[Federal Register Volume 66, Number 1 (Tuesday, January 2, 2001)]
[Proposed Rules]
[Pages 77-84]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-32479]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[REG-104906-99]
RIN 1545-AX04


Third Party Contacts

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations providing guidance 
on third-party contacts made with respect to the determination or 
collection of tax liabilities. The proposed regulations reflect changes 
to section 7602 of the Internal Revenue Code made by section 3417 of 
the Internal Revenue Service Restructuring and Reform Act of 1998. The 
proposed regulations potentially affect all taxpayers whose Federal tax 
liabilities are being determined or collected by the IRS.

DATES: Written and electronic comments and requests for a public 
hearing must be received on or before April 2, 2001.

ADDRESSES: Send submission to: CC:M&SP:RU (REG-104906-99), room 5226, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. Submissions may be hand delivered Monday through Friday 
between the hours of 8 a.m. and 5 p.m. to: CC:M&SP:RU (REG-104906-99), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, 
NW., Washington, DC. Alternatively, taxpayers may submit comments 
electronically via the Internet by selecting the ``Tax Regs'' option on 
the IRS Home Page, or by submitting comments directly to the IRS 
Internet site at http://www.irs.gov/tax_regs/reglist.html.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Bryan T. 
Camp, 202-622-3620 (not a toll-free number); concerning submissions, 
Sonya Cruse at 202-622-7180 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed regulations amending the Procedure 
and Administration Regulations (26 CFR part 301) relating to the 
exercise by officers and employees of the IRS of the authority given 
them under section 7602 of the Internal Revenue Code (Code). Section 
3417 of the IRS Restructuring and Reform Act of 1998 (RRA 1998), Public 
Law 105-206 (112 Stat. 685), amends section 7602 to prohibit IRS 
officers or employees from contacting any person other than the 
taxpayer with respect to the determination or collection of the 
taxpayer's liability without first giving the taxpayer reasonable 
advance notice that such contacts may be made. The section further 
requires that a record of the persons contacted be provided to the 
taxpayer both periodically and upon the taxpayer's request. The section 
sets forth a number of exceptions to its requirements. These proposed 
regulations interpret and implement the amendments made by section 3417 
of RRA 1998.

Explanation of Provisions

    Section 3417 of RRA 1998 amended section 7602 to prohibit IRS 
officers or employees from contacting any person other than the 
taxpayer with respect to the determination or collection of the 
taxpayer's liability without giving the taxpayer reasonable advance 
notice that contacts with persons other than the taxpayer may be made.
    Section 3417 was added to the bill by the Senate Finance Committee. 
In explaining the reasons for its proposal, the Senate Finance 
Committee expressed a concern that third-party contacts ``may have a 
chilling effect on the taxpayer's business and could damage the 
taxpayer's reputation in the community,'' and that taxpayers ``should 
have the opportunity to resolve issues and volunteer information before 
the IRS contacts third parties.'' S. Rep. No. 174, 105th Cong., 2nd 
Sess. 77 (1998). At the same time, the Senate Finance Committee stated 
that ``[c]ontacts with government officials relating to matters such as 
the location of assets or the taxpayer's current address are not 
restricted by this provision.'' Id.
    As originally drafted by the Senate Finance Committee, the third-
party contact rule would have prohibited most IRS contacts with third 
parties prior to taxpayer notification of the specific contact to be 
made. It contained exceptions for notification of contacts (i) that 
were authorized by a taxpayer, (ii) that would jeopardize collection, 
or (iii) with respect to pending criminal investigations. The 
requirement for specific pre-contact notice was modified by the 
Conference Committee to require only a generalized notice of IRS intent 
to contact third parties, followed by post-contact notice of specific 
contacts. Further, the exceptions were expanded to include situations 
that might involve reprisal against the third party or any other 
person. With regard to the general, pre-contact notice, the Conference 
Report states that ``this notice will be provided as part of an 
existing IRS notice provided to taxpayers.'' H.R. Rep. No. 599, 105th 
Cong., 2nd Sess. at 277 (1998).
    The provision as enacted and the particular changes made by the 
Conference Committee to the Senate proposal support an interpretative 
approach that balances taxpayers' business and reputational interests, 
articulated as the principal impetus for the Senate proposal, with 
third parties' privacy interests and the IRS' responsibility to 
administer the internal revenue laws effectively. The replacement of 
specific pre-contact identification of intended third-party contacts, 
as proposed by the Senate, with a general pre-contact notice 
accompanied by post-contact identification, still enables taxpayers to 
come forward with information before third parties are contacted. The 
modifications still allow taxpayers to address business or reputational 
concerns arising from IRS contact with third parties, but accomplish 
this result without impeding the ability of the IRS to make those 
third-party contacts that are necessary to administer the internal 
revenue laws. The maintenance of the exceptions proposed in the Senate

[[Page 78]]

version and the addition of an exception for situations involving 
potential reprisal express Congressional concern that the business and 
reputational interests of taxpayers be balanced with the privacy and 
safety interests of third parties and that certain types of 
investigations (i.e., those involving jeopardy and potential criminal 
prosecution) be excepted from the statute.
    Accordingly, the proposed regulations attempt to balance among the 
taxpayer, third party, and governmental interests implicated by the 
statute. The IRS and Treasury invite public comments on the following 
specific issues addressed by these proposed regulations, as well as any 
other issue raised by the new requirements for third-party contacts.

