Taxpayer interviews, recordings and the right to representation under IRC 7521

What counts as an interview

IRM 4.10.3.4 defines an interview as a meeting between two or more people, in person, by phone or by video, to gather information to investigate or resolve issues. IRC 7602 authorizes the IRS to take testimony under oath. The IRM explains why interviews matter to examiners: oral testimony can provide information not available from documents, corroborate the return, add information not on the return, and establish the taxpayer's intent. That last item is why interview preparation matters for penalty exposure.

IRC 7521 applies to interviews relating to the determination or collection of tax. Under 7521(d), it does not apply to criminal investigations or to investigations of IRS employee integrity.

The initial interview

IRC 7521(b)(1) requires the IRS, before or at an initial in-person interview about the determination of tax, to explain the audit process and the taxpayer's rights. IRM 4.10.3.4.1.1 implements that: the examiner verifies receipt of Pub 1 and Notice 609, describes the rights, describes the examination process and the resolution options for unagreed cases (managerial conference, Fast Track Settlement, Appeals, Tax Court), and tells the taxpayer that Appeals needs 365 days on the statute and may send back cases with new information or issues. “Initial interviews should be conducted face to face whenever possible.” SB/SE revenue agents (GS-12 and below) set a mutual commitment date at the end of the first appointment.

Examiners must give their name and identification number in personal and phone contacts and, in the first conversation, the group manager's name and phone number (IRM 4.10.1.2.2.2). If identity is in doubt, IRM 4.10.3.4.1.1 has the examiner provide the IRS verification number.

Under IRM 4.10.3.4.4, office interviews are at the IRS office closest to the taxpayer; field interviews are at the residence, place of business or where the original books are kept. The initial appointment is supposed to be held within 20 to 35 calendar days of opening the case.

Suspending to consult a representative

IRC 7521(b)(2) is the core protection. If the taxpayer clearly states at any time during an interview that they want to consult an attorney, CPA, enrolled agent, enrolled actuary or other person permitted to represent them, “such officer or employee shall suspend such interview regardless of whether the taxpayer may have answered one or more questions”. The only exception is an interview initiated by an administrative summons; IRM 4.10.3.4.5.2 adds interviews required by court order.

After the request, the examiner must “allow the taxpayer a minimum of 10 business days to permit such consultation and secure representation,” with extensions case by case, and may hand over or mail an IDR explaining what is needed. The same 10 business days apply if the taxpayer asks for representation before the first appointment is scheduled (IRM 4.10.2.9.1), and examiners are told not to ask questions in that first call so as not to appear to bypass the representative.

Suspension has limits. Work the examiner can do at the office without the taxpayer, such as reviewing records already received or writing up the case, continues. Where the statute has 270 days or fewer left, or third-party evidence may be destroyed, correspondence and third-party contacts need not wait. And IRM 4.10.3.4.5.2 warns: “An administrative summons should be issued if the taxpayer abuses this process through repeated delays or suspensions of interviews.”

Does the taxpayer have to attend?

IRC 7521(c) lets a qualified representative with a written power of attorney represent the taxpayer at an interview, and says: “An officer or employee of the Internal Revenue Service may not require a taxpayer to accompany the representative in the absence of an administrative summons”. IRM 4.10.2.9.1 adds the IRS's expectation: the representative must commit to having first-hand knowledge of the taxpayer's business operations, affirm that the examiner can rely on the information, and agree to follow up promptly on anything not answered at the interview.

IRM 4.10.3.4.3.1 says the examiner may interview the representative without the taxpayer if the representative has first-hand knowledge of the business, its practices, bookkeeping, accounting and daily operations, and will ask questions (about financial accounts, records kept, use of a bookkeeper) to test that knowledge. If the answers show the representative lacks that knowledge, expect a request for the taxpayer's appearance and, failing that, a summons. Deciding whether the client attends is a judgment about the client's knowledge and demeanor and the issues; the statute gives the choice to the taxpayer unless a summons issues.

Bypassing a representative

IRC 7521(c) allows an examiner, with the immediate supervisor's consent, to notify the taxpayer directly that the representative is responsible for unreasonable delay or hindrance. IRM 4.10.3.4.3.1 describes the triggers: failing to submit records promptly, missing appointments, and not returning calls or letters. The procedure is in IRM 4.11.55.4. Bypass is a real risk when a representative is overcommitted; documenting each response and request for more time avoids it. See when the IRS contacts your client directly.

