Beyond Information Document Requests: Tools The IRS Uses To Obtain Information From Foreign Countries

Many U.S. taxpayers express bravado with respect to their records in foreign countries, commonly exclaiming "the IRS can't get that—it's overseas" in strategy conferences with their tax attorneys. However, these taxpayers are misguided. In addition to the traditional method of obtaining information via Information Document Requests, the International Examiners of the IRS have numerous tools at their disposal to acquire information from abroad.

Before reviewing these tools, an initial problem confronting U.S. taxpayers is that most of their foreign offices do not have records that are in a usable format, as records are often prepared in foreign languages. Must a U.S. taxpayer spend a large amount of time and money translating the documents into English for the IRS?

This issue was confronted in the case of Nissei Sangyo America, Ltd.1 Nissei involved the audit of a U.S. subsidiary of a Japanese parent. In response to an IRS summons, the U.S. subsidiary had randomly selected documents relating to the issue under examination and provided full translations. The Japanese parent had also randomly selected and translated documents. In addition, the U.S. subsidiary translated the subject matter headings or titles of 1,441 pages of Japanese correspondence and prepared English translation keys for the travel expense authorization forms. The IRS demanded that all documents described in the summonses be translated to English, which the company estimated would cost from $850,000 to $1.5 million. The court held that the IRS could not compel the translation of documents that were not relevant to the tax liability or that the IRS already had in its possession.2

Most cases do not involve translation costs of $1 million, but just as there are subtle nuances of meaning in the definitions in the Internal Revenue Code, there are subtle nuances of meaning in the translation of languages. Considering the diverse army of employees that the IRS has to consult with for translations, the taxpayer should be advised to engage a translator who will resolve any ambiguities in meaning in the taxpayer's favor. Although Nissei involved summons enforcement, this lesson is applicable to any type of information gathering tool the IRS may use.

The primary authority for recordkeeping requirements of a taxpayer is Code Sec. 6001 , giving the IRS the specific authority to examine any books, papers, records or other data that may be relevant or material to ascertaining the correctness of any tax liability.

The IRS typically exercises its authority in an Information Document Request (IDR). An IDR requests information or documents from taxpayers when there are voluminous records to be examined or when it is desirable to document requests. Requested on Form 4564, an IDR provides the IRS a convenient means to request information and simultaneously yields a permanent record of what was requested, received and returned to the taxpayer. After reviewing the information gathered from an initial IDR, the International Examiner will focus on those areas with the largest potential for possible adjustments. As the examination progresses, IDRs generally become more narrow in scope and tend to focus on specific items or transactions.

In addition to this authority, an International Examiner of the IRS can employ several procedural tools to obtain information beyond that obtained via IDRs. These tools include summonses, designated summonses, foreign plant visits, Formal Document Requests, and exchanges of information under treaties. The Summons Power

Used both domestically and internationally under the general authority to examine, the IRS has the power to compel a taxpayer or any other person to produce records and to testify under oath. This compulsory process authorizes the IRS to issue an administrative summons.3 The IRS may summon any person to appear at a time and place named in the summons for the purpose of giving testimony under oath and producing books, papers, records or other data. The IRS has generally delegated the authority to Internal Examiners to issue summonses.4

When auditing a corporation, the IRS may direct the summons to either a specific corporate officer or the corporation itself.5 The summons should indicate the officer's corporate title. When a corporation receives a summons, the IRS...