The Meaning of ``Person Other Than the Taxpayer'' When Contacting 
Business Entities

    Section 7602(c) applies to contacts with ``any person other than 
the taxpayer.'' The ``person'' contacted may be a business entity 
rather than an individual. IRS employees must often contact employees 
of business entities. These contacts arise in two situations. First, 
IRS employees examining a business taxpayer generally must communicate 
with employees of the taxpayer. Second, in the course of determining or 
collecting any taxpayer's liability, an IRS employee may need to 
contact employees of a third-party business entity. For example, when 
an IRS employee contacts a bank or other business, the IRS employee 
actually communicates with an employee of the bank or business.
    With respect to the first situation, when an IRS employee contacts 
an employee of a taxpayer under examination, the proposed regulations 
provide that a taxpayer's employee is not a ``person other than the 
taxpayer'' when acting within the scope of his or her employment. 
Several rationales underlie this position. First, corporations may 
speak and act only through individuals. Moreover, state law generally 
provides that employers are responsible for their employees, regardless 
of the form under which the employer does business, when the employees 
are acting within the scope of their employment. It seems reasonable, 
therefore, to treat employees who are acting within the scope of their 
employment as being part of the business taxpayer under examination. 
Second, this approach is consistent with how employees are treated 
elsewhere in the Internal Revenue Code. See I.R.C. 7609(c)(2)(A) 
(summons issued to any person who is the taxpayer under investigation 
``or any officer or employee of such person'' not considered a summons 
issued to a third party). From an administrative standpoint, IRS 
employees examining a business generally rely on certain individuals 
designated by the taxpayer to provide information and direct the IRS to 
whichever employees can best provide that information. The regulations 
will not affect this current examination practice and business 
taxpayers will continue to be informed about contacts with their 
employees pursuant to current procedures.
    With respect to the second situation, where an IRS employee 
contacts a third party that is a business entity, the proposed 
regulations provide that when an employee of the business is contacted 
while acting within the scope of his or her employment, the ``person 
other than the taxpayer'' to be recorded and reported to the taxpayer 
is the business entity and not any individual employee. Two rationales 
support this position. First, contacts with a business' employees 
should not be treated as contacts with persons other than the taxpayer 
because employees acting within the scope of their employment are most 
appropriately viewed as being part of the business entity being 
contacted. Second, the individual employee's privacy interest in not 
having his or her identity recorded by the government and reported to 
the taxpayer outweighs the taxpayer's interest in learning the name of 
the individual employee in addition to the identity of the business 
contacted. The most relevant information for the taxpayer is the 
identity of the business contacted, which information enables the 
taxpayer to contact the appropriate individuals within the business to 
address any business or reputational concerns that might result from 
the IRS contact.

Request for Comments

    The IRS and the Treasury Department are interested in receiving 
comments on the extent to which employees of business entities should 
be considered ``persons other than the taxpayer'' apart from the 
business entity being contacted. The comments should assume that 
employees are contacted within the scope of their employment. The 
comments should articulate how well or poorly the proposed regulation, 
or any proposed alternative, balances taxpayer interests in their 
community reputations or businesses with third parties' interests in 
their privacy and with the IRS' obligation to administer the tax laws 
fairly and effectively.

The Meaning of ``With Respect to a Determination or Collection'' of Tax

    Section 7602(c) prohibits IRS employees from contacting any person 
other than ``the'' taxpayer ``with respect to'' the determination or 
the collection of the tax liability of ``such'' taxpayer. The term 
``with respect to'' indicates a required nexus between the contact and 
one of the two enumerated purposes of determining or collecting tax. 
The use of the words ``the'' and ``such'' imply a single affected 
taxpayer whose liability is being determined. The statute and committee 
reports do not describe with greater specificity the type of contacts 
that should be considered ``with respect to'' the determination or 
collection of a tax liability, nor how close a nexus must exist between 
a contact and the purposes described in section 7602(c).
    Examination and collection activity is critical to the IRS' mission 
of ``helping [taxpayers] understand and meet their tax 
responsibilities.'' Administering the tax laws, however, involves more 
activities than an individual IRS employee examining a single return 
selected for audit or collecting unpaid taxes. It also includes: 
locating taxpayers who may not have fulfilled a filing or payment 
obligation, monitoring information returns, performing compliance 
checks to help identify which returns to examine, investigating leads 
from newspapers and other sources to identify non-filers and 
underreporters, providing services to taxpayers such as issuing Private 
Letter Rulings or determining employment status, tracing lost payments, 
and exchanging information with other taxing authorities and other 
federal agencies. Moreover, the examination of a single return may 
significantly affect other taxpayers. For example, adjustments to items 
attributable to partnerships or other pass-through entities may 
significantly affect partners or other investors in flow-through 
entities. Likewise, adjustments on returns of corporate taxpayers may 
significantly affect the corporations' shareholder liabilities. Broadly 
stated, almost every third-party contact made by IRS employees could be 
seen as ``with respect to the determination or collection'' of tax in 
that almost every contact may indirectly affect the liability of one or 
more taxpayers. Not every contact, however, has a direct and immediate 
nexus to the determination or collection of a particular taxpayer's 
liability.
    The proposed regulations generally provide that a contact must be 
directly connected to the purpose of determining or collecting an 
identified taxpayer's

[[Page 79]]

liability before the contact is subject to the statute, in contrast to 
making every contact which may affect a person's liability subject to 
the statute. An interpretation that requires each IRS employee to 
report each contact to every taxpayer whose liability could potentially 
be affected by the contact is overbroad, potentially unadministrable, 
and could needlessly alarm taxpayers whose returns were not actually 
being examined and would not in fact be selected for examination. 
Conversely, an interpretation that a contact was not ``with respect 
to'' the determination of liability until a return had been formally 
selected for examination would unduly elevate administrative concerns 
over taxpayer business and reputational interests. If a bank is 
contacted about a particular taxpayer, for example, the reputational 
concerns caused by the contact do not depend on whether the taxpayer is 
under formal examination at the time or is merely being screened as 
part of a process to identify returns for examination. Therefore, 
although the proposed regulations require a direct connection between 
the contact and the purpose of examining or collecting a liability of 
an identified taxpayer's liability before the contact is subject to the 
statute, they do not require that a formal examination be opened. They 
instead provide a series of tests and examples to identify classes of 
contacts which should or should not be subject to the statute under 
this standard, regardless of whether a formal examination has been 
opened.

