Two recent federal appeals court decisions should serve as a reminder to U.S. taxpayers that, under the terms of many tax treaties, the IRS can force them to disclose their tax and banking information so that it can be shared with foreign tax authorities. These decisions also highlight the need to report the same information in the U.S. and abroad because foreign authorities may have access to a taxpayer’s U.S. tax and banking records.

The decisions, both issued by the U.S. Court of Appeals for the 9th Circuit, said the IRS could enforce administrative third-party summonses seeking taxpayer information on behalf of foreign governments if the IRS acted in good faith and complied with the law. The court said it did not need to consider whether the foreign governments seeking the information was also acting in good faith.

The first of the decisions, Puri v. U.S., No. 21-55132 (9th Cir. 2022), was issued in August and rejected a taxpayer’s efforts to quash a summons seeking information on Sabena Puri’s bank accounts that was issued at the request of Indian tax authorities. The second, Zhang v. U.S., No. 21-17093 (9th Cir. 2022), rejected Jen and Charles Zhang’s effort to stop the IRS from issuing an administrative third-party summons on behalf of the Canadian government. The U.S. has bilateral income tax treaties with both the Indian and Canadian governments.

Taxpayers claimed foreign authorities acting in bad faith

To enforce the summonses, the court said that the IRS needed to demonstrate that it was acting in good faith. Neither Puri nor the Zhangs claimed that the IRS was acting in bad faith. Instead, they maintained that the summonses should be quashed because the foreign governments that requested the summons from the IRS were acting in bad faith.

Puri contended that she could show the Indian government was acting in bad faith by presenting evidence that the true purpose of the Indian tax authorities in seeking the summons was to harass her family, who are prominent members of the Indian government’s political opposition. The court did not discuss the evidence that the Zhangs wanted to present in their efforts to show the Canadian government was acting in bad faith.

The 9th Circuit said it did not need to address the issue of whether the foreign governments were acting in good faith. It observed that the U.S. Supreme Court has ruled that, so long as the IRS is acting in good faith in issuing the administrative third-party summonses and complies with the applicable statutes, the IRS is entitled to enforce the summons. In its Zhang ruling the 9th Circuit noted that it has explicitly found in past decisions that the IRS need not establish that the requesting nation is acting in good faith when the summons is issued at the request of a tax treaty partner.