‘John Doe’ summons gives US IRS strong tools to ferret out tax evaders, crack secrecy havens

The US Internal Revenue Service has many administrative, civil and criminal weapons at its disposal to enforce the nation’s tax laws. A new one it is just now brandishing, the Foreign Account Tax Compliance Act, extends the reach of Uncle Sam’s tax enforcer beyond the nation’s borders.

The ultimate application and operation of FATCA, as it is known, is much anticipated by tens of thousands of financial institutions, tax practitioners, compliance officials and government officials around the world.

One weapon the IRS has used with greater visibility lately, which portends the future battles FATCA disclosures will generate, is the “John Doe summons.”

That name is attached to a powerful legal tool that the IRS and Justice Department are using with increasing frequency in their hunt for offshore tax evaders and other financial criminals. Unlike a typical IRS administrative summons, which seeks information on a specific person or entity, a John Doe summons can be issued to obtain information for a group or class of persons whose identities are unknown.

Over the past several years, the IRS has issued John Doe summons seeking the bank records of thousands of suspected US tax evaders from a range of financial institutions, including global banking giants like HSBC and UBS.  It was a John Doe summons served on UBS in July 2008 that inaugurated the ongoing US offshore tax evasion crackdown and presaged FATCA. Since then, John Doe summonses have proven effective at obtaining data from institutions with no US affiliates or operations, once thought to be beyond the reach of US tax authorities, by targeting their correspondent accounts with US banks.

Summonses on US correspondent accounts let IRS reach secrecy havens

That international reach of the IRS was on display on April 29 in a San Francisco federal court. US District Judge Thelton E. Henderson approved a John Doe summons seeking information on “any” US taxpayers with accounts at FirstCaribbean International Bank. FCIB is headquartered in Barbados and has branches in 18 Caribbean nations, but no US operations. The summons did not request information from FCIB directly, but from Wells Fargo, a US institution where it maintains a correspondent account.

The summons seeks transaction records from the correspondent account, including details on deposits and payments by check and wire. The IRS seeks evidence of US accountholders who moved funds to FCIB and repatriated their undeclared assets in the US.

John Doe summonses a precursor of FATCA legal battles, expert says

“The IRS still needs an enforcement mechanism for institutions that thumb their noses at US jurisdiction. John Doe summons are increasingly popular,” said David Garvin, an attorney specializing in tax issues in Miami.  “By next year, they will really be in vogue. The FCIB situation may well be a forerunner of what’s coming next.”

Earlier this year, the IRS served a UBS branch in Connecticut with a John Doe summons seeking transaction data from the correspondent account it held for Wegelin. Once Switzerland’s oldest bank, Wegelin shut its 274-year-old doors last year after being indicted by a federal grand jury in New York on criminal tax fraud charges. The bank subsequently suffered a large forfeiture, admitted guilt and furnished names of its account holders to the US Justice Department and IRS.

John Doe summonses win acceptance from courts

Although it has recently emerged as a key tool in offshore tax enforcement, the John Doe summons has been a part of the IRS enforcement arsenal for decades. As a safeguard against the IRS from using them in “fishing expeditions,” the US Congress passed the Tax Reform Act in 1976, which requires a federal court order to serve a John Doe summons. This contrasts with the more common IRS administrative summons that does not need court approval.

To establish grounds for the issuance of John Doe summons, the IRS and Justice Department prosecutors must present evidence showing tax evasion may have occurred among the class or group that the summons targets.

United States law, at Title 26, US Code Section 7609, sets out the standard required. It says the IRS must show that “a transaction has occurred, and that the transaction… [is] reasonably suggestive of the possibility that the correct tax liability… may not have been reported.”

The IRS typically obtains the evidence to support a John Doe summons from a prosecution, whistleblower, or voluntary disclosure that offers a glimpse into a wider tax evasion scheme.

Federal judges have become increasingly amenable to authorizing John Doe summonses, Garvin says.