Request for Comments

    The IRS and the Treasury Department are interested in receiving 
comments on the types of contacts that should be considered to be 
``with respect to the determination or collection of the liability of 
such taxpayer'' and, when one contact may indirectly affect the 
liabilities of more than one taxpayer, which taxpayers should receive 
the general advance notice.

Reports of Persons Contacted

    Section 7602(c)(2) requires the IRS to report ``periodically'' to 
taxpayers the persons contacted during such period and to provide 
reports to taxpayers upon request. The statute does not specify the 
time that should elapse between reports or requests.
    The proposed regulations provide that the periodic report should be 
produced once each year, and that taxpayers should be allowed to 
request the report more frequently, subject to any reasonable 
restrictions that the IRS may impose. In deciding what restrictions may 
be reasonable, the IRS may look to other, similar statutes for 
guidance. For example, section 6103(e)(8) allows one ex-spouse to 
request a report on whether the IRS has attempted to collect a joint 
liability from the other ex-spouse and how much of the joint liability 
has been collected. Like section 7602(c), section 6103(e)(8) places no 
restrictions on the number of requests. Nonetheless, the House Ways and 
Means Committee Report explaining section 6103(e)(8) suggested that 
``the IRS may develop procedures to address the frequency of such 
requests'' and that ``one request per quarter would be a reasonable 
rate unless the taxpayer had good cause to seek more frequent 
information.'' H.R. Rep. No. 506, 104th Congress, 1st Session (1997) at 
32.
    A mandatory annual reporting rule, coupled with taxpayers' ability 
to request more frequent reports, is reasonable because a one-year 
cycle should be sufficiently long such that only one report would 
usually have to be provided to most taxpayers and yet sufficiently 
short, particularly in light of taxpayer ability to request more 
frequent reports, to enable taxpayers to address any business or 
reputational concerns raised by the third-party contacts. To enable the 
IRS to institute appropriate automated procedures to handle this 
requirement, the IRS plans to begin the annual mailings in the year 
2001. In the interim, the IRS will provide taxpayers with reports of 
contacts upon request according to the guidelines contained in these 
proposed regulations.

Request for Comments

    The IRS and Treasury are interested in receiving comments on how to 
interpret ``periodically'' for purposes of periodically providing a 
record of persons contacted to the taxpayer and whether and on what 
basis to impose reasonable limits or conditions on the frequency with 
which taxpayers may request reports.

Record of Person Contacted

    Section 7602(c)(2) requires the IRS to give taxpayers a ``record of 
persons contacted'' both periodically and upon request. IRS employees 
do not obtain information from every person who is contacted with 
respect to the determination or collection of the taxpayer's 
liabilities. Moreover, when the accuracy of the information received is 
self-proving, IRS employees have no need to learn the identity of the 
persons they contact. For these reasons, the IRS does not request or 
learn the identity of every third party contacted. For example, an IRS 
employee who is trying to locate a taxpayer may talk with various 
persons other than the taxpayer. In these situations, the identity of 
the persons contacted is not relevant to the location information 
sought because the information will either lead to the taxpayer or not.
    The proposed regulations provide that, as a general standard, the 
``record of persons contacted'' should give the taxpayer information 
that, if known to the IRS employee, reasonably identifies the person 
contacted. The proposed regulations, however, do not require IRS 
employees to obtain information about third parties that they would not 
otherwise obtain. The proposed regulations also do not require 
disclosure to the taxpayer of any information about the third-party 
other than the identity information known to the employee at the time 
of the contact. Finally, the proposed regulations provide a bright-line 
rule that naming the person contacted will always satisfy the general 
standard of reasonable identification. This approach is consistent with 
the policy articulated by other privacy and disclosure statutes that 
the United States government will not disclose any more information 
about citizens in its possession than necessary to administer the laws. 
See generally 5 U.S.C. Sec. 552a.
    The general standard recognizes taxpayer interests by providing 
taxpayers a reasonable opportunity to learn the identity of the person 
contacted. The proposed regulations also recognize third-party privacy 
interests and the IRS' interest in not making unnecessary inquiries of 
third parties by requiring the IRS to report only the fact of a contact 
and not to make new inquiries of the third parties that would not 
otherwise be made. To interpret the statute otherwise would require IRS 
employees to intrude further into the affairs of third parties than is 
necessary to administer the tax laws and would adversely affect the 
willingness of third parties to provide information to the IRS.
    An additional issue is the type of identifying information that 
should be included in the record when the name of the third party is 
not known or obtained by the IRS employee making the contact. The 
proposed regulations recognize that the information, other than a name, 
that would reasonably identify a person contacted will depend on the 
facts and circumstances of the contact. While the proposed regulations 
give an example where the place of contact might reasonably identify a 
person, the regulations intentionally do not set forth any specific 
list of characteristics to record. This approach is consistent with the 
interpreting the statute to require that only the fact of

[[Page 80]]

the contact be recorded and not to require IRS employees to obtain more 
information about third parties than is otherwise necessary to 
administer the tax laws.

Request for Comment

    The IRS and Treasury are interested in receiving comments on the 
type of information that should be included in the record of persons 
contacted which is provided to a taxpayer. Specifically, when the name 
of the third party is known, should additional information be included 
in the record of persons contacted? When the name of the third party is 
not known, what information should be included in the record of persons 
contacted?

