Outrageous Outsourcing: Senator Hatch Questions IRS Collusion with Law Firm

Today, Senate Finance Committee Chairman Orrin Hatch (R-UT) called on the IRS Commissioner to explain the details of a sordid matter that “call(s) into question the integrity of the agency’s examination process.”

At issue is a reported $2.2 million IRS contract with the law firm Quinn Emanuel to continue a truly onerous examination process in a near-decade-long federal tax dispute involving Microsoft. Tax litigation experts call this move unprecedented on several levels.

The expense is one thing, but the more frightening issue is that the IRS broke protocol in allowing a private entity to take over duties Congress specifically restricts to the IRS to protect taxpayer information.

While reducing expense in the federal bureaucracy through private contracting very often serves Americans well; the IRS has a history of turning beneficial qualities like transparency and accountability on their heads.

So it’s sadly no surprise to see the tax agency attempt a costly scheme that is not only breaking taxpayers’ backs but could very well be breaking the law.

Here’s the story:

  • Quinn Emanuel is a litigation specialty firm, with virtually no deep experience in tax matters. No wonder a House Ways and Means Committee report speculated whether giving this kind of firm the work was to “interrogate Microsoft employees” rather than provide a meaningful perspective the IRS lacked.
  • Quinn Emanuel’s attorneys command as much as $1,000 per hour, making the optics of the contract more than a little ridiculous as the IRS’s defenders paint a rather misleading picture of the agency’s finances. NTU noted as much on these pages just a few weeks ago.
  • Furthermore, the tax law and enforcement litigation workload at the IRS’s own Chief Counsel’s Office has not suddenly increased during the litigation of Microsoft, thereby depriving the government of internal staff. Cases received and closed have hovered at to slightly above 70,000 each year in this area for a decade.
  • In previous matters the IRS has only enlisted private firms in tax cases for very narrow advisory matters such as expert witnesses or economists. That’s because the law draws a very clear line on how far the IRS can go. Subsections of the Internal Revenue Code under sections 6103, 6201, 7601, 7602, and 7701, stipulate, among other things, that only officers and employees of the Treasury can conduct examinations of taxpayer records, take sworn testimony, and only disclose taxpayer data under limited circumstances.
  • How did the IRS get away with this? Like an overbearing sheriff eager to justify his acts by handing out tin stars to a posse, the agency enacted a “temporary regulation” (without notice or a comment period) expanding its authority to hire Quinn Emanuel.

NTU and its allies have spent the better part of three decades struggling to enact vital taxpayer safeguards against IRS abuse, many of which involve protecting privacy, enhancing data security, avoiding incentives for harsh enforcement and collection tactics, and above all providing consistent oversight from Congress. This contract and the controversy surrounding it could endanger all of these important goals.

Enlisting private sector expertise has worked, and can work in our federal tax system. One success story has been the Oversight Board created by the IRS Restructuring and Reform Act of 1998, which has brought individuals with real-world industry experience into discussions over the tax agency’s toughest operational challenges. Unfortunately, IRS leaders seem to need a refresher course about the right and wrong way to outsource.

Enter Chairman Hatch, whose eloquent 3-page letter to IRS Commissioner Koskinen methodically demonstrates the problems with the IRS’s extra-legal approach and calls on the agency to desist. He notes:

The IRS’s hiring of a private contractor to conduct an examination of a taxpayer raises concerns because the action: 1) appears to violate federal law and the express will of the Congress; 2) removes taxpayer protections by allowing the performance of inherently government functions by private contractors; and 3) calls into question the IRS’s use of its limited resources.

Chairman Hatch is right on target in asking the Commissioner to “immediately halt the use of private contractors” in this manner and answer the Committee’s inquiries. If the IRS hems and haws, Congress should legislate to put an end to this odious practice before it spreads.

Microsoft is just one of several tech firms that the IRS has hounded with unreasonable, near-interminable “requests” for information on their tax-related business decisions, so this case has implications for many taxpayers. This is precisely the kind of administrative mischief that could infect the IRS’s entire institutional culture with yet another strain of win-at-all-costs disease. And the symptoms of that malady can show up in the audits, collection processes, Tax Court cases, and administrative rulings affecting everyday taxpayers.

The tax agency’s leaders have recently been spinning a sad tale of woe about bare-bones budgets and pruned powers of enforcement (both dubious claims), as they no doubt wonder why, oh why, the public can’t trust them again and just get over the Lois Lerner scandal. For those seeking an answer, re-read the past 14 paragraphs.