Third-Party Contacts in an IRS Audit: When the Examiner Calls Your Bank or Clients

The IRS's stated practice is to get information from you first. The Third Party Contact Program manual says it is the IRS's practice to obtain information relating to a liability directly from the taxpayer whenever possible (IRM 25.27.1.3). But it also says plainly that situations arise when the IRS must contact third parties. When it does, the law imposes rules.

What counts as a third-party contact

The regulation, as summarized in IRM 25.27.1.2, defines a third-party contact as a communication that is initiated by an IRS employee, made with someone other than the taxpayer, made with respect to determining or collecting that taxpayer's liability, and that discloses both the taxpayer's identity and the employee's IRS affiliation (26 CFR 301.7602-2).

Examples the IRM gives of things that generally are third-party contacts:

• A summons or levy issued to someone other than the taxpayer, such as a bank, credit card processor or employer.
• Questioning a business taxpayer's employees outside the scope of their normal employment.
• Following up with a third party who called the IRS first, to solicit more information.

Examples that are not third-party contacts include computer database searches with no one on the other end, contacts with government offices (unless the contact concerns your business with that office), unsolicited information a third party volunteers, contacts with your authorized representative, contacts about an industry where no specific taxpayer is identified, and contacts with your current employees or officers acting within the scope of their employment, which the IRM presumes during business hours on business premises.

The notice requirement

IRC 7602(c)(1), as amended by the Taxpayer First Act, says an IRS employee may not contact anyone other than the taxpayer about the determination or collection of the taxpayer's liability unless the contact occurs during a period, not longer than one year, specified in a notice that:

• tells you contacts with other persons are intended during that period, and
• is provided to you not later than 45 days before the period begins.

The statute also says the notice may be issued only if there is an actual intent, at the time, to contact third parties. It is not supposed to be boilerplate.

In exams, the notice is Letter 3164. The IRM says Letter 3164-E is generally used, the notice must state the tax period and the contact period, and the contact period begins on the 46th day after the date of the notice and ends one year later (IRM 4.10.1.2.1.14). Campus correspondence exams use Letter 3164-E as well (IRM 4.19.13.10). Publication 1 no longer satisfies the advance notice requirement.

If the IRS plans to keep contacting third parties past the year, it issues a refresher letter. For joint return liabilities, each spouse gets a separate Letter 3164 (IRM 25.27.1.3.1).

Your right to a list

IRC 7602(c)(2) requires the IRS to periodically provide you a record of persons contacted, and to provide it on request. The IRM details the request rules (IRM 25.27.1.5):

• You can ask orally or in writing, at any time.
• Include your name, address, TIN and the tax periods.
• One taxpayer per request. Spouses each request separately.
• The request covers contacts made before the request date, not future contacts.
• Requests must be at least 90 days apart.

The list comes on Letter 3173, which the IRM says should be mailed within 14 calendar days of the request.

The exceptions

IRC 7602(c)(3) says the rules do not apply to contacts you authorized, where the IRS determines for good cause that notice would jeopardize collection or may involve reprisal against any person, or with respect to a pending criminal investigation. The regulation adds government entities, confidential informants and contacts in pending court proceedings (IRM 25.27.1.3.2).

Reprisal deserves a word. When the IRS contacts a third party, the employee asks whether the person fears reprisal, and, if so, that contact is left off the list you receive. The IRM says any reprisal concern is taken at face value (IRM 25.27.1.3.4).

Authorizing contacts yourself

You can authorize specific contacts using Form 12180, Third Party Contact Authorization Form. The IRM says each authorized contact should be listed, blanket authorizations are not accepted, both spouses sign for joint liabilities, and you can revoke the authorization at any time. Authorized contacts are not recorded or reported back to you (IRM 25.27.1.3.5).

There is a twist the IRM is careful to note: refusing to authorize does not stop the IRS. You cannot prevent a third-party contact by withholding consent. You can only make sure the notice and recording rules are followed.

In CP2000 cases, the consent form works differently. When you dispute an information return, AUR will contact the payer only if you provide a signed Form 2624, Consent for Third-Party Contact (IRM 4.19.3.23.9.6). See disputing a wrong 1099.

What the IRS can tell a third party

A third-party contact necessarily reveals that the IRS is looking at you. The law limits how much more it reveals. The Third Party Contact Program manual explains that IRC 6103(k)(6) allows IRS employees to disclose return information only to the extent necessary to obtain information that is not otherwise reasonably available (IRM 25.27.1.1.1). An examiner verifying a payment with a vendor needs to identify you and the transaction, not discuss your audit.

The IRS also records each reportable contact on Form 12175, a separate form for each third party on each day of contact, and that record is the source of the list you can request (IRM 25.27.1.4). When the IRS issues a summons to a third party under the special third-party summons procedures, the copy of the summons you receive satisfies the recording requirement for that contact.

How to keep third parties out of your audit

The most effective strategy is the simplest. Give the examiner what the examiner needs, so the examiner has no reason to go elsewhere. The IRM itself tells examiners to explain to reluctant taxpayers that withholding records "will only prolong the examination or investigation since third-party inquiries will, by necessity, be initiated" (IRM 4.10.2.10.2).

1. Produce bank records yourself when they are legitimately requested. A summons to your bank is a third-party contact you could have avoided.
2. Offer customer or vendor information in a controlled way, such as invoices and contracts, instead of leaving the examiner to call customers.
3. Read every letter for "3164." If one arrives, call your representative. It means the examiner has decided records from you are not enough.
4. Request the contact list at sensible intervals so you know who the IRS has spoken with.
5. Prepare your staff. Employees acting within the scope of their jobs on business premises are not third parties under the definition. Make sure they know to route IRS questions appropriately.

When the contacts have already happened

If a third party has already been contacted without the required notice, talk to counsel about what that means for your case. Do not raise it in anger at the examiner's desk. The procedural protections in section 7602(c) are real, and they are best used deliberately.

One practical note for business owners: the third parties most likely to be contacted in an exam are the ones whose records mirror yours. Banks, payment processors, large customers and major vendors. If you would rather those relationships never hear from the IRS, the answer is the same every time. Produce the records yourself, early and completely.

For related guidance, see responding to document requests and bank deposits analysis, which is the most common reason examiners want bank records in the first place.