Reprisal Exception

    Section 7602(c) does not apply when the Secretary has good cause to 
believe that providing either the pre-contact notice or the post-
contact record ``may involve reprisal against any person.'' When 
contacting a third party, IRS employees often do not know the details 
of the relationship, if any, between the third party and the taxpayer 
and so often do not know whether reporting the contact to the taxpayer 
may result in harm to any person, particularly the third party being 
contacted. At times, an IRS employee may have information that 
constitutes good cause to believe that reporting a contact may result 
in harm to someone. In the absence of this information, however, the 
IRS employee cannot know whether potential exists for reprisal without 
asking the third party. Under interim procedures, IRS employees 
generally inform the person contacted of the statute's requirements and 
ask whether the person has any concern that reprisal might occur 
against any person if the contact is reported to the taxpayer. The IRS 
experience under these interim procedures has been that few persons 
assert a fear of reprisal.
    The proposed regulations interpret the statute to elevate third-
party concerns about reprisal above taxpayers' business or reputational 
interests. The proposed regulations provide that ``reprisal'' 
encompasses not only physical harm, but also emotional or economic 
harm. The proposed regulations provide that a statement by the person 
contacted that harm may occur against any person is good cause to 
believe that reprisal may occur. Because third parties will ordinarily 
be better able than the IRS to evaluate their relationship with the 
taxpayer, the IRS must be permitted to rely on a third party's claim of 
potential reprisal without separately investigating every such claim. 
Further, to require IRS employees to investigate every claim of 
potential reprisal would divert resources from investigating tax 
liabilities to investigating third parties. Such a requirement would 
place a heavy administrative burden on the IRS, intrude into the third 
party's affairs, and require IRS employees to make judgments that they 
are not well positioned to make. Finally, the proposed regulation 
reflects the IRS' interim experience during which few persons expressed 
a fear of reprisal even when told that if they feared reprisal, their 
identity would not be reported to the taxpayer. This experience 
suggests that third parties generally will not express a fear of 
reprisal simply to keep their names off the contact lists.
    The proposed regulations provide that information from any source, 
not only the third party contacted, may constitute good cause to 
believe that reprisal may occur. The proposed regulations also provide, 
however, that IRS employees are under no duty to investigate or 
determine for each contact whether good cause exists to believe that 
reprisal may occur. Finally, the proposed regulations provide that a 
mere desire for privacy will not be treated as a fear of reprisal and, 
in this respect, the statute requires that third-party privacy 
interests yield to taxpayers' interests in learning of IRS contacts. 
The examples clarify that third parties cannot simply request to be 
kept off the list of contacts reported to taxpayers.

Request for Comments

    The IRS and Treasury are interested in receiving comments 
discussing the appropriate standards for ``reprisal'' for purposes of 
excluding third parties' identities from the record of persons 
contacted.

Contacts With Other Government Entities

    Section 7602(c) applies to contacts with any person other than the 
taxpayer.
    The statute contains no explicit exception for contacts with 
government entities. The Senate Finance Committee report, however, 
states that ``[c]ontacts with government officials relating to matters 
such as the location of assets or the taxpayer's current address are 
not restricted by this provision.'' S. Rep. No. 105-174, at 77 (1998). 
This report language suggests that Congress did not generally consider 
government contacts to implicate taxpayer business and reputational 
interests to the same degree as other types of third-party contacts.
    In determining and collecting taxes, IRS employees often contact 
other government entities. For example, IRS employees may need to 
contact: county court clerks to retrieve land records or case files; 
state Secretary of State offices to retrieve corporate records; state 
Motor Vehicle offices to obtain license and vehicle registration 
information; the United States Post Office to obtain change of address 
information; or foreign governments to obtain information about 
taxpayer assets, location, or transactions. IRS employees may need to 
confer with non-IRS Treasury employees, Department of Justice 
employees, and other federal government employees with respect to the 
determination or collection of a taxpayer's liability. IRS employees 
also may need to contact bankruptcy trustees and other officers and 
employees of courts.
    The proposed regulations provide that, generally, contacts with 
government entities need not be reported because they generally do not 
implicate the concerns that underlie the statute's enactment. 
Government contacts are much less likely than nongovernment contacts to 
affect taxpayers' reputations among persons with whom taxpayers have 
business relationships. Moreover, many government officials are under 
duties not to disclose IRS contacts to the general public. 
Additionally, government offices, like databases, generally serve as 
repositories of information on large groups of people. Inquiries for 
that information, whether made by the IRS or any other agency, are a 
routine part of the work performed by the contacted government office 
and generally should not affect a taxpayer's community reputation or 
business. The administrative burden on the IRS of maintaining and 
providing to taxpayers records of government contacts would be 
substantial because of the high volume of government contacts. 
Moreover, contacts with government offices are often made to locate 
taxpayers or their assets, which fact presents situations where pre-
contact notice may not be feasible and attempts to comply with that 
requirement could delay and otherwise impair administration of the tax 
laws.
    Some government contacts, however, may affect taxpayers' business 
relationships with the government and so will be treated as subject to 
the statute. The proposed regulations recognize taxpayers' interest in 
their business relations with government entities by providing that 
contacts concerning a taxpayer's conduct of business with the 
particular government office contacted will be subject to the statute.

[[Page 81]]

Request for Comments

    The IRS and Treasury are interested in receiving comments on the 
extent to which contacts with government entities should be excluded 
from section 7602(c)'s requirements. The comments should articulate how 
well or poorly the proposed regulation, or any suggested alternative, 
balances taxpayer interests in their community reputations or 
businesses with third parties' interests in their privacy and with the 
IRS' obligation to administer the tax laws fairly and effectively.

Special Analyses

    This notice of proposed rulemaking is not a significant regulatory 
action as defined in Executive Order 12866. Therefore, a regulatory 
assessment is not required. Likewise, section 553(b) of the 
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to 
this regulation, and because the proposed regulations do not impose a 
collection of information on small entities, the Regulatory Flexibility 
Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of 
the Internal Revenue Code, these proposed regulations will be submitted 
to the Chief Counsel for Advocacy of the Small Business Administration 
for comment on their impact on small business.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (yes, 8) copies) and electronic comments that are submitted 
timely to the IRS. The IRS and Treasury Department specifically request 
comments on the clarity of the proposed regulations and how they can be 
made easier to understand. All comments will be available for public 
inspection and copying. A public hearing may be conducted if requested 
in writing by any person who timely submits written comments. If a 
public hearing is scheduled, notice of the date, time, and place for 
the hearing will be published in the Federal Register.

Drafting Information

    The principal author of these proposed regulations is Bryan T. Camp 
of the Office of Assistant Chief Counsel (General Litigation). Other 
personnel from the IRS and Treasury Department have also participated 
in their drafting and development.

