmental entity in relation to the violation of any law or the
investigation or inquiry by such government or governmental entity into the potential
violation of any law. To evaluate whether or not a government settlement with a
taxpayer involved non-deductible penalties, the IRS may review the government’s
underlying cause of action, the documents filed in a lawsuit (if one was filed), and the
discussions surrounding the settlement agreement. In many instances, the IRS requests
information about these matters from DOJ, which generally represents U.S. government
agencies in litigation and in matters referred by such agencies for litigation.

The questions above arise in the context of the IRS’s requests for information from the
DOJ about the government’s non-tax lawsuit or cause of action against a taxpayer. An
IRS agent might contact a DOJ attorney with knowledge of the case and request a DOJ-
generated FMIS audit report and/or other information about the manner in which DOJ
handled and/or settled the lawsuit or cause of action with the taxpayer.

The IRS is ordinarily required to inform a taxpayer that IRS employees intend to contact
third parties as part of an examination or collection proceeding under I.R.C. § 7602(c)
and Treas. Reg. § 301.7602-2. You requested our advice on whether the IRS’s requests
for information from the DOJ—whether for documentary information or verbal
discussions with the DOJ—regarding the government’s settlement with a taxpayer of a
non-tax cause of action are considered third-party contacts for which I.R.C. § 7602(c)’s
advance notice and post-contact reporting rules apply.
POSTN-102315-20 3

LAW AND ANALYSIS

Background on Third-Party Contact Rules

The scenarios above are governed by the third-party contact provisions found in I.R.C.
§ 7602(c) and Treas. Reg. § 301.7602-2. Third-party contact rules provide that when an
IRS employee intends to contact third parties with respect to the determination or
collection of the tax liability of a taxpayer, the IRS is generally required to provide
advance notice to the taxpayer of the IRS employee’s intent to make such third-party
contacts. I.R.C. § 7602(c)(1). A “third party contact” is generally defined as any
communication which (1) is initiated by an IRS employee; (2) is made to a person other
than the taxpayer; (3) is made with respect to the determination or collection of the tax
liability of such taxpayer; (4) discloses the identity of the taxpayer being investigated;
and (5) discloses the association of the IRS employee with the IRS. Treas. Reg.
§ 301.7602–2(b).

History and Purpose of I.R.C. § 7602(c)

When third-party contact provisions were first added to the Code, Congress intended to
strike a balance between the competing interests of a taxpayer in its reputation, of third
parties in their privacy, and of the IRS in its responsibilities to administer the internal
revenue laws effectively. Congress struck this balance in the IRS Restructuring and
Reform Act of 1998 (RRA 98), by requiring the IRS to provide taxpayers with a “general
notice” that provided “reasonable” advance notice to the taxpayer that contacts with
persons other than the taxpayer “may be” made, and by providing various exceptions to
IRS pre-contact notice or post-contact reporting.

The preamble to Prop. Treas. Reg. § 301.7602-2, 66 Fed. Reg. 77-78 (Jan. 2, 2001)
(hereinafter NPRM (Notice of Proposed Rulemaking)) describes this balancing
approach with which the IRS interprets and administers I.R.C. § 7602(c):

   The provision as enacted and the particular changes made by the
   Conference Committee to the Senate proposal support an
   interpretative approach that balances taxpayers' business and
   reputational interests, articulated as the principal impetus for the
   Senate proposal, with third parties' privacy interests and the IRS'
   responsibility to administer the internal revenue laws effectively.

The preamble to the final regulations adopted this approach without change. In pertinent
part, it provides:

   [T]he final regulations balance a taxpayer's business and
   reputational interests with third parties' privacy interests and the

POSTN-102315-20 4

    IRS' responsibility to administer the internal revenue laws
    effectively.

The Taxpayer First Act of 2019 Amendment to I.R.C. § 7602(c)

Under the Taxpayer First Act of 2019, P.L.116-25, Congress struck the word
“reasonable” before “notice,” and instead set forth the specific characteristics of
advance notice that it thought would be sufficient for its balanced purposes. The new
elements of advance notice are that the IRS:

•   actually intend (not “may”) to contact third parties;
•   notify the taxpayer of this intention;
•   generally notify a taxpayer at least 45 days before it contacts a third party; and
•   tell the taxpayer the time period in which it intends to make the contact and the
     period may not be more than one year, subject to renewal.

Importantly, the Taxpayer First Act did not change what the IRS considers to be a third-
party contact.

Issue 1. IRS Documentary Evidence Request to Non-IRS Governmental Entity

The Governmental Entities Exception

Although I.R.C. § 7602(c) notice rules generally apply to IRS contacts with any “person
other than the taxpayer,” and the statute contains no explicit exception for contacts with
governmental entities, Treas. Reg. § 301.7602-2(f)(5) specifically carves out a
governmental entities exception. The regulation provides that “Section 7602(c) does not
apply to any contact with any office of any local, state, Federal or foreign governmental
entity” and that “[t]he term office includes any agent or contractor of the office acting in
such capacity.” Treas. Reg. § 301.7602-2(f)(5).

