On November 7, 2013, United States District Judge Kimba M. Wood of the Southern District of New York, granted authorization to the IRS to issue John Doe summonses to Bank of New York Mellon and Citibank requiring those banks to produce records and information pertaining to US taxpayers holding accounts at Zurcher Kantonalbank and its affiliates (ZKB) in Switzerland.
Thereafter, on November 12, 2013, U.S. District Judge Richard M. Berman, also of the Southern District of New York, granted permission for the IRS to issue John Doe summonses to Bank of New York Mellon, Citibank, JP Morgan Chase, HSBC, and Bank of America requiring those banks to produce records and information relating to accounts held by US persons at The Bank of NT Butterfield & Son, Limited, and its affiliates (Butterfield) in a number of foreign jurisdictions including the Bahamas, Barbados, the Cayman Islands, and Switzerland. The Department of Justice’s news release on these orders is available here.
The judicial orders and the summonses that will follow represent the latest effort by the United States to root out and hold accountable US taxpayers holding accounts and financial assets abroad in an attempt to avoid US taxation. Recently, for instance, three employees of ZKB were indicted for conspiring with US taxpayers to hide over $400 million in Swiss bank accounts. Additionally, the United States, working together with Swiss bank regulators, has reached an agreement with certain Swiss banks encouraging those banks to disclose their US account holders in exchange for non-prosecution guarantees. Further, Congress has enacted the Foreign Account Tax Compliance Act (FATCA), which is designed to punish foreign banks, via a withholding tax mechanism imposed on payments made to those banks from US sources, which refuse to provide information regarding their US account holders. For more information about FATCA and the Treasury Department’s struggles to implement the law, please see our prior blog discussions here, here, and here.
The issuance of John Doe summonses is a tactic the IRS has utilized previously. For instance, last April, the IRS issued a John Doe summons to Wells Fargo seeking information concerning US persons with accounts at First Caribbean International Bank.
The IRS will issue John Doe summons in instances where it is unsure of the precise identity of the inpiduals about whom it is seeking information. Because the scope of a John Doe summons is necessarily broad, John Doe summonses allow the IRS to recover vast amounts of information from the banks on which they are served. The IRS serves summonses on US banks seeking information about accountholders of foreign banks because US banks often act as correspondent banks for the foreign banks. Under these arrangements, a US bank will hold accounts for the benefit of a foreign bank that is seeking to do business in US dollars but that otherwise does not have a US presence. Service of the summons on the US correspondent bank is simpler and more efficient than attempting to retrieve information directly from the foreign bank.
The IRS’s efforts to crack down on offshore tax evasion have led to severe consequences for non-compliant US taxpayers. For instance, the IRS’ focus on identifying non-compliant account holders with UBS have led to criminal convictions and the imposition of severe monetary penalties, as highlighted here, here, and here. Further, the United States has pursued the banks and the bankers that have assisted non-compliant US taxpayers in hiding their assets, as highlighted here, here, and here. Given the tough stance the IRS has taken on this issue, cooperation between foreign banks and the IRS regarding the production of information about US accountholders is likely to only grow in the future. Such cooperation, in turn, will likely increase the risk that more non-compliant US accountholders are identified and prosecuted.
It is important to keep in mind that there is no prohibition against US persons holding foreign bank accounts. However, US persons holding foreign accounts generally must disclose these interests to the IRS in any year in which the balance of the account exceeds $10,000.00, by making a Foreign Bank Account Report (FBAR). Separate reporting requirements exist for other foreign assets held by US persons, such as stock in foreign corporations or interests in offshore trusts. Further, US persons are taxed on their worldwide income, regardless of the source of the income. Interest earned on foreign bank accounts, distributions from offshore trusts, and pidends paid by foreign corporations are all subject to US tax and must be reported on the US person’s annual tax return. Failure to report the existence of overseas accounts or financial interests when required can lead to significant monetary penalties and, potentially, criminal prosecution. For more information regarding the FBAR requirements, see our previous blog entries here, here, and here.
The IRS has re-opened the Offshore Voluntary Disclosure Program (OVDP), which permits taxpayers with undisclosed foreign income or assets from previous tax years to make a full disclosure of their previously undisclosed interests and income in exchange for generally lower penalties and a guarantee from the IRS that it will not recommend the disclosing taxpayer’s case to the Justice Department for criminal prosecution. Read more about the most recent OVDP here.
The most recent efforts by the IRS to learn the identity of non-compliant US accountholders at ZKB and Butterfield is especially pertinent considering the limitations of the OVDP. Specifically, once the IRS or the Department of Justice becomes aware of a taxpayer’s non-compliance through the use of a John Doe summons or similar investigatory mechanism that taxpayer becomes ineligible for participation in the OVDP. That prohibition does not apply, however, in situations where a non-compliant taxpayer merely holds an account at a bank that is the subject of a John Doe summons—the government must learn of the specific taxpayer’s non-compliance on its own before the door to the OVDP is shut.
Given the generally beneficial nature of the OVDP, it would be wise for non-compliant US taxpayers holding accounts with ZKB or Butterfield to immediately explore their options regarding the OVDP.