Monthly Archives: January 2012

PALO ALTO—U.S. participation in exchange of information agreements does not mean that the Internal Revenue Service automatically releases taxpayer information to any nation that requests it, Douglas O'Donnell, IRS assistant deputy commissioner (International), said Jan. 20.

“Every country that's on the receiving end of a specific request is paying very close attention to the narrative of the story that is being told by the requesting jurisdiction,” he told attendees at the 2012 Pacific Rim Tax Institute. That way, he said, countries “know whether they have met the standard to request the information.”

Since the Group of 20 launched its global initiative in 2009 to safeguard the international financial system through improved transparency, more than 700 additional EOI agreements have been signed and 81 nations—including the United States—have undergone peer reviews, O'Donnell said.

On Friday, October 7, 2011 WASHINGTON—The U.S. Senate Permanent Subcommittee on Investigations released tax data in a report it commissioned from the U.S. Government Accountability Office (GAO) disclosing a mixed record on the use of tax treaties to combat offshore tax abuse.

“The good news in the GAO report is that the IRS has set up automatic information exchange arrangements with 25 countries and is getting a stream of 2.1 million data items per year on U.S. taxpayers with offshore income. The bad news is that, aside from the automatic information, the IRS initiates only a couple hundred specific requests for taxpayer information per year from other countries.

143 Agreements with 90 Countries. The United States had tax treaties, tax information exchange agreements (TIEAs), or mutual legal assistance treaties (MLATs) that include tax matters, with 90 foreign jurisdictions. Of those jurisdictions, 37 are in Europe; 18 in the Asia-Pacific region; 16 in the Caribbean; 12 in North or South America; and 7 in Africa or the Middle East. Because the United States has more than one type of agreement with some jurisdictions, GAO identified a total of 143 agreements authorizing tax information exchanges.

Automatic Data Exchanges. Tax information exchange partners may choose to provide information to each other on a regular or routine basis, through what is referred to as an automatic exchange of information. The GAO report found that in 2010 alone, as a result of automatic data exchange arrangements with 25 foreign jurisdictions, the IRS received about 2.1 million data items from those countries, while providing about 2.5 million data items to them. Automatic information exchanges typically provide data on wages, interest, dividends, or other forms of income paid to persons from a specified country.

Specific Data Requests. One-time only tax information requests made by either the IRS to another country, referred to as outgoing requests, or by a foreign country to the IRS, referred to as incoming requests. The number of these outgoing and incoming requests was relatively small compared to the number of data exchanges taking place on an automated basis. Over the five year period from 2006 to 2010, GAO found that the IRS initiated a total of about 900 tax information requests to other countries, ranging from a low of 165 to a high of 236 requests made in a single year. Each request can refer to one or multiple taxpayers. GAO’s figures indicate that, on average over the five years, the IRS sent less than one specific request for taxpayer information per day to a foreign country.

During the same five-year period, outside of the automated process, foreign jurisdictions made a total of about 4,200 specific tax information requests to the IRS, resulting in more than four times as many incoming as outgoing requests. These figures indicate that, on average over the five-year period, the 90 jurisdictions collectively made about 840 requests per year, or less than 3 requests per day to the United States.

Of the 900 outgoing requests and 4,200 incoming requests, 711 involved a single foreign jurisdiction, which was not named in the report due to IRS confidentiality rules. The request activity was concentrated among a small group of countries, with the ten most active countries making roughly 68% of the outgoing and incoming requests. The ten countries were also not named due to IRS confidentiality rules.

Spontaneous Tax Information Exchanges. Foreign jurisdictions made about 300 spontaneous disclosures of taxpayer information to the IRS per year, meaning the information was provided outside of any automatic or specific request process. The IRS made about 10 spontaneous disclosures of taxpayer information per year to other countries. GAO stated those numbers fluctuated widely by year.

Responding to Requests. Most requests took between 50 and 200 days to complete, although some took much less time and others much longer. On average, the IRS was 17% faster than other countries in completing requests.

Corporate records, tax return data, bank records, public records, and third-party interviews were the most frequent types of information requested.

Taxpayer Names. As a general rule, the IRS and its tax information exchange partners do not make or respond to information requests lacking specific taxpayer names or other specific taxpayer identifiers, such as account numbers. The United States had made a recent policy change to support information requests that identify a specific group of persons under investigation, even when those persons’ names are unknown.

The Miami Hearld reports that Republican presidential candidate Mitt Romney owns investments worth between $7 million and $32 million in offshore-based holdings, which are often used legitimately by private equity firms to attract foreign investors. Such offshore accounts also can enable wealthy investors to defer paying U.S. taxes on some assets.

The six Romney offshore holdings are in investment funds run by Bain Capital, the private equity powerhouse he led in the 1980s and 1990s. The six funds are listed only by name and a range of amounts in Romney's financial records, but the Cayman addresses are in other corporate documents filed with the U.S. Securities and Exchange Commission and in foreign investment portfolios.
Five of the Cayman-based funds are included within a blind trust for Romney's wife, Ann, and worth between $2.8 million and $7.6 million.

A sixth fund, called Bain Capital Investment Partners Trust Associates lll, is part of Romney's IRA retirement account and worth between $5 million and $25 million.

Using offshore funds to attract foreign investors is a legitimate and standard business practice. Increased foreign investment in a U.S. fund based abroad could increase financial returns for American investors. Offshore funds offer advantages for U.S. investors looking to diversify their portfolios and for foreign investors seeking to avoid U.S. reporting and tax-withholding requirements.

Romney's taxpaying strategy may become clearer when he makes his 2012 tax returns available in April as he has promised.

Posting Supplied by Kevin E. Packman, Partner at Holland & Knight.

A recent advisory issued by the Chief Counsel's Office of the Internal Revenue Service ("IRS") sets forth the IRS's position on the procedures that its agents must follow in order to obtain a taxpayer's e-mails from his or her Internet service provider ("ISP").  

Furthermore, the Chief Counsel noted that various federal courts "have recognized that a warrant is not required by the Constitution for a government entity to require an electronic communications provider to produce a customer's non-content information regarding an electronic communication."