List of Subjects in 26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 301 is proposed to be amended as follows:

PART 301--PROCEDURES AND ADMINISTRATION

    Paragraph 1. The authority citation for part 301 continues to read 
in part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Section 301.7602-2 is added to read as follows:


Sec. 301.7602-2  Third party contacts.

    (a) In general. Subject to the exceptions in paragraph (f) of this 
section, no officer or employee of the Internal Revenue Service (IRS) 
may contact any person other than the taxpayer with respect to the 
determination or collection of such taxpayer's tax liability without 
giving the taxpayer reasonable notice in advance that such contacts may 
be made. A record of persons so contacted must be made and given to the 
taxpayer both periodically and upon the taxpayer's request.
    (b) Third-party contact defined. Contacts subject to section 
7602(c) and this regulation shall be called ``third-party contacts.'' A 
third-party contact is a communication which--
    (1) Is initiated by an IRS employee;
    (2) Is made to a person other than the taxpayer;
    (3) Is made with respect to the determination or collection of the 
tax liability of such taxpayer;
    (4) Discloses the identity of the taxpayer being investigated; and
    (5) Discloses the association of the IRS employee with the IRS.
    (c) Elements of third-party contact explained. (1) Initiation by an 
IRS employee--(i) Explanation. For purposes of this section an IRS 
employee includes all officers and employees of the IRS, the Chief 
Counsel of the IRS and the National Taxpayer Advocate, as well as any 
other person who, through a written agreement with the IRS, is subject 
to disclosure restrictions consistent with section 6103. No inference 
about the employment or contractual relationship of such other persons 
with the IRS may be drawn from this regulation for any purpose other 
than the requirements of section 7602(c). An IRS employee initiates a 
communication whenever it is the employee who first tries to 
communicate with a person other than the taxpayer. Returning 
unsolicited telephone calls or speaking with persons other than the 
taxpayer as part of an attempt to speak to the taxpayer are not 
initiations of third-party contacts.
    (ii) Examples. The following examples illustrate this paragraph 
(c)(1):

    Example 1. An IRS employee receives a message to return an 
unsolicited call. The employee returns the call and speaks with a 
person who reports information about a taxpayer who is not meeting 
his tax responsibilities. Later, the employee makes a second call to 
the person and asks for more information. The first call is not a 
contact initiated by an IRS employee. Just because the employee must 
return the call does not change the fact that it is the other 
person, and not the employee, who initiated the contact. The second 
call, however, is initiated by the employee and so meets the first 
element.
    Example 2. An IRS employee wants to hire an appraiser to help 
determine the value of a taxpayer's oil and gas business. At the 
initial interview, the appraiser signs an agreement which prohibits 
him from disclosing return information of the taxpayer except as 
allowed by the agreement. Once hired, the appraiser initiates a 
contact by calling an industry expert in Houston and discusses the 
taxpayer's business. The IRS employee's contact with the appraiser 
does not meet the first element of a third-party contact because the 
appraiser is treated, for section 7602(c) purposes only, as an 
employee of the IRS. For the same reason, however, the appraiser's 
call to the expert does meet the first element of a third-party 
contact.
    Example 3. A revenue agent trying to contact the taxpayer to 
discuss the taxpayer's pending examination twice calls the 
taxpayer's place of business. The first call is answered by a 
receptionist who states that the taxpayer is not available. The IRS 
employee leaves a message with the receptionist stating only his 
name, telephone number, that he is with the IRS, and asks that the 
taxpayer call him. The second call is answered by the office 
answering machine, on which the IRS employee leaves the same 
message. Neither of these phone calls meets the first element of a 
third-party contact because the IRS employee is trying to initiate a 
communication with the taxpayer and not a person other than the 
taxpayer. The fact that the IRS employee must either speak with a 
third party (the receptionist) or leave a message on the answering 
machine, which may be heard by a third party, does not mean that the 
employee is initiating a communication with a person other than the 
taxpayer. Both the receptionist and the answering machine are only 
intermediaries in the process of reaching the taxpayer.

    (2) Person other than the taxpayer--(i) Explanation. The phrases 
``person other than the taxpayer'' and ``third party'' are used 
interchangeably in this section, and do not include--
    (A) An officer or employee of the IRS, as defined in paragraph 
(c)(1)(i) of this section, acting within the scope of his or her 
employment;

[[Page 82]]

    (B) Any computer database or web site regardless of where located 
and by whom maintained, including databases or web sites maintained on 
the Internet or in county courthouses, libraries, or any other real or 
virtual site; or
    (C) A current employee, officer, or fiduciary of a taxpayer when 
acting within the scope of his or her employment or relationship with 
the taxpayer. Such employee, officer, or fiduciary shall be 
conclusively presumed to be acting within the scope of his or her 
employment or relationship during business hours on business premises.
    (ii) Examples: The following examples illustrate this paragraph 
(c)(2):

    Example 1. A revenue agent examining a taxpayer's return speaks 
with another revenue agent who has previously examined the same 
taxpayer about a recurring issue. The revenue agent has not 
contacted a ``person other than the taxpayer'' within the meaning of 
section 7602(c).
    Example 2. A revenue agent examining a taxpayer's return speaks 
with one of the taxpayer's employees on business premises during 
business hours. The employee is conclusively presumed to be acting 
within the scope of his employment and is therefore not a ``person 
other than the taxpayer'' for section 7602(c) purposes.
    Example 3. A revenue agent examining a corporate taxpayer's 
return uses a commercial online research service to research the 
corporate structure of the taxpayer. The revenue agent uses an IRS 
account, logs on with her IRS user name and password, and uses the 
name of the corporate taxpayer in her search terms. The revenue 
agent later explores several Internet web sites that may have 
information relevant to the examination. The searches on the 
commercial online research service and Internet web sites are not 
contacts with ``persons other than the taxpayer.''

