The Internal Revenue Service’s Director of Collection Policy recently released Memorandum SBSE-05-0912-075, revising prior guidance to IRS collection employees on their obligations to preserve electronic and paper documents related to disputes with taxpayers.  This Memorandum generally follows existing law, but represents a welcome departure from recent guidance issued by the IRS Office of Chief Counsel in Notice (CC-2012-017), which we discussed in a prior post.  As we discuss in more detail after the jump, the Memorandum:

  • Generally assigns responsibility for the document preservation process to IRS Collection Advisors and agency counsel;
  • Expansively describes “potentially relevant information” subject to preservation, specifically listing extensive categories of electronically stored information and paper documents that IRS employees must preserve; and .
  • Signals that the agency views preservation of potentially relevant information as a higher priority than in prior guidance.

The Memorandum specifies relatively early dates in the dispute development process when the IRS believes its obligation to preserve documents attach.  We have previously noted the complications that can arise in determining the point in the development of a tax dispute when the IRS and taxpayers “reasonably anticipate” litigation and are required to take action to preserve potentially relevant documents.  The recent Memorandum clarifies that the obligation to preserve arises no later than the date that IRS refers a matter to the Justice Department for filing of suit.  An example in the Memorandum clarifies that the obligation to preserve can arise earlier, such as where the taxpayer presents an administrative claim and indicates that it will litigate if the claim is denied.

The Memorandum identifies “Collection Advisors” and agency counsel as the principal actors responsible for coordinating E-discovery compliance.  Agency counsel is responsible for determining when to issue a litigation hold in response to filed or reasonably anticipated litigation.  That determination is generally communicated to the relevant Collection Advisor, who is then responsible for identifying and contacting all potentially relevant IRS employees and instructing them on their document and file preservation responsibilities.

The Memorandum expansively describes the documents to be preserved.  In addition to contemplating extensive efforts to identify IRS employees familiar with aspects of a dispute, the Memorandum broadly describes the information that must be preserved.  Collection employees are instructed that all electronic materials “relating to a particular taxpayer’s case must be preserved” and explains that privilege or relevancy determinations are to be made by counsel, not field employees.  The Memorandum goes on to provide a lengthy (but non-exhaustive) list of documentation to be preserved including e-mail, word-processing documents, spreadsheets, telephone logs, case history reports, research materials, and related metadata.  It further requires review of hard drives, portable thumb drives, internet data, and back-up or archived material.

Two potential gaps in this listing are worthy of note.  First, because collection activity often involves multiple targets (e.g., a corporation and its officers or transferees), the definition of “taxpayer” applied will be important.  If IRS treats each target as a separate taxpayer, it might not preserve important information associated with other targets of the same collection activity if it limits preservation to a narrowly-defined “taxpayer.”  Second, the Memorandum reflects an IRS expectation that e-mail communications amongst IRS employees will be preserved by having the individual recipients print copies of the e-mail, place the paper copy in the official file, and delete the original e-mail.  Given that studies have shown that relatively few e-mails are ever printed or otherwise preserved, placing principal reliance upon paper copies of e-mail communication may be less than optimal.

The Memorandum emphasizes document preservation procedures instead of compliance cost containment.   In our prior post on the September 2012 Office of Chief Counsel Notice on e-discovery compliance, we noted that the scope of preservation adopted in that Notice was not in step with the law on preservation.  That Notice had suggested that “it may be appropriate to forego . . . litigation hold procedures” (emphasis added) where potentially relevant information was information that the agency viewed as “not reasonably accessible” due to cost or burden.”  In fact, as previously noted, the rules-based right not to search or produce potentially information identified to an opposing party as not reasonably accessible due to burden or cost –a claim later subject to proof if challenged – is an issue of production, not preservation.  The Memorandum does not contain this guidance and, in fact, correctly differentiates between the scope of preservation and production:

All ESI is subject to discovery if it is relevant to the case. For purposes of determining relevancy, the nature of the litigation or anticipated litigation, including the time periods involved, the allegations made by the parties, and the subject matter of the litigation, must be considered. While all potentially relevant ESI must be preserved, this does not mean that the information must be or will be produced in litigation.

Of course, the Memorandum explicitly applies only to personnel in the IRS Collection function, but its issuance was coordinated with the IRS Office of Chief Counsel.   As Chief Counsel is the IRS component responsible for establishing agency-wide procedures on document retention, the helpful guidance in the Memorandum hopefully reflects that the agency is moving in a positive direction in addressing e-discovery issues.