Government Suit to Enforce JDS to Offshore Promoter (5/29/22)

In United States v. Wessell (S.D. Fla. Case 22-cv-60988), Cl dkt entries here, the Government filed under seal a request for authorization of a John Doe Summons (“JDS”) to Kevin W. Wessell and related entities.  The Government had filed similar JDS’s in other jurisdictions for related summonsees.  The Government now files a petition to enforce the summons (JDS) issued to Wessell.  (See dkt entry 1, dated 5/24/22, here.)  The Government also filed a Brief in Support (dkt entry 3, dated 5/24/22, here (15 pages) with supporting documents including an IRS declaration here (124 pages) and certain other exhibits, including a privilege log of 482 pages).

The Brief summarizes the IRS’s concerns about Mr. Wessell as follows (pp. 1-2, footnotes omitted):

            On September 26, 2018, the IRS served a summons on Mr. Wessell. Exhibit 1 (Cincotta Decl.) ¶ 10. The purpose of the summons is to identify the clients of the Wessell Group, a sprawling enterprise operated by Mr. Wessell whose activities bear “the hallmarks of offshore tax evasion.” Id., Attachment C ¶ 27.1

            In particular, the Wessell Group creates foreign entities and bank accounts in tax havens such as the Cook Islands and Nevis in order to help United States taxpayers hide their money. Id. ¶¶ 19–49. The Wessell Group equips its customers with nominee directors and officers, and it even provides them with suggested avenues for circumventing court orders to repatriate funds. Id. ¶¶ 32–38. Based on extensive evidence outlined by the United States in a 2018 filing, this Court has already concluded that “there is a reasonable basis for believing” that the Wessell Group’s customers “may fail or may have failed to comply with the internal revenue laws,” which require taxpayers to report their worldwide income and pay associated taxes. See In re Tax Liabilities of John Does, No. 0:18-cv-62135- WPD, ECF No. 6 at 1 (S.D. Fla. Sept. 13, 2018).

            The IRS summons required Mr. Wessell to produce all documents related to United States taxpayers who, between January 1, 2012 and December 31, 2017, used the Wessell Group 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 a foreign entity.” Exhibit 1 (Cincotta Decl.) ¶ 11 & Attachment D. The deadline for compliance was October 26, 2018. Id. ¶ 9.

 Once the JDS was issued, the concern addressed in the petition to enforce is whether Wessell properly complied with the summons.  The Government has concerned about whether Wessell produced the summonsed records or properly accounted for the summonsed records in a privilege log.  Suffice it to say that the number of potential documents within the scope of the summons is quite large.

Things that caught my attention include the following:

D.C. SDNY Approves John Doe Summons re Offshore Enablers (7/30/21; 7/31/21)

In The Matter of the Tax Liabilities of John Does, United States Taxpayers (S.D. N.Y. 7/15/21), CL here, the Court ordered the service of a John Doe Summons upon several prominent financial services businesses related to taxpayers who may have used an offshore law firm, Panama Offshore Legal Services for U.S. tax noncompliance.  I first cut and paste the order (short 2 pages) and then link to and excerpt from the USAO SDNY Press Release explaining more about the perfunctory order.

1. The Order

UNITED STATES DISTRICT COURT FOR THE
SOUTHERN DISTRICT OF NEW YORK

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 associates, 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.

Case No. 21 Misc. 424

ORDER GRANTING EX PARTE
PETITION FOR LEAVE TO
SERVE “JOHN DOE”
SUMMONSES

THIS MATTER is before the Court upon the United States of America’s “Ex Parte Petition for Leave to Serve ‘John Doe’ Summonses” (the “Petition”). Based upon a review of the Petition and supporting documents, the Court has determined that the “John Doe” summonses to Federal Express Corporation a/k/a FedEx Express; Fed Ex Ground Package System, Inc. a/k/a FedEx Ground; DHL Express (USA), Inc.; United Parcel Service, Inc.; the Federal Reserve Bank of New York; The Clearing House Payments Company LLC; HSBC Bank USA, N.A.; Citibank, N.A.; Wells Fargo Bank, N.A.; and Bank of America, N.A. (the “Summoned Parties”) relate to the investigation of an ascertainable group or class of persons, that there is a reasonable basis for believing that such group or class of persons has failed or may have failed to comply with any provision of any internal revenue law, and that the information sought to be obtained from the examination of the records or testimony (and the identities of the persons with respect to whose liability the summonses are issued) are not readily available from other sources. Moreover, the information sought to be obtained by the summonses is narrowly [*2] 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 law. It is therefore:

ORDERED AND ADJUDGED that the Internal Revenue Service, through Revenue Agent Katy Fuentes or any other authorized officer or agent, may serve Internal Revenue Service “John Doe” summonses upon the Summoned Parties in substantially the form as attached as Exhibits A-F to the May 4, 2021 Declaration of Katy Fuentes, Dkt. No. 4, and Exhibits G-J to the July 15, 2021 Letter from Talia Kramer, Dkt. No. 18. A copy of this Order shall be served together with the summonses.