“Over time, the bar [for obtaining one] has gradually been lowered,” he continues. “That speaks to the regularity of their use. They were once viewed as an extraordinary measure, but because there have not been many successful legal challenges, courts have grown more willing to approve them.”

FirstCaribbean case may show tax evasion ties to other financial crimes

The case against FirstCaribbean International Bank appears to have emerged from persons who took advantage of the IRS Offshore Voluntary Disclosure Initiative (OVDI) that was initiated after the UBS scandal.  The initiative allows tax evaders to disclose their illegal or improper conduct linked to their undeclared overseas accounts in exchange for fixed penalties that are more lenient than if the IRS had discovered the violations on its own. The Voluntary Disclosure Initiative has unearthed a trove of information that has led to the filing of tax evasion cases.

An affidavit filed by IRS Revenue Agent Cheryl Kiger on April 29 in support of the John Doe summons petition describes how she discovered 129 US persons with accounts at FirstCaribbean. Several of the accounts held “tens of millions” in undeclared income, she said. Revenue Agents of the IRS are distinct from IRS Criminal Investigation Special Agents, who investigate criminal violations and carry guns. Revenue agents work the civil or audit side of the IRS responsibilities.

The affidavit depicts FBIC accounts as “concealed repositories for the proceeds” of an array of financial crimes. Kiger cites six other criminal cases in the US in which defendants were found to have FBIC accounts in their names or the names of shell corporations they controlled. The cases involved securities, insurance and health care fraudsters, money launderers, and a corrupt US Army major who pleaded guilty to a bribery scheme in Iraq and Kuwait.

The cases vividly demonstrate the intersections between tax evasion, global anticorruption, money laundering, fraud and offshore havens.

IRS Manual details procedures for John Doe summonses

Part 25, Chapter 5 of the IRS Manual, at 25.5.7, specifies the detailed procedures that must be followed by the IRS in seeking court approval for John Doe summonses. Among other things, it says:

  1. A John Doe summons can only be served after approval by a Federal court. Therefore, the (IRS) must never serve a “friendly” John Doe summons even though a prospective summoned party may request one as a condition to providing information…. Serving a John Doe summons without court approval violates the statute and will jeopardize the investigation.
  2. (IRS officials) Submit a request for pre-issuance approval of a John Doe summons to Area… Counsel…. The summons request should state the pertinent facts and circumstances that justify seeking court approval to serve the summons and include information to satisfy each of the statutory requirements contained in (Title 26, US Code Section) 7609(f)(1) through (3)….

The Manual also grants IRS agents and lawyers a way to identify taxpayers without a John Doe summons. Section calls these “Dual Purpose Summons,” described as follows:

“In some investigations, it may be possible for the (IRS) to obtain the identities of taxpayers without issuing a John Doe summons. If the Service is conducting an investigation of a known taxpayer (such as a tax shelter promoter) who can identify an unknown taxpayer or class of taxpayers… and the identities of the unknown taxpayers are relevant to the investigation of the known taxpayer, the Service can issue a standard, non-John Doe summons as part of the known taxpayer’s investigation and can require the production of the unknown taxpayer’s identities. “

“This technique is only acceptable where discovering the identities of the unknown taxpayers is relevant to the investigation of the known taxpayer. This type of summons is referred to as a “dual purpose summons.”

IRS faces tangled web of transactions to uncover tax evaders

While the John Doe summons can garner considerable information in tax evasion cases, it is still just one step in a larger investigative process. Once the IRS obtains the correspondent account records from Wells Fargo, the agency will face the tough task of sorting through a large volume of transactions in an effort to identify and track those relating to US persons.

“It is very laborious trying to trace everything and parse this ‘big plate of spaghetti,’” says Garvin, referring to the information gathered by a John Doe summons.

“However, the agency has proven they’re able to do it,” he continues. “The IRS is maybe not catching everything, but they’re getting quite a lot.”

Read the Declaration of IRS Revenue Agent Kiger here

Read IRS Manual Part 25.5.7 here