On July 12, 2016, the Internal Revenue Service (IRS) finalized regulations allowing third-party contractors (i.e., outside economists, engineers, consultants and attorneys) to participate in audits of taxpayers. The regulations are not limited to allowing outside parties to review taxpayers’ books and records, but extend to the full participation in summons interviews. The final regulations replace proposed and temporary regulations issued in 2014.
The IRS’s position is highly controversial and several organizations submitted comments arguing against finalization of the regulations. Additionally, the IRS’s position was the subject of a dispute between Microsoft and the IRS relating to the IRS’s use of the law firm of Quinn Emmanuel in an audit of Microsoft’s transfer pricing. It appears highly likely that taxpayers will challenge the validity of the final regulations in court, and at some point a court will be required to decide the issue. In the wake of the final regulations, taxpayers that are currently under audit should consider requesting that the IRS provide a list of all third-parties, including outside contractors that are being consulted with during an examination. It is a good practice to request in writing a list of the third-parties that the IRS contacts during the course of an examination.