BY GINA LOREDO – “Offshore tax havens cost the United States approximately $100 billion per year; worldwide, the revenue losses from tax havens may be over $250 billion.” [1] Obtaining records from a foreign bank presents a challenge for the United States because they are not under United States jurisdiction. In order to deal with this issue, the Internal Revenue Service (IRS) has used “John Doe” summons, which are special third-party summons used when the name of taxpayers under investigation are unknown.[2] “The John Doe summons is directed to a U.S. bank where a targeted foreign bank maintains a correspondent account, [which] is an account held by a foreign bank at a U.S. bank in order to conduct transactions in U.S. currency . . . without having a U.S. presence.”[3]
The issuance of a John Doe Summons over a foreign bank by a U.S. federal judge in 2008 in search of hidden offshore accounts held by United States citizens began the upheaval of IRS investigations throughout various countries,. The United States has used the power granted by John Doe Summons to collect hundreds of millions of dollars in penalties from individuals trying to circumvent the tax system through foreign bank accounts.
The IRS requires you to file a Foreign Bank Account Report with the Department of Treasury if you have any offshore bank accounts exceeding $10,000. On one hand, if an individual files erroneously they face a minimum penalty of $10,000; on the other hand, if there is willful error when filing, the minimum penalty is $100,000. [4]
In 2008, the U.S. District Court for the Southern District of Florida granted the issuance of a John Doe Summons on Union Bank of Switzerland AG (UBS) demanding they disclose records of U.S. citizens who maintained unreported accounts at their bank in Switzerland. “In response to the petition, UBS argued that Swiss banking secrecy laws, the Switzerland-U.S. income tax treaty, and principles of comity militated against disclosure of the U.S. taxpayers’ information.”[5] The dispute between the Department of Justice and UBS ultimately transformed into a dispute between the U.S. and Swiss governments which was resolved out of court and resulted in the UBS ultimately revealing 10,000 U.S. citizen held accounts. [6]
After its UBS victory, the IRS has issued John Doe summons to various foreign banks such as Switzerland’s Zuercher Kantonalbank Bank (ZKB) and Bank of N.T. Butterfield & Son Limited in the Bahamas, Barbados, Cayman Islands, Guernsey, Hong Kong, Malta, Switzerland, and the United Kingdom. Most recently, in September of this year, U.S. District Judge Ursula Ungaro entered an order authorizing the IRS to serve John Doe summons permitting them to seek records of U.S. taxpayers holding offshore accounts at Belize Bank International Limited’s (BBIL) and Belize Bank Limited’s (BBL) correspondent accounts at Bank of America and Citibank. [7] The John Does Summonses will provide information about U.S. citizens using financial institutions in Belize and even whether funds were transferred to other jurisdictions. [8] IRS commissioner John Koskinen said that “[t]his court action further demonstrates [their] relentless efforts to pursue and catch those evading taxes with hidden offshore accounts no matter where they are or what structures are used to hide behind.” [9]
The IRS has been able to identify many individuals that have offshore bank accounts because of information revealed from taxpayers that have come forward through the IRS’s Offshore Voluntary Disclosure Program.[10] This program allows U.S. taxpayers to inform the IRS of their offshore bank account before subjecting themselves to criminal liability if and when the IRS discovers their offshore tax havens. To date there have been “tens of thousands of individuals [that] have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to comply with the U.S. tax system and resolve their tax obligations” [11] The program has demonstrated to be very effective and, even though the penalty fine has risen since 2012, the immunity from criminal prosecution given in return for the disclosures has proven to be a high incentive for individuals to come clean. [12] At this rate, those individuals hiding funds in foreign accounts who have decided to abstain from disclosing their wrong doings to the Offshore Voluntary Disclosure Program will have their names uncovered and found by the IRS.
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[1] Laura Szarmach, Piercing the Veil of Bank Secrecy? Assessing the United States’ Settlement in the Ubs Case, 43 Cornell Int’l L.J. 409, 410 (2010) (citing Staff of S. Comm. on Homeland Sec. and Governmental Affairs, Perm. Subcomm. on Investigations, 110th Cong., Report on Tax Haven Banks and U.S. Tax Compliance 1 & n.1 d 2008), available at http://hsgac.senate.gov/public/_ files/071708PSIReport.pdf.)
[2] Id.
[3] Stephanie C. Chomentowski, The Use of ‘John Doe’ Summons To Enforce US Tax Laws, Blank Rome Counselors at Law (Sep. 22, 2015), http://www.blankrome.com/index.cfm?contentID=37&itemID=368.
[4] IRS, Report of Foreign Bank and Financial Accounts (FBAR), https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Report-of-Foreign-Bank-and-Financial-Accounts-FBAR (Nov. 8, 2015).
[5] Szarmach, supra note 1 at 410-412.
[6] Id.
[7] Department of Justice Office of Public Affairs, Court Authorizes IRS to Issue Summonses to Discover U.S. Taxpayers with Offshore Bank Accounts at Belize International Limited and Belize Bank Limited, (Sep. 16, 2015), http://www.justice.gov/opa/pr/court-authorizes-irs-issue-summonses-discover-us-taxpayers-offshore-bank-accounts-belize-ba-0.
[8] Id.
[9] Id.
[10] Robert W. Wood, IRS Hunts Belize Accounts, Issues John Doe Summons to Citibank, BofA, Forbes (Sep. 17, 2015), www.forbes.com/sites/robertwood/2015/09/17/irs-hunts-belize-accounts-issues-john-doe-summons-to-citibank-bofa/.
[11] IRS Announces Key Milestone in FATCA Implementation; U.S. Begins Reciprocal Automatic Exchange of Tax Information under Intergovernmental Agreements. https://www.irs.gov/uac/Newsroom/IRS-Announces-Key-Milestone-in-FATCA-Implementation%3B-U.S.-Begins-Reciprocal-Automatic-Exchange-of-Tax-Information-under-Intergovernmental-Agreements (Nov. 8, 2015).
[12] IRS Offshore Voluntary Disclosure Program https://www.irs.gov/uac/2012-Offshore-Voluntary-Disclosure-Program (Nov. 8, 2015).
