[Federal Register Volume 67, Number 243 (Wednesday, December 18, 2002)]
[Rules and Regulations]
[Pages 77419-77425]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-31857]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[TD 9028]
RIN 1545-AX04


Third Party Contacts

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations providing guidance on 
third-party contacts made with respect to the determination or 
collection of tax liabilities. The 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 
regulations potentially affect all taxpayers whose Federal tax 
liabilities are being determined or collected by the IRS.

DATES: Effective Dates: These regulations are effective on December 18, 
2002.
    Applicability Dates: For the date of applicability, see section 
301.7602-2(g).

FOR FURTHER INFORMATION CONTACT: Robert A. Miller, 202-622-3630 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    Section 3417 of the IRS Restructuring and Reform Act of 1998 (RRA 
1998), Public Law 105-206 (112 Stat. 685), amended section 7602 by 
adding section 7602(c). This provision prohibits IRS officers and 
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

[[Page 77420]]

persons other than the taxpayer may be made.
    On January 2, 2001, the IRS published in the Federal Register a 
notice of proposed rulemaking (66 FR 32479) to interpret and implement 
section 7602(c). Two written comments were received but a public 
hearing was not held. The proposed regulations, as revised by this 
Treasury decision, are substantially adopted.
    As described more fully in the preamble to the proposed 
regulations, the final regulations balance a taxpayer's business and 
reputational interests with third parties' privacy interests and the 
IRS' responsibility to administer the internal revenue laws 
effectively. By providing general pre-contact notice followed by post-
contact identification, these final regulations enable a taxpayer to 
come forward with information required by the IRS before third parties 
are contacted. The taxpayer's business and reputational interests 
therefore can be addressed without impeding the IRS' ability to make 
those third-party contacts that are necessary to administer the 
internal revenue laws.
    These final regulations do not finalize the provisions in the 
proposed regulations regarding periodic reports. Subsequent to the 
issuance of the proposed regulations, the IRS determined that the 
issuance of periodic reports may result in harm to third parties and, 
accordingly, has determined that periodic reports should not be issued. 
Taxpayers will continue to receive pre-contact notice and may 
specifically request from the IRS reports of persons contacted.

Comments on the Proposed Regulations

Sec.  301.7602-2(e)(3)(ii)--Post Contact Reports

    The proposed regulations provided that 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.
    One commentator noted that there may be situations where the name 
of a specific employee of a business should be recorded and made 
available to the taxpayer. The commentator suggests adopting a ``safe 
harbor'' rule that requires that the name of the party contacted be 
recorded whenever there is any doubt about how the contact should be 
recorded. The commentator stated that whenever an employee of a 
business is contacted due to his or her personal knowledge or business 
relationship with the taxpayer, the name of the specific employee 
contacted should be recorded in the contact record rather than (or in 
addition to) the name of the business entity.
    This comment has not been adopted in the final regulations. The 
final regulations do not prevent IRS employees from providing more than 
the name of the entity in the record of contact when an employee of a 
business is contacted. Because the information being sought typically 
is that of the entity, and not of any specific employee outside of 
their capacity as an employee, requiring the identification of the 
specific employees contacted is not required to provide notice to the 
taxpayer of the contact made and may impede the IRS' ability to obtain 
information from the entity.