Court Authorizes Service of John Do Summons to Payward Ventures d/b/a Kraken, a Cryptocurrencies Service Provider (5/4/21)

DOJ Tax has issued this press release:  Court Authorizes Service of John Doe Summons Seeking Identities of U.S. Taxpayers Who Have Used Cryptocurrency (5/5/21), here.  The key parts of the press release are:

            A federal court in the Northern District of California entered an order today authorizing the IRS to serve a John Doe summons on Payward Ventures Inc., and Subsidiaries d/b/a Kraken (Kraken) seeking information about U.S. taxpayers who conducted at least the equivalent of $20,000 in transactions in cryptocurrency during the years 2016 to 2020. The IRS is seeking the records of Americans who engaged in business with or through Kraken, a digital currency exchanger headquartered in San Francisco, California.

  * * * *

            Cryptocurrency, as generally defined, is a digital representation of value. Because transactions in cryptocurrencies can be difficult to trace and have an inherently pseudoanonymous aspect, taxpayers may be using them to hide taxable income from the IRS. On April 1, 2021, a federal court in the District of Massachusetts granted an order authorizing the IRS to serve a similar John Doe summons on Circle, a digital currency exchange headquartered in Boston.

            Today’s order from the Northern District of California grants the IRS permission to serve what is known as a “John Doe” summons on Kraken. The United States’ petition does not allege that Kraken has engaged in any wrongdoing in connection with its digital currency exchange business. Rather, according to the court’s order, the summons seeks information related to the IRS’s “investigation of an ascertainable group or class of persons” that the IRS has reasonable basis to believe “may have failed to comply with internal revenue laws.” According to the copy of the summons filed with the petition, the IRS directed Kraken to produce records identifying the U.S. taxpayers described above, along with other documents relating to their cryptocurrency transactions.

            The IRS has issued guidance regarding the tax consequences on the use of virtual currencies in IRS Notice 2014-21,which provides that virtual currencies that can be converted into traditional currency are property for tax purposes, and a taxpayer can have a gain or loss on the sale or exchange of a virtual currency, depending on the taxpayer’s cost to purchase the virtual currency (that is, the taxpayer’s tax basis).

The press release linked above has links to pdfs of most the documents in the case as of this date.  I find that a better free source for most of the documents is on the CourtListener web site, here for the case, In the Matter of the Tax Liabilities of John Does (N.D. Cal. Dkt No. 3:21-cv-02201).  (The pdfs linked on the press release seem not to allow copying and pasting, but the ones on CourtListener do; in addition, future documents will likely be available on the CourtListener site.)

Actions by District Courts to (i) Approve a John Doe Summons for Cryptocurrency Client Data and (ii) Order the Government to Show Cause as to Requirements (4/1/21)

 DOJ Tax has announced here that a Massachusetts district court authorized a John Doe Summons (“JDC” be issued to Circle Internet Financial Inc., or its predecessors, subsidiaries, divisions, and affiliates, including Poloniex LLC (collectively “Circle”).  The key excerpts are:

           The court’s order grants the IRS permission to serve what is known as a “John Doe” summons on Circle. The United States’ petition does not allege that Circle has engaged in any wrongdoing in connection with its digital currency exchange business. Rather, according to the court’s order, the summons seeks information related to the IRS’s “investigation of an ascertainable group or class of persons” that the IRS has reasonable basis to believe “may have failed to comply with any provision of any internal revenue laws[.]” According to the copy of the summons filed with the petition, the IRS is requesting that Circle produce records identifying the U.S. taxpayers described above, along with other documents relating to their cryptocurrency transactions.

            The IRS issued guidance regarding the tax treatment of virtual currencies in IRS Notice 2014-21, which provides that virtual currencies that can be converted into traditional currency are property for tax purposes. The guidance explains that receipt of virtual currency as payment for goods or services is treated as income and that a taxpayer can have a gain or loss on the sale or exchange of a virtual currency, depending on the taxpayer’s cost to purchase the virtual currency (that is, the taxpayer’s tax basis).

Readers should also note that a California magistrate judge deferred the Government’s petition to issue a JDS to Payward Ventures Inc. d/b/a/ Kraken (“Kraken”) and its subsidiaries, issuing an order that the Government “SHOW CAUSE why its petition to issue a JDS should not be denied for failure to meet the ‘narrowly tailored’ requirement of 26 U.S.C. § 7609(f), by filing a response to this order (which may include an amended petition or summons) no later than April 14, 2021.”  See In re TAX LIABILITY OF JOHN DOES (Order dated 3/31/21 in Dkt. 21-cv-02201-JCS N.D. Cal.), TN here (with link to pdf).

Fifth Circuit Rejects Attorney-Client Identity Privilege for Law Firm Documents (4/26/20)

In Taylor Lohmeyer Law Firm P.L.L.C. v. United States, 957 F.3d 505 (5th Cir. 4/24/20), here, the Court of Appeals affirmed the district court’s enforcement of a John Doe Summons (JDS) to a law firm to obtain documents, and thus identities, of the Firm’s clients who “at any time during the years ended December 31, 1995[,] through December 31, 2017, used the services of [the Firm] . . . to acquire, establish, maintain, operate, or control (1) any foreign financial account or other asset; (2) any foreign corporation, company, trust, foundation or other legal entity; or (3) any foreign or domestic financial account or other asset in the name of such foreign entity.”  The Court affirmed the district court's enforcement of the summons, rejecting the firm's argument that the client's identities were confidential client communications. 

