The IRS Can Share Your Tax Information With Foreign Governments

• Published date: 01 November 2022
• Subject Matter: Tax, Tax Treaties, Tax Authorities
• Law Firm: McDermott Will & Emery
• Author: Mr Andrew Roberson and Kevin Spencer

The recent Zhang v. United States case, Docket No. 21-17093 (9th Cir. Oct. 18, 2022), serves as a reminder that the Internal Revenue Service (IRS) can force you to disclose and share your tax information with foreign governments. The taxpayers in Zhang appealed the decision from the US District Court for the Northern District of California denying their petition to quash an IRS summons for information. The summons was at the request of the Canadian tax authority pursuant to a bilateral tax treaty between the United States and Canada. The US Court of Appeals for the Ninth Circuit reaffirmed that the IRS can seek information for, and on behalf of, a foreign government as long as the request satisfies the accepted guidelines of requesting information in the United States'for example, the "good faith" requirement announced in United States v. Powell, 379 U.S. 48, 57-58 (1964).

So why do we highlight Zhang for you? In this ever-increasing world of tax information transparency, taxpayers need to be mindful of the ability of tax authorities to share information with each other and adjust their taxes accordingly. During a tax audit, it's a strategic decision as to what tax information to share and what not to share with each tax authority. Telling different stories to different tax authorities could lead to more intrusive audits/scrutiny and higher overall tax bills and could even lead to criminal prosecution. Below are some basic principles to keep in mind:

• There are three primary methods as to how countries share tax information with each other
  • Automatic Exchanges
  • Spontaneous Exchanges
  • Targeted Requests
• Automatic exchanges are becoming increasingly used by countries (g., BEPS Action 5 and the Foreign Account Tax Compliance Act) because they are automatic and routine and usually associated with standardized financial/bank transactions.
• A spontaneous exchange occurs when one country sees something of interest and alerts another country about a potential tax issue or as part of a joint audit by the countries
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