New law prohibits IRS summons of tax software and source code.

• Author: Brauweiler, Daniel C.

The IRS Restructuring and Reform Act of 1998 (IRSRRA) provides major protection to corporations using commercial tax software. In the recent past, the IRS has aggressively sought full access to commercial tax software used by taxpayers in preparing taxpayers' returns. In many instances, the Service has issued summonses to obtain this software, including its source code. (This source code is the programming language underlying the software.)

The IRS's ability to obtain a taxpayer's commercial tax software and source codes for purposes of assisting its field agents with the examination of taxpayers' tax returns has spawned significant litigation. For example, in Norwest Corporation, 111 TC No. 5 (1998), the Service sought to enforce a designated summons directing Norwest to produce tax preparation software licensed from Arthur Andersen LLP. The court denied Norwest and Arthur Andersen's motions to quash the summons, compelling them to hand over the tax software. Similarly, in Caltex Petroleum Corp. (DC Tex. 1998), the IRS sought to enforce a designated summons issued to Caltex to produce tax software licensed from Price Waterhouse LLP. Although the Service's summons was prima facie valid, the court granted Caltex's motion to quash. In denying access to the computer source code, the court used its equitable powers to prevent undue burden and hardship, as well as to protect Price Waterhouse's competitive position in the marketplace.

The IRS's recent zeal in this area has caused concern in the tax community and Congress. One problem in granting the Service access to the tax preparation software is that it could easily allow it to perform "what if" computations, comparing different potential tax adjustments. Another problem is that most commercial tax software licensing agreements prohibit users from providing copies to anyone (including the IRS). While the Service wants...