The Department of Justice has been using the “John Doe” summons as an investigative technique for the IRS to use in its efforts to close that part of the tax gap attributable to unreported income and accounts in offshore financial institutions.
Information as to the identity of U.S. persons maintaining Swiss accounts has been an area of emphasis since 2008 when the IRS received authority to issue a “John Doe” summons on UBS from the U.S. District Court in the Southern District of Florida. The United States and Switzerland and many Swiss Banks have since entered into agreements of various kinds, all of which are intended to do at least the following: identify U.S. persons using Swiss accounts to avoid U.S. tax payment and reporting obligations.
A “John Doe” summons is a summons which is issued pursuant to the Code Section 7609(f). Unlike an “ordinary summons” issued pursuant to Code Section 7602, “John Doe” summonses do not identify the person or persons with respect to whose liability the summonses are issued. They may be served only after a court proceeding in which the U.S. establishes that the following three tests are met:
1. The summonses must be shown to relate to an investigation of an ascertainable group or class of persons,
2. The U.S. must establish that there is a reasonable basis for believing that such group or class of persons have failed to comply with any provision of any internal revenue law, and
3. The U.S. must establish that the information sought to be obtained from the examination of the records or testimony (and the identities of the persons with respect to whose liability the summonses are issued) and not readily available from other sources.
On November 7th and 12th, 2013, two U.S. federal district courts in New York granted the ex parte motions of United States and issued orders permitting the IRS to issue “John Doe” summonses to the following U.S. banks: JP Morgan Chase, Bank of New York Mellon, HSBC Bank, and Citibank.
The caption of the matter shown on the Orders granting leave to the summons petitions sets forth the scope of the summonses:
1. Years. The summonses requested names of persons for years ended December 31, 2004, through December 31, 2012.
2. Signature or Control Over Financial Accounts. The persons must have directly or indirectly had interests in or signatures or other authority (including authority to withdraw funds; trade or give instructions or receive account statements, confirmations, or other information, advice or solicitations) with respect to the subject financial accounts.
3. Specified Bahamian and Swiss Banks and their Affiliates and Specified U.S. Banks Which Transacted Business With Said Foreign Banks.
A. Bahamian and Swiss Banks. The accounts subject to the summonses were those maintained at, monitored by, or managed through: (1) Butterfield & Son, Limited (a/ka/ Butterfield Bank and Bank of Butterfield) and (2) Zurcher Kantonalbank (ZKB), which together, have banks in the Bahamas, Barbados, Cayman Islands, Guernsey, Hong Kong, Malta, Switzerland, and the United Kingdom.
B. U.S. Banks Which Were Served Summonses. The summons were served on and will be responded to by the following correspondent U.S. banks which did business with Butterfield and Kantonalbank: JP Morgan Chase, Bank of New York Mellon, HSBC, Bank of America or Citibank.
The Department of Justice (DOJ) press release regarding the above (press release of 11/12/2013,on DOJ web site) made it clear that there is a concerted and serious effort to bring U.S. taxpayers with offshore accounts into compliance, reading in part as follows:
“These cases once again demonstrate the department’s resolve to uncover and identify taxpayers who tried to hide money overseas as a way to avoid federal taxes,” said Assistant Attorney General Keneally. “These John Doe summonses will provide information about individuals using financial institutions from Switzerland to the Cayman Islands to Hong Kong to avoid their U.S. tax obligations. U.S. taxpayers still holding accounts who have not come clean should come forward and do the right thing before it’s too late.
Today’s action show that the use of foreign banks for tax evasion remains a high investigative priority of this office and U.S. citizens should understand that loud and clear,” said U.S. Attorney Bharara. “By issuing these John Doe summonses, we continue our joint efforts with the IRS to identify and hold accountable those who try to evade their legal responsibility to pay taxes.
International issues remain a major focus for the IRS, and we are continuing our efforts to fight tax evaders who use offshore accounts to skirt the law,” said IRS Acting Commissioner Werfel. “These John Doe summonses for correspondent account records show our determination to pursue evaders using offshore accounts, even if the person hiding money overseas chooses a bank that has no offices on U.S. soil.”
The above DOJ press release then discussed the IRS’ Offshore Voluntary Disclosure Initiatives (OVDI), which the U.S. is relying upon the “close the tax gap” by effectively making “voluntary compliance” the only practical choice for U.S. taxpayers who are not complying with U.S. tax laws at this time, for whatever reason. The release stated:
“IRS Offshore Voluntary Disclosure programs and initiatives enable U.S. taxpayers to resolve their tax liabilities and minimize their chances of criminal prosecution by voluntarily disclosing previously undisclosed foreign accounts and income. To date, U.S. taxpayers have identified 371 previously undisclosed accounts at ZKB and 81 such accounts at Butterfield. In addition, a number of U.S. taxpayers with beneficial ownership and control over funds held in accounts at ZKB and Butterfield have admitted failing to report income earned from their offshore accounts on their federal tax returns. The IRS has reason to believe that other U.S. taxpayers who held or presently hold similar accounts at ZKB, Butterfield, and their affiliates have done the same in violation of federal tax law. In December 2012, three employees of ZKB were indicted for conspiring with U.S. taxpayers and others to hide at least $423 million from the IRS in secret Swiss bank accounts.”
The Tax Gap and John Does Summons are just one part of the interrelated activities being pursued by the IRS to close the Tax Gap resulting from unreported offshore accounts and offshore income. Offshore enforcement activities are indeed today a major focus is a major part of IRS tax enforcement activities today. We can tell in our practice, when areas are “hot” enforcement areas and this area is on the front burner which is set on “high.” Seminars around the country addressing offshore enforcement are the ones which are filling, a sure indication of a this is the “hot” topic for taxpayers and tax attorneys.
We will continue to emphasize foreign account enforcement efforts and taxpayer and foreign country compliance and non-compliance.