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Maintaining Confidentiality While Navigating Cross-Border Transactions

Today, taxing authorities across the globe, including the Internal Revenue Service (IRS), are increasing their efforts to gather and share sensitive taxpayer information, often aggressively seeking copies of tax advice, opinions and analysis prepared by counsel and other advisors. In some situations, tax advisors specifically draft their advice to be shared with third parties, but frequently the IRS seeks advice that was always intended to be confidential client communications—for example, drafts and emails containing unfinished analysis and unguarded commentary. Sharing this latter type of advice could be problematic for taxpayers because such advice could be used as a road map for examiners during an audit and may mislead the IRS regarding the strength or weakness of a taxpayer’s reporting positions.

Last month, we spoke to tax executives at Tax Executives Institute forums in Houston and Chicago about the IRS’s increased use of treaty requests to obtain US taxpayers’ documents and information from international tax authorities.

In recent cases, we have seen the IRS aggressively pursue all methods available to obtain a taxpayer’s tax advice, opinions and analysis. For example, the IRS recently began using treaty requests to seek the production of a US taxpayer’s tax advice from an international taxing authority. This is typically in lieu of, or in addition to, a traditional domestic summons. In at least one case, the IRS admitted to attempting to bypass US privilege proceedings by initiating the treaty request process before US summons proceedings began.

The IRS tactic to employ treaty requests in order to circumvent traditional document request procedures is particularly disturbing because a taxpayer may not receive notice of the request by either the IRS or the international taxing authority. Notice is not guaranteed, and depends on the applicable treaty and local procedures abroad. The IRS does not consider treaty requests and other exchanges of information to be “third-party contacts,” and may decide not to notify the taxpayer. Once a case is in litigation, a taxpayer can include this topic in formal discovery requests to the IRS. Before that time, however, options may be limited.

As we have seen employed in recent cases, the IRS’s new treaty request tactic is objectionable as it arguably violates two core treaty principles found in most bilateral and model treaties. First, the requesting treaty party must first exhaust all local remedies before making a treaty request for documents abroad. The IRS’s local remedies include Information Document Requests and administrative summonses. These remedies require notice to the taxpayer and permit the taxpayer to invoke privileges that can be resolved in court. Second, international taxing authorities are not obligated to employ procedures or obtain information that is at variance with or not obtainable under the laws of either the United States or the foreign country. Therefore, if a privilege would preclude production in the United States, the foreign country is not permitted to disclose the information under most treaties.

Practice Points:

What can you do if the IRS issues a treaty request for your tax advice?

First, developing a cooperative working relationship with the IRS Exam Team and keeping the lines of communication open is the best way to ensure the IRS will inform the taxpayer of its information gathering efforts.

In the event of an improper treaty request, you should raise all objections immediately and frequently with the IRS to prevent the transmittal of privileged and protected documents by third parties. Request a face-to-face meeting with the IRS and submit a formal objection letter with a clear request to revoke the treaty request. The objection should include detailed explanations of the specific treaty violations. If the IRS persists, international legal counsel may need to be retained to advise on the applicable international laws and to challenge the request in international proceedings. Also, consider whether you want to remind international third-parties of the protected nature of any documents held abroad.

Maintaining confidentiality in cross-border transactions can be challenging but can be successfully navigated if you are aware of the applicable rules in the relevant jurisdictions and seek counsel as soon as the taxing authority’s intent to obtain privileged or protected advice is evident. 

© 2018 McDermott Will & Emery

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About this Author

Laura L. Gavioli, P.C., McDermott Will Emery

Laura L. Gavioli, P.C. is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Dallas office. Laura is a member of McDermott’s U.S. and International Tax Practice Group. She specializes in handling complex civil tax audits, administrative appeals, and litigation. Laura is comfortable and seasoned in the court room, having litigated numerous civil tax cases in U.S. Tax Court and federal district court venues around the country.

Her experience includes significant taxpayer victories in civil tax cases in U.S. Tax...

214-295-8079
Justin Jesse, Tax International, McDermott Will Emery Law Firm
Associate

Justin Jesse is an associate in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, DC office.  He focuses his practice on U.S. and International Tax.

202-756-8777
Partner

Andrew R. Roberson is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office.  Andy specializes in tax controversy and litigation matters, and has been involved in over 30 matters at all levels of the Federal court system, including the United States Tax Court, several US Courts of Appeal and the Supreme Court. 

Andy also represents clients, including participants in the CAP program, before the Internal Revenue Service Examination Division and Appeals Office, and has been successful in settling...

312-984-2732
Denise Mudigere, McDermott Law Firm, Tax Attorney
Associate

Denise M. Mudigere  focuses her practice on representing individuals and entities in all stages of federal civil and criminal tax controversies. She represents clients in US Internal Revenue Service (IRS) examinations, administrative appeals, and litigation. Denise has settled multiple tax disputes in administrative proceedings and with IRS legal counsel—avoiding litigation in court, when possible.

Denise is active in the pro bono community, and has assisted in several tax matters for low-income individuals.

214-295-8066