Looking at the legislative history of RRA 98, it appears Congress did not intend to
require notice to taxpayers for government contacts because those contacts do not
implicate the concerns that underlie the statute’s enactment. The NPRM specifically
points to the 1998 Senate Finance Committee Report on RRA 98, which states
“[c]ontacts with the government officials relating to matters such as the location of
assets or the taxpayer’s current address are not restricted by this provision.” S. Rep.
No. 105-174, at 77 (1998). As the NPRM explains, “[t]his report language suggests that
Congress did not generally consider government contacts to implicate taxpayer
business and reputational interests to the same degree as other types of third-party
contacts.”

Generally not requiring notice for government contacts is consistent with striking the
balance between the taxpayer’s reputation, third parties’ privacy, and the IRS’s
POSTN-102315-20 5

enforcement of the law. Indeed, the NPRM explains that “[i]n determining and collecting
taxes, IRS employees often contact other government entities” and among the list of
non-IRS governmental entities the IRS employees may need to confer with are “[DOJ]
employees, and other federal government employees with respect to the determination
or collection of a taxpayer's liability.” The NPRM further explains that notice for
government contacts is generally unnecessary because they are less likely “to affect
taxpayers' reputations among persons with whom taxpayers have business
relationships” and because government officials have “duties not to disclose IRS
contacts to the general public.” Moreover, the NPRM continues, the “administrative
burden on the IRS of maintaining and providing to taxpayers records of government
contacts would be substantial because of the high volume of government contacts,” and
requiring notice “could delay and otherwise impair administration of the tax laws.”

In balancing taxpayer-friendly provisions with IRS responsibilities to continue to
administer the internal revenue laws effectively, the Treasury Department and the IRS
determined that government contacts are generally not third-party contacts as defined in
§ 301.7602–2(b) and are generally not subject to I.R.C. § 7602(c) procedures for
advance notice or post-contact reporting of contacts with third parties.

The Exception to the Governmental Entities Rule

An exception to this general rule exists if the IRS contact with another government
agency concerns that other government agency’s business relationship with the
taxpayer. Treas. Reg. § 301.7602-2(f)(5) carves out this narrow exception to the types
of government contacts not subject to application of I.R.C. § 7602(c) for “contacts
concerning the taxpayer’s business with the government office contacted, such as the
taxpayer’s contracts with or employment by the office.”

The NPRM explains this “exception to the exception,” noting there might be limited
instances when a government unit contact by the IRS could impact a taxpayers'
business and reputational interests with the contacted government unit when the
taxpayer and the government unit have a business relationship. The NPRM states that
“[s]ome government contacts, however, may affect taxpayers' business relationships
with the government and so will be treated as subject to the statute. The proposed
regulations recognize taxpayers' interest in their business relations with governmental
entities by providing that contacts concerning a taxpayer's conduct of business with the
particular government office contacted will be subject to the statute.”

Here, in the case of an IRS request to DOJ for documentary evidence from the
government’s non-tax lawsuit against a taxpayer, an IRS employee’s request to a DOJ
attorney for documentary information (such as a FMIS report) on a taxpayer who
violated a federal law is a contact with a governmental entity within the meaning of
Treas. Reg. § 301.7602-2(f)(5). As such, it is not a third-party contact for purposes of
I.R.C. § 7602(c), so long as the government’s cause of action against the taxpayer was
not based on the taxpayer’s employment by or contract with DOJ.
POSTN-102315-20 6

Issue 2. IRS Verbal Discussions Request to Non-IRS Governmental Entity

The general exception that IRS contacts with a non-IRS government employee are not
considered third-party contacts applies equally to IRS verbal discussions with the non-
IRS government employee as to a formal request for documentary information. The
limited, in context, exception to this general rule for when the subject matter of the
government’s cause of action concerned the taxpayer’s employment by or business
contract with the DOJ here, would also be applied the same way.

Therefore, if an IRS employee discusses with a DOJ attorney the manner in which DOJ
handled or settled a lawsuit on behalf of the United States with a taxpayer who allegedly
violated a non-tax federal law, the discussion would not qualify for the contract or
employment relationship exception to the general government contacts exception in
Treas. Reg. § 301.7602-2(f)(5), and is not a third-party contact for purposes of I.R.C.
§ 7602(c), so long as the government’s cause of action against a taxpayer is not based
on the taxpayer’s employment by or contract with DOJ.

The presence or absence of a verbal discussion could be relevant to whether another
type of IRS interaction is considered a third-party contact, however. An IRS employee’s
use of a commercial (or government) online research service or Internet website to
obtain information relevant to an IRS investigation of the taxpayer is not a third-party
contact because there is no contact with a “person” other than the taxpayer. See Treas.
Reg. §§ 301.7602-2(c)(2)(i)(B) and (c)(2)(ii)-Example 3. The general exception to third-
party contacts for IRS contacts with other government agencies or their employees is
separate from the exception for commercial (or government) online research services or
Internet research.

Please call (202) 317-3400 if you have any further questions.

                                   _____________________________
                                   William V. Spatz
                                   Senior Counsel, Branch 6
                                   (Procedure & Administration)