    (3) With respect to the determination or collection of the tax 
liability of such taxpayer--(i) With respect to. A contact is ``with 
respect to'' the determination or collection of the tax liability of 
such taxpayer when made for the purpose of either determining or 
collecting a particular tax liability and when directly connected to 
that purpose. While a contact made for the purpose of determining a 
particular taxpayer's tax liability may also affect the tax liability 
of one or more other taxpayers, such contact is not for that reason 
alone a contact ``with respect to'' the determination or collection of 
those other taxpayers' tax liabilities. Contacts to determine the tax 
status of a pension plan under chapter I, subchapter D (Deferred 
Compensation), are not ``with respect to'' the determination of plan 
participants' tax liabilities. Contacts to determine the tax status of 
a bond issue under chapter 1, subchapter B, part IV (Tax Exemption 
Requirements for State and Local Bonds), are not ``with respect to'' 
the determination of the bondholders' tax liabilities. Contacts to 
determine the tax status of an organization under chapter 1, subchapter 
F (Exempt Organizations), are not ``with respect to'' the determination 
of the contributors' liabilities, nor are any similar determinations 
``with respect to'' any persons with similar relationships to the 
taxpayer whose tax liability is being determined or collected.
    (ii) Determination or collection. A contact is with respect to the 
``determination or collection'' of the tax liability of such taxpayer 
when made during the administrative determination or collection 
process. For purposes of this paragraph (c) only, the administrative 
determination or collection process may include any administrative 
action to ascertain the correctness of a return, make a return when 
none has been filed, or determine or collect the tax liability of any 
person as a transferee or fiduciary under chapter 71 of title 26.
    (iii) Tax liability. A ``tax liability'' means the liability for 
any tax imposed by title 26 of the United States Code (including any 
interest, additional amount, addition to the tax, or assessable 
penalty) and does not include the liability for any tax imposed by any 
other jurisdiction nor any liability imposed by other federal statutes.
    (iv) Such taxpayer. A contact is with respect to the determination 
or collection of the tax liability of ``such taxpayer'' when made while 
determining or collecting the tax liability of a particular, identified 
taxpayer. Contacts made during an investigation of a particular, 
identified taxpayer are third-party contacts only as to the particular, 
identified taxpayer under investigation and not as to any other 
taxpayer whose tax liabilities might be affected by such contacts.
    (v) Examples. The following examples illustrate the operation of 
this paragraph (c)(3):

    Example 1. As part of a compliance check on a return preparer, 
an IRS employee visits the preparer's office and reviews the 
preparer's client files to ensure that the proper forms and records 
have been created and maintained. This contact is not a third-party 
contact ``with respect to'' the preparer's clients because it is not 
for the purpose of determining the tax liability of the preparer's 
clients, even though the agent might discover information that would 
lead the agent to recommend an examination of one or more of the 
preparer's clients.
    Example 2. A revenue agent is assigned to examine a taxpayer's 
return, which was prepared by a return preparer. As in all such 
examinations, the revenue agent asks the taxpayer routine questions 
about what information the taxpayer gave the preparer and what 
advice the preparer gave the taxpayer. As a result of the 
examination, the revenue agent recommends that the preparer be 
investigated for penalties under sections 6694 or 6695. Neither the 
examination of the taxpayer's return nor the questions asked of the 
taxpayer are ``with respect to'' the determination of the preparer's 
tax liabilities within the meaning of section 7602(c) because the 
purpose of the contacts was to determine the taxpayer's tax 
liability, even though the agent discovered information that may 
result in a later investigation of the preparer.
    Example 3. To help identify taxpayers in the florist industry 
who may not have filed proper returns, an IRS employee contacts a 
company that supplies equipment to florists and asks for a list of 
its customers in the past year in order to cross-check the list 
against filed returns. The employee later contacts the supplier for 
more information about one particular florist who the employee 
believes did not file a proper return. The first contact is not a 
contact with respect to the determination of the tax liability of 
``such taxpayer'' because no particular taxpayer has been identified 
for investigation at the time the contact is made. The later 
contact, however, is with respect to the determination of the tax 
liability of ``such taxpayer'' because a particular taxpayer has 
been identified. The later contact is also ``with respect to'' the 
determination of that taxpayer's liability because, even though no 
examination has been opened on the taxpayer, the information sought 
could lead to an examination.
    Example 4. A revenue officer, trying to collect the trust fund 
portion of unpaid employment taxes of a corporation, begins to 
investigate the liability of two corporate officers for the section 
6672 Trust Fund Recovery Penalty (TFRP). The revenue officer obtains 
the signature cards for the corporation's bank accounts from the 
corporation's bank. The contact with the bank to obtain the 
signature cards is a contact with respect to the determination of 
the two identified corporate officers' tax liabilities because it is 
directly connected to the purpose of determining a tax liability of 
two identified taxpayers. It is not, however, a contact with respect 
to any other person not already under investigation for TFRP 
liability, even though the signature cards might identify other 
potentially liable persons.
    Example 5. The IRS is asked to rule on whether a certain pension 
plan qualifies under section 401 so that contributions to the 
pension plan are excludable from the employees' incomes under 
section 402 and are also deductible from the employer's income under 
section 404. Contacts made with the plan sponsor (and with persons 
other than the plan sponsor) are not contacts ``with respect to'' 
the determination of the tax liabilities of the pension plan 
participants because the purpose of the contacts is to determine the 
status of the plan, even though that determination may affect the 
participants' tax liabilities.

