In what appears to be an unprecedented and illegal action, the Internal Revenue Service (IRS) has apparently for the first time hired a law firm to assist in the income tax audit and investigation of a taxpayer. In a May 13, 2015 letter to IRS Commissioner John Koskinen, Senate Finance Committee Chairman Orrin Hatch (R-Utah) pointed out several provisions of the Internal Revenue Code that specifically limit “the performance of certain revenue functions, such as examinations and sworn testimony, to the [Treasury] Secretary and limited delegates.” In other words, these inherently governmental functions cannot be carried out by anyone other than a Treasury Department or IRS employee. If the IRS wishes to use private contractors for any purpose, it may do so only pursuant to an act of Congress, such as the 2004 law that allows the agency to use private debt collectors for delinquent taxes.

Sen. Hatch questioned the cost of the $2.2 million contract, which permits the law firm, Quinn Emanuel Urquhart and Sullivan, to charge up to $1,000 per hour to take testimony under oath and obtain confidential taxpayer information in connection with an IRS audit. His letter noted that to the best of the Finance Committee’s knowledge, this was the first time such revenue functions and information sharing had been outsourced. In keeping with highly questionable “sub-regulatory” actions taken by other agencies during the first six years of the Obama administration, the authorization for the contract was provided in a temporary regulation issued as a “clarification” to the Internal Revenue Code – several weeks after it was signed by the IRS and the law firm.
As Sen. Hatch observed, Treasury Department personal must swear an oath to the Constitution and follow the rules and regulations that govern interactions with taxpayers. Those are among the reasons why Congress limits certain functions for examinations solely to IRS auditors. Private contractors have no such restrictions in conducting these same activities.

In addition to its highly questionable constitutionality, the arrangement is also galling to taxpayers after the IRS cried poverty when it came to providing even the most rudimentary tax filing assistance leading up to April 15. As Sen. Hatch’s letter noted, the IRS has more than 36,000 employees involved in exams and collections. Certainly a few of those individuals could conduct the examination of the taxpayer without any assistance, as the agency has done until now.

If action is not taken by Congress or in court to immediately squelch this shady deal, the door will be open to future arbitrary and capricious “clarifications” and “temporary regulations” to hire a litigation law firm or any other private contractor to help the IRS go after any taxpayer at any time. It is never pleasant to face an IRS employee during a tax examination, but at least there are boundaries to his or her statutory duties. It is even more intimidating to be face to face with a $1,000 an hour litigator from a law firm that has been called “a global force in business litigation” and claims to have won nine judgments of $100 million or more. And while there is no reason that the IRS should have signed a contract with any law firm in the first place, at least the agency could have picked one that listed "taxes" as one of its 32 practice areas.

If this contract is allowed to stand, it sets a frightening precedent for future audits of all taxpayers.  It will be interesting see how the IRS responds to Sen. Hatch's request for a briefing on this matter as well as his demand that the agency immediately cease from using private contractors to examine records and take sworn testimony.