Treasury Regulation § 301.7602-1 and Nongovernment Contractors

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Treasury Regulation § 301.7602-1 and Nongovernment Contractors

The IRS and Treasury Department issued a new and finalized version of Treasury Regulation § 301.7602-1. The regulations took effect on September 7, 2021, and shine a new light on nongovernment contractors’ participation in IRS audits and other proceedings. Specifically, these regulations dictate new rules regarding the persons who may be provided books, papers, records, or other data obtained pursuant to section 7602 of the Internal Revenue Code (Code) for the sole purpose of providing expert evaluation and assistance to the IRS. Moreover, these regulations adopt further limitations on the types of non-governmental attorneys to whom, under the authority of section 6103(n) of the Code, any books, papers, records, or other data obtained pursuant to section 7602 may be provided. These final regulations also prohibit any IRS contractors from asking substantive questions of a summoned witness under oath or asking a summoned person’s representative to clarify an objection or assertion of privilege. The regulations affect persons who are examined by the IRS and any persons who are questioned by the IRS under oath pursuant to section 7602.

The prior version of Reg. § 301.7602-1 allowed persons authorized to receive returns or return information under I.R.C. § 6103(n) to receive and review books, papers, records, or other data. I.R.C. § 6103(n) allows returns and return information to “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.” I.R.C. § 7513(a) allows “any Federal agency or any person to 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.”

However, the current version of § 301.7602-1 states that the Secretary may NOT under § 6103(n) provide any books, papers, records, or other data obtained pursuant to § 7602 to any person authorized under § 6103(n), except when such person requires such information for the sole purpose of providing expert evaluation and assistance to the IRS.

These final regulations mandate compliance with additional rules. For instance, § 301.7602-1(b)(3) states that the “IRS may not hire an attorney as a contractor to assist in an examination under section 7602 unless the attorney is hired by the IRS as a specialist in foreign, state, or local law (including foreign, state, or local tax law), or in non-tax substantive law that is relevant to an issue in the examination, such as patent law, property law, or environmental law, or is hired for knowledge, skills, or abilities other than providing legal services as an attorney.” Moreover, “[n]o person other than an officer or employee of the IRS or its Office of Chief Counsel may, on behalf of the Secretary, question a witness under oath whose testimony was obtained pursuant to section 7602.” Persons authorized by I.R.C. § 6103(n) may continue to attend a summons interview and aid the IRS or Office of Chief Counsel employees in attendance but are no longer allowed to question the summoned witness under oath or ask a summoned person’s representative to clarify an objection or assertion of privilege. See Treas. Regs. § 301.7602-1(b)(3).

These changes are significant in terms of the IRS’s relationship with nongovernment contractors and may have the effect of decreasing the use of attorney contractors hired by the IRS.