IRS Proposes to Amend Rules for Providing Advance Notice of Third-Party Contacts

The IRS has proposed updating the rules for providing taxpayers with advance notice of third-party contacts to conform to the requirements of the Taxpayer First Act of 2019 (PL 116-25). (Preamble to Prop Reg REG-117542-22)

Examinations of books and records.

Under federal tax law, the IRS generally may examine a taxpayer’s books and records, issue summonses, and take testimony under oath for any reason that may be “relevant or material” or when “inquiring into any offense connected with the administration or enforcement of the internal revenue laws.” The IRS is authorized to examine a taxpayer’s books and records that are kept by a third party.

Current Regulations.

Under the current regs (TD 9028) before contacting a third party about a taxpayer’s books and records, the IRS must provide notice of such contact to the taxpayer. The current rules allow the IRS to give such notice orally or in writing in manner that the IRS employee sending the notice reasonably believes will get to the taxpayer before any third-party contact is made. Written notice is considered reasonable if it is mailed to the taxpayer’s last known address, given in person, left at the taxpayer’s dwelling or usual place of business, or otherwise received by the taxpayer.

Taxpayer First Act.

The TFA amended the law to provide that IRS employees may not contact a third party to obtain information about a taxpayer’s tax liability or collection of that tax liability unless the notice:

• Specifies the period, not to exceed one year, during with the IRS intends to make the contact,
• Is provided to the taxpayer at least 45-days before the beginning of such period, subject to exceptions provided in the regulations.

Under the TFA amendments, the IRS may not issue a third-party notice unless the IRS intends to contact third parties during the period specified in the notice. The IRS may meet this intent requirement based on the assumption that the information sought from the contact will not be obtained by other means before such contact. The TFA amendments apply to notices provided, and third-party contacts made, after August 15, 2019.

Proposed amendments to the rules.

The proposed regs would keep the rule that  IRS officers or employees may not contact third parties with respect to the determination or collection of the tax liability of a taxpayer unless the advance notice requirements have been satisfied. (Prop Reg §301.7602-2(a)(1))

The proposed regs would also provide exceptions to the 45-day advance notice requirement in certain circumstances. In particular, the 45-day advance notice requirement would be amended with respect to the IRS’s fuel compliance program, nonjudicial redemption investigations, and in limited time-sensitive circumstances involving assessment or collection of tax. (Prop Reg §301.7602-2(d)(5))

For more information about the rules governing the IRS’ contacting third parties for information about a taxpayer, see Checkpoint’s Federal Tax Coordinator ¶ T-1139.1.