Co-authored by: Gil Keteltas

The Internal Revenue Service Office of Chief Counsel recently issued Notice (CC-2012-017, Sept. 13, 2012), updating its internal procedures for complying with the agency’s e-discovery obligations.  The Notice updates and supersedes prior guidance to agency attorneys regarding their responsibilities in ensuring compliance with the agency’s e-discovery obligations.  As we discuss after the jump, the Notice:

  • introduces the concept of “key custodians” to the IRS discovery lexicon;
  • establishes several procedural requirements apparently designed to improve compliance with the procedures by agency staff;
  • continues to reflect the agency’s reluctance to embrace e-discovery as the norm in litigation; and
  • in the cases of inaccessible information and metadata, arguably gives advice that is inconsistent with procedural discovery rules and the case law interpreting those rules.

The Notice introduces the concept of “key custodians” to the lexicon as the focal point for identification of existing Electronic Stored Information (ESI).  Key custodians are defined as the individuals most likely to have information subject to discovery and who the IRS will rely on to build or defend the case, but excludes most managers and executives who have only been advised of the case.  Multiple key custodians may exist, and the responsible IRS attorneys are instructed to identify key custodians very early in the proceedings.  Each key custodian is to be sent an electronic or paper litigation hold notice requiring them to identify all potentially relevant documents and ESI in their possession, or control and follow-up notices are required at six month intervals.  Each key custodian is required to provide a written response identifying the documents in their possession or control.

In addition, the Notice establishes several procedural requirements apparently designed to improve compliance with the procedures by agency staff.  Assigned staff attorneys are directed to provide, in writing, the litigating attorneys representing the agency with the identities of the key custodians and descriptions of the documents identified by the key custodians.  Documentation concerning compliance with these procedures must be submitted to a centralized location in the IRS National Office.  Collectively the requirements of written communications and submission of the documentation to a centralized e-mail contact should make it more difficult for staff attorneys and others to take shortcuts in the process.  

The Notice continues to reflect the agency’s reluctance to embrace e-discovery as the norm in litigation.  IRS continues to balance the obligations imposed by the Federal Rules of Civil Procedure and the Tax Court Rules with its concerns regarding litigation costs and potential violations of the Section 6103 taxpayer privacy protections.  Several classes of cases are exempted from the procedures.  In addition, responsible attorneys are directed that “a litigation hold should be narrowly tailored to cover those individuals likely to have [relevant] information” and that “narrowing the scope of a litigation hold . . . reduces the compliance burden on Counsel.”  Similarly, the Notice separates the document identification and document collection processes, advising key custodians (not Counsel) with responsibility for holding relevant documents until they are requested in discovery.   More ominously, the Notice repeatedly references the agency’s limited resources for processing e-discovery data, suggesting that the agency may not be prepared to produce e-discovery information in most cases.

Finally, some advice in the Notice does not appear to be consistent with the procedural rules governing e-discovery.  For example, the notice states that “it may be appropriate to forego the litigation hold procedures” in cases where “potentially relevant ESI  . . . is not reasonably accessible because of undue burden or cost.”  But that advice mixes up the concepts of preservation and productionFederal Rule of Civil Procedure 26(b)(2)(B) states that a “party need not provide discovery of electronically stored information from sources that the party identifies as not reasonably accessible because of undue burden or cost.”  But production of such information can be ordered if the requesting party shows good cause.

The Federal Rules Advisory Committee makes clear that a claim that electronically stored information is not reasonably accessible does not necessarily relieve a party of its duty to preserve such information.  And preservation of information that is claimed to be inaccessible should be a topic for discussion by the parties:

A party’s identification of sources of electronically stored information as not reasonably accessible does not relieve the party of its common-law or statutory duties to preserve evidence.  Whether a responding party is required to preserve unsearched sources of potentially responsive information that it believes are not reasonably accessible depends on the circumstances of each case.  It is often useful for the parties to discuss this issue early in discovery.

In addition, the notice suggests that the production of metadata should be opposed where the metadata itself is not relevant to the action.  While that is certainly a basis to oppose the production of metadata, the advice does not address the possibility that the production of metadata may be independently necessary to render a form of production (like TIFF image with a load file) reasonably usable. 

The Sedona Principles observe that a choice of form of production should take into account “the extent to which the production of metadata will enhance the functional utility of the electronic information produced and allow the parties to conduct a more cost-effective and efficient review.”  And, in Nat’l Day Laborers, a FOIA opinion (subsequently withdrawn), Judge Scheindlin used less technical terms, rejecting the government’s rationale for not producing metadata in that case – namely that plaintiffs’ failed to request it – as a “lame excuse for failing to produce the records in a usable format.

Stay tuned to see how the revised IRS procedures play out in practice.  But bottom line – tax practitioners should continue to develop their knowledge of e-discovery, or associate with colleagues who have that knowledge.