Saturday, September 10, 2011

Rumors of Additional Grand Jury Subpoenas and John Doe Summonses Against Foreign Banks (9/10/11)

Jeff Neiman has a new blog entry, Reuters: Enforcement Action Against Ten Swiss Banks in the Works (9/10/11), here, reporting on a Lynnley Browning Reuters report of subpoena / John Doe summons action that are being prepared to blast information out perhaps 10 foreign banks. (Ms. Browning's report is here; as I get additional links for information I deem useful on this subject, I will post them below.) The reported rumor is that the request will be for accounts of "as low as $50,000." Jeff's discussion is excellent, so I encourage readers to go to that discussion. My comments are:

1. While assisting clients having a significant, sometimes, large number of foreign financial accounts scattered in relatively low amounts among a number of foreign financial institutions, the sheer number of accounts created logistical difficulties in making a proper assessment of the risks of not getting into the voluntary disclosure programs and, if the client entered the programs, then the processing of the information and documents for the final package. But when that significant or large number of accounts involved relatively small amounts and relatively small aggregate amounts, even beyond the logistics issues, the upfront decision was tilted in favor of joining the programs and will affect the decision whether to opt out. Specifically, the nonwillful penalty (up to $10,000) is per account per year. For example, in the worst cases (the criminal cases to date), the Government has demanded only a single FBAR willful penalty of 50% of the highest amount in the foreign financial account(s) in the highest year(which does not include foreign assets, such as real estate). This 50% willful penalty asserted in the criminal cases could be significant, but still represents a Government decision not to press for larger penalties by including more years otherwise permitted by the FBAR statute. (There could be some constitutional issues of Excessive Fines and perhaps due process in asserting higher FBAR penalties; see the tag below.) But, with a large number of accounts, the IRS could go for the nonwillful penalty, designed to punish less culpability, and easily extract the same or a larger penalty than the willful penalty depending upon a combination of the aggregate numbers and the number of accounts. The problem with trying to assess what the risks are with respect to the nonwillful penalty (assuming that the lawyer and client properly reach a conclusion of unlikelihood of criminal risk, civil fraud risk, and willfulness risks, which are all variations of the same them) is that we don't have enough of a populated data base to anticipate what the IRS will do in nonwillful cases. The nonwillful penalties are up to $10,000 per account per year and the IRS agent has a lot of discretion, even in cases where there is no reasonable cause, as to what to do -- including merely issuing a slap on the hand letter saying, in effect, go forth and sin no more. We just don't know based on real information data points (including the discussion in the IRM), so many clients in this profile were not willing to take the risk of going forth and sinning no more, but taking the audit risk for past years. They were pushed into the program, thus capping the civil penalties with the notion of perhaps opting out for audit after better information is available as to what might happen on audit.

