In a recent case, (see Hanse v. U.S. 121 AFTR 2d 2018-512), the U.S. District Court for the Northern District of Illinois upheld a summons issued by the IRS to a U.S. law firm. The IRS issued the summons in response to a request from the French tax authorities for information regarding a transfer of funds made by an alleged French citizen to an account maintained by a U.S. law firm.
Generally, the IRS may issue a summons to obtain information necessary to determine the income tax liability of a person for any internal revenue tax. Additionally, the IRS may also issue a summons to obtain information for another country with which the United States has entered into an income tax treaty that contains an appropriate exchange of information article. In order to obtain a summons, the IRS must first establish that the summons was issued in good faith. This involves showing that the summons was issued for a legitimate purpose, seeks information relevant to that purpose, that the IRS does not already possess the information it is seeking in summons, and that the summons complies with all of the administrative requirements of the code.
In Hanse, the taxpayer was under investigation by the French tax authorities for issues related to income tax and wealth tax liabilities. Pursuant to the U.S.-France income tax treaty, the French tax authorities sent the IRS an information exchange request for information related to their investigations. Specifically, the request sought information regarding two transfers of approximately €500,000 made by the taxpayer to a client trust account maintained by a U.S. law firm.
The request stated that the taxpayer was a French citizen domiciled in France, that it was in conformity with all laws and practices of the French tax administration, and that the French tax authority had exhausted all means by which to obtain the information. Upon receipt of the request, the IRS determined that it did not possess the information requested, and that the summons was reasonably expected to result in the collection of information relevant to the French tax authority’s request. Upon review, the U.S. competent authority, the official charged with administering U.S. income tax treaties, determined that the request was within the scope of the information exchange provisions of the treaty, and that it would be appropriate to honor the request.
After the taxpayer received notice of the summons he filed a motion to quash, raising several objections. Specifically, he argued that the IRS failed to comply with the proper notice requirements, that the summonsed information was protected under the attorney-client privilege, and that the French authorities were not entitled to the information sought by the summons under French law. The court disagreed, finding none of the taxpayer’s arguments sufficient to quash the summons.
The court tackled the first two arguments relatively quickly, finding that the IRS had indeed complied with the requisite notice requirements, and that the taxpayer’s argument of attorney client privilege was insufficient. The taxpayer failed to even assert that he had retained the U.S. law firm as his attorney.
Perhaps the most interesting conclusion by the District Court was in regard to the taxpayer’s argument that French authorities were not entitled to the information sought by the summons to under French law. Here the court concluded that the IRS was not required to assess the good faith of the French tax authority’s investigation of the taxpayer prior to issuing the summons. Stating instead that the legitimacy of the French investigations was separate from the IRS’s compliance with its requirement to act in good faith in honoring a request under the treaty. Quoting the Fifth Circuit, the court explained that, “as long as IRS acts in good faith, it need not also attest to, much less prove, the good faith of the requesting nation.”
With global information reporting and exchange of information agreements becoming commonplace, taxpayers should be aware that governments are increasingly enlisting the aid of governments in foreign countries to enforce domestic tax laws. As a result, the perception that one can avoid the reach of a foreign tax authority by maintaining accounts offshore is rapidly becoming a questionable view.