In what may be a presage of actions to come the IRS has asked a court to issue a “John Doe” summons at the request of the Government of Norway. A “John Doe” summons is a court order that compels the receiving financial institutions to produce records of accounts by category as opposed to by specifically named individual or account number. The law applicable to “John Doe summons is “Courts may grant leave to serve a “John Doe” summons that does not identify the person with respect to whose liability it is issued if the United States establishes three factors: the summons relates to a particular person or group of individuals; there is a reasonable basis to believe that person or group may have not complied with the internal revenue laws; and the information sought is not readily available from some other source. See 26 U.S.C. §7609(f).”
In this case the Government of Norway was seeking bank records of its citizens who hold accounts and payment cards at specific banks. The fundamental basis for the request was that the funds held in the accounts constitute unreported income under the revenue laws of Norway. Norway based its assertion on the belief that some of its citizen opened accounts for the express purpose of receiving disguised payments. This approach, seeking records of taxpayers from foreign banks by way of “John Doe” summons, is a regular tactic of the IRS and Department of Justice in investigations of U.S. taxpayers who hold offshore accounts. As stated in the court pleadings:
“The United States has entered into tax treaties with other nations that provide, among other things, for gathering and exchanging information to assist each other in administering the tax laws. The tax treaty between the United States and Norway is the law of the United States, and it provides that, if Norway makes a proper request for information, the United States will use its internal revenue laws to collect the requested information.
Norway has made such a request here. It is investigating whether individuals may owe tax in Norway, and part of that investigation involves identifying individuals who are consistently using payment or credit cards in Norway that are issued by banks outside of Norway. Norwegian taxpayers can use a foreign payment card as part of a scheme to avoid reporting income and paying Norwegian income tax. Individuals can divert income to a foreign country, deposit the proceeds in a bank there, and then use the income to make purchases in their “home” country through payment or credit cards issued by foreign banks. The United States Internal Revenue Service has investigated this scheme with respect to U.S. taxpayers”
What is important to legal and accounting practitioners about this case is the fact that the U.S. is willing to use “John Doe” summons proceedings to assist treaty partners in tax enforcement. It is not a stretch to see how various groups can and will be the target of this type of action. Entertainment companies, multi-national entrepreneurs and dual citizen from treaty countries are all potentially facing bi-national tax investigations. The key question is what will be the next country to make a John Doe request and what will be the target class of taxpayers? Careful planning is the key to avoiding tax compliance difficulties