Related exam teams may share return information when tax duties require it

Plain-English summary

Chief Counsel advised that IRS examination teams may share third-party return information internally under section 6103(h)(1) when the receiving employees have a tax-administration need to know it. The standard is broad enough to cover information that is helpful or useful, but teams should avoid indiscriminate sharing, disclose identities only when necessary, and segregate and label shared files for later FOIA or discovery requests. An engineering memorandum created from one taxpayer's examination remains return information even after identifiers are removed, yet it may be shared with other exam teams that need its analysis. Section 6103(h)(4)(B) also permits disclosure to taxpayers and their authorized representatives during administrative tax proceedings when a third party's item directly relates to resolving an issue. On the stated facts, valuation information could be shared in the related examinations and with a representative in a valuation-penalty proceeding if that direct relationship existed.

Ruling snapshot

• Question: When may IRS employees share third-party return information across related examinations and disclose it to parties or representatives?
• Outcome: advice given
• Key authorities: IRC §§ 6103(b)(2), 6103(h)(1), 6103(h)(4)(B), 6695A; Church of Scientology; Monumental Life; Disclosure and Privacy Law Reference Guide

Full text (IRS public release)

 ID:       CCA_2022092817031050
 UILC:     6103.00-00, 6103.05-12,
           6103.08-00, 6103.08-04
Number: 202405005
Release Date: 2/2/2024
From: -----------------
Sent: Wednesday, September 28, 2022 5:03:10 PM
To: ------------------------
Cc: ------------------------
Bcc:
Subject: RE: Additional Disclosure Question


Hi Erin,

    1. The --------------------------------------may be shared internally for use in -------------
        -------------- and ------------------ examinations under section 6103(h)(1).
As discussed previously, the ----------------------------------- are ------------------------return
information, which would generally be confidential under section 6103(a). However, in
this context, the ----------------------exam team could disclose the information to their
colleagues for purpose of the ------------- and the ---------------- examinations. This is
because section 6103(h)(1) provides an exception to the general confidentiality rule,
allowing for the inspection and disclosure of tax returns and return information to
officers and employees of the Department of the Treasury where such inspection or
disclosure is necessary for tax administration purposes. This means Service and Chief
Counsel employees may have access to tax information if they have a “need to know”
the information for tax administration reasons. A need to know is not strict necessity,
but a situation where the information sought would be helpful/useful to the employee in
carrying out their official tax administration duties. “Tax administration” has a sweeping
definition. United States v. Mangan, 575 F.2d 32 (2nd Cir. 1978), cert denied, 439 U.S.
931 (1978); Tavery v. United States, 32 F.2d 1423 (10th Cir. 1994). The term expressly
includes the “assessment, collection, enforcement, litigation, publication, and statistical
gathering functions” under the internal revenue laws. IRC § 6103(b)(4)(B). And courts
have found that section 6103(h)(1) authorizes IRS employees involved in one
investigation to share third party taxpayer information with IRS employees on another,
related investigation. E.g., United States v. Monumental Life Ins. Co., 440 F.3d 729,
734 (6th Cir. 2006).

Here, providing ------------------------return information ---------------------to the exam teams
for ------------------and -------------------- would enable them to better accomplish their
official duty of determining the correct tax and/or penalties owed by the respective
examinees, because it would provide them with useful information that they are not
otherwise privy to. As such, the information may properly be shared among the exam
teams under section 6103(h)(1).
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Please remember that the establishment of a “need to know” should be done on a case
by case basis, and while the standard for sharing is considered broad, care must be
taken to avoid disclosing the identity of a third-party taxpayer unless it’s necessary, in
order to further the spirit of the “need to know” exception. See IRM 13.3.22.2.1 (4)-
(5). For what it’s worth, it does appear that the exam teams here would need to know
the identity of ---------------------. However, we caution that you should avoid sharing
information indiscriminately. If an exam file for ----------------------covers numerous
issues, only documents pertaining to the issue relevant to the ------------ and the -----------
--------------- should be disclosed to the employees working those cases. This doesn’t
mean you need to go through case files with a fine-tooth comb, but to the extent that
there’s an easily identifiable demarcation of where the relevant information is located –
i.e. a subheading – then only provide the documents in that section.

Also, whatever information is shared from ----------------------to the other case teams
should be segregated and labelled. In other words, the shared documents should be
kept separately from the other files in Case 2 and not intermixed. The segregated file
should also be clearly labelled as ------------------------return information. This will
become relevant when FOIA or discovery requests are made and having the files
segregated will make appropriate responses much easier and another reason why we
caution against indiscriminate sharing of large case files – not only are you obligated by
statute to not share that which your fellow employee does not have a “need to know,”
but also minimizing the volume of information shared makes for less work when FOIA
and discovery requests later come in.

