Many non-residents or U.S. tax residents holding a passport of another country worry about the U.S. government sharing information about their U.S. financial activities with their home country.

Solomon Juan Marcos Villarreal (Villlarreal), a Mexican national, tried to block the IRS from obtaining his U.S. banking records for release to Mexico’s tax authority, the Servicio de Adminstracion Tributaria (SAT).  He appealed to the U.S. Court of Appeals for the Tenth Circuit after the U.S. District Court had denied his motion to quash a subpoena issued to his bank and his request for an evidentiary hearing and granted summary judgment for the U.S. on its motion to enforce the summons.  The Tenth Circuit affirmed the lower court’s ruling (Solomon Juan Marcos Villarreal v. United Sates of America, 10th Cir., Case No. 12-1131, filed 4/22/13).

The facts were undisputed:

  • In March 2011 the SAT asked the IRS for assistance in its investigation of Villarreal’s 2009 tax liabilities.
  • The request was made under the Mexico – U.S. Income Tax Treaty.[i]
  • The IRS official responsible for reviewing such requests stated in an affidavit:
    • SAT informed him that Villarreal was associated with a Mexican entity and U.S. entity.
    • SAT believed that Villarreal used these entities “to falsely obtain value added tax refunds and to evade income and corporate tax obligations.”
    • SAT was examining Villarreal’s business income associated with a cash deposits made into accounts opened in the name of each entity.
    • The IRS official determined that SAT’s request was a proper request within guide-lines of the treaty and “that it is appropriate for the U.S. to honor this request and thereby lend assistance and support to Mexico, as the treaty contemplates.”
    • An IRS agent issued a summons to the bank and requested documents for the period January 1, 2009 through December 31, 2009, as follows:
      • Account opening documents
      • Signature cards
      • Monthly statements, and,
      • Certain deposit and withdrawal documents
    • Villarreal argued in his motion to quash that the SAT was merely harassing him and that it could not gather more evidence against him until the Mexican Court ruled on his challenge to the propriety of the SAT’s continued investigation of him.
    • The IRS agent, responding to these allegations, confirmed with the SAT that its investigation of Villarreal was ongoing and in conformity to Mexican law.
    • Specifically, the SAT informed the IRS that Mr. Villarreal’s challenge might suspend the final resolution of its case, but would not impact the SAT’s ability to continue to gather evidence.

Villarreal lost his appeal and the summons was enforced because the IRS burden is not great:

IRS need only show, usually by affidavit, (pursuant to U.S. v. Powell, 379 U.S. 48 (1964) that:

    • The investigation will be conducted pursuant to a legitimate purpose,
    • The information sought may be relevant to that purpose,
    • The information sought is not already in the IRS’s possession, and,
    • Administrative steps required by the Internal Revenue Code have been followed.

Once IRS establishes the above, a heavy burden of proof is imposed on the party challenging the summons: to show by presenting facts that evince proof of abuse of the court’s process, or institutional bad faith on the part of IRS.

Moreover, the Court of Appeals in reviewing the lower court’s ruling will not reverse absent a showing of “clear error” on the part of the lower tribunal.

The problem with Villarreal’s motion was:

    • He supported his allegations only with naked assertions, i.e., the SAT was harassing him, and IRS was engaging in a fishing expedition without offering evidence of facts to support these charges.
    • The relevance of information sought by IRS summons is viewed very broadly, to include items of even “potential relevance” or “that might throw light on the taxpayer’s return.”

Thus, Villarreal’s arguments were characterized as a red-herring.

Lesson to take from this case:

  1. When a foreign country requests assistance under a tax treaty, the IRS will accept that country’s need on its face.
  2. Challenging an IRS summons seeking the information requested by the foreign county is very difficult because of the slight burden of proof on IRS and heavy burden on the taxpayer.
  3. Thus, the target of the foreign investigation may have to consider opposing the request for information in his or her own country’s judicial system, a path most would not relish trying to pursue.


i. Article 27 of the Treaty provides for the exchange of information.

© 2013 by Robert S. Steinberg, Esquire
All rights reserved

This entry was posted in TAX, TAX INFORMATION EXCHANGE AGREEMENTS and tagged , , , , , , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s