    (4) Discloses the identity of the taxpayer being investigated--(i)

[[Page 83]]

Explanation. An IRS employee discloses the taxpayer's identity whenever 
the employee knows or should know that the person being contacted can 
readily ascertain the taxpayer's identity from the information given by 
the employee.
    (ii) Examples. The following examples illustrate this paragraph 
(c)(4):

    Example 1. A revenue officer seeking to value the taxpayer's 
condominium calls a real estate agent and asks for a market analysis 
of the taxpayer's condominium, giving the unit number of the 
taxpayer's condominium. The revenue officer has revealed the 
identity of the taxpayer, regardless of whether the revenue officer 
discloses the name of the taxpayer, because the real estate agent 
can readily ascertain the taxpayer's identity from the address 
given.
    Example 2. A revenue officer seeking to value the taxpayer's 
condominium unit calls a real estate agent and, without identifying 
the taxpayer's unit, asks for the sales prices of similar units 
recently sold and listing prices of similar units currently on the 
market. The revenue officer has not revealed the identity of the 
taxpayer because the revenue officer has not given any information 
from which the real estate agent can readily ascertain the 
taxpayer's identity.

    (5) Discloses the association of the IRS employee with the IRS. An 
IRS employee discloses his association with the IRS whenever the 
employee knows or should know that the person being contacted can 
readily ascertain the association from the information given by the 
employee.
    (d) Pre-contact notice--(1) In general. An officer or employee of 
the IRS may not make third-party contacts without providing reasonable 
notice in advance to the taxpayer that contacts may be made. The pre-
contact notice may be given either orally or in writing. If written 
notice is given, it may be given in any manner which the IRS employee 
responsible for giving the notice reasonably believes will be received 
by the taxpayer in advance of the third-party contact. Written notice 
is deemed reasonable if it is--
    (i) Mailed to the taxpayer's last known address;
    (ii) Given in person;
    (iii) Left at the taxpayer's dwelling or usual place of business; 
or
    (iv) Actually received by the taxpayer.
    (2) Pre-contact notice not required. Pre-contact notice under this 
section need not be provided to a taxpayer for third-party contacts of 
which advance notice has otherwise been provided the taxpayer pursuant 
to another statute, regulation or administrative procedure. For 
example, Collection Due Process notices sent to taxpayers pursuant to 
section 6330 and its regulations constitute reasonable advance notice 
that contacts with third parties may be made.
    (e) Post-contact reports--(1) Periodic reports. A record of persons 
contacted must be reported to the taxpayer periodically, but no less 
frequently than once a year. The period of time between these periodic 
reports shall be called ``the reporting period.'' The periodic report 
must be mailed to the taxpayer's last known address.
    (2) Requested reports. A taxpayer may request a record of persons 
contacted in any manner which the Commissioner reasonably permits. The 
Commissioner may set reasonable limits on how frequently taxpayer 
requests need be honored. The requested report may be mailed either to 
the taxpayer's last known address or such other address as the taxpayer 
specifies in the request.
    (3) Contents of record--(i) In general. The record of persons 
contacted should contain information, if known to the IRS employee 
making the contact, which reasonably identifies the person contacted. 
Providing the name of the person contacted fully satisfies the 
requirements of this section but this section does not require IRS 
employees to solicit identifying information from a person solely for 
the purpose of the post-contact report. The record need not contain any 
other information, such as the nature of the inquiries or the content 
of the third party's response. The record need not report multiple 
contacts made with the same person during a reporting period.
    (ii) Special rule for employees. For contacts with the employees, 
officers, or fiduciaries of any entity who are acting within the scope 
of their employment or relationship, it is sufficient to record the 
entity as the person contacted. A fiduciary, officer or employee shall 
be conclusively presumed to be acting within the scope of his 
employment or relationship during business hours on business premises. 
For purposes of this paragraph (e)(3)(ii), the term ``entity'' means 
any business (whether operated as a sole proprietorship, disregarded 
entity under Treas. Reg. 301.7701-2, or otherwise), trust, estate, 
partnership, association, company, corporation, or similar 
organization.
    (4) Post-contact record not required. A post-contact record under 
this section need not be made, or provided to a taxpayer, for third-
party contacts of which the taxpayer has already been given a similar 
record pursuant to another statute, regulation, or administrative 
procedure.
    (5) Examples. The following examples illustrate this paragraph (e):

    Example 1. An IRS employee trying to find a specific taxpayer's 
assets in order to collect unpaid taxes talks to the owner of a 
marina. The employee asks whether the taxpayer has a boat at the 
marina. The owner gives his name as Mr. John Doe. The employee may 
record the contact as being with Mr. John Doe and is not required by 
this regulation to collect or record any other identity information. 
The taxpayer will receive a report that Mr. John Doe was contacted.
    Example 2. An IRS employee trying to find a specific taxpayer 
and his assets in order to collect unpaid taxes talks to a person at 
502 Fernwood. The employee asks whether the taxpayer lives next door 
at 500 Fernwood, as well as where the taxpayer works, what kind of 
car the taxpayer drives and whether the camper parked in front of 
500 Fernwood belongs to the taxpayer. The person does not disclose 
his name. The employee may record the contact as being with a person 
at 502 Fernwood. If the employee then makes the same inquiries of 
another person on the street in front of 500 Fernwood, and does not 
learn that person's name, the contact may be reported as being with 
a person on the street in front of 500 Fernwood. Later contacts with 
either person during the same reporting period need not be reported 
again.
    Example 3. A revenue officer seeking to collect a taxpayer's 
unpaid tax liability obtains loan documents from a bank where the 
taxpayer applied for a loan. After reviewing the documents, the 
revenue officer talks with the loan officer at the bank who handled 
the application. The revenue officer has contacted only one ``person 
other than the taxpayer.'' The bank and not the loan officer is the 
``person other than the taxpayer'' for section 7602(c) purposes. The 
loan officer is not a person other than the taxpayer because the 
loan officer is acting within the scope of her employment.
    Example 4. An IRS employee issues a summons to a third party 
with respect to the determination or collection of a taxpayer's 
liability and properly follows the procedures for such summonses 
under section 7609, which requires that a copy of the summons be 
given to the taxpayer. This third-party contact need not be 
maintained in a record separately reported to the taxpayer because 
providing a copy of the third-party summons to the taxpayer pursuant 
to section 7609 satisfies the post-contact recording and reporting 
requirement of this section. In addition, later contacts with this 
third party during the same reporting period need not be reported.
    Example 5. An IRS employee serves a levy on a third party with 
respect to the collection of a taxpayer's liability. The employee 
provides the taxpayer with a copy of the notice of levy form which 
shows the identity of the third party. This third-party contact need 
not be maintained in a record or list separately reported to the 
taxpayer because providing a copy of the notice of levy to the 
taxpayer satisfies the post-contact recording and reporting 
requirement of this section.

