By Stanley I. Foodman

A “John Doe” summons is an IRS investigative tool available to IRS through federal court approval.  IRS uses it as an investigative tool when casting a wide net to locate the names of U.S. taxpayers who would otherwise be unknowable to IRS.  To issue a “John Doe” summons, IRS must satisfy a federal court that the information IRS seeks is not readily available from other “regular” sources of information and that a reasonable basis exists for believing that U.S. taxpayer(s) may have failed to comply with U.S. tax laws.   

Most U.S taxpayers don’t realize that all financial transactions taking place in a correspondent account generate footprints. That means these transactions consisting of wires, checks and deposits will lead the IRS directly to the beneficial owner of the account.

 

A correspondent account is the U.S. bank account of an offshore bank that the offshore bank uses to conduct transactions in U.S. currency without having a U.S. presence. The account is “nested” within a U.S. bank giving the offshore bank access to the U.S. banking system, which would not otherwise be available to it.  For foreign banks not subject to U.S. jurisdiction and a “John Doe” summons, IRS has developed the alternative method of issuing a “John Doe” summons to a U.S. bank that maintains a correspondent account for a targeted offshore bank. 

Using the summons requirements outlined above, IRS recently convinced a U.S. federal court to authorize the service of a “John Doe” summons on Bank of America NA and Citibank NA.  It was seeking information about their Belize Bank International Ltd (BBIL) correspondent accounts for the years 2006 through 2014.  The BBIL records provided to the IRS in response to the “John Doe” summons will probably reveal the identity of U.S. taxpayers with unreported accounts at BBIL.  In other words, the names and other identifying information of U.S. taxpayers with unreported bank accounts at BBIL will soon be revealed to the IRS.  The summons will also permit IRS to identify other offshore banks exploiting BBIL’s correspondent accounts at Bank of America NA and Citibank NA to service their U.S. clients. U.S. banks and companies and noncompliant taxpayers should be aware of this investigative mechanism used by the IRS to uncover potential tax evaders and those that assist them.

This tool was an integral part of the IRS investigation of UBS AG that resulted in UBS entering into a deferred prosecution agreement with the U.S. and its payment of $780 million in penalties, interest and restitution.

To obtain its “John Doe” summons for BBIL, IRS again tapped data obtained through the Offshore Voluntary Disclosure Program (OVDP) to provide part of the reasonable basis that convinced the U.S. federal court to permit IRS to issue the summons. As part of its tax and criminal prosecutions involving a BBIL account, IRS reviewed information provided in taxpayers’ OVDP submissions and interviewed five taxpayers who had enrolled in the OVDP in order to disclose their BBIL accounts.  Each OVDP enrollee interviewed by IRS had previously undisclosed accounts at BBIL, requested a “hold mail” account arrangement with BBIL and failed to report income earned in the accounts to IRS.  All but one of the five formed a Belize corporation to open the account at BBIL, and failed to report the foreign corporation on their U.S. tax returns.  This information was the reasonable cause basis used by IRS that convinced a U.S. federal court in Miami to authorize the IRS “John Doe” summons.

In April 2013, IRS also served a “John Doe” summons on Wells Fargo NA. It was looking for information about Canadian Imperial Bank of Commerce’ First Caribbean International Bank (FCIB) correspondent account at Wells Fargo.  The “reasonable basis” for this summons was information provided by 120 OVDP taxpayer participants who had disclosed their FCIB accounts through the Program.  OVDP is a partial “amnesty” program offered by the IRS permitting U.S. taxpayers who successfully enroll in the program to reveal their previously undisclosed foreign financial assets, pay all unpaid taxes, interest and penalties, and pay a separate offshore penalty.  

Acting Assistant Attorney General Caroline D. Ciraolo of the U.S. Department of Justice (DOJ) has said that DOJ will continue using the “John Doe” summons to further its goal of pursuing taxpayers with unreported foreign accounts and that the time to come clean is now before DOJ knocks on your door.

From the banker’s perspective, although it is not alleged that they engaged in any wrongdoing, Bank of America and Citibank will probably experience significant costs responding to the summons, including devoting time and resources to gather and produce information and documents about BBIL.

Furthermore, this IRS tool has wide-ranging uses. In 2014, IRS served a “John Doe” summons on certain shipping and handling companies seeking information concerning an entity that used those companies to send information to U.S. taxpayer individuals regarding setting up foreign companies used to conceal offshore banking activity.

For U.S. taxpayers participating in or considering participating in OVDP, a Quid Pro Quo for successful completion of the OVDP program is an agreement to cooperate with IRS when it requests information.  This could include being interviewed by IRS about offshore financial activities, which the IRS may use to pursue the foreign bank or other taxpayers. Furthermore, the price of admission to the OVDP increases as the number of foreign banks targeted by the IRS and DOJ grows. The OVDP penalty levied on the highest balance in an undisclosed offshore account held at a targeted foreign bank jumps from 27.5 percent to 50 percent. 

A “John Doe” summons and its effects can have far reaching consequences for U.S. taxpayers. According to the IRS webpage entitled “Offshore Tax-Avoidance and IRS Compliance Efforts,” at least 50 of the first U.S. taxpayers whose names were supplied to IRS through complying with a “John Doe Subpoena” have been prosecuted, paid taxes, penalties and interest of at least $250 million. 

 

The more than 50,000 U.S. taxpayers who have successfully entered into the OVDP to avoid the risks of criminal litigation have paid back taxes, penalties and interest exceeding $7 billion. Because OVDP is managed through IRS Criminal Investigations, the documents that Foodman CPAs & Advisors has prepared for the large number of U.S. taxpayers whom we were retained to represent were prepared under the same attorney-client privilege that would be utilized for a criminal tax defense matter. 

Don’t become a victim of your own making. In February 2015, IRS said that avoiding taxes by hiding money or assets in unreported offshore accounts remains on its annual list of tax scams known as the “Dirty Dozen” for the 2015 filing season. The IRS remains committed to its priority efforts to stop offshore tax evasion wherever it occurs.  Even though the IRS has faced several years of budget reductions, the IRS continues to pursue cases in all parts of the world, regardless of whether the person hiding money overseas chooses a bank with no offices on U.S. soil. 

Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities and then using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose. 

The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. The IRS works closely with the Department of Justice to prosecute tax evasion cases.  

The use of a “John Doe” summons is just one of the bullets in its gun. FATCA reporting is the next large caliber bullet that IRS will use to enforce U.S. tax collections. 

South Florida Legal Guide 2015 Financial Edition