The IRS’s Reach in a Research Tax Credit Audit

Published Categorized as Research Tax Credits
What Is A Project For The Research Tax Credit?, Houston Tax Attorney

The IRS has a track record of taking aggressive stances when auditing research tax credits.  But its position in the Bayer Corp. & Subs v. United States, Civil Action Nos. 08-693, 09-351 (W.D. PA 2010), raises the question whether a taxpayer claiming a research tax credit is signing up to disclose their confidential information.  

Facts & Procedural History

Bayer filed a refund suit to recover $50 million in research tax credits. The IRS audited the tax credits and demanded that Bayer produce millions of pages of supporting documents. 

This issue was eventually considered by the court. The U.S. Tax Court denied the taxpayer’s request to limit the government’s ability to disclose confidential information acquired during the audit of the research tax credits.

During the course of the litigation, the IRS and U.S. Department of Justice (“DOJ”) sought the production of information that included “confidential and proprietary information, trade secrets, commercial information, strategic planning information, commercial planning information, and commercial pricing relating to the sale, distribution and/or marketing of certain products.”

Bayer and the government were not able to reach an agreement on how the information would be handled by the government.

The Court’s Protective Order

Bayer was concerned that the agreement would allow the IRS and DOJ to pass the information along to other federal agencies. Bayer argued that this information could be subject to disclosure under the Freedom of Information Act pursuant to request submitted by a third party to these other agencies.

The court concluded that the agreement included sufficient safeguards, nothing that “the federal agency or department which receives the Confidential Information from the Defendant becomes a ‘Receiving Party’ as that term is defined in the Order, with all the obligations of the Defendant set out therein, including the obligation to destroy or return all confidential information (with some specified exceptions) within sixty (60) days after the conclusion of the litigation.”

Confidentiality Under Section 6103

Given that the case was before the court in a refund claim, the court was able to reach this conclusion in the context of a protective order without even having to address Section 6103. Section 6103 is the code section that is normally implicated in disputes with taxpayers and the IRS over confidential information.

It seems this section may have also protected the information at issue in this case. Section 6103 provides that no employee of the United States–not just an IRS or DOJ employee–can disclose confidential tax return information. It goes on to define confidential tax return information as essentially any information provided to the IRS on audit. The implementing statute even allows for an award of actual and punitive damages against the IRS for unauthorized disclosures.

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