US court approves first US Internal Revenue Service ‘John Doe’ summons to help track tax evaders

(This ACFCS.org story is adapted from an article in the October 2013 International Enforcement Law Reporter, published and edited by attorney Bruce Zagaris. A partner at Berliner, Corcoran & Rowe, in Washington, DC, Mr. Zagaris is member of the ACFCS Advisory Board and a leading world expert on international financial crime matters.)

The United States Internal Revenue Service has various tools to determine who maintains accounts at particular financial institutions or who owns a credit or debit card account at particular credit card companies or who owns a particular property. One of these tools has achieved notable success in recent years and now it looks like it is on the brink of expanding its impact to the entire world.

It is called a “John Doe” summons, a name given because the IRS does not know the identity of the person being investigated.

One of the more notable successful uses of an IRS John Doe summons was the identification in 2008 of certain US taxpayers who had secret accounts at the Swiss bank, UBS AG. The revelations from that John Doe summons helped lead the US government to the large conspiracy by the bank and tens of thousands of US taxpayers to evade their US taxes.

The prosecution and ultimate United States Department of Justice plea agreement with UBS formed the backdrop for the movement in the US Congress that spawned the Foreign Account Tax Compliance Act of 2010. FATCA, as it is called, in essence requires foreign financial institutions to tell the IRS of US persons who maintain accounts with them and the details of these accounts.

The IRS is now breaking new ground with the John Doe summons. In a series of seminal cases that it has filed in US federal courts in six states, the IRS is now utilizing the John Doe summons to assist another country in ferreting out foreign tax evaders.

Norway is the first beneficiary of this extraordinary assistance, which is particularly timely because it occurs shortly before the full implementation of FATCA, which will undoubtedly produce many situations in which other nations ask the IRS for similar assistance.

IRS help to Norway extends from coast to coast in the US

On July 29, 2013, the US Department of Justice announced that federal courts in Minnesota, Texas, Pennsylvania, Oklahoma, Virginia, and California had issued orders authorizing the IRS to serve John Doe summonses on certain US banks and financial institutions. The summonses seek information about persons who have used specific credit or debit cards in Norway. Court orders have been entered in seven of the cases and US petitions are pending in three other cases.

The US government filed the lawsuits on July 19 and 22, 2013, in nine federal districts at the request of the Norwegian government under an income tax treaty between the two countries. The US is seeking the identities of persons who have used specific debit or credit cards issued by certain US financial institutions to allow Norway to determine if these persons have complied with Norwegian tax laws.

The US and Norway identified 18 US financial institutions in these court filings. The petitions do not allege that these institutions violated any US law concerning the accounts.

The US petitions indicate that Norwegian authorities have reason to believe that based on the use of the debit or credit cards in Norway issued by US banks, the unidentified card holders may have failed to report financial account information or income on their Norwegian tax returns. The US court filings cite examples of some individuals that used non-Norwegian payment cards claiming to be tax residents of other countries, but who were found to have resided in Norway for sufficient time to be subject to Norwegian taxes.

IRS cases are filed under a tax law provision, supported by treaty

The US lawsuits are ex parte proceedings, meaning that they are filed without notification to any other party. The cases are brought under a US tax code provision that permits the IRS to seek court permission to serve John Doe summons on specific financial institutions and others. (Title 26, USC Section 7609(f) and (h)).

Courts may grant leave to the IRS to serve a “John Doe” summons that does not identify the person whose tax liability is at issue, if the IRS through the US Department of Justice establishes three factors: the summons relates to a particular person or group of persons, there is a reasonable basis to believe that the specified person or group may have not complied with the US tax laws, and the information sought is not readily available from another source.

In its court filings, the US cites Article 28 of the Norway-US income tax treaty as the authority for bringing the suit seeking approval for issuance of the John Doe summonses.  Article 28 provides that each country “shall obtain the information to which the request relates in the same manner and to the same extent as if the tax of the [requesting] state were the tax of the other state and were being imposed by the other state.” (Protocol to Norway-US treaty, Article XII).

Norway tax agency launched ‘Payment Card Project’

Declarations filed in the case by IRS Deputy Commissioner Michael Danilack and IRS Revenue Agent Cheryl Kiger indicated Norway requested information about payment cards issued by US financial institutions that were used in Norway in certain dollar volumes in certain locations suggesting a taxable residence in Norway. The request by Norway arises from a “Payment Card Project” of the Norwegian Directorate of Taxes’ (NDT), in which information on the use of debit and credit cards issued by foreign financial institutions is used to identify Norwegian persons who are evading their Norwegian taxes. The NDT’s investigations have shown that Norwegian taxpayers have used cards issued by foreign financial institutions to make substantial purchasers anonymously.

The US court briefs explain that upon a request for information from Norway, the income tax treaty allows the US to use any method that it could use to obtain information on its own behalf.  A “John Doe” summons is available to the US if the conditions to obtain judicial approval for this type of summons have been met. Therefore, the US may use a “John Doe” summons upon a request from Norway is the otherwise applicable conditions are met. (This was explained in a Department of Justice Memorandum in Support of Ex Parte Petition for Leave to Serve “John Doe” Summons in the case, In the Matter of the Tax Liabilities of John Doe, Norwegian taxpayer Including Prairie Sun Bank payment card XXXXXXXXXXXX7857, filed in the US District Court Minnesota, Case No. 0:13-CV-1950.)

FATCA will likely spawn many similar foreign requests to IRS

The assistance by the US Internal Revenue Service to Norway will not go unnoticed by other nations that are pursuing their own tax evaders, especially after FATCA begins providing them with information about the financial accounts their taxpayers hold in the United States. The large US financial market, the absence of tax on interest paid to foreign depositors and, until now, the absence of automatic exchange of information reporting, except with Canada, make the United States a magnet for wealthy persons from other countries.