Microsoft Corp. has recently challenged the enforcement of IRS summons regarding some of its international tax planning, arguing that the IRS has flouted the law by allowing Quinn Emanuel Urquhart & Sullivan to participate in an audit of the company. The dispute raises many fundamental questions that a district court has been asked to answer. U.S. v. Microsoft (W.D. Wash.) (No. 2:15-cv-00102).
The court will first have to address whether the IRS has improperly outsourced an essential governmental function. It’s one thing to hire a private firm to provide assistance in, for example, valuing some taxpayer property, but it’s quite another to hire a private firm to actually audit a taxpayer. There was significant public uproar when the IRS temporarily hired third parties to assist with tax debt collection, and the involvement of a third parties in actual audits raises potentially greater concerns.
The IRS also has not done itself any favors by issuing a so-called “fighting” regulation. About a month after retaining Quinn Emanuel, the IRS hastily issued a regulation that purportedly permits private parties to help with tax audits. One would have thought that the notice-and-comment process would be especially important for such a sensitive topic, but the IRS maintains, as it usually does, that it is special and it need not comply with the democratic safeguards that every other federal agency observes. Thus, the IRS did not let the public comment on the regulations prior to their taking effect, and the district court may address whether the IRS can issue rules this way.
Aside from the administrative law issues, the use of Quinn Emanuel raises interesting questions over whether government attorneys need help from private law firms to do their job. The pages of a leading tax journal reflect debate over this, with one practitioner arguing that Microsoft is a highly unique case and that Quinn Emanuel can offer a valuable perspective. But a former government employee argues that the use of the outside law firm, along with the payment of high billable hour rates, reflects an insult to capable government litigators. It does seem odd that IRS attorneys may scramble to find office supplies while the agency is paying up to $1,000 an hour for outside help. And if government attorneys simply aren’t capable of handling a big-ticket case on their own, that seems like a clear signal that the government’s litigating arms should be better funded and supported.
Although the Microsoft case relates to a tax dispute, companies in any regulated industry may find the government supplementing its legal team with outside counsel. The Microsoft dispute could help define the appropriate scope of that outside involvement, and this makes the case well worth watching.
By Andy Grewal