IRS Issues “John Doe Summons” to Wells Fargo Seeking Identities of U.S. Taxpayers with Offshore Accounts at First Caribbean International Bank

Introduction

On April 30, 2013, the United States Department of Justice issued a “John Doe Internal Revenue Code” summons to Wells Fargo Bank, as a provider of correspondent bank services for Canadian Imperial Bank of Commerce’s First Caribbean International Bank (“FCIB”), requiring it to turn over records relating to accounts held at FCIB by United States Taxpayers between 2004 through 2012.  The issuance of this summons is one of the aftershocks of the UBS AG debacle that destroyed Switzerland’s bank secrecy laws. [A discussion on this issue can be found here]. You can read more about the Department of Justice’s John Doe summons to Wells Fargo here.

Because First Caribbean operates in 18 Caribbean countries, it is inevitable that the issuance of the Department of Justice’s summons will reveal thousands upon thousands of U.S. account holders who reside in the United States, and particularly South Florida.  It is also inevitable that some of these U.S. account holders will be prosecuted for failing to disclose their accounts overseas.  Additionally, it is virtually certain that the Department of Justice will start issuing John Doe summonses to other banking institutions that maintain correspondent accounts.

Because of the urgent nature of this issue for holders of foreign accounts who may be unaware of their reporting requirements, and the consequences of failing to report their foreign accounts, over the course of several articles we will present a comprehensive overview of the IRS’s most recent efforts to thwart offshore tax evasion and raise money for the government through tax collection efforts. Additionally, we will explore the intricacies of this issue attempt to explain exactly what the IRS is doing here.

In this article, Part I includes a discussion of what exactly a “John Doe Summons” is and what effects the summons issued to FCIB may have on foreign account holders. Part II of this article focuses on immediate actions expected “violators” can/should take to insulate themselves from prosecution.

Part I:
The John Doe Summons: Who is John Doe?

So what exactly is a John Doe Summons and why is it particularly dangerous for US taxpayers with accounts abroad?

First, “[f]or the purpose of ascertaining the correctness of any return, making a return where none has been made, [or] determining the liability of any person for any internal revenue tax…”, the Internal Revenue Code empowers the Secretary of the Treasury, or its delegate, “[t]o summon the person liable for tax or required to perform the act…or any person having possession, custody, or care of books of account containing entries relating to the business of the person liable for tax or required to perform the act, or any other person the Secretary may deem proper…to produce such books, papers, records, or other data, and to give such testimony…as may be relevant or material to such inquiry.” 26 U.S.C. §§ 7602(a), 7701(11). The IRS power to summon extends even to those situations in which the identity of the taxpayer is unknown. 26 U.S.C. § 7609(f). Where the IRS seeks to summon information that pertains to an unknown taxpayer and is in the custody of a third party, the United States must first make a showing to a court that: 1) its investigation relates to an ascertainable class of persons; 2) a reasonable basis exists for the belief that these unknown taxpayers may have failed to comply with Internal Revenue Laws; and 3) the United States cannot obtain the information sought from another readily available source. Id.

The unknown or unspecified name of the target taxpayer gives rise to the notion of “John Doe.” The IRS defines a John Doe Summons as “any summons where the name of the individual taxpayer under investigation is unknown and therefore not specifically identified.” John Doe summonses are utilized by the IRS primarily to identify individuals participating in activities that would violate internal revenue laws or the Bank Secrecy Act and have most recently been utilized to uncover information regarding foreign accountholders who are illegally failing to report their offshore assets under U.S. tax law. Because the summons allows the IRS to seek information about unspecified taxpayers, the IRS commonly uses them as a means to collect information on an extraordinarily broad scale from financial institutions wherever located.

Although maintaining an offshore account is perfectly legal, United States tax law requires that a Foreign Bank Account Report or (“FBAR”) be filed with the United States Treasury for any citizens holding foreign accounts with balances exceeding $10,000.00 at any time during the calendar year. Under the FBAR regulations, deliberate failure to report a foreign account with a value that exceeds the threshold amount can result in penalties up to 50 percent of the amount in the account at the time of the violation. Of late, the IRS has been making concerted efforts to ensure that taxpayer who evade these reporting requirements are punished and John Doe Summonses have been the IRS’s weapon of choice.

In this most recent summons, IRS served Wells Fargo’s San Francisco branch which maintains correspondent accounts for the Barbados-based FCIB. Correspondent accounts are bank deposit accounts maintained by one bank for another. Typically, correspondent accounts are held by foreign banks without branch offices in the U.S. that do business in U.S. dollars. The United States Department of Justice is expecting that this summons will produce significant information about the account holders as well as the amount of money moved through their accounts. Beyond the identification of tax evaders, the John Doe summons also requires Wells Fargo to produce its own internal anti-money laundering compliance reports.

In a U.S. Department of Justice Press release found here, Kathryn Keneally, Assistant Attorney General for the Justice Department’s Tax Division, stated as follows: “The Department of Justice and the IRS are committed to global enforcement to stop the use of foreign bank accounts to evade U.S. taxes…This John Doe summons is a visible indication of how we are using the many tools available to us to purse this activity wherever it is occurring. Those who are still hiding should get right with their country and fellow taxpayers before it’s too late.” IRS Acting Commissioner Steven T. Miller went on to say that “[t]his summons marks another milestone in international tax enforcement…our work here shows our resolve to pursue these case in all parts of the world regardless of whether  the person hiding the money overseas chooses a bank with no offices on U.S. soil.”

The summons to Wells Fargo naturally begs the question of whether the U.S. government can assert jurisdiction over foreign banks that have no branches or employees within the United States. In response, the U.S. government maintains that despite a bank employee never stepping foot on U.S. soil, if a foreign bank’s employees knowingly assist a U.S. taxpayer evade tax filing obligations, the bank itself can and will be held criminally liable. The way the U.S. Department of Justice sees it, if there is any conspiracy to violate U.S. tax law, the fact that the conduct took place overseas is irrelevant. IRS’s success in pursing illegal offshore account activity in Switzerland which led to the closure of the historic Swiss bank Wegelin & Co., which we previous discussed here and here, is instructive on this point. What is even more damning for FCIB is that its correspondent accounts held at Wells Fargo’s San-Francisco branch further established the nexus – however limited – between it and the U.S. 

This John Doe summons will result in significant exposure to prosecution for foreign account holders, banks, bankers, and account facilitators such as insurance companies, lawyers, accounts and investment advisors who the IRS has suspected of facilitating tax evasion in the United States. Given the nature of the new international information sharing agreements, the disclosure of account names and information is becoming more frequent and intrusive. For example, the Foreign Account Tax Compliance Act  (“FATCA”) was implemented in 2010 to encourage non-U.S. financial institutions to “voluntarily” disclose their U.S. account holders to the IRS and requires foreign financial institutions to report information about financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest directly to the IRS. [See IRS press release here.]

These IRS initiatives to identify individuals evading taxes are moving forward, and as such, foreign account holders and those associated with facilitating those accounts both domestically and abroad will need to prepare themselves to quickly become compliant with U.S. tax laws or prepare for a legal battle with the IRS.

Part II:
The Offshore Voluntary Disclosure Program

We now look more closely at the IRS’s Offshore Voluntary Disclosure Program and what steps suspected holders of unreported offshore accounts can immediately take to mitigate penalties, fines, and possible criminal prosecution.

In 2009, as a means of encouraging U.S. taxpayers to report previously undisclosed income, the IRS created the first offshore disclosure initiative. This initiative was coined the Offshore Voluntary Disclosure Program (“OVDP”) and was a response to the IRS prosecution of wealthy Americans who evaded taxes with the help of UBS AG (located in Switzerland) along with information obtained from disclosures of former UBS AG banker Bradley Birkenfeld in 2008.[ We have previously blogged on the OVDP here, here, and here] This program was considered a success, reportedly collecting over $4 Billion between its inception in 2009 and 2011 and nearly $5 Billion to date. Furthermore, the OVDP has resulted in over 34,500 disclosures and led to information that has assisted the IRS in furthering its investigation into other offshore tax jurisdictions. [See IRS press release on OVDP success here.] Consequently, in 2012, the IRS decided to eliminate any deadlines and kept the program as an open ended vehicle for investigating tax evasion and collecting tax revenue.

The OVDP currently focuses on the main vehicles of offshore tax evasion – unreported foreign financial accounts and unreported foreign entities, examples of which include depositing unreported and untaxed income into foreign accounts and/or omitting investment income earned from the foreign account on tax returns.  Under the OVDP, current tax evaders are encouraged to report previously undisclosed foreign accounts through reduced penalties and elimination of criminal prosecution risks for evasion.

For example, by entering into the OVDP, the IRS will waive FBAR non-compliance penalties. Foreign Bank Account Report (“FBAR”) violations range from $10,000 per account per year of unreported foreign bank accounts exceeding $10,000 during any point in a calendar year to the greater of $100,000 or 50 percent (50%) of the maximum balance of the foreign account exceeding $10,000. In contrast, the ODVP rates general degrees of willful tax evasion, and penalizes tax evaders based upon the underlying severity of the evasive acts. The threshold limits are a respective 27.5%, 10%, and 5% of the maximum foreign account balance based on the three different levels of willfulness.

Beyond its focus on FBAR violations, OVDP also looks to unreported foreign entities. Tax evasion schemes created through sophisticated foreign trusts, corporations, and partnerships that do not report this foreign entity to IRS on annual tax returns are susceptible to between $10,000 and $50,000 in penalties. OVDP however, affords the same 27.5%, 10%, and 5% mitigated penalties for disclosures of foreign business entities.

Individuals and businesses fearful of being identified of illegally evading taxes through undisclosed foreign financial accounts must ultimately assess the prospective risk of penalties and/or criminal prosecution when reviewing their foreign accounts and should consider whether the OVDP is their best option for solving their tax issues. When making this assessment, foreign account holders should be mindful of the following rules under OVDP:

  • The 27.5%, 10%, and 5% penalties apply to all assets related to tax evasion.
  • The OVDP only covers the most recent 8 tax years.
  • The OVDP penalties apply to all tax evasion-related assets that may be both directly and indirectly owned by the tax payer. i.e. the beneficiary of a foreign trust account  that maintains $500,000 will be applied under OVDP the same as a $50,000 car purchased with funds from a non-compliant FBAR account.

When making this final decision we suggest that foreign accountholders contact a competent professional with specialization in offshore disclosures, FBAR compliance, and asset protection to ensure that the accountholder is making the decision that is best suited for his or her specific financial situation.

The attorneys at Fuerst, Ittleman, David & Joseph have extensive experience working with taxpayers who have undisclosed foreign bank accounts and who have availed themselves of the IRSs voluntary disclosure program. We will continue to monitor the development of this issue, and we will update this blog with relevant information as often as possible. You can reach an attorney by calling us at 305-350-5690 or emailing us at  contact@fuerstlaw.com.

 

Topics:  Bank Secrecy Act, FATCA, FBAR, IRS, John Doe Investigation, Offshore Funds, OVDP, Wells Fargo

Published In: Criminal Law Updates, Finance & Banking Updates, International Trade Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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