Tax agencies face problems enforcing tax laws when their citizens have investments located abroad. One tool that countries use to address that problem is to include exchange of information provisions in tax treaties. Another tool is a specific exchange of information treaty, or a tax information exchange agreement. The general effect of these treaties and agreements is that a requesting country can rely on the other country’s process to gather information that be relevant for ascertaining compliance with the requesting country’s tax obligations.
Recent appellate opinions address non US country requests that lead to the IRS issuing a third party summons to obtain information about US-sourced investments. I discuss the issue extensively in Saltzman and Book Chapter 13, but the upshot is that courts have essentially held that a challenge to the enforcement of the summons on the basis that the requesting nation is seeking the information for an improper purpose is not relevant to the inquiry.
What is relevant?
The case law, essentially applying the well-known Supreme Court Powell standard, requires that the IRS must make a prima facie showing of its “good faith” in issuing the summons. That is a minimal burden, and the IRS need only demonstrate its own good faith, not that of the requesting party.
Once that minimal hurdle is cleared the taxpayer then has the burden to challenge the government’s evidence or otherwise show that there are grounds to quash the summons.
This framework does not sit well with taxpayers who allege that the requesting country may have improper or nontax related motives in getting the US documents. For example, in Puri v US, a Ninth Circuit nonprecedential case from earlier this year, the taxpayer alleged that the Indian tax authority sought investment information from Citibank to harass their family, who are prominent members of the Indian opposition political party.
Under the framework I discuss above, the court held that those allegations were not relevant, resulting in an order to enforce the summons.
One aspect of the Puri opinion that stood out is that it proceeded to analyze the merits of the allegations, stating that “in any event” Puri “does not present any plausible evidence suggesting that the Indian tax authorities acted in bad faith.” The opinion notes that Puri failed to connect how the requested bank statements could be used for harassment.
That discussion engendered a concurring opinion that joined in all but the “in any event” discussion:
Because courts are categorically forbidden from inquiring into the bad faith of a foreign government when deciding whether to quash an IRS summons, I see no need for us to reach the “in any event” argument in paragraph two
As the concurrence notes, an inquiry of any kind into a requesting state’s motives raises separation of powers concerns:
I have serious separation-of-powers concerns for even raising the prospect that courts can look through the Executive branch’s decision to comply with an international treaty and surmise the motives of a foreign government. That is clearly beyond our competence.
We generally take for granted that US tax administration is a nonpartisan business, though recent events are starting to show that the norms are shifting. Questions about the perhaps coincidental research audits of prominent opponents of the Trump Administration and allegations of pressure to audit from the former President’s Chief of Staff John Kelly have brought attention to that topic.
There is a sense, perhaps more intuitive than empirical, that other tax administrators are less able to insulate their actions from political pressure. As Puri and other cases reflect, the norm is that US courts are to stay out of the messy inquiry of motive.