Hatch: IRS Use of Private Law Firm In Microsoft Case May Violate Federal Law

May 13 — The hiring of an outside law firm in a sharply contested audit of Microsoft’s transfer pricing “appears to violate federal law and the express will of the Congress,” Senate Finance Committee Chairman Orrin G. Hatch (R-Utah) said in a letter to IRS Commissioner John Koskinen.

Hatch, in his May 13 letter, asked Koskinen to immediately halt the use of Quinn Emanuel Urquhart & Sullivan LLP in its audit of the technology giant. He also demanded that the agency explain its decision and justification in hiring the law firm.

Microsoft already has asserted in court filings that the IRS acted illegally in enlisting the law firm’s assistance.

The company is seeking an evidentiary hearing in consolidated summons enforcement actions related to an audit of the company’s 2004 to 2006 tax years. The audit is focused on cost-sharing arrangements between the U.S. parent and affiliates in Bermuda and Puerto Rico.

Testimony Key Issue

In the letter, Hatch questioned the Internal Revenue Service’s decision and criticized the fact that IRS gave Quinn Emanuel attorneys the authority to conduct sworn interviews and perform other actions that would give them access to confidential taxpayer information.

The IRS has argued that it acted properly, under the authority of a temporary regulation that allows third-party contractors to take summoned testimony. The agency also has stated that the income at issue in the audit—$38.6 billion in intercompany royalties—and the complexity of the case account for its need for outside legal help.

In the letter, Hatch pointed out that the IRS issued the regulation just weeks after retaining the law firm, without a notice and comment period.

He said in its writing of the tax code—particularly Sections 6201, 7602, and 7701—Congress intentionally chose to restrict the performance of certain revenue functions, such as examinations and the taking of sworn testimony, to the Secretary of the Treasury and “limited delegates.”

Ask Congress, Hatch Says

Hatch said, “If the IRS believes it is necessary to expand the use of private contractors to question witnesses and assume other examination functions, the agency should consult with Congress and seek additional authorization.”

He demanded that the IRS act “without delay” to:

• brief Finance staff on the reasoning behind the temporary regulation and the procedure used to issue it;

• explain its “novel” readings of the tax code;

• detail the use of private contractors in examinations;

• tell the committee whether the agency intends to use private contractors to represent the IRS in litigation; and

• inform Finance whether the practice used in the Microsoft audit will be used against other taxpayers.