John Doe Summonses: A Key IRS Tool Against Tax Evasion

March 2, 2017Articles Law360

The Internal Revenue Service continues to make frequent use of a relatively unknown information-gathering tool in its nearly decade-old crusade against offshore tax evasion: the “John Doe” summons. A John Doe summons may be used to obtain information and records about a class of unidentified taxpayers if the IRS has a reasonable belief that such taxpayers are engaged in conduct violating the U.S. laws.

Because the identities of the targeted taxpayers are unknown, the summons is denoted with a “John Doe” moniker. Expressly authorized by Internal Revenue Code, a John Doe summons must first be approved by a federal judge before it can be served.

To date, federal judges have authorized the IRS to issue sweeping John Doe summonses for information and records around the globe, in countries including Switzerland, India, the Bahamas, Barbados, Belize, the Cayman Islands, Guernsey, Hong Kong, Malta, the United Kingdom and others.

In its most recent John Doe summons, the IRS obtained authority to summons documents and records relating to the use by U.S. taxpayers of debit cards linked to secret offshore bank accounts, a common technique used to repatriate funds held in foreign accounts.

IRS Authority to Seek John Doe Summonses

The Internal Revenue Code authorizes the IRS to issue a summons to gather information and/or testimony about a specific taxpayer whose identity is known, and the IRS frequently uses traditional summonses in the normal course of conducting audits and investigations.

A John Doe summons, by contrast, allows the IRS to gather information about a group of unidentified taxpayers believed to be violating the tax laws, such as investors in a tax shelter or account holders at a financial institution.

In United States v. Bisceglia, 520 U.S. 141 (1975), the United States Supreme Court expressly recognized the authority of the IRS to issue a John Doe summons in order to uncover the identities of individuals who may have failed to disclose all of their income.

Congress subsequently enacted section 7609(f) of the Internal Revenue Code, which authorizes service of a John Doe summons if the IRS convinces a federal judge that (1) the summons relates to the investigation of an ascertainable group or class of persons; (2) there exists a reasonable basis for believing that such group or class or persons may have failed to comply with U.S. tax laws; and (3) the information sought by the summons is not readily available from any other source.

To ensure that the John Doe summonses are not used as pure “fishing expeditions,” internal IRS policy mandates that such summonses may only be used in investigations that are at an advanced stage, rather than at the outset of an investigation. In addition, only certain high-ranking IRS officials are authorized to approve issuance of a John Doe summons; special agents, revenue agents and revenue officers are not authorized to issue such summonses.

A federal court’s determination of whether the IRS has satisfied the requirements for a John Doe summons is required to be conducted ex parte and must be based solely on the basis of a petition and supporting affidavits. Once a court determines that the IRS has met its burden, the agency is then authorized to serve the John Doe summons on the party to whom it is directed.

IRS Use of John Doe Summonses In Its Offshore Crackdown

Since 2009, the IRS (working hand-in-hand with the U.S. Department of Justice) has worked aggressively to combat tax evasion by U.S. taxpayers making use of secret offshore bank accounts, and John Doe summonses have played a prominent role in that enforcement effort.

In 2009, the IRS served a John Doe summons seeking the identities of U.S. taxpayers maintaining bank accounts at UBS in Switzerland. Two years later, the IRS received court approval to serve a John Doe summons seeking the identities of U.S. taxpayers maintaining undisclosed bank accounts at HSBC in India.

In January 2013, a federal judge authorized the IRS to serve a John Doe summons seeking the names of account holders at Swiss bank Wegelin & Co. In September 2015, a federal court in Miami authorized the issuance of a John Doe summons seeking information about U.S. taxpayers who held offshore accounts at Belize Bank International Limited or Belize Bank Limited.

The Latest John Doe Summons Target: Users of Offshore Debit Cards

Most recently, on Jan. 25, 2017, a federal judge in Montana authorized the IRS to serve a John Doe summons seeking information about U.S. taxpayers who had been issued a debit card that could be used to access the funds in offshore accounts in such a manner as to evade their tax obligations.[1]

The summons specifically seeks records regarding U.S. taxpayers who possessed a “Sovereign Gold Card” during the years 2005 to 2016 which could be used to access funds held in accounts established by Sovereign Management & Legal LTD, a Panamanian company (Sovereign).

Sovereign is an offshore services provider alleged to have offered clients, among other things, the formation and administration of anonymous corporations and foundations. The IRS believes that Sovereign’s related services included the maintenance and operation of offshore structures, mail forwarding, availability of virtual offices, re-invoicing and the provision of professional managers who appoint themselves directors of the client’s entity while the client maintains ultimate control over the assets.

The IRS has long been concerned with the use of debit cards by U.S. taxpayers as a way to repatriate funds held in offshore accounts. In 2000, the IRS began investigating the use of offshore credit cards and served numerous John Doe summonses on major credit card companies.