2. What would have helped in the risk and benefit analysis on the front end decision of whether to get into the program is some feel for materiality standards. This is not just an audit risk issue, but an issue of materiality as to what might happen in the future. While attorneys and tax professionals generally must be very circumspect in advising clients as to audit risks, if for no other reason than that they are unpredictable and lightning can strike, but also because there are ethical issues intertwined. (I can't get into that right now without distracting the focus of the discussion.) But, since I am not advising clients here and merely offering points for observation and discussion, one has to wonder how this new rumor about the $50,000 threshold might play out and affect decisions in the future about whether a taxpayer not yet in the programs should do some form of voluntary disclosure or just go forth and sin no more (taking the audit risks (not just whether he or she is audited but what would happen if he or she is audited) with him or her). Quite frankly, in my practice, where I have seen large numbers of accounts is with relative unsophisticated taxpayers, often immigrants with some cultural issues bearing on their culpability, with aggregate amounts that are relatively small who had reasons other than U.S. tax noncompliance for the number of accounts. Many of these have no accounts where the highest amount exceeded $50,000. Thus, if $50,000 is a threshold (only rumor now), their risks of detection may not be very great (subject to the lightning strike). And, by contrast, the prototypical worst offenders I heard of (I have no comment as to whether I represent any such prototypical worst offender) has a relatively small number of very -- often very, very -- large accounts, with the purpose in each instance of exploiting the secrecy opportunities (real or imagined) in the countries involved. (I suspect that many of those prototypical worst offenders would like have viewed a large number of accounts as offering a greater likelihood that one or more them might be detected.) Bottom line, there are people in the program with relatively small accounts and relatively small aggregate amounts who likely would never have been detected and, therefore, who (if their criminal and civil penalty risk profile were acceptable) could have made a decision to go forward and sin no more with only a civil risk that was acceptable. Some with that profile made a decision to go forward and sin no more.  (The "sin no more" is a truncated quote from John 8:11, and as is often the case in quotes not exactly apropos, since Jesus coupled that with a form of forgiveness; the sin no more in this context means just that; no one has forgiven the past conduct relative to tax and FBAR penalties that might apply.) That is not a basis for noncompliance in the future. That is just a factor to be considered in what to do, if anything, about the past.  [I JUST CAVEAT THAT THIS BLOG REALLY IS TARGETED TO THE TAX PROFESSIONAL, PARTICULARLY LAWYERS AND LAW STUDENTS; LAY READERS SHOULD SEEK PROFESSIONAL ADVICE REGARDING ANYTHING THEY THINK THEY READ IN THIS PARAGRAPH OR THE BLOG GENERALLY, BECAUSE PROPER CONSIDERATION REQUIRES SOME SPECIFIC TARGETED EDUCATION AND EXPERIENCE TO DETERMINE WHAT IT MEANS AND WHETHER AND HOW IT SHOULD BE CONSIDERED IN A PARTICULAR FACT SITUATION.]

3. I highly recommend Jeff's discussion of the utilities of the Bank of Nova Scotia subpoena and the John Doe summons for students and practitioners. I may return to that issue in a future blog (note the word may; why don't I have time to do all that I want to do!).

4. Jeff is correct that district courts traditionally grant the IRS's application for issuance of John Doe summonses, but there is one recent notable case (not involving foreign accounts) where the district court did not grant the application. See my prior blog, John Doe Summonses and Statutes of Limitations (5/27/11), here. The district court is supposed to make an independent decision as to the need for the John Doe summons. But, there is no such requirement for district court approval for the Bank of Nova Scotia grand jury subpoena. Why is this important? Because, as I hope at least my Tax Procedure and Tax Crimes students will recall, the grand jury subpoena is the grand jury analog of the regular IRS summons which can be issued with no muss and no fuss. Indeed, for that reason, in some prominent cases, the IRS has used the regular IRS summons using the pretext of an audit of the recordkeeper rather than going through the procedural steps to obtain a John Doe summons (apparently the IRS believes those steps are a nuisance, at least in the cases it tried to end run the steps). The poster child case for the IRS being slapped down for trying to use the regular summons pretextually to end run the John Doe summons steps is United States v. Gertner, 65 F.3d 963 (1st Cir. 1995). But the point, consistent with Jeff's point, is that the Bank of Nova Scotia grand jury subpoena, like the regular IRS summons, is no muss, no fuss.

5. And returning to the traditional granting of the motion for a John Doe summons, it is true that the district court has granted the application in most reported cases. But what we don't know is those times the IRS sought a John Doe summons and, upon meeting resistance from the district court judge in the ex parte application, decided that the better part of wisdom was to withdraw the application.


  1. Jack,
    The 50K reporting limit makes sense as I believe that is the same amount that ties into the new FATCA regulations. Also when you look at IRM FBAR Mitigation guidelines, 50K is where they start really spelling out penalty guidance although they do specify guidance for under 50K as well.
    I think it kind of gives some indication as to what IRS thinks is a Big Fish. In OVDI 75K made you a Big Fish based on the penalty application. Clearly it does not take a huge account to generate the potential for painfull penalties. Maybe IRS is planning to kill the FBAR report and work off of the FATCA regulations in the future. It would certainly get rid of the collection hastles that face IRS in collecting disputed FBAR penalties.


