Private Contractors Performing Audits for IRS

There has always been a gray area between core government functions and the use of private enterprise. With IRS regulation changes allowing private contractors to participate in tax audits, the tension in this gray area has already begun to increase.

According to a recent Forbes article, Microsoft has filed an injunction against the IRS regarding its contracting of a private law firm for performing an audit of Microsoft. The injunction seeks visibility under the Freedom of Information Act (FOIA) of the contract between the IRS and the firm performing the audit

Although the IRS has been using private entities in the auditing process for some time, the practice has been traditionally limited to certain discreet functions pursuant to an audit. The IRS revisions to the procedure, and the recent use of a private firm in the actual evaluation of Microsoft’s return, indicate a much more widespread and integrated use of outside entities in the auditing process.

The primary goal of the injunction filed by Microsoft is to see the nature of the contract between the IRS and the firm it hired to perform the Microsoft audit. Most likely, by obtaining this information, Microsoft is preparing to challenge the nature of this contractual relationship in order to ultimately discredit or invalidate any of the audits findings that could be unfavorable to Microsoft.

The results of this legal conflict could have wider impact for the future of tax law. In addition to the constitutional issues involved, the use of private entities in tax return examinations, if allowed to continue as a result of this litigation, could create unprecedented efficiency in the auditing process. Individuals and businesses alike could be much more likely to face tax audits.