Congress should protect small business from IRS overreach

The Internal Revenue Service (IRS) has faced intense scrutiny over the past year thanks to the Lois Learner scandal involving the IRS targeting of groups because of their political and religious beliefs, the apparent perjury by IRS officials in testifying before Congress and the leaking of private material by IRS employees. However, there is a lower profile yet potentially more critical dispute currently playing out before federal judges that impact businesses large and small across the nation.

As many right leaning non-profit groups can attest, the IRS audit process has become increasingly abusive and newly released court documents show why.

It appears the IRS has unilaterally taken actions vastly expanding their tools and powers in order to force companies to provide large amounts of private information not required under tax law. Second, the IRS is also treating the audit process as a hostile and adversarial system, rather than a cooperative process as it has been traditionally treated under the law.

The issue stems from a long running dispute with Microsoft. Government officials, counter to federal law, are trying to bully the company into extending an audit process that should have ended over 6 years ago. This battle of the titans will set a precedent that the IRS will use against medium and small sized businesses during an audit if these tactics and power grabs are allowed to stand.

Federal law provides a three-year time period for the completion of an audit, yet IRS officials have been digging through the company's files for over nine years. The Seattle Times reports that “Microsoft and the Internal Revenue Service (IRS) are set to take to open court this week after a month long delay to argue over a longtime tax dispute. At issue at the hearing, scheduled for Tuesday in U.S. District Court in Seattle, is whether some of the methods the tax agency used in its nine-year audit of the software giant are worthy of further investigation.”

Seattle-based Microsoft had to force a hearing on this matter because the IRS refused to submit a final tax bill to Microsoft for a dispute over taxes owed from 2004 to 2006. The IRS has been dragging out this audit process for close to a decade, and continues to pressure the company to sign waivers extending the audit infinitum.

Although a waste of resources, time and money, Microsoft has the ability to fight the federal behemoth while smaller companies do not. A decade-long audit would bankrupt most medium and small-sized companies and that's why it is critical for members of Congress to take note.

Additionally, the IRS has taken steps to turn the audit process in this case into an adversarial affair. In 2014, the government in an unprecedented move hired Quinn Emanuel, a L.A.-based litigation firm to help audit the company. The IRS has billions in budget, teams of lawyers and accountants, yet they decided spend $2.2 million dollars outsourcing their legal team to lawyers that charge in excess of $1000 an hour.  It should come as no shock to anyone following the IRS scandal that Quinn Emanuel is chock full of lawyers who are also large contributors to the party in power. The hiring of a private firm well connected to the administration in power today smells of cronyism.

The purpose of an audit is to identify the appropriate level of taxation for an individual or corporation and if there is a disagreement, then the taxpayer can appeal, litigate or negotiate. The IRS seems to have entered this process on the front end in a confrontational manner. 

This fight actually has little to do with Microsoft. It has everything to do with the prospect of the IRS abusing power, wasting taxpayer money and setting dangerous precedents for enforcement against small businesses.

It is true that complicated tax cases sometimes require consultation with outside experts, but that has not historically included a core government function like the examination of tax returns. The IRS even promulgated new regulations granting their hired guns authority to participate in questioning a taxpayer during the examination process, making it unnecessarily hostile and adversarial. And from a policy standpoint, it makes no sense to treat one of American’s largest taxpayers and most successful companies like a criminal enterprise. That is not what America is all about.

Congress should prepare for yet another IRS scandal to be dropped in their lap if this dispute is not resolved soon and the IRS fails to dial back the use of extraordinary government power to convert a simple audit into a federal case.

The actions of the IRS that put this matter into court threatens to set a dangerous precedent on the power of the federal government with regard to tax issues. Congress needs to protect citizens against IRS overreach, and now a potential new procedure that will allow private tax information to be shared with outside law firms.

Quinlan is the co-founder and president of the Center for Freedom and Prosperity, a Washington-based think tank promoting free market ideals and ideas.