IRS Recommends Broad Search for Foreign Audit Evidence

For over 50 years, Bloomberg Tax’s renowned flagship daily news service, Daily Tax Report® has helped leading practitioners and policymakers stay on the cutting edge of taxation and...

Oct. 26 — The IRS is recommending that agents use a host of ways—including the Internet and travel abroad—to get foreign-based evidence for an international audit if the taxpayer can't be found or doesn't respond to information document requests (IDRs).

The advice came in one of three new international practice units, released Oct. 26 by the agency's Large Business and International Division, to provide guidance on how to conduct cross-border audits and look at international transactions. The documents are dated Oct. 22.

The unit devoted to finding evidence abroad—IGI/9460.02_01(2013)—offered multiple methods to obtain records located in a foreign jurisdiction.

Multiple Methods to Gather Evidence

The Internal Revenue Service said if taxpayers won't cooperate, agents should use Internet searches, industry database searches, interviews, formal document requests under tax code Section 982, summonses under Section 6038A, specific exchange of information requests, and even foreign travel to examine records and conduct interviews.

In the unit specifically dealing with examinations (IGA/9560.01_03(2014)), the IRS gave agents advice on how to handle cases surrounding correct filing of the Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations.

The agency said if penalties under tax code Section 6038 apply, they should generally be assessed within three years after the taxpayer files a “substantially complete” Form 5471.

Instructions for Foreign-Owned U.S. Companies

In the third practice unit IGA/PUO/C_17.8.1_04(2014), the IRS outlined a series of steps agents should take in using an Authorization of Agent request in audits where a U.S. corporation is 25 percent foreign-owned.

According to the document, the IRS can issue these requests when the taxpayer under exam is a domestic corporation owned by a 25 percent foreign shareholder and there was a transaction between:

• the domestic corporation and its 25 percent foreign shareholder, or
• the domestic corporation and any foreign person related to the domestic corporation or related to the 25 percent foreign shareholder.

To contact the reporter on this story: Alison Bennett in Washington at
To contact the editor responsible for this story: Brett Ferguson at

Request Daily Tax Report