International Tax Enforcement in the United States
| Author | David Kerzner, David W. Chodikoff |
| Pages | 135-180 |
135
chapter five
INTERNATIONAL TAX ENFORCEMENT IN
THE UNITED STATES
A INTRODUCTION
International tax enforcement may comprise an examination or investiga-
tion process, an enforcement or collections process, and, where warranted,
a criminal prosecution process. This chapter will be of particular interest
to professionals who work in wealth management, accounting, and law and
who have clients with offshore or delinquent compliance issues concerning
the tax or foreign-reporting laws of the United States. It explains the do-
mestic administrative measures relied upon by the United States to obtain
foreign-based taxpayer information for the purpose of conducting a civil
audit or examination, or a criminal investigation. Without the ability to ver-
ify the foreign earned income of its citizens and residents, the United States
would not be able to effectively or fairly administer its tax system, which is
based on the taxation of worldwide income.1 Hence, the focus of this chap-
ter is on understanding the framework of legal powers granted to the fis-
cal authorities in the United States to obtain taxpayer information for the
administration and enforcement of their respective tax laws and to combat
non-compliance related to offshore accounts, where this information is not
currently in the government’s possession, or is otherwise unobtainable from
an unwilling taxpayer or record holder. As the Supreme Court of the United
States observed in United States v Arthur Young & Co,
1 See United States, Congress, Joint Committee on Taxation, Tax Compliance and Enforcement
Issues with respect to Offshore Accounts and Entities (Washington, DC: Joint Committee on
Taxation, 2009) at 44 [JCT, Enforcement Issues].
136 • InternatIonal tax evasIon In the Global InformatIon aGe
Our complex and comprehensive system of federal taxation, relying as it
does upon self-assessment and reporting, demands that all taxpayers be
forthright in the disclosure of relevant information to the taxing authorities.
Without such disclosure, and the concomitant power of the Government to
compel disclosure, our national tax burden would not be fairly and equit-
ably distributed. In order to encourage effective tax investigations, Con-
gress has endowed the IRS with expansive information-gathering authority;
§7602 is the centerpiece of that congressional design.2
An understanding of these administrative measures is critical to grasping
where tax information exchange agreements (TIEAs) and exchange of in-
formation (EOI) under double tax conventions (DTCs) fit into the infor-
mation-gathering process and to evaluating their functionality in fighting
tax evasion against alternative tools. This chapter is also important to the
research in this book because it examines some of the legal, political, eco-
nomic, and social problems connected to the EOI process. Moreover, it illus-
trates the range of domestic powers that the IRS can use against a taxpayer or
third-party holder of information to inflict potential civil and criminal sanc-
tions for failing to comply with its summons power, thereby creating serious
consequences for uncooperative parties. As Professor Gianni admonishes,
“since deficiencies asserted by the IRS are presumptively correct when liti-
gated, taxpayers usually lose more than they gain by dragging their feet when
asked for information.”3
This chapter begins by reviewing the privacy rights and safeguards of tax-
payers in the United States, including the vital interplay between these domes-
tic rules and the obligations of governments to exchange information under
TIEAs and DTCs. An understanding of these rights is important because, as
discussed below, taxpayer privacy is a cornerstone both to administering the
tax system domestically and to enabling effective EOI with treaty partners.
This chapter also examines, perhaps for the first time in this research field,
the use of criminal prosecution by the United States as a new means of bol-
stering EOI. Additionally, it examines the legal regime surrounding the use of
the summons powers, including the John Doe “super” summons power, to ob-
tain foreign-based information. The use of these two administrative measures
either as an alternative to treaty-based EOI mechanisms or in conjunction
with them serves to (1) illustrate how these measures differ from TIEAs and
2 465 US 805 at 815–16 (1984), cited in Monica Gianni, “IRS Investigative Authority” in Boris
Bittker & Lawrence Lokken, Federal Taxation of Income, Estates, and Gifts (Thomson Reuters/
WG&L) (Checkpoint) at 112.2.1 [Revised].
3 Gianni, above note 2.
International Tax Enforcement in the United States • 137
(2) reveal underlying political and legal problems with EOI mechanisms. To
help illustrate the use of some of the tools being used to obtain foreign docu-
mentation, this chapter draws on the experience of the United States in ob-
taining foreign account information from UBS both under the United States’
tax treaty with Switzerland and through such unilateral measures as the John
Doe summons and the recent and new formalization of the threat of criminal
prosecution. The UBS case study highlights the legal, political, and economic
challenges that exist in the EOI field. And these challenges pose the broader
policy questions of whether EOI works without incentives (be they sanctions
or rewards) and whether one “policy size” (e.g., automatic exchange of infor-
mation) will be effective in the war on tax evasion for all players.
B PRIVACY RIGHTS AND SAFEGUARDS OF TAXPAYERS
The question of whether or not information regarding taxpayers in America
should be private is as old as the income tax itself.4 Present rules on tax privacy
provide that tax returns and tax return information are to be treated as con-
fidential and prohibit the release, subject to limited exceptions, of taxpayer
information by the federal government without the consent of the taxpayer.5
Taxpayer information that is to be treated as confidential is broadly de-
fined to include the following: a tax or information return, a taxpayer’s iden-
tity, the nature, source, or amount of a taxpayer’s income, payments, receipts,
deductions, exemptions, credits, assets, liabilities, net worth, tax liability, tax
withheld, deficiencies, overassessments, and tax payments, and any other
data received or collected by the Secretary of the Treasury (Secretary) with
4 See Joshua Blank, “In Defense of Individual Tax Privacy” (2012) 61 Emory Law Journal 265 at
267, quoting Boris I Bittker, “Federal Income Tax Returns—Confidentiality vs. Public Disclo-
sure” (1981) 20 Washburn Law Journal 479 at 480–81: when the income tax was first intro-
duced in 1862 to pay for the American Civil War, the statute required the names of taxpayers
and their liabilities to be open to public access. In this article, Professor Blank examines the
relationship between individual tax privacy and individual tax compliance, arguing that tax
privacy allows the government to influence individuals’ perceptions of its tax enforcement
strengths without exposing its weaknesses, which would become apparent without appropri-
ate measures of confidentiality.
5 Internal Revenue Code, USC 26 (1986) of 1986, as amended, and the Treasury Regulations
issued thereunder at §6103(a) [Code]. Section 6103, relating to tax return privacy, was rewrit-
ten by Congress in 1976 in part to address privacy concerns following the Watergate scandal:
see M Saltzman & L Book, IRS Practice and Procedure (Thomson Reuters/WG&L, 2012 ed)
(Checkpoint) ch 2B and 4C. Although the Privacy Act of 1974, 5 USC ch 5 §552a, provides cer-
tain safeguards against the invasion of personal privacy, Code, ibid, §6103 expressly regulates
the disclosure of tax return information (Saltzman & Book, ibid, ch 2B). Exceptions to the
general rule of IRS non-disclosure may be made for a variety of reasons involving tax admin-
istration and law enforcement: see Code, ibid, §§6103(c)–(o); Blank, above note 4 at 279.
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