  2. For HSBC India, the summons covered ALL accounts from 2002-2009. Not just the 100K Premier level, not even the 10K FBAR level. Its not clear that the IRS actually obtained all this information or will do something with it, but they had legal authority to obtain this data. In an way it makes sense -- the IRS wants to send the message that even having a small account doesn't mean that you are safe from penalties.

    One issue with the 'go forth and sin no more' approach is that if total financial assets abroad are > 50K (not just at one bank) is the new form 8938 requires (at least in its draft version) filling out the date an account was created. Certainly filling in date of account creation would be a 'giveaway' that a particular account was likely not reported before. (I'm not sure if there is a Fifth Amendment issue involved here)

    And speaking of FATCA, the IRS likely has or will setup some mechanisms (with computer entry and matching) to obtain FATCA data from offshore banks and match with filed forms, so its possible that smaller accounts may get correspondence audits or the like. It may also make it easier to process dumps of John Doe summon data.

  3. Re: "legal authority"
    I do not see how the IRS has legal authority in India, unless the Indian government compelled HSBC India to comply, though HSBC is a British bank.

    Do you think a US Bank would answer a summons from China for a list of all of their accounts with Chinese addresses?

    I have not studied the HSBC situation, but I read that HSBC closed the Private Banking division that catered to these wealthy clients, asked all clients to shut their accounts, under threat of reporting. And that was their answer to the IRS.

    FATCA is being delayed until 2014 due to complaints from Europe. Apparently the IRS wants all banks in the world to report to them.

    I read that Canadian banks are preparing to ask US residents to either close their accounts or agree to reporting. (If FATCA is implemented).

    We have seen the Swiss bankers get mad. We have not yet seen world bankers respond to these regulations without representation.

    There is also the business loss aspect, since these banks compete for capital/depositors. Banks would have to turn away customers and business. I don't see this happening without a fight.

  4. 'I do not see how the IRS has legal authority in India, unless the Indian government compelled HSBC India to comply, though HSBC is a British bank.'

    The IRS asked HSBC USA to get that information, and HSBC USA had access to a lot of that data, or could get it. Certainly many of the accounts were opened in the US. I doubt it went to the Indian government, although India does have TIEAs with the US and could ask HSBC India to pony up the accounts.

    'I have not studied the HSBC situation, but I read that HSBC closed the Private Banking division that catered to these wealthy clients, asked all clients to shut their accounts, under threat of reporting. And that was their answer to the IRS'

    They may have done that for wealthy US customers worldwide as well under US pressure, but they did hand over at least some HSBC India accounts to the IRS. Related but somewhat separate issues, I think.

  5. Well, let's get this fight going sooner rather than later...

    This whole issue is way under the radar of the US Media, and so complex, I am not sure how they could actually cover it.

    FATCA implementation may be delayed to 2014, but that isn't stopping Senator Levin from proposing even more complex regulations (he would say clarifications...see below) in the name of stopping tax evasion. You have to wonder, at some level, if this new effort by Levin becomes law combined with FATCA provisions already enacted, it doesn't pose some very serious systemic risk to the whole US Financial system. You could think that banks might freeze up and not want to deal with each other based upon the lack of knowledge of each other's compliance. This seems like it could have a lot of unintended consequences. But then, maybe I am just being alarmist.

