TAXLITIGATOR – Tax Controversy (Civil & Criminal) Report

On July 28, 2021, the Internal Revenue Service (IRS) and the Department of Justice (DOJ) announced that it had obtained a Court Order authorizing summonses for records relating to U.S. Taxpayers who used Panama Offshore Service Providers (POLS) to hide assets and evade taxes.[i]   The issuance of these “John Doe” summonses will permit the IRS to obtain records for individuals who may have used POLS to hide assets from the following 10 specified U.S. couriers and financial institutions: FedEx Ground Package System, Inc., Federal Express Corporation, Corp., DHL Express, UPS Inc., Federal Reserve Bank of New York, The Clearing House Payments Company LLC, HSBC Bank USA, Citibank, Wells Fargo Bank, and Bank of America.  Specifically, the information ordered to be provided includes details on deliveries and electronic fund transfers between POLS and clients of the summoned couriers and financial institutions.

I recently blogged on the IRS’s use of the John Doe summons procedure to obtain information about U.S. taxpayer’s cryptocurrency transactions in the Circle Internet Financial, Inc., and Payward Ventures Inc. d/b/a Kraken John Doe summons cases.[ii]   While historically, the IRS’s use of a John Doe summons was more the exception than the rule, these recent filings, both in scope and numbers, reminiscent of the IRS’s use of John Doe summonses in the 1980’s and 1990’s tax shelter days, suggest that trend may be on the uptick again.   While the legal requirements for obtaining a John Doe summons order are more rigorous than the issuance of a non-John Doe summons, the swath of information the IRS is obtaining in these cases is much broader.  

A quick refresher as to what is a John Doe Summons and when can the IRS use this investigation tool, I note the following: 

A John Doe summons, unlike an individualized summons used in an investigation of a single taxpayer and which the IRS can issue without judicial approval,[iii] permits the Government to obtain information about a large group of unidentified taxpayers where the Government can demonstrate a reasonable belief that the “unidentified” taxpayers are engaged in conduct that may violate U.S. tax laws.[iv]

The Government must meet a three prong test for a Federal Court to grant the right for the IRS to issue a John Doe summons, namely the following:[v]

1. The John Doe summons relates to the investigation of a particular person or ascertainable group or class of persons;
2. There is a reasonable basis for believing that such person or group or class of persons may fail or may have failed to comply with any provision of any internal revenue law; and,
3. The information sought to be obtained from the examination of the records or testimony (and identity of the person(s) with respect to whose liability the summons is issued) is not readily available from other sources.

The law involving the issuance of John Doe summons was, however, narrowed by the Taxpayer First Act of 2019 (“TFA”), requiring that the Government must also meet a narrowly tailored requirement in the flush language of the statute added as part of the TFA.[vi]  That language requires that the information sought to be obtained in the summons should be narrowly tailored to information that pertains to the failure or potential failure of the group or class of persons to comply with one or more provisions of the internal revenue laws which have been identified. 

The POLS and POLS Group John Doe Summons Case

According to the IRS, POLS is a Panamanian law firm that advertised services including the creation of foundations and corporations as well as offshore financial accounts while promising clients “100% anonymity, privacy and confidentiality.”[vii]   

The IRS believes that U.S. taxpayers who used the services of POLS may have failed to comply with their U.S. tax and reporting obligations. The IRS is investigating U.S. taxpayers who used the services of the POLS Group from 2013 through 2020 “to establish, maintain, operate, or control any foreign financial account or other asset; any foreign corporation, company, trust, foundation, or other legal entity; or any foreign or domestic financial account or other asset in the name of such foreign entity.”[viii]

In light of this information, the government petitioned a federal court in New York for leave to serve John Doe summonses on the 10 entities listed above.  The government also filed a petition in the District of Minnesota asking to allow the IRS to serve a John Doe summons on MoneyGram, a global money transfer and payment services company, as part of the investigation involving POLS.

On July 28, 2021, the federal district court in New York entered the order granting the government permission to issue the 10 summonses.  After entry of the order, the following higher-up government officials were quoted:

U.S. Attorney Audrey Strauss, SDNY:“This action underscores our Office’s commitment to hold accountable those who use offshore service providers to avoid U.S. taxes.  In issuing these John Doe summonses, we continue our joint efforts with the IRS to investigate tax evaders who use foreign financial accounts and sham foreign entities to hide their assets.”

Acting Assistant Attorney General, Tax Division, David A. Hubbert: “The Department of Justice, working alongside the IRS, is dedicated to unearthing the use of foreign bank accounts to evade U.S. taxes.  We will use the many tools available to us, including John Doe summonses like the ones authorized today, to ensure that taxpayers are fully meeting their responsibilities.”

IRS Commissioner Charles P. Rettig: “These court-ordered summonses should put on notice every individual and business seeking to avoid paying their fair share of taxes by hiding assets in offshore accounts and companies.  These records will empower the IRS and the Department of Justice to find those attempting to skirt their tax obligations and ensure their compliance with the U.S. tax laws.”

Conclusion In the IRS’s ongoing efforts to obtain more data to effectuate greater tax compliance and a narrowing of the tax gap, a John Doe summons can be a jackpot of information.  While some of that information will be worked by IRS compliance employees; it is fair to assume that many of these cases will find their way to the desk of an IRS Criminal Investigation special agent. 

Sandra R. Brown is a Principal at Hochman Salkin Toscher Perez P.C., and former Acting United States Attorney, First Assistant United States Attorney, and the Chief of the Tax Division of the Office of the U.S. Attorney (C.D. Cal). Ms. Brown specializes in representing individuals and organizations who are involved in criminal tax investigations, including related grand jury matters, court litigation and appeals, as well as representing and advising taxpayers involved in complex and sophisticated civil tax controversies, including representing and advising taxpayers in sensitive-issue audits and administrative appeals, as well as civil litigation in federal, state and tax court. 

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[i] IN THE MATTER OF THE TAX LIABILITIES OF: JOHN DOES, United States taxpayers who, at any time during the years ended December 31, 2013, through December 31, 2020, used the services of Panama Offshore Legal Services, including its predecessors, subsidiaries, and associate, to establish, maintain, operate, or control any foreign financial account or other asset; any foreign corporation, company, trust foundation or other legal entity; or any foreign or domestic financial account t or other asset in the name of such foreign entity. Case 1:21:mc-00424.

[ii] https://www.taxlitigator.com/the-irs-remains-committed-to-seeking-authorization-to-serve-john-doe-summonses-for-information-from-cryptocurrency-exchanges-as-it-targets-taxpayers-who-fail-to-report-cryptocurrency-transactionsby-s/

[iii] 26 U.S.C. §7602(a).

[iv] 26 U.S.C. §7609(f).

[v] Id.

[vi] Pub. L. No. 116-25, §1204(a), 133 Stat. 988 (2019).

[vii] https://www.justice.gov/usao-sdny/pr/irs-obtains-court-order-authorizing-summonses-records-relating-us-taxpayers-who-used

[viii] United States of America v. John Does, Notice of Filing of Ex Parte Petition for Leave to Serve John Doe Summons, Case No. 0:21-mc-00032.