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.