Introduction

Recently there has been a flurry of activity with respect to International Financial Centers and their standing and obligations concerning the disclosure of their financial clients and records. This text will direct itself to the fundamentals of the tools that have traditionally been utilized to monitor, sensible regulation, reasonable supervisory monitoring, and appropriate national enforcement.

This will be presented in segments of regulation, the tools of enforcement of those regulations, and taxpayer defenses to enforcement. A main purpose is to establish an understanding of principles that will give a more meaningful understanding of the various unilateral agreements between the United States and various countries regarding business activities, including the use of anonymous banking facilities.

Basic Requirements Imposed Upon United States Taxpayers.

The apparatus of the United States government in implementing a supervisory role of international transactions emphasizes the functions of the Treasury Department and its collection agency, the Internal Revenue Service (hereinafter the Service). The functions can be divided into record keeping requirements imposed on taxpayers, examination authority of the Service in the monitoring phase of international activity, and enforcement used to compel compliance.

As in the domestic setting, taxpayers are required to maintain adequate books and records sufficient to establish the amount of gross income, deductions, credits, or other matters required by a taxpayer to substantiate any tax or informational return. This is required of any taxpayer who accounts for income of any kind. In the international setting, this information requirement is supplemented by provisions directed to corporations that are controlled foreign corporations and those deemed United States shareholders.

Each United States shareholder is required to make available and provide permanent books of account or records sufficient to satisfy Section 6001 and 964 (c) of the Code within a time deemed reasonable after demand by the Service. In lieu thereof, true copies of records demanded will normally be sufficient. These accountings must be sufficient to enable the Service to verify Subpart F Income of a controlled foreign corporation with respect to its gross income and deductions.

A further requirement places the burden on a taxpayer to maintain such records at one or more convenient and safe locations accessible to the officers of the Service, and they are required at all times to be available for inspection. These records are to be preserved for a period of four years subsequent to the date upon which any return is filed and upon which the information is utilized. In the alternative, records shall be maintained four years subsequent to the date upon which the tax is actually paid, whichever is later in time.

In establishing requirements for maintaining information to account for income for regulatory purposes, the Treasury regulations utilize an annual information form for each United States taxpayer with respect to specific foreign corporations. The requirements of the annual information are that every United States person is required to make separate annual information returns regarding each annual account period pertaining to each foreign corporation the person controls.

This annual information form is Form 5471 for taxable years subsequent to December 31, 1983. The dual requirements of Sections 6001 and 964 (c) of the Code are considered complied with if they provide verification of Subpart F Income. The extent of information required for compliance of appropriate record keeping to satisfy guidelines is espoused by extensive Treasury regulations. As a part of the procedures for organization of an enterprise, the guidelines for accounting of records should be consulted to insure appropriate documentation is maintained.

ENFORCEMENT

The supervisory, examination role of the Service is provided by the authority of statute. For purposes of ascertaining the correctness of any return, statutory compliance requires the taxpayer permit any authorized officers or employees of the Service to examine books, papers, records or other date which may be relevant or material to any inquiry. This statutory power enables them to administer and enforce compliance with the Internal Revenue Code.

These statutory provisions requiring the taxpayer to maintain records sufficient for verification and empowering the Service to investigate and examine to ascertain compliance have various means to enforce their implementation. These enforcement tools utilized in this supervisory capacity include the power to summon records and people, subpoena records and testimony, Formal Document Requests, (FDR) and treaty arrangements.

The administrative power of a summons enables the Commissioner of the Internal Revenue Service to summon a person liable for tax or one that is deemed to be required to perform certain related acts. Additionally, it empowers a summons for any officers or employees of a person in such a capacity, or any person having possession, custody, or care of the books of accounts containing entries relating to the business of the person liable for tax. It extends to those required to perform the acts deemed requisite to the liability for the tax and to any other person that might be deemed proper. They may be summoned to appear before a designated officer or employee of the Internal Revenue Service at a time and place named in the summons.

Pursuant to such summons power, such a party can be commanded to produce such books, papers, records, or other data requested and to give such testimony under oath that may be relevant or material to such an inquiry. Whether testimony of the person under oath is relevant or material to the inquiry is the focus of defense to the government’s request. The summons power may be utilized in an investigation of either civil or criminal tax-related liability.  Any person summoned to testify or to produce books, papers, or other data can be compelled to make an appearance. The appropriate United States District Court of the United States is empowered to compel attendance to provide such testimony and to produce requested records as the court determines. The appropriate District Court empowered to compel through the use of this enforcement tool is that in which the person is physically located or the United States District Court in the place where such person resides.

An administrative summons issued by such an appropriate United States District Court is enforceable by the court. This summons power authorizes the assistance in obtaining relevant or material information to the inquiry. A court may receive an application for the enforcement of a summons against a person refusing to comply with the request for the production of records and is empowered to issue an attachment as an order of the court. The attachment is followed by a hearing.

A second enforcement weapon employed is the use of a subpoena. A United States court has jurisdiction and may order the issuance of a subpoena requiring the appearance of any witness who is a citizen or resident of the United States without regard as to the individual’s location in the world. It is applicable to the appearance of the person, testimony, and records of such United States citizen or resident located in any foreign country, anywhere.

The statutory provision is accompanied by sanctions for non-compliance. Upon an appropriate motion and notice by the Commissioner of the Service, the United States Tax Court shall order any foreign corporation, foreign trust or estate, or nonresident alien individual who has filed a petition with the Tax Court to make available certain information. There must be a good cause shown. The Tax Court is assisted in the use of this enforcement tool by statute. The Commissioner for the Service can apply by motion and appropriate notice for the inspection of books, records, and documents relevant to Tax Court proceedings.

Upon the filing of motion and notice, the Tax Court can order any foreign corporation, foreign trust or estate, or nonresident alien individual to produce or make available to the Commissioner books, records, documents, memoranda, correspondence, and other papers wherever situated. The court is empowered to make such an order when it is demonstrated such information is relevant to the proceedings and are in the possession, custody, or control of the Petitioner or any person directly or indirectly under his or its control or having control over him or subject to the same common control. If the Petitioner is unable to produce the requested documents, he or it shall be compelled upon satisfactory proof to the Tax Court to permit inspection, copying, or photographing of such books, records, documents, memoranda, correspondence as the court shall find appropriate.

Continued in Part II – Taxpayer’s Defense

In accordance with Circular 230 Disclosure