Recording interviews

IRC 7521(a)(1) requires the IRS to allow a taxpayer, on advance request, to make an audio recording of an in-person interview at the taxpayer's expense and with the taxpayer's equipment. IRM 4.10.3.4.7.1 (following Notice 89-51) sets the conditions:

The IRS may record on its own initiative if it notifies the taxpayer 10 calendar days in advance (Letter 2156), with territory manager approval (IRM 4.10.3.4.7.2). Under IRC 7521(a)(2) the taxpayer can get a copy or transcript on paying the cost; IRM 4.10.3.4.7.4 says a copy of an IRS audio recording is provided on media the taxpayer supplies without a fee, while a third-party transcript is obtained from the stenographer.

Recording changes the tone of an interview, and the IRS will record too. It is most useful when the client's account of facts is central to an issue such as intent or business purpose, and when you expect the interview to be cited later.

Financial status techniques and home visits

IRC 7602(e) limits lifestyle audits: “The Secretary shall not use financial status or economic reality examination techniques to determine the existence of unreported income of any taxpayer unless the Secretary has a reasonable indication that there is a likelihood of such unreported income.” Minimum income probes remain part of exams under IRM 4.10.4. On residences, IRM 4.10.3.5.5.2 says that when determining the taxpayer's financial status, “an inspection of the interior of the home is not required”; public records and a drive through the neighborhood are the listed alternatives. A home office deduction is different, since the space itself is at issue (IRM 4.10.3.5.5.1).

How the examiner runs the interview

IRC 7521(b)(1)(A) requires the examiner, before or at the initial in-person interview, to give “an explanation of the audit process and the taxpayer's rights under such process”; the Pub 1 confirmation described above is how that is documented, and the IRM tells examiners to record both the confirmation and the discussion. What follows is planned. IRM 4.10.3.4.2 has the examiner sort what is known about the case into three groups before any interview: information that can be documented and need not be discussed, information that may be documented but needs discussion, and “Information that must be developed by testimony.” The outline is built from the third group, so expect questions aimed at facts no document supplies: who did what, when a decision was made, why a payment was characterized as it was.

The technique is also prescribed. IRM 4.10.3.4.5.1 tells examiners to use short questions on one topic, to ask for narrative answers rather than yes or no, to avoid leading questions, and to “Ask how the taxpayer learned what they state to be fact. The taxpayer should also be required to provide a factual basis for any conclusions stated.” Incomplete or unresponsive answers are to be followed up until “all information, which can reasonably be expected, has been secured.” A client who answers a question about intent with a conclusion (the trip was for business) will be asked for the facts behind it, so prepare the facts, not the conclusion. The initial interview also covers the return preparer: whether the return was prepared for compensation, what the client gave the preparer, whether the preparer signed and included an identification number, and whether the client got a copy (IRM 4.10.3.4.6). Those answers feed preparer penalty and reasonable cause determinations.

The record the examiner makes is the one that will be read later. IRM 4.10.3.4.6 says examiners take brief notes and then “Prepare a memorandum of interview (MOI) immediately following the meeting or shortly thereafter, fully documenting the statements and replies made by the taxpayer.” Its stated purpose is to “document statements made by the taxpayer, refute subsequent contradictory statements, and support examination positions taken.” SB/SE revenue agents and tax compliance officers record the initial interview on Lead Sheet 400, Initial Interview Questions and Notes, which is part of the workpapers. Two practice points follow. Send the examiner a short letter after the interview stating what was said on any point that matters, so the file contains the client's version alongside the memorandum. And when the case goes unagreed, get the memorandum and the lead sheet with the rest of the file (see getting the exam file); a protest that contradicts the MOI without explaining why will lose credibility in Appeals.

Interviews of third parties follow the same rules plus the third-party contact procedures in IRM 25.27.1. IRM 4.10.3.4.1.3 states the policy: “Information will be collected, to the greatest extent practicable, directly from the taxpayer to whom it relates”, and information obtained from third parties “will be verified to the extent practicable with the taxpayer before action is taken.” If the examiner relies on a customer's or former employee's account, you are entitled to hear it and respond before the report is written; ask for the third-party contact list and the substance of what was said. Subsequent interviews are held when requested information was not provided, more detailed explanations are needed, or the examiner wants to review progress (IRM 4.10.3.4.1.2), so a complete IDR response is the way to keep the client out of the second interview.

Preparing for the interview

1. Get the Form 2848 on the CAF before the appointment so scheduling goes through you.
2. Read the IDR and the issues in the opening letter; prepare the client only on those issues and on the business overview the examiner will ask for (history, operations, recordkeeping, bank accounts).
3. Decide whether the client attends. If you attend alone, make sure you can answer the first-hand-knowledge questions or commit to written follow-up.
4. If recording, send the written request at least 10 calendar days ahead.
5. Agree on a mutual commitment date and the next steps before the meeting ends, and confirm them in writing.
6. After the interview, send a short letter confirming what was provided and what is to follow; it protects against later claims of delay.

Summoned interviews are different: no suspension right and no appearance by representative alone. See IRS summonses.

Questions practitioners ask