IRS Issues Proposed Regulations on Advance Notice of Third-Party Contacts

(Parker Tax Publishing April 2024)

The IRS issued proposed regulations relating to the notice that the IRS must provide to a taxpayer of IRS contact with a third party with respect to the determination or collection of the taxpayer's tax liability. The proposed regulations reflect amendments made to Code Sec. 7602(c) by the Taxpayer First Act of 2019 (Pub. L. 116-25). REG-117542-22.

Background

Under Code Sec. 7602(a), the IRS is authorized to examine books and records, issue summonses, and take testimony from witnesses for the purpose of ascertaining the correctness of any return, making a return in cases in which none has been made, or determining or collecting the liability of any person for any internal revenue tax. Code Sec. 7602(b) further provides that the purposes for which the IRS may examine books and records, issue summonses, and take testimony include the purpose of inquiring into any offense connected with the administration or enforcement of the internal revenue laws.

Prior to being amendment by the Taxpayer First Act of 2019 (TFA) (Pub. L. 116-25), Code Sec. 7602(c)(1) required that the IRS provide the taxpayer "reasonable notice in advance" before it contacted a third party with respect to the determination or collection of the tax liability of such taxpayer. Reg. Sec. 301.7602-2(d)(1) provides that the pre-contact notice may be given either orally or in writing. If notice is written, it may be given in any manner that the IRS employee who gives such notice reasonably believes will be received by the taxpayer prior to the contact with the third party. 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 actually received by the taxpayer. Reg. Sec. 301.7602-2(d)(2) provides that taxpayers need not be given pre-contact notice for contacts with third parties of which advance notice otherwise has been provided to the taxpayer pursuant to another statute, regulation, or administrative procedure.

Section 1206 of the TFA amended Code Sec. 7602(c)(1) to provide that IRS officers or employees may not contact a third party with respect to the determination or collection of the tax liability of a taxpayer unless the IRS first provides the taxpayer with advance notice meeting certain requirements. The notice must specify the period, not to exceed one year, during which the IRS intends to make the contact. The IRS must provide the notice to the taxpayer no later than 45 days before the beginning of such period, except as otherwise provided by the IRS. The IRS may issue multiple notices to the same taxpayer with respect to the same tax liability that, taken together, cover an aggregate period greater than one year. The IRS may not issue a notice under Code Sec. 7602(c) unless the IRS intends, at the time the notice is issued, to contact third parties during the period specified in that notice. The IRS may meet this intent requirement based on the assumption that the information sought to be obtained by the contact will not be obtained by other means before such contact. The TFA amendments apply to notices provided, and contacts made, after August 15, 2019.

Proposed Regulations

On March 21, the IRS issued proposed regulations (REG-117542-22) that update Reg. Sec. 301.7602-2(a) and (d) pertaining to the advance notice that must be provided to taxpayers prior to IRS contact with third parties to conform to the new statutory language of Code Sec. 7602(c).

Like existing Reg. Sec. 301.7602-2(a), Prop. Reg. Sec. 301.7602-2(a)(1) provides that, subject to the exceptions in existing Reg. Sec. 301.7602-2(f), 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 requirements of Code Sec. 7602(c) and Prop. Reg. Sec. 301.7602-2(d) have been satisfied. The exceptions in existing Reg. Sec. 301.7602- 2(f) implement the statutory exceptions set forth in Code Sec. 7602(c)(3) prior to, and unaffected by, the TFA.

In cases not covered by the exceptions in Code Sec. 7602(c)(3) and existing Reg. Sec. 301.7602-2(f), Prop. Reg. Sec. 301.7602-2(d)(1) implements the requirements of Code Sec. 7602(c)(1) as amended by the TFA 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 IRS provides advance notice to the taxpayer (third-party contact notice). The third-party contact notice must specify a period, not to exceed one year, during which the contact is intended to occur and inform the taxpayer that third-party contacts are intended to be made during such period. Prop. Reg. Sec. 301.7602-2(d)(1) further provides that the third-party contact notice must be in writing.

Prop. Reg. Sec. 301.7602-2(d)(1)(iii) implements the requirement of Code Sec. 7602(c)(1)(B) that the third-party contact notice generally must be provided to the taxpayer no later than 45 days before the beginning of the period in which the contact is intended to be made (45-day advance notice period). Prop. Reg. Sec. 301.7602-2(d)(2) further provides the methods by which the IRS will provide a third-party contact notice to the taxpayer, which are similar to the methods set forth in existing Reg. Sec. 301.7602-2(d)(1)(i) through (iv).

Prop. Reg. Sec. 301.7602-2(d)(3) provides, consistent with the second sentence of Code Sec. 7602(c)(1), that the IRS is not prevented from issuing successive notices to the same taxpayer with respect to the same tax liability for periods (each not greater than one year) that, in the aggregate, exceed one year. As provided in the third and fourth sentences of Code Sec. 7602(c)(1), Prop. Reg. Sec. 301.7602-2(d)(4) states that no third-party contact notice will be issued under Prop. Reg. Sec. 301.7602-2(d) unless there is an intent at the time such notice is issued to contact persons other than the taxpayer during the period specified in such notice, which intent may be met by the IRS on the basis of the assumption that the information sought to be obtained by the third-party contact will not be obtained by other means before such contact.

The proposed regulations also provide, under the IRS's authority in Code Sec. 7602(c)(1)(B), exceptions to the 45-day advance notice requirement. if delaying contact with third parties for 45 days after providing notice to the taxpayer would impair tax administration. In these situations, the 45-day advance notice period is reduced or eliminated to ensure sufficient time for the IRS to properly conduct certain time-sensitive examination or collection activities. In particular, exceptions to the 45-day notice requirement are provided in Prop. Reg. Sec. 301.7602-2(d)(5) with respect to (1) the IRS's fuel compliance program, under which fuel compliance officers and agents conduct field inspections authorized under Code Sec. 4083(d); (2) investigations related to nonjudicial foreclosure sale redemptions under Code Sec. 7425(d); and (3) in limited time-sensitive circumstances involving assessment or collection of tax in which the IRS the statutory assessment period will expire one year or less from the date the IRS intends to contact third parties.

For a discussion of the advance notice requirement for third-party contacts, see Parker Tax ¶263,110.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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