    (f) Exceptions--(1) Authorized by taxpayer. (i) Section 7602(c) 
does not apply to contacts authorized by the taxpayer. A contact is 
``authorized'' within the meaning of this section if--
    (A) The contact is with the taxpayer's authorized representative, 
that is, a person who is authorized to speak or act

[[Page 84]]

on behalf of the taxpayer, such as a person holding a power of 
attorney, a corporate officer, a personal representative, an executor 
or executrix, or an attorney representing the taxpayer; or
    (B) The taxpayer or the taxpayer's authorized representative 
requests or approves the contact.
    (ii) This section does not entitle any person to prevent or delay 
an IRS employee from contacting any individual or entity.
    (2) Jeopardy. (i) Section 7602(c) does not apply when the IRS 
employee making a contact has good cause to believe that providing the 
taxpayer with either a general pre-contact notice or a record of the 
specific person being contacted may jeopardize the collection of any 
tax. For purposes of this section only, good cause includes a 
reasonable belief that providing the notice or record will lead to--
    (A) Attempts by any person to conceal, remove, destroy, or alter 
records or assets which may be relevant to any tax examination or 
collection activity;
    (B) Attempts by any person to prevent other persons, through 
intimidation, bribery, or collusion, from communicating any information 
which may be relevant to any tax examination or collection activity; or
    (C) Attempts by any person to flee, or otherwise avoid testifying 
or producing records which may be relevant to any tax examination or 
collection activity.
    (ii) In the jeopardy situations described in this paragraph (f)(2), 
the IRS employee must make a record of the person contacted but the 
taxpayer need not be provided the record until it is no longer 
reasonable to believe that providing the record would cause the 
jeopardy described.
    (3) Reprisal--(i) In general. Section 7602(c) does not apply when 
the IRS employee making a contact has good cause to believe that 
providing the taxpayer with either a general pre-contact notice or a 
specific record of the person being contacted may cause any person to 
harm any other person in any way, whether the harm is physical, 
economic, emotional or otherwise. A statement by the person contacted 
that harm may occur against any person is good cause to believe that 
reprisal may occur. This section does not require the IRS employee 
making the contact to question further the contacted person about 
reprisal or otherwise make further inquiries regarding the statement.
    (ii) Examples. The following examples illustrate this paragraph 
(f)(3):

    Example 1. A revenue officer seeking to collect unpaid taxes is 
told by the taxpayer that all the money in his and his brother's 
joint bank account belongs to the brother. The revenue officer 
contacts the brother to verify this information. The brother refuses 
to confirm or deny the taxpayer's statement. He states that he does 
not believe that reporting the contact to the taxpayer would result 
in harm to anyone but further states that he does not want his name 
reported to the taxpayer because it would then appear that he gave 
information. This contact is not excepted from the statute merely 
because the brother asks that his name be left off the list of 
contacts.
    Example 2. The same facts as Example 1, except that the brother 
states that he fears harm from the taxpayer should the taxpayer 
learn of the contact, even though the brother gave no information. 
This contact is excepted from the statute because the third party 
has expressed a fear of reprisal. The IRS employee is not required 
to make further inquiry into the nature of the brothers' 
relationship or otherwise question the brother's fear of reprisal.
    Example 3. A revenue officer is seeking to collect unpaid taxes 
owed jointly by a husband and wife who are recently divorced. From 
reading the court divorce file, the revenue officer learns that the 
divorce was acrimonious and that the ex-husband once violated a 
restraining order issued to protect the ex-wife. This information 
provides good cause for the IRS employee to believe that reporting 
contacts which might disclose the ex-wife's location may cause 
reprisal against any person. Therefore, when the revenue officer 
contacts the ex-wife's new employer to verify salary information 
provided by the ex-wife, the revenue officer has good cause not to 
report that contact to the ex-husband, regardless of whether the new 
employer expresses concern about reprisal against it or its 
employees.

    (4) Pending criminal investigations--(i) IRS criminal 
investigations. Section 7602(c) does not apply to contacts made during 
an investigation, or inquiry to determine whether to open an 
investigation, when the investigation or inquiry is--
    (A) Made against a particular identified taxpayer for the primary 
purpose of evaluating the potential for criminal prosecution of that 
taxpayer; and
    (B) Made by an IRS employee whose primary duties include either 
identifying or investigating criminal violations of the law.
    (ii) Other criminal investigations. Section 7602(c) does not apply 
to contacts which, if reported to the taxpayer, could interfere with a 
known pending criminal investigation being conducted by law enforcement 
personnel of any local, state, federal, foreign or other governmental 
entity.
    (5) Governmental entities. Section 7602(c) does not apply to any 
contact with any office of any local, state, federal or foreign 
governmental entity except for contacts concerning the taxpayer's 
business with the government office contacted, such as the taxpayer's 
contracts with or employment by the office. The term ``office'' 
includes any agent or contractor of the office acting in such capacity.
    (6) Confidential informants. Section 7602(c) does not apply when 
the employee making the contact has good cause to believe that 
providing either the pre-contact notice or the record of the person 
contacted would thereby identify a confidential informant whose 
identity would be protected under section 6103(h)(4).
    (7) Nonadministrative contacts. Section 7602(c) does not apply to 
contacts made in the course of a pending court proceeding.
    (g) Effective Date. This section is applicable on the date the 
final regulations are published in the Federal Register.

Charles O. Rossotti,
Commissioner of Internal Revenue.
[FR Doc. 00-32479 Filed 12-29-00; 8:45 am]
BILLING CODE 4830-01-U