Since 2007, the IRS and Department of Justice has been waging war against tax evaders hiding money offshore. Unfortunately, millions of U.S. taxpayers may become victims of that war as the IRS ramps up efforts to find and prosecute Americans with unreported offshore accounts. One of the most powerful weapons in their arsenal is the John Doe summons.
The typical IRS summons (most people would call these subpoenas) is directed at one taxpayer. If the IRS believes that you are committing a crime or not reporting income, the service can begin an investigation and either a revenue agent or criminal division special agent can issue a summons to a bank or employer seeking records.
The John Doe process is much different – it is used to obtain information about a group of people whose identities are unknown.
It was a John Doe summons that started the investigation which ultimately lead to the record $780 million fine against UBS in 2009. UBS isn’t the only bank to have received a John Doe summons, however. HSBC and several other banks are widely believed to have received one or more such information requests.
Earlier this spring a federal judge in San Francisco approved a John Doe summons seeking information from FirstCaribbean International Bank. Unlike UBS and HSBC, which have branches in the United States, FCIB has no property or locations in the U.S. Without a physical presence in the U.S., the court could find itself without jurisdiction to enforce the summons. In a novel twist, the IRS served the summons on Wells Fargo which served as a correspondent bank for FCIB. By targeting Wells Fargo, the IRS was able to track wires and transfers from the U.S. to FCIB.
The 1976 Tax Reform Act allows the IRS to seek John Doe summons but only with court approval. Section 7609 of the Internal Revenue Code sets a fairly low bar to obtaining a summons. The IRS must show that tax evasion may have occurred among a class of people (typically Americans with offshore accounts).
The IRS is mining data from the various amnesty programs such as the current Offshore Voluntary Disclosure Program to use in its enforcement efforts. If a few people come forward through the amnesty program and identify a particular bank where they kept accounts, the IRS has sufficient information to seek a John Doe summons.
What does all this mean? We speak to many potential clients with unreported foreign accounts. While many seek to come into compliance through amnesty or traditional voluntary disclosure mechanisms, some feel they won’t get caught. Recently we heard one individual say that his accounts in Hong Kong were “safe” as Hong Kong would never sign up for FATCA (the Foreign Account Tax Compliance Act). We disagree.
Clearly, some countries will never participate in FATCA. The IRS has proven ability to find hidden accounts anywhere, however. One of its most powerful tools is the John Doe summons. As the FirstCarribean International Bank summons proves, the IRS can now reach foreign banks with no ties to the United States by simply targeting their correspondent relationships.
The days of bank secrecy are nearly extinct.
If you have an unreported foreign account, give us a call. We can explain your responsibilities and explore your options. Our tax lawyers have helped many taxpayers with a wide variety of foreign reporting problems including the Offshore Voluntary Disclosure tax amnesty program and unfiled FBARs. In many cases it is possible to avoid all or most penalties.
For more information, contact attorney Brian Mahany at or by telephone at (414) 704-6731 (direct). All inquiries are protected by the attorney – client privilege and kept in strict confidence.
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and San Francisco, California. IRS tax services available worldwide.
Need more information about unreported foreign accounts? Our Due Diligence blog has a search engine located in the upper right hand corner. Our website also has an article titled FBAR 101 – Critical Information for FBAR Filers which may answer many of your questions.
Post by Brian Mahany, Esq.