Sec.  301.7602-2(f)(3)--Reprisal Exception

    The proposed regulations provided that a statement by the person 
contacted that harm may occur is good cause for the IRS to believe that 
reprisal may occur. Such contacts are not reported by the IRS to the 
taxpayer.
    One commentator asserted that the proposed regulations are 
inconsistent with the statute's origin and purpose because the proposed 
regulations (i) subordinate the rights given to taxpayers to the rights 
of third parties and the IRS; (ii) provide an insufficient threshold 
for determining whether good cause exists to conclude that reprisal may 
occur; (iii) permit a third party to express concerns that providing 
notice to the taxpayer may result in reprisal against another person; 
(iv) permit the IRS to make a reprisal determination based upon 
information obtained from any source; and (v) permit the IRS to make a 
reprisal determination without peer or supervisory review. In brief, 
the commentator argued that the scope of what would be considered 
reprisal is too broad and that the determination of when reprisal would 
be considered to exist is too lenient. The commentator claimed that the 
adoption of the proposed regulations would render the requirement in 
section 7602(c) to provide taxpayers with a record of persons contacted 
a nullity.
    The Treasury Department and the IRS do not agree that the proposed 
regulations are either too broad with respect to what will be 
considered reprisal or too permissive with respect to the determination 
of whether the potential for reprisal exists. As a general matter, by 
including a reprisal exception to the notice requirements of section 
7602(c), Congress recognized that the rights of taxpayers to receive 
notice of third-party contacts must be balanced with the rights of 
third parties to be free from adverse consequences that may result from 
the IRS providing such notice. The reprisal exception reflects 
Congress' determination that a taxpayer's right to know whom the IRS 
has contacted is outweighed by a third party's right to be free from 
any reprisal. Moreover, since the statute's effective date, the IRS has 
been operating under reprisal procedures consistent with the proposed 
regulations. Based upon the small number of reprisal concerns expressed 
to date, the Treasury Department and the IRS believe that the final 
regulations, which make no change to the proposed regulations with 
respect to this issue, appropriately balance the competing interests 
reflected in the statute and will not render section 7602(c)(2) a 
nullity.
    More specifically, the Treasury Department and the IRS believe that 
a third party is in the best position to evaluate its relationship with 
a taxpayer and the potential for reprisal if a contact with that third 
party is reported by the IRS to the taxpayer. Requiring the IRS to 
investigate each claim of potential reprisal, including supervisory 
review of a reprisal determination, would place a heavy administrative 
burden on the IRS and, more importantly, would intrude into the third 
party's affairs and require IRS employees to make judgments that they 
are not well positioned to make. For these reasons, the final 
regulations do not adopt the ``probable cause'' standard suggested by 
the commentator. In addition, the rights provided to a taxpayer under 
section 7602(c) (i.e., prior notice that contacts with third parties 
may be made and a record of persons contacted) cannot be equated with a 
person's Fourth Amendment right to be free from unreasonable searches 
and seizures.
    In addition, the statute clearly contemplates that the reprisal 
exception is not limited to concerns of reprisal against the third 
party contacted. The reprisal exception applies when providing notice 
to the taxpayer ``may involve reprisal against any person.'' section 
7602(c)(3)(B) (emphasis added). The statutory exception also does not 
restrict the source of information that can be used in making a 
reprisal determination. In certain cases, an IRS employee may be in 
possession of information that is unknown to the third party contacted 
but which suggests that reprisal may occur against another person if 
the contact with the third party is reported to the taxpayer.
    Finally, limiting the reprisal exception to physical harm would be 
inconsistent with the statute and Congress' clear concern that third 
parties be free from adverse

[[Page 77421]]

consequences as a result of being contacted by the IRS regarding a 
taxpayer's liability. Congress did not define or limit the kind of 
reprisal situations with which it was concerned. Excluding economic, 
emotional, or other types of harm would significantly diminish the 
third-party protections provided by the reprisal exception.

Modifications of Proposed Regulations

Sec.  301.7602-2(c)(1)(i)

    The proposed regulations stated that for purposes of section 
7602(c), an IRS employee includes, inter alia, a person who, through a 
written agreement with the IRS, is subject to disclosure restrictions 
consistent with section 6103. The final regulations provide that an IRS 
employee includes a person described in section 6103(n), an officer or 
employee of such person, and a person who is subject to disclosure 
restrictions pursuant to a written agreement in connection with the 
solicitation of an agreement described in section 6103(n) and its 
implementing regulations. This change was made to provide a legally 
precise statement of the rule and to clarify that persons who provide 
tax administration services to the IRS and who enter into nondisclosure 
agreements with the IRS, as well as prospective bidders who enter into 
nondisclosure agreements, are treated as IRS employees for purposes of 
section 7602(c).

