Federal Court Approves U.S. Government Issuance Of John Doe Summonses

By: Michael J. Tedesco

A Federal Judge recently approved the Internal Revenue Service’s issuance of what is known as a “John Doe” summons¹ to several entities in the U.S who utilized the services of Sovereign Management & Legal Ltd. (“Sovereign”). These entities include FedEx, DHL, UPS, Western Union, the Federal Reserve Bank of New York, Clearing House Payments Company LLC and HSBC USA. According to Sovereign’s website and the government’s Petition filed with the U.S. District Court for the Southern District of New York, Sovereign provides Offshore Banking, Corporation and Trust services. The U.S. government alleges that U.S. taxpayers used those services to conceal ownership of assets held offshore to evade U.S. taxation.

These summonses seek information that the government cannot procure through the Foreign Account Tax Compliance Act (“FATCA”)² and serves as the latest effort in the IRS’s recent push to achieve global tax compliance from its citizens. In the context of offshore financial holdings, the government has recently issued John Doe summonses to a number of financial institutions requesting account information for U.S. taxpayers with ownership or signature authority over foreign accounts without knowing the names of the specific taxpayers whose information it is seeking. For a John Doe summons to be approved, the government is required to make a showing in court that (1) the summons relates to a particular person or ascertainable group, (2) there is a reasonable basis for believing that such person or group may have failed to comply with any provision of the internal revenue law, and (3) the information sought is not readily available from other sources.

The Federal Court found that the government met its burden with respect to these requests. The government believes that the John Doe summonses issued to the courier companies will assist them in identifying U.S. clients of Sovereign through records of shipping services between Sovereign and taxpayers in the U.S.

HSBC USA is among the entities named in the government’s Petition because of its correspondent bank accounts held at the bank by HSBC Hong Kong and HSBC Panama. The correspondent account provides banking services to the foreign bank that does not have a U.S. branch so that the foreign bank may reach U.S. customers. The government alleges that HSBC USA’s records relating to the correspondent accounts will assist the government in determining the identity of Sovereign’s clients who held accounts with HSBC Hong Kong and HSBC Panama through wire transfer information and cancelled checks retained by HSBC USA.

The government’s Petition further requests authority to issue summonses to gather wire and electronic fund transfer information from the New York Federal Reserve and Clearing House Payments Company. According to the Petition, the New York Federal Reserve Bank maintains the primary electronic funds transfer system for domestic U.S. fund transfers, and the Clearing House Payments Company operates the main electronic funds transfer system for processing international U.S. dollar funds transfers made between international banks. All of these sources are believed to contain information relevant to discovering the identities of U.S. taxpayers hiding assets offshore through services allegedly provided by Sovereign.

The John Doe summons has already proved to be a powerful tool to help the IRS gather information, including names and account information of U.S. taxpayers with foreign accounts or other foreign financial interests. The IRS has used the John Doe summonses to target individuals with foreign accounts who are hoping to “wait out” the IRS and thus avoid making a voluntary disclosure as well as those intending to avoid future reporting requirements. Once a taxpayer is on the IRS’s radar, IRS Criminal Investigation will no longer clear them to come into compliance under the protections of a voluntary disclosure program.

U.S. taxpayers with undisclosed foreign accounts, whether or not the institution servicing those accounts may be subject to a “John Doe” summons, should seek legal counsel immediately to evaluate their circumstances and whether a voluntary disclosure is required. Andreozzi Bluestein LLP can provide legal counsel regarding foreign assets/accounts and the various compliance initiatives offered by the IRS. The voluntary disclosure initiatives offered by the IRS can provide protection against criminal prosecution and certainty regarding civil penalties.

 

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¹A “John Doe” summons may be issued when the government is unsure of the exact identity of the person(s) for whom they are seeking the information.
²Provisions commonly known as FATCA, enacted by Congress in March of 2010, requires foreign financial institutions to report certain information about U.S. taxpayer held foreign financial accounts or foreign entities in which U.S. taxpayers hold a substantial ownership interest.

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Author Information

Mr. Tedesco is a partner at Andreozzi Bluestein LLP. He concentrates his practice in Foreign Bank Account Reporting (FBAR) and individual and corporate tax litigation and controversy matters.

Mr. Tedesco received his B.A. at the State University of New York College at Geneseo. He went on to receive his J.D. degree, cum laude, from the State University of New York at Buffalo Law School.

During law school, Mr. Tedesco served as an extern with IRS Office of Chief Counsel. Prior to joining the firm, Mr. Tedesco served as a law clerk with another Buffalo law firm.

Mr. Tedesco was recognized along with other attorneys at Andreozzi Bluestein LLP when our firm received the Law Firm Commitment Award from the ECBA Volunteer Lawyers Project in 2014.

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