    Jack, you will have life time employment opportunity! I see a whole new legal, accounting and consultancy industry being born now. It is a growth industry. :)

    Read this...
    The Annual Stop Tax Haven Abuse Act Show

  6. The answer to FATCA will be in the West Indies:

    Historian John C. Miller noted that the tax:

    ...threatened New England with ruin, struck a blow at the economic foundations of the Middle colonies, and at the same time opened the way for the British West Indians -- whom the continental colonists regarded as their worst enemies -- to wax rich at the expense of their fellow subjects on the mainland

    Against the Molasses Act, Americans had only their smugglers to depend upon -- but these redoubtable gentry proved more than a match for the British. After a brief effort to enforce the act in Massachusetts in the 1740’s, the English government tacitly accepted defeat and foreign molasses was smuggled into the Northern colonies in an ever-increasing quantity. Thus the New England merchants survived -- but only by nullifying an act of Parliament.

    And then there is Bermuda:
    "After the American Revolution, the Royal Navy began improving the harbours and in 1811 started building the large dockyard on Ireland Island, in the west of the chain, to serve as its principal naval base guarding the western Atlantic Ocean shipping lanes. During the War of 1812 between Britain and the United States, the British attacks on Washington, D.C. and the Chesapeake were planned and launched from Bermuda where the headquarters of the Royal Navy's 'North American Station' had recently been moved from Halifax, Nova Scotia."

    It was here that the British soldiers assembled before being sent to attack Baltimore and Washington. In 1816, James Arnold, the son of Benedict Arnold, fortified Bermuda's Royal Naval Dockyard against possible U.S. attacks.

    As a result of Bermuda's proximity to the southeastern U.S. coast, it was regularly used by Confederate States blockade runners during the American Civil War to evade Union naval vessels and bring desperately needed war goods to the South from England. The old Globe Hotel in St George's, which was a centre of intrigue for Confederate agents, is preserved as a museum open to the public.

  7. Could I be so bold as to advocate for something here. Jack, if you don't think this is appropriate use of this blog, I understand if you don't want to post it.

    I would encourage readers to join with American Citizens Abroad in their fight to repeal FATCA.

    This is not a Tparty movement, or some fringe anti tax movement, but a middle class effort by those who live outside of the US, and thus have a better perspective of the very negative consequences of this misguided effort at getting the worlds financial institutions to be tax collectors for the IRS.

    I am no expert, but it seems to me that FATCA is analogous to the Frank-Dodd Legislation, which will also have lots of unintended consequences in its attempt to correct the greed and excesses of the Collateralized Debt Obligations (CDOs) and the Credit Default Swaps (CDS) and other complex financial instruments in the banking industry.

    It too created endless provisions, and then turned over to regulators the task of writing complex rules when something more simple like re-establishing Glass–Steagall Act and getting commercial banks separated from investment banks again would have been much better solution. Also, setting some upper limits on bank size, and/or breaking up the Big banks which have only become bigger since TARP would have been simpler and better. Finally, increasing real capital requirements and not some phony ones that banks manipulate according to their own analysis of risk, would be important. That doesn't take 1000s of pages to describe, like Frank Dodd. If we don't have behemoths that are too big to fail, we don't have to worry about the Tax payer "ponying up" for the next greedy excess. And given human nature, there will be a next time.

    Sometimes, when it comes to legislation, simpler is better, but why do that when you can have 1000 pages instead of just 3.

    Given the choice, complex and minute' rules and regs, with the hundreds of pages of detail trump simpler, broader systemic legislative changes. In the end, the targets of the legislation find legalistic ways around every rule, or actually exploit them to their advantage.

    It is kind of like Free Trade Legislation. How many pages does it take to describe that? Two? Three at the most. Instead, we have bills that are thousands of pages, so what you have, is not "Free Trade", what you have is specialized provisions for hundreds of interest groups and you have "Controlled Trade", but that title doesn't sound as good in the press, and we are left to deal with the endless unforeseen consequence of job losses.

    I know, that is just the way it is in Congress, is the counter argument, which does leave one pretty depressed about the opportunities for real change in the financial sector, or the probabilities of getting FATCA actually repealed.


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