c. Third Party Witness Interviews.
An issue frequently arising in the investigation stage is whether the taxpayer’s counsel can be present during the interviews of the third parties. In tax cases, the accountant / return preparer (hereafter in this section, the accountant) is the quintessential third party whose interview the taxpayer’s counsel would want to attend. But, the issue is presented for other third party witnesses as well. Obviously, if the taxpayer’s counsel could be present during the interviews, the counsel’s ability to represent the taxpayer is greatly enhanced, because, in this “game,” knowledge is power.
From the Special Agents’ perspective, the presence of someone other than the witness and, if engaged, the witness’ counsel is problematic, particularly if the other person present is taxpayer’s counsel. Generally, taxpayers and their counsel are not entitled to the fruits of a criminal investigation except as required in disclosure in any criminal case that may follow from the investigation. So, the IRS will prefer to keep the investigation close to the vest where possible. Moreover, having taxpayer’s counsel present could result in disruptions by taxpayer’s counsel and, even where not overtly disruptive, subtle pressure on the third party witness to shape his testimony so as not to directly offend the taxpayer who will quickly learn what the witness said during the interview. So, all other things being equal, the Special Agents will not want taxpayer’s counsel at the interview of third party witnesses.
Let’s focus first on the accountant as the third party being interviewed. Most accountants will be subject to professional obligations that will require that they receive compulsory process before providing information to anyone, including an investigator. Usually, the accountant will have advised taxpayer’s counsel that the IRS desires the interview but, in any event, the IRS is required to notify the taxpayer when it issues the summons because the accountant is within the class of persons designated as “third party recordkeepers.” n1462 So the taxpayer’s counsel will have the opportunity to raise and resolve, if possible, the taxpayer’s counsel attendance at the interview.
n1462 § 7609(c)(2)(E) (excluding from the notice requirement summonses in criminal cases except for third party recordkeeper summons).
In most instances, the accountant will be cooperative with taxpayer’s counsel. If taxpayer’s counsel wants to be present, the accountant will have no objection. Indeed, often the accountant will want taxpayer’s counsel to protect the accountant’s interests in the interview – in effect, formally or informally taking on the representation of the accountant. Taxpayer’s counsel will want to be careful about the potential for a conflict. It is not uncommon in a representation that the taxpayer’s defense may included shifting some or all of the responsibility for tax noncompliance to the accountant. If that is even a possibility at the time of the interview, taxpayer’s counsel cannot represent the accountant because of the potential conflict and has to make that clear to the accountant. So, the question in that case becomes whether the taxpayer’s counsel can appear as an observer with the consent of (i) the accountant being interviewed and (ii) the taxpayer whose consent is needed because his “return information” will be discussed.
Here are the IRM instructions (emphasis supplied): n1464
n1464 IRM 184.108.40.206.7 (10-28-2011), Third-Party Witness's Choice of Representative, here; see also IRM 220.127.116.11.8 (04-30-1999), Disclosure Issues, here.
Any witness, including a third-party witness, has the right to have counsel present at a summoned interview. 5 USC 555(b) The taxpayer has no right to be present himself or to have his counsel present during the questioning of a third-party witness. If a witness's counsel appears to represent persons with conflicting interests, refer to IRM 18.104.22.168, Dual Representation, and consult Associate Area Counsel. A summoned third party may choose to be represented by the taxpayer's attorney at the interview. In that case, consider whether there are dual representation problems and whether the attorney should be disqualified on conflict of interest grounds.
A summoned witness may choose to have observers present at the interview so long as (1) the observers are silent and do not participate in or disrupt the interview in any manner, (2) the taxpayer being investigated provides written consent allowing the disclosure of return information to all attending the interview, and (3) the disclosure of that return information would not seriously impair Federal tax administration.
Parsing this, the general rule is that the accountant can permit taxpayer’s counsel to be present, although, in the absence of the accountant’s permission, the taxpayer has no right have his counsel present. It is important to note the conditions and that, ultimately, the IRS can make a determination that the taxpayer’s counsel’s presence in the interview would “seriously impair Federal tax administration.”
If there is some risk that the IRS will exclude the taxpayer’s counsel on the substantial impairment notion, is there anything that the taxpayer can do. Perhaps, in theory, the taxpayer might move to quash the summons, but that action might be premature because it occurs before taxpayer’s counsel has actually been excluded from the interview. Perhaps the better approach is for the accountant and taxpayer’s counsel to appear at the interview and lay the predicate for taxpayer’s counsel’s presence (accountant and taxpayer permissions). If the IRS insists upon excluding taxpayer’s counsel, the question then is whether the IRS can continue the interview over the accountant’s objection. The IRM suggests (although not as crisply as I would like) that, provided the taxpayer’s the conditions noted above are met, the IRS should terminate the interview and seek to pursue the interview by judicial enforcement of the summons. n1465 Certainly, subject to the risk that the IRS may not agree that it is required to terminate the interview, this would be the better choice than moving to quash because the approval and implementation processes for judicial enforcement of the summons may not be completed and will take time (usually in the taxpayer’s interest). n1466 Moreover, as a practical matter, based on the authority, I am not sure that, absent a very strong showing of necessity to exclude, any court would judicially enforce the summons with a condition that taxpayer’s counsel be excluded. n1467
n1465 IRM 22.214.171.124.8.1 (04-30-1999), Disclosure Issues.
n1466 If the accountant questions the IRS’s exclusion of taxpayer’s counsel and the IRS were for some reason not to terminate the interview, the witness probably could decline to proceed in the absence of taxpayer’s counsel with little risk for “noncompliance” with the summons. All the IRS could do is move to enforce the summons which would permit the taxpayer to intervene to assert the IRS’s abuse of the witness’s choice to have a third party present. The issue of the propriety of the IRS determination could be raised in that proceeding. I doubt that a court would hold the witness in contempt if the witness met the conditions to have a third party present.
n1467 See authorities discussed in the next paragraph and its footnotes.
I have not encountered the situation as to a witness wanting someone other than the witness’ own counsel and taxpayers’ counsel present. Obviously, if the taxpayer does not want the third person to be present, the taxpayer could withhold the consent required. But, if the taxpayer did consent, the IRS presumably would have to make the determination as to whether the presence of the third person would seriously impair tax administration. However, I say again that I have never encountered the situation and, based on my experience, cannot even project that it is likely to occur. n1468
n1468 Having said that it is unlikely, there are some cases, highly unusual, where the witness, with consent of the taxpayer, wanted some third parties present. See United States v. Puckett, 573 F. Supp. 713 (ED TN 1981); United States v. Finch, 434 F. Supp. 1085 (D. Colo. 1977). I suspect that, at some level, these may be tax protestor cases where, let’s just say, taxpayers attempt weird things.