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US Inbound: IRS outsources transfer pricing examination to law firm

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Jim Fuller


David Forst

In a quite surprising development, the IRS has retained the law firm of Quinn Emanuel Urquhart & Sullivan to assist in a transfer pricing audit of Microsoft. Under its agreement with the IRS, Quinn Emanuel will receive $2,185,500 for its provision of these legal services. Under disclosed portions of the contract, Quinn Emanuel will be closely associated with the IRS examination team. The relevant section of the contract states that the "Contractor will work collaboratively with the Service to support the examination". The law firm is tasked in the agreement with reviewing all the "key documents, including reports, position papers, information document request (IDR) responses, and so on (prepared by or on behalf of the taxpayer or the IRS) and all relevant legal authorities to build a thorough understanding of the factual and legal issues and the record to date".

Microsoft also believes that the IRS has retained a second high-profile law firm in connection with the examination. Microsoft filed a complaint in a district court seeking to require the IRS to respond to four Freedom of Information Act requests. Microsoft believes Boies Schiller & Flexner also has been retained by the IRS to assist in the government's § 482 examination. Boies Schiller is reportedly set to receive another $350,000.

This is a very interesting and unfortunate development in the tax law: the IRS has retained an outside law firm (or two outside law firms) to sue a taxpayer, or assist in bringing an action against a taxpayer, asserting that the taxpayer might owe additional US federal income taxes. The law firm apparently also will assist in determining whether taxes are owed and then presumably assert the grounds for arguing that those taxes, determined in part by the law firm, should be paid to the IRS. Therefore a private law firm is performing functions heretofore performed only by the US government.

While Microsoft's IRS examination involves a US-based (outbound) taxpayer, there would not seem to be anything to stop the IRS from doing the same thing in the examination of an inbound taxpayer.

Microsoft also seeks to quash certain IRS summonses. One purports to be a "designated" summons. If it is upheld as such, it would unilaterally extend Microsoft's statute of limitations. Microsoft argues that the IRS isn't entitled to judicial enforcement of those summonses because the IRS improperly delegated its authority to an outside law firm. Thus, the court might have to consider whether the IRS is illegally attempting to outsource an inherently governmental function to a third-party contractor, and whether the IRS has impermissibly outsourced other key aspects of the tax audit in violation of federal law.

Jim Fuller (jpfuller@fenwick.com) and David Forst (dforst@fenwick.com)

Fenwick & West

Tel: +1 650 335 7205; +1 650 335 7274

Website: www.fenwick.com

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