     2. The engineer memo describing general deficiencies in -----------------
         conducted by -------------------may be shared internally under section
         6103(h)(1).
We understand that engineers will not be assigned to -------------- audits. However, an
engineering manager has offered to provide one memo that will explain why ---------------
------------ uses a flawed method and why the deficiencies in ----- -------------- make them
insufficient to allow an alternate valuation determination in -------------------- cases. The
memo would then be provided to all the agents.

It appears that this memorandum would be generated by the IRS with respect to ---------
---------------tax liability, making it the return information of -----------------, even though ----
---------------identifiers are removed. See IRC section 6103(b)(2) (defining “return
information” to include “any other data . . . prepared by . . . the Secretary with respect to
a return or with respect to the determination of the existence, or possible existence, of
liability (or the amount thereof) of any person under this title for any tax, penalty,
interest, fine, forfeiture, or other imposition, or offense”); Church of Scientology of Cal. v.
IRS, 484 U.S. 9, 14-18 (1987) (return information from which identifiers have been
deleted is still subject to section 6103 disclosure restrictions). As described above,
return information may be disclosed among the IRS exam teams where the recipients
have a “need to know” the information for tax administration reasons. It would be useful
for the agents in ------------------- audits to rely on the shared memo and piggyback upon
the reasoning and explanations within it in order to justify adjustments proposed in their
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respective examinations. Because it would be useful to the agents in carrying out their
tax administration duties, the memo may be shared with them under section 6103(h)(1).

    3. The ------------------------------------- may be shared with the ---------------- -------------
        -------------- and their POAs under section 6103(h)(4)(B).
The IRS may disclose returns or return information in a Federal or State judicial or
administrative proceeding pertaining to tax administration under certain conditions. IRC
§ 6103(h)(4). One such condition arises where the treatment of an item on a third
party’s return is directly related to the resolution of an issue in the tax proceeding. IRC
§ 6103(h)(4)(B). It is Chief Counsel’s position that an item directly relates to the
resolution of an issue in the tax proceeding if “the item on the third party’s return or
return information directly relates to the elements for defending or proving the civil
cause of action or crime at issue in the tax proceeding.” Disclosure and Privacy Law
Reference Guide at 3-14. Audits are “administrative tax proceedings” under section
6103(h)(4). See First W. Gov’t Sec, Inc. v. United States, 578 F. Supp. 212, 217-18 (D.
Colo. 1984), aff'd, 796 F.2d 356 (10th Cir. 1986); Nevins v. United States, No. 84-4147,
1987 WL 47316, at *3 (D. Kan. Aug. 26, 1987). A disclosure in a proceeding includes,
among other things, disclosure to the parties and their duly authorized representatives
in the proceeding. Disclosure and Privacy Law Reference Guide at 3-12. Accordingly,
the ------------------------------------may be disclosed to -------------------- and their POAs if
they directly relate to the elements for defending or proving an issue in the respective
examinations of --------------------.

Based on my understanding of the facts here, the --------------------------------------------------
----------------------------------------------------------------------------------------------support the IRS’s
determination of the correct valuation of -------------------at issue in the ----------------
examinations. By using the --------------to show the true value of ------------------ at issue,
the IRS can prove that -----------------------------claimed by -------------------- were inflated,
and adjustments to --------------------- returns are appropriate. Since the correct amount
of the -----------------------------is an issue in --------------------- audits, and the -------------------
-------------------------are directly related to the resolution of that issue, the --------------can
be disclosed in the proceeding, including to the parties to the proceeding (------------------
---------------/POAs), under section 6103(h)(4)(B).

     4. The --------------------------------------may be shared with ----------------------------------
         POA under section 6103(h)(4)(B).
As above, the information in the ------------------------------------shows the true value of the -
------------- at issue, which helps the IRS prove that ------------------misstated the valuation
of ------------------------------ in ----- --------------. We understand an element of supporting
the section 6695A penalties asserted against ------------------is proving the valuation was
misstated. If our understanding is correct, then the ------------------------------------are
directly related to the resolution of issues in ------------------audit, because they directly
relate to the resolution of that issue. Accordingly, the --------------can be shared with -----
------------/POA, who is a party to the proceeding, under section 6103(h)(4)(B).
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Please let me know if you would still like to discuss further. -------------------------------------
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--------I will let you know in the morning.

Thanks,

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