I have revised the relevant portion of the working draft of my Federal Tax Procedure Book (for publication in August 2020) and offer below a cut and paste of the revised portion (footnotes omitted).  I also point readers to a good law review article on the general subject:  Richard Lavoie, Making a List and Checking it Twice: Must Tax Attorneys Divulge Who's Naughty and Nice, 38 U.C. Davis L. Rev. 141 (2004), here.  The following discussion from my Federal Tax Procedure Book is under the attorney-client privilege discussion.

(4) Client Identity Privilege. 

Is the identity of the client privileged under the attorney-client privilege?   A frequent context in which this question is presented is the reporting requirements for cash payments via the Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.  (Recall that the Form 8300 is a double agency form–for the IRS and for FinCEN.)  This reporting requirement applies to cash received by attorneys.  Often clients engaged in criminal activity pay their attorneys in cash.  Can the attorney receiving cash omit the client’s name from the report?  The mere receipt of the cash might disclose, at least implicitly, something confidential that is important to the purposes behind the attorney-client privilege; thus a requirement that the attorney disclose the receipt of the cash from the identified client might be inconsistent with the attorney-client privilege.  Another context in which the issue comes up is when the IRS issues a John Doe Summons (“JDS”) to a law firm related to abusive tax shelter transactions to discover the names of clients engaging the firm with respect to the shelter. That those clients engaged the firm with respect to the shelter does imply something about the clients’ communications with the firm, at a minimum the clients’ desire and tax need for some form of tax mitigation.  The conventional holding in this context is that the identity of the client and fee arrangements are not attorney-client communications invoking the the attorney-client confidential communications privilege.  

Some courts of appeals recognize that there may be a “narrow exception * * * when revealing the identity of the client and fee arrangements would itself reveal a confidential communication.” For purposes of convenience I refer to this narrow exception as the “identity privilege” which is a common term for it, but you should remember that it is not a separate privilege but rather a particular subset of one or more other privileges or policies that might be involved (here the attorney-client privilege).  The district court in Gertner relied upon the identity privilege but the Court of Appeals did not address the issue because it denied enforcement of the summons in any event because the Government had not used the proper John Doe summons procedure. 

I attempt here just a summary of the law in the area in tax cases: 

District Court Rejects Argument that JDS Seeking Law Firm Client Identities Violates Attorney-Client Privilege (5/25/19)

In Taylor Lohmeyer Law Firm PLLC v. United States, 2019 U.S. Dist. LEXIS 81809 (W.D. Tex 2019), here, the district court (i) dismissed a law firm ("Firm") challenge to an IRS John Doe Summons (JDS) for client identities and (ii) enforced the JDS.

Based on information from an audit which resulted in substantial tax liability, the IRS obtained the JDS, which is an ex parte proceeding, seeking "names of and other information related to the Firm's clients between 1995-2017 to investigate the tax liability of those who used the Firm to 'create and maintain foreign bank accounts and foreign entities that may have been used to conceal taxable income in foreign countries.'" 

The Court held that the JDS easily met the Powell factors (United States v. Powell, 379 U.S. 48, 57-58 (1964)) which it stated as:

the Government must establish that the summons: (1) is issued for a legitimate purpose; (2) seeks information which may be relevant to that purpose; (3) seeks information that is not already within the IRS's possession; and (4) satisfies all administrative steps required by the Internal Revenue Code.

The Court recounted the evidence as follows:

But the bar for "reasonable basis" is not high and the affidavit of Russell-Hendrick from the ex parte proceeding establishes a reasonable basis. She details her conclusion that Taxpayer-1 concealed his connection to offshore structures—for which Taxpayer-1 remained the beneficial owner—created under the advice of the firm. Taxpayer-1 entered an agreement with the IRS in June 2017, admitting that Taxpayer-1 owned all assets owned by the offshore trusts and earned over $5 million in unreported income between 1996 and 2000. Taxpayer-1 accepted liability for civil fraud penalties and penalties for failing to file the required forms for reporting foreign income. 

Russell-Hendrick then states the basis for her opinion that the Firm provided similar advice to other clients. Among other pieces of evidence, she states that in an interview with John Taylor, former partner of the firm, Taylor estimated that he structured offshore entities for tax purposes for 20 to 30 clients between the 1990s and early 2000s. Russell-Hendrick states in part that: 

Taylor Lohmeyer PLLC's services to their U.S. clients, as described by Taxpayer-I and Taylor himself, are the kinds of activities that, in the experience of the IRS, are hallmarks of offshore tax evasion, including: (1) structures of offshore trusts with compliant trustees, and foundations and anonymous corporations managed by nominee officers and directors, (2) the use of "straw men" to contribute nominal funds to foreign trusts to create the false appearance that such trusts have foreign grantors, and (3) the concealment of beneficial ownership of foreign accounts and assets in jurisdