The Use of 'John Doe' Summons to Enforce US Tax Laws


Individuals who have been hiding funds in accounts at Belize Bank International Ltd., also known as Belize Bank Ltd., will soon be known to the Internal Revenue Service by name. 

Last week, a federal court authorized the IRS to serve a “John Doe” summons on Bank of America NA and Citibank NA, seeking information about BBIL’s correspondent accounts maintained at those banks from 2006 through 2014. Records provided to the IRS in response will likely reveal the identity of U.S. taxpayers who have unreported accounts at BBIL. The IRS will also be able to identify other foreign banks that utilized BBIL’s correspondent accounts to serve their U.S. clients. U.S. banks and companies and noncompliant taxpayers should be aware of this investigative mechanism used by the IRS to uncover potential tax evaders and those that assist them.

A “John Doe” summons is an investigative tool available only to the IRS and only after having been approved by a federal court. It is used when the name of the taxpayer under investigation is unknown. To obtain a “John Doe” summons, the IRS must show that there is a reasonable basis that a person (or group of persons) may have failed to comply with tax laws and the information sought to be obtained is not readily available from other sources. 

A “John Doe” summons was integral in the IRS’s investigation of UBS AG. In July 2008, using information provided by a whistleblower, the IRS obtained a “John Doe” summons for UBS seeking information on its U.S. account holders. Six months later, UBS entered into a deferred prosecution agreement on charges of conspiring to evade U.S. tax laws and agreed to pay $780 million in penalties, interest and restitution.

For foreign banks that otherwise would not be subject to U.S. jurisdiction and consequently a “John Doe” summons, the IRS has devised an alternative method — the “John Doe” summons is directed to a U.S. bank where a targeted foreign bank maintains a correspondent account. A correspondent account is an account held by a foreign bank at a U.S. bank in order to conduct transactions in U.S. currency, such as accepting payments from its U.S. customers, without having a U.S. presence. In addition, a foreign bank may utilize another foreign bank’s correspondent account in the U.S. to access the U.S. banking system, which the IRS has termed “nested” correspondent accounts.

In January 2013, the IRS obtained a “John Doe” summons directed to UBS seeking information about a correspondent account held by Wegelin & Co. Wegelin had just pleaded guilty to conspiring to assist U.S. taxpayers to evade taxes and soon thereafter was forced to close. The IRS continued to pursue information about Wegelin’s U.S. account holders. The IRS relied upon the allegations underlying its guilty plea to provide the “reasonable basis” for the “John Doe” summons to be issued for Wegelin’s correspondent account at UBS.

In April 2013, the IRS served a “John Doe” summons on Wells Fargo NA, where Canadian Imperial Bank of Commerce FirstCaribbean International Bank (which operates in the Caribbean) maintained a correspondent account. The summons sought information about FCIB’s correspondent account at Wells Fargo. The “reasonable basis” for this summons originated from information provided by 120 taxpayers who had disclosed their FCIB accounts through the IRS’s Offshore Voluntary Disclosure Program, which is an amnesty program offered by the IRS where taxpayers disclose their foreign assets and pay all unpaid taxes, interest and penalties, including a separate offshore penalty.

To obtain the “John Doe” summons for BBIL, the IRS again tapped data obtained through the OVDP to provide, in part, the reasonable basis required for the summons. Along with analyzing publicly available information and criminal prosecutions involving a BBIL account, the IRS reviewed information provided in taxpayers’ OVDP submissions and then interviewed five taxpayers who had enrolled in the OVDP in order to disclose their BBIL accounts. 

Each of the taxpayers the IRS interviewed had opened accounts at BBIL, requested that BBIL account information not be mailed to them in the U.S., and failed to report income earned in the accounts to the IRS. All but one of these taxpayers utilized a Belize corporation to obtain the account at BBIL and also failed to report the foreign corporation on their U.S. tax returns. 

Based upon this information, the IRS asserted that the “John Doe” summons was warranted: “BBIL and BBL are related banks based in Belize that market their ability to provide secret banking services to foreign residents. Belize Corporate Services is a related corporate service provider that has marketed its ability to set up Belize corporate entities, used to hide the identity of account owners.”

The U.S. Department of Justice emphasized that it continues to focus on pursuing taxpayers with undisclosed foreign accounts and will use the “John Doe” summons to further that goal. Acting Assistant Attorney General Caroline D. Ciraolo of the Justice Department’s Tax Division warned:

The Department and the IRS are using every tool available to identify and investigate those individuals determined to evade their U.S. tax and reporting obligations through the use of offshore financial accounts and foreign entities. These John Doe summonses will provide detailed information about individuals using financial institutions in Belize and, to the extent funds were transferred, other jurisdictions. But rest assured, we are receiving information from many sources regarding hidden foreign accounts and offshore schemes. The time to come clean is now — before we knock on your door.

Both noncompliant taxpayers and U.S. banks and companies should be aware of the “John Doe” summons. Though it is not alleged that Bank of America or Citibank had engaged in any wrongdoing, both will likely incur significant costs to respond to the summons, including devoting time and resources to gather and produce information and documents about BBIL.

And, it is not only banks that may have to bear the burden of responding to a “John Doe” summons. In 2014, the IRS served a “John Doe” summons on a number of shipping and handling companies, such as FedEx, DHL and UPS, seeking information about an entity that used those shipping companies to send information to individuals about setting up foreign companies used to conceal offshore banking activity.

Individuals participating in — or considering participating in — the OVDP also need to be aware that the price to successfully complete the OVDP could include being interviewed about their offshore financial activities, which the IRS may use to pursue the foreign bank or other taxpayers. In addition, as the number of foreign banks targeted by the IRS and Justice Department grows, the price of admission to the OVDP increases; the disclosure of an account held at a targeted foreign bank causes the offshore penalty to jump from 27.5 percent to 50 percent of the high value of the undisclosed foreign accounts.

Even with the potential of a 50 percent penalty and of being interviewed about foreign banking activity, the OVDP continues to provide taxpayers with a clear path to tax compliance. U.S. tax laws have always required the reporting of all income, regardless of where it was earned, and, in this increasingly flat world, the IRS is more than willing to use all the tools at its disposal, including “John Doe” summons, to enforce U.S. tax laws.

“The Use of 'John Doe' Summons to Enforce US Tax Laws,” by Stephanie C. Chomentowski was published in Law360 on September 22, 2015. To view the article online, please click here.

The original version of this article was first published on Blank Rome’s Tax Controversy Watch Blog on September 17, 2015. To read the article, please click here.