Third Party Contacts

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 301 [REG-104906-99] RIN 1545-
AX04

TITLE: Third Party Contacts

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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
reputation 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 reputation 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 version and the addition of
an exception for situations involving potential reprisal express
Congressional concern that the business and reputation 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 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. §
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 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. 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 Adoption of Amendments to the Regulations Accordingly, 26
CFR part 301 is proposed to be amended as follows:

PART 301--PROCEDURES AND ADMINISTRATION

Par. 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:

§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;

(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) 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 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.

Commissioner of Internal Revenue

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