Based upon information gathered through that project, the IRS confirmed that the use of payment cards (including credit and debit cards) linked to offshore bank accounts is a common means of obtaining access to such funds. A United Nations report focused on money laundering similarly concluded that “[c]redit and debit cards are the way people who have laundered money draw ready cash without leaving a financial trail. As one advertisement for a bank put it, it is the best way to stay in touch with your offshore account.”[2]

In its petition seeking court approval for the John Doe summons, the government alleged that Sovereign advertised various “packages” that afforded individuals the ability hide assets offshore. These packages include corporations owned by other entities (including phony charitable foundations) which are held in the name of nominee officers provided by Sovereign.

Sovereign would then open bank accounts for these entities and provide debit cards in the name of the nominee to the U.S. taxpayer. By using such debit cards, taxpayers could access their offshore funds without revealing their identities.

Upon consideration of the government’s petition, the court determined that the IRS had a reasonable basis for believing that U.S. taxpayers may be using Sovereign Gold Cards to evade their U.S. tax obligations.

The IRS investigation of Sovereign has been ongoing for several years, and was initiated as a result of information derived from a federal narcotics investigation. As part of an investigation of online marketplaces for drug trafficking, the Drug Enforcement Administration learned that traffickers frequently moved money through Panamanian bank accounts controlled by Sovereign using debit cards.

Using information generated through that drug investigation, the IRS sought, and obtained, court approval for several John Doe summonses in late 2014 requiring various courier delivery services and U.S. financial institutions to produce information about U.S. taxpayers who might be evading or have evaded federal taxes by using Sovereign’s services.[3]

The IRS alleged that Sovereign used certain couriers to correspond with U.S. clients, and certain money transmission services to transmit funds to and from clients in the United States. In addition, the IRS alleged that wire services operated by various financial institutions, and U.S. correspondent bank accounts held for Sovereign’s banks in Panama and Hong Kong, were believed to have records of financial transactions between Sovereign and its clients in the United States.

The IRS also relied upon information generated through its ongoing Offshore Voluntary Disclosure Program to support its latest application for the John Doe summons seeking debit card information. In a revenue agent’s affidavit submitted to the court, the IRS disclosed that its “voluntary disclosure program databases” revealed at least one taxpayer who acknowledged using Sovereign’s services to establish numerous offshore structures and 21 undeclared accounts, 11 of which were opened in Panama.

During an IRS interview, that taxpayer stated that he discovered Sovereign through an Internet search and subsequently utilized Sovereign’s services to set up structures, establish offshore accounts and open a Sovereign Gold Card to access funds in those accounts.

Warning to Non-Compliant Taxpayers

The most recent John Doe summons stands as yet another stern warning to non-compliant taxpayers that the era of bank secrecy and secret offshore accounts in tax haven jurisdictions is over.

Indeed, in a Justice Department press release announcing court approval of the latest John Doe summons, Tax Division Acting Assistant Attorney General David A. Hubbert stated that “[t]his John Doe summons is yet another example of how we are using all available tools to identify, investigate and hold accountable those who cheat our nation’s tax system by hiding money offshore, as well as those individuals and entities facilitating U.S. taxpayers engaged in this conduct.”[4]

Hubbert further warned that “[t]he time to come forward and come into compliance is running short, and those who continue to violate U.S. tax and reporting laws will pay a heavy price.”

The IRS continues to offer voluntary disclosure initiatives, including the Offshore Voluntary Disclosure Program, that provide a pathway for taxpayers with undisclosed foreign assets to come back into compliance and avoid criminal prosecution, but those options are generally available only if the taxpayer comes forward before the IRS or Justice Department learn of their non-compliance.

Conclusion

As its latest John Doe summons demonstrates, the IRS now has more access to information about the offshore activities of U.S. taxpayers than at any previous time in the tax agency’s history. With a wealth of information gathering tools at its disposal, including John Doe summonses, the IRS has the ability to command production of a vast array of documents relating to offshore tax evasion schemes and to uncover the identities of those involved.

And the IRS can be expected to make full use of that information in undertaking enforcement activity against non-compliant taxpayers. Taxpayers with undisclosed offshore financial assets would be well-advised to take advantage of IRS voluntary disclosure options promptly, as time is of the essence as the IRS continues to aggressively crack down on offshore tax evaders.

[1] See In the Matter of the Tax Liabilities Of: John Does, Case No. CR 17-02-BU-BMM (D. Mont.).

[2] United Nations, Global Programme Against Money-Laundering, Office for Drug Control and Crime Prevention, “Financial Havens, Banking Secrecy and Money Laundering” (1998).

[3] See In the Matter of the Tax Liabilities Of: John Does, Case 1:14-mc-00417 (S.D.N.Y.).

[4] U.S. Department of Justice Press Release, “Court Authorizes Service of John Doe Summons Seeking the Identities of U.S. Taxpayers Who Have Used Debit Cards in Furtherance of Tax Evasion” (Jan. 25, 2017).

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