Deposition rules: new Tax Court Rule may change the way IRS pursues depositions.

• Author: Walker, Steven L.
• Position: Legalnews

CPAs Often find themselves representing individuals and businesses being audited by the IRS, as well as negotiating settlement of tax disputes in eases pending before the IRS Office of Appeals. Clients rely on their CPAs, even after a Tax Court petition is filed, to provide tax advice with respect to litigating positions being taken in Tax Court and their likely tax consequences. A new Tax Court Rule, however, may change the way certain cases are handled before the IRS.

The U.S. Tax Court amended its rules, effective Jan. 1, 2010, to authorize the IRS--under certain circumstances--to obtain discovery by taking the deposition of a taxpayer without consent. This is one of the most significant changes to Tax Court practice in recent years and will likely impact the way CPAs represent taxpayers before the IRS.

Prior to the change CPAs rarely allowed a client to have any contact with the IRS to limit the scope of an IRS audit. Tax Court often was the first time that the IRS had an opportunity to cross-examine the taxpayer about the transaction at issue.

Former Tax Court Rule 74 allowed the IRS to take a taxpayer's deposition so long as the taxpayer consented to the deposition, which almost never occurred. Former Rules 74 and 75 provided for the taking of depositions without consent, but such depositions were limited to nonparty witnesses and expert. witnesses. These depositions were considered an extraordinary method of discovery required a court order and rarely occurred.

In light of the IRS' limited ability to take depositions, it has relied upon other discovery methods--requests for production of documents under Rule 72, written interrogatories under Rule 71 and cross-examination at trial--to prove its case.

New Tax Court Rule 74(c)(3)

New Tax Court Rule 74(c)(3) providing that a party may be deposed without consent was made to align (he Tax Court's rules more closely to Rule 30 of the Federal Rules of Civil Procedure, which liberally permits deposition of parties. The new rule reflects the Court's growing acceptance of depositions as a trial preparation tool and activity that may enhance settlements in cases involving expert testimony. (Office of Chief Counsel Notice, Dec. 2, 2009, Amendments to U.S. Tax Court Rules of Practice and Procedure).

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The Tax Court has, however, imposed limits on the IRS' ability to take a taxpayer's deposition.

As Rule 74(c)(1)(B) makes clear, the taking of a deposition of a party is an...