Here We Go Again … IRS Destroys Another Hard Drive

The Internal Revenue Service appears to have violated a court order once again requiring the preservation of evidence needed by investigators looking into questionable practices at the agency. In a case sure to stir up memories of the Lois Lerner investigation, which saw IRS Commissioner John Koskinen dragged before Congress for multiple hearings, the agency destroyed a computer hard drive belonging to an IRS official connected to the subject of a Congressional query.

Earlier this year, the IRS was ordered by a federal judge to preserve documents – including electronic documents – that were possibly related to an ongoing dispute between the agency and Microsoft.

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The disagreement between the IRS and the software giant centered on compliance with the federal tax code, specifically, the agency was looking into the company’s transfer pricing practices. A major concern in establishing the tax liability of multinational corporations, transfer pricing refers to the sale of goods and services between entities that are part of the same corporate structure.

Some companies have been known to illegally reduce their tax liabilities by “mispricing” the goods and services exchanged between their subsidiaries.

The computer hard drive the IRS destroyed belonged to Samuel Maruca, who oversaw the transfer pricing section at the agency’s Large Business and International division.

In the Microsoft case, the software giant’s attorneys became curious when they were directed to meet with, and in some cases have their clients give depositions before non-IRS attorneys as part of the case.

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The company filed a Freedom of Information Act request, and discovered that the IRS had spent more than $2.5 million on outside legal assistance, often to trial lawyers charging the government $1,000 per hour or more.

The revelation led Microsoft to protest that senior executives from the company ought not to be forced to comply with demands to testify, on the grounds that the private attorneys do not have the legal standing to conduct interviews related to an IRS audit.

A federal judge disagreed, and though he said that the involvement of the outside attorneys was “troubling,” told the company to comply.

However, while the courts might have sided with the IRS, the Senate Finance Committee and the House Oversight and Investigations Committee were not pleased to learn that the agency, which employs thousands of tax attorneys, spent millions of dollars on outside legal help.

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Sen. Orrin Hatch, the Utah Republican who chairs the Senate Finance Committee, wrote to Koskinen in May, noting, “The IRS has over 40,000 employees dedicated to enforcement efforts, including more than 36,000 tasked specifically with exams and collections. If none of these employees, nor IRS Office of Chief Counsel or Department of Justice tax attorneys, have sufficient expertise to undertake the examination at hand, we should have a broader conversation about your agency’s hiring practices and recruitment needs.”

Hatch also challenged the idea that it was acceptable to allow non-government attorneys to participate in the audit of a private firm.

“Unlike private contractors, Treasury Department officials are required to swear an oath to the Constitution and are subject to rules of conduct and federal law regulating their interactions with taxpayers…. Turning over inherently government functions such as the conduct of an examination to private contractors not only jeopardizes the rights of taxpayers, but also confuses the examination process and changes the well-regulated relationship between revenue examiners and private taxpayers.”

The revelation that the agency had destroyed a hard drive that Congressional investigators viewed as central to an ongoing inquiry infuriated House Oversight and Investigations Committee Chairman Jason Chaffetz (R-Utah).

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In a letter to Koskinen last week, co-signed by Ohio Rep. Jim Jordan, he wrote, “It is stunning to see that the IRS still does not take reasonable care to preserve documents that it is legally required to protect,” and demanded information related to the agency’s document retention policies.

In a line that seems to presage further uncomfortable Congressional hearings for Koskinen, they also wrote, “The destruction of evidence subject to preservation orders and subpoenas has been an ongoing problem under your leadership at the IRS.”