Will the IRS Share Tax-Related Information With Other Countries?

 Posted on November 18, 2022 in Taxation Law

Taxpayers who own foreign assets, earn income in more than one country, or may otherwise be required to pay taxes in multiple countries may need to address a variety of tax-related issues to ensure that they are in compliance with all applicable requirements. This can be a significant concern during tax audits, and in some cases, information about a person's finances and tax obligations may be shared with other countries by the IRS. By understanding when this can occur and how the sharing of information may affect tax liabilities, taxpayers can make sure they take the correct steps to avoid penalties in the United States or other countries.

Court Ruling Highlights Tax Information Sharing Practices

A recent court case that took place in California demonstrates the issues that taxpayers may face regarding the sharing of information by the IRS. In the case of Zhang v. United States, the Canadian government requested tax information from the IRS related to a married couple. The taxpayers challenged this request, claiming that the Canadian government made the request in bad faith. However, the Ninth Circuit Court of Appeals ruled against the taxpayers and found that the IRS had acted in good faith to provide the requested documents based on the terms of a bilateral treaty between the United States and Canada.

When Will the IRS Exchange Information With Foreign Tax Authorities?

The case described above demonstrates that when foreign countries request information from the IRS, taxpayers usually will not be able to challenge the release of this information. These types of information exchanges may occur in a variety of situations, including:

• Information requests - In situations where the United States has treaties with other countries, those countries' tax authorities may request information from the IRS, and details related to a taxpayer's income, the taxes they have paid, and other information may be turned over. The IRS may also request information from other countries about a taxpayer's foreign assets or income, and the information received may lead to tax audits.

• Automatic and spontaneous exchanges - Certain types of financial transactions will trigger automatic reporting of information between the IRS and other countries' governments. The IRS may also alert other countries about suspicious transactions or other tax-related issues. These exchanges will usually be based on bilateral treaties, and in addition to ensuring that a taxpayer properly reports financial details and pays taxes that are owed, they also ensure that taxpayers will not be taxed twice for economic activity that crosses international borders.

• Joint audits - When a taxpayer owns assets in more than one country, the IRS and foreign tax authorities may work together to audit the taxpayer, determine what types of taxes are owed, and assess any applicable penalties.

In these types of information exchanges, multiple types of data may be shared between the IRS and other countries. This information may include bank and investment account numbers, account balances, income from interest and dividends, information about financial transactions, and other details about a taxpayer's assets and income. To avoid penalties, taxpayers will usually want to make sure the information provided to the IRS matches information provided to tax authorities in other countries. Inconsistencies in tax filings in multiple countries could lead to taxes or penalties being owed in multiple jurisdictions, and in some cases, taxpayers may even face criminal prosecution.

Contact Our San Jose, CA Foreign Tax Reporting Lawyer

If you are a taxpayer with foreign income or assets, it is important to be aware that the IRS may be sharing your information with other countries. You should also be aware of the possibility that you may be subject to investigation by a foreign government or by the IRS based on these exchanges of information. You will want to make sure you are in compliance with all U.S. tax laws, as well as the applicable laws in other countries. At John D. Teter Law Offices, our San Jose offshore tax attorney can help you address these issues correctly, and we will ensure that you take the correct steps to come into compliance with your tax-related requirements while avoiding or minimizing potential penalties. Call us today at 408-866-1810 to arrange a consultation.

Sources:

https://www.irs.gov/irm/part11/irm_11-003-025

https://www.irs.gov/pub/int_practice_units/EOICUP_20.1_01R.pdf

https://cdn.ca9.uscourts.gov/datastore/memoranda/2022/10/24/21-17093.pdf