“How will they ever find out?”
It’s a classic tax-planning strategy that works very well, until the day it doesn’t work. Then it fails spectacularly.
Children do this all the time. They say “Dad said I could stay out until midnight!” to Mom and “Mom said I could stay out until midnight!” to Dad. This works until Mom and Dad compare notes.
It’s the same with taxpayers working across borders. If the tax authorities in Country A can’t see transactions that happen in Country B, then you can lie to Country A and get away with it. On the other hand, if Country A and Country B talk to each other, you are dead meat.
[Narrator]: Countries talk about you behind your back.
Here’s how it works. The USA has treaties with many, many countries.
Those countries can ask the IRS for help in enforcing their own tax laws. The IRS can and will issue a summons, ordering the custodian of that information to hand it over. Then the IRS sends the information to the foreign country’s tax authorities.
Hilarity ensues. Your “The tax people will never find out aren’t I clever?” strategy fails expensively.
A routine example of this came across the wire this week: Dadon v. United States. Opinion date: April Fool’s Day 2020.
A French company may (!) have cheated on their French taxes–VAT to be precise. A U.S. bank account became interesting to the French government in their quest to find information about the (ahem) possible inadvertent underpayment. What money came in? Where did it go?
The French government asked the IRS to get the bank to get the bank records. The IRS sent a summons to the bank, ordering it to turn over the records.
The person controlling the bank account (Mr. Dadon) promptly filed a Motion to Quash the IRS summons. (Translation: “Hey Judge, tell the bank to ignore that thing they got from the IRS because it’s not legal.”)
After some procedural fol-de-rol, the Judge allowed the summons to be in enforced. The bank has to cough up the information to the IRS.
The French government will get the U.S. bank information from the IRS, and something unpleasant will probably happen in that French VAT audit in the fullness of time.
They teach us how to brief a case in law school. It’s one of the many utterly useless skills you learn there.
So here, in all its glory, I show you the method the learned professors taught me at UCLA so many years ago. Here is my case brief of Dadon v. United States.