Sec.  301.7602-2(c)(1)(ii) Example 3

    The regulations provide that 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. 
This provision is illustrated by Example 3, where 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, and the second call is answered by 
the office answering machine. The example in the regulations states 
that in both situations the employee leaves a message ``stating only 
his name, telephone number, that he is with the IRS, and asks that the 
taxpayer call him.'' The phrase ``that he is with the IRS'' has been 
deleted from the example in the final regulations because there may be 
situations where it would be inappropriate for an IRS employee to 
identify his or her employer in a telephone conversation or message 
that can be seen or heard by persons other than the taxpayer. See 
section 6304(b)(4).

Sec.  301.7602-2(c)(3)(ii)

    The final regulations add Examples 6(a) and 6(b) to illustrate the 
application of the third-party contact rules to audits of TEFRA 
partnerships.

Sec.  301.7602-2(d)(2)

    The regulations provide that the pre-contact notice need not be 
provided to a taxpayer for third-party contacts when advance notice has 
otherwise been provided to the taxpayer pursuant to another statute, 
regulation or administrative procedure. The proposed regulations 
provide that the Collection Due Process (CDP) notice furnished under 
section 6330 and its regulations is an example of a situation where the 
pre-contact notice requirement is fulfilled by another notice. The 
final regulations modify the proposed regulations to clarify that CDP 
notices sent to taxpayers pursuant to section 6330 and its regulations 
constitute reasonable advance notice that contacts with third parties 
may be made for purposes of effectuating a levy.

Sec.  301.7602-2(f)(7)

    The final regulations add examples to illustrate the application of 
the nonadministrative contacts exception.

Special Analyses

    It has been determined that this Treasury decision 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 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, the notice of proposed 
rulemaking was submitted to the Chief Counsel for Advocacy of the Small 
Business Administration for comment on its impact on small business.

Drafting Information

    The principal author of these regulations is Charles B. Christopher 
of the Office of Associate Chief Counsel, Procedure & Administration 
(Collection, Bankruptcy & Summonses Division).

List of Subjects in 26 CFR Part 301

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

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 301 is 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 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--(A) Initiation. 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.
    (B) IRS employee. 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 a person 
described in section 6103(n), an officer or employee of such person, or 
a person who is subject to disclosure restrictions pursuant to a 
written agreement in connection with the solicitation of an agreement 
described in section 6103(n) and its implementing

[[Page 77422]]

regulations. 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).
    (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 that 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 industry 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 and telephone number, 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)(B) of this section, acting within the scope of his or her 
employment;
    (B) Any computer database or website 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 websites 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) Explanation--(A) 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 1, subchapter 
D (Deferred Compensation) of the Internal Revenue Code, 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) of the Internal Revenue Code, 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) of the Internal Revenue Code, 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.
    (B) 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.
    (C) 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 penalty) and does not 
include the liability for any tax imposed by any other jurisdiction nor 
any liability imposed by other Federal statutes.
    (D) 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.
    (ii) 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.

[[Page 77423]]

    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 section 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.
    Example 6(a). The IRS audits a TEFRA partnership at the 
partnership (entity) level pursuant to sections 6221 through 6233. 
The tax treatment of partnership items is at issue, but the 
respective tax liabilities of the partners may be affected by the 
results of the TEFRA partnership audit. With respect to the TEFRA 
partnership, contacts made with employees of the partnership acting 
within the scope of their duties or any partner are not section 
7602(c) contacts because they are considered the equivalent of 
contacting the partnership. Contacts relating to the tax treatment 
of partnership items made with persons other than the employees of 
the partnership who are acting within the scope of their duties or 
the partners are section 7602(c) contacts with respect to the TEFRA 
partnership, and reasonable advance notice should be provided by 
sending the appropriate Letter 3164 to the partnership's tax matters 
partner (TMP). Individual partners who are merely affected by the 
partnership audit but who are not identified as subject to 
examination with respect to their individual tax liabilities need 
not be sent Letters 3164.
    Example 6(b). In the course of an audit of a TEFRA partnership 
at the partnership (entity) level, the IRS intends to contact third 
parties regarding transactions between the TEFRA partnership and 
specific, identified partners. In addition to the partnership's TMP, 
the specific, identified partners should also be provided advance 
notice of any third-party contacts relating to such transactions.

    (4) Discloses the identity of the taxpayer being investigated--(i) 
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 agent 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 agent has revealed the identity 
of the taxpayer, regardless of whether the revenue agent 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 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 that 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 to 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 in order to 
effectuate a levy.
    (e) Post-contact reports--(1) Requested reports. A taxpayer may 
request a record of persons contacted in any manner that 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.
    (2) 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 inquiry 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

[[Page 77424]]

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)(2)(ii), the term entity means any 
business (whether operated as a sole proprietorship, disregarded entity 
under Sec.  301.7701-2 of the regulations, or otherwise), trust, 
estate, partnership, association, company, corporation, or similar 
organization.
    (3) 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.
    (4) 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 John Doe. The employee may 
record the contact as being with John Doe and is not required by 
this regulation to collect or record any other identifying 
information.
    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 latter contact may be reported as 
being with a person on the street in front of 500 Fernwood.
    Example 3. An IRS employee examining a return obtains loan 
documents from a bank where the taxpayer applied for a loan. After 
reviewing the documents, the employee talks with the loan officer at 
the bank who handled the application. The employee 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 contact with the loan officer is treated as a 
contact with the bank because the loan officer was an employee of 
the bank and was acting within the scope of her employment with the 
bank.
    Example 4. An IRS employee issues a summons to a third party 
with respect to the determination 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 of contacts available 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.
    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 that 
shows the identity of the third party. This third-party contact need 
not be maintained in a record of contacts available 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) Explanation. 
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 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) No prevention or delay of contact. This section does not 
entitle any person to prevent or delay an IRS employee from contacting 
any individual or entity.
    (2) Jeopardy--(i) Explanation. 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 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 that 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 
that 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 that may be relevant to any tax examination or 
collection activity.
    (ii) Record of contact. If the circumstances described in this 
paragraph (f)(2) exist, the IRS employee must still 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 sufficient to constitute good 
cause for the IRS employee to believe that reprisal may occur. The IRS 
employee is not required to further question 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. An IRS employee 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 IRS employee 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 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. Assume the same facts as in 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. An IRS employee is examining a joint return of a 
husband and wife, who recently divorced. From reading the court 
divorce file, the IRS employee 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 IRS employee contacts the ex-wife's new 
employer to verify salary information provided by the ex-wife, the 
IRS employee 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

[[Page 77425]]

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 identify a confidential informant whose identity would 
be protected under section 6103(h)(4).
    (7) Nonadministrative contacts--(i) Explanation. Section 7602(c) 
does not apply to contacts made in the course of a pending court 
proceeding.
    (ii) Examples. The following examples illustrate this paragraph 
(f)(7):
    Example 1. An attorney for the Office of Chief Counsel needs to 
contact a potential witness for an upcoming Tax Court proceeding 
involving the 1997 and 1998 taxable years of the taxpayer. Section 
7602(c) does not apply because the contact is being made in the 
course of a pending court proceeding.
    Example 2. While a Tax Court case is pending with respect to a 
taxpayer's 1997 and 1998 income tax liabilities, a revenue agent is 
conducting an examination of the taxpayer's excise tax liabilities 
for the fiscal year ending 1999. Any third-party contacts made by 
the revenue agent with respect to the excise tax liabilities would 
be subject to the requirements of section 7602(c) because the Tax 
Court proceeding does not involve the excise tax liabilities.
    Example 3. A taxpayer files a Chapter 7 bankruptcy petition and 
receives a discharge. A revenue officer contacts a third party in 
order to determine whether the taxpayer has any exempt assets 
against which the IRS may take collection action to enforce its 
federal tax lien. At the time of the contact, the bankruptcy case 
has not been closed. Although the bankruptcy proceeding remains 
pending, the purpose of this contact relates to potential collection 
action by the IRS, a matter not before or related to the bankruptcy 
court proceeding.
    (g) Effective Date. This section is applicable on December 18, 
2002.

David A. Mader,
 Assistant Deputy Commissioner of Internal Revenue.
Pamela F. Olson,
Assistant Secretary of the Treasury.
[FR Doc. 02-31857 Filed 12-17-02; 8:45 am]
BILLING CODE 4830-01-P