05.21.2015 1

Letters of marque and reprisal granted by IRS


By Nathan Mehrens

In the wake of the IRS scandals involving the targeting of Tea Party and other conservative organizations and leaks of their legally-protected information, one would have thought that the agency would become a little more careful in how it handles its review and enforcement activities.

That didn’t happen.

Last year, the IRS quietly promulgated a new, temporary regulation that allows it to give part of its review and enforcement powers to outside entities, such as law firms. These “contractors are permitted to participate fully in a summons interview. Full participation includes, but is not limited to, receipt, review, and use of summoned books, papers, records, or other data, being present during summons interviews, questioning the person providing testimony under oath, and asking a summoned person’s representative to clarify an objection or an assertion of privilege.”

Since it is generally illegal under the Internal Revenue Code (IRC) for the IRS to share taxpayer information with anyone, how did they manage to do this? They got creative.

Some exceptions to the IRC’s general rule are in place to allow the IRS to perform its work. Here, the IRS has shoehorned one of those exceptions in a way that effectively eviscerates the intent and plain meaning of the exception.

The IRC generally prohibits the disclosure of return or return information at IRC § 6103(a).

The terms “return and return information” are defined by the IRC to include just about every kind of financial information of a taxpayer, their tax status, and whether the IRS is looking at their tax returns at IRC § 6103(b)(2).

Disclosure of tax return or return information is a felony punishable by five years in prison and a $5,000 fine at IRC § 7213(a)(1).

One of the exceptions to the general rule was created to allow the IRS to have contracted personnel work on things like the physical equipment that handles tax returns. This allows a copy repair company to do things like fix a broken copier and remove a paper jam from a copier without a felony occurring.

The exception states as follows at IRC § 6103(n). :

Certain other persons. Pursuant to regulations prescribed by the Secretary, returns and return information may be disclosed to any person, including any person described in section 7513(a), to the extent necessary in connection with the processing, storage, transmission, and reproduction of such returns and return information, the programming, maintenance, repair, testing, and procurement of equipment, and the providing of other services, for purposes of tax administration.

The “any person described in section 7513(a)” relates to persons contracted to handle the processing of documents. This section states at IRC § 7513(a):

  • 7513. Reproduction of returns and other documents.

(a) In general. The Secretary is authorized to have any Federal agency or any person process films or other photoimpressions of any return, document, or other matter, and make reproductions from films or photoimpressions of any return, document or other matter.

Taken together, IRC §§ 6103(n) and 7513(a) clearly refer to contractors who perform necessary handling, copying, and storage tasks with the tax returns after they are filed, nothing more. Unfortunately, Congress when it drafted IRC § 6103(n) included this phrase at the end, “and the providing of other services, for purposes of tax administration.”

The term “tax administration” is defined by IRC § 6103(b)(4)(B) to include, among other things, “assessment, collection, enforcement, litigation, publication, and statistical gathering functions under such laws [‘internal revenue laws or related statutes (or equivalent laws and statutes of a State’)], statutes, or conventions.” (Emphasis added.)

This last phrase operates as a catch-all that if read incorrectly creates an exception that swallows the rule. The best way to read this phrase “for purposes of tax administration” is that it means the limited list of services must be done for the purpose of tax administration, not that any activities related to tax administration may be contracted out. The latter interpretation is the one that the IRS has chosen to adopt, although from the regulation you wouldn’t know because there is no discussion at all regarding whether they are interpreting the section correctly.

Congress is partially to blame for passing a statutory section, that while purporting to protect taxpayer’s private information from disclosure, actually contains unhelpful language that arguably authorizes the conduct at issue here.

By adopting a broad interpretation of its powers, the IRS has essentially given itself the power to grant letters of marque and reprisal to private law firms. Microsoft appears to be one of the first targets for such firms.

Law enforcement activities should only be handled by Executive Branch officials operating under officials who are subject to political accountability. What the IRS has done in the last few years to organizations based on their ideology was bad enough. The situation will only get worse if an additional layer is inserted; and the IRS can, with a wink, blame the contractor when additional problems occur.

Ironically, this contracting out of enforcement activities has occurred during a time when the Obama Administration has pushed to insource everything it can. It also occurs at a time when the IRS is crying that it is underfunded. Perhaps, if it didn’t hire expensive law firms, the IRS could better manage its budget.

The IRS should scrap any plans to make its temporary regulation permanent.

Additionally, at a minimum, statutory provisions like the one discussed above should be cleaned up by Congress so that exceptions are just that, exceptions, and don’t swallow the entire rule.

Nathan Mehrens is President of Americans for Limited Government Foundation.

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