During an IRS audit, one of the most serious grinds that a small or medium business can face is when the IRS decides that as part of an audit they are going to contact third parties – the taxpayers’ bank, suppliers, creditors and even customers. Joy. Now, a recent Ninth Circuit opinion breathes new life into a statute intended to provide taxpayer’s rights as to the IRS making third party contacts.
While the Congress years ago (thanks to one of my old bosses at the time – Senator Bond (R-MO) put into place protections for taxpayers from the IRS willy-nilly making third party contacts (26 U.S.C. 7602(c)). In short, 7602(c) provides that the IRS may not contact a third person in regards to an audit without first providing reasonable notice in advance to the taxpayer that contacts with a third person are going to be made. The intent of Senator Bond (and as originally implemented by the IRS) was that the taxpayer should have an opportunity to in good faith provide the IRS the information and eliminate the need for the IRS to contact a third party.
As the years have passed, the rights of taxpayers have deteriorated to the point that now all the IRS does is provide taxpayers a statement at the beginning of an audit (Publication 1 – Taxpayer Bill of Rights) that includes a passing comment that the IRS may contact third parties. Essentially gutting the intended protections of Section 7602(c).