Could this mark the end of bank secrecy?
The John Doe Summons
The IRS has a powerful tool called a John Doe summons, which is authorized by 26 U.S.C. § 7609(f). Essentially a John Doe summons is sent to an institution, like a financial firm, to identify unknown taxpayer accounts for potential criminal investigation. In order to obtain authorization for a John Doe summons the IRS must demonstrate in an ex parte proceeding that it has reasonable belief that “a person or group or class of persons may fail or may have failed to comply with any provision of any internal revenue law” and that the information sought cannot be obtained from other sources.
In 2008 the IRS issued a John Doe summons to the Swiss bank UBS seeking information on 52,000 undeclared accounts belonging to U.S. taxpayers. In 2009 it negotiated the release of some 4,500 U.S. taxpayer accounts suspected of evading U.S. tax obligations through Swiss bank secrecy laws. At the time, this was a huge, high-profile win for the IRS in its mission to break the shield of Swiss bank secrecy laws and identify U.S. taxpayers evading their tax obligations overseas. Soon thereafter, the IRS developed a voluntary disclosure program for other taxpayers to disclose their failure to report foreign holdings. That program was so successful that today it has expanded to include voluntary disclosure of other forms of noncompliance if the taxpayer meets certain conditions.
The IRS continues to issue John Doe summons as they prioritize and target taxpayers using offshore accounts to evade taxes. Last year it obtained a win when the courts declined to quash a John Doe summons issued to a law firm. That case did not receive nearly the news coverage as UBS did, but it could have consequences far more dire for taxpayers than the UBS summons. I’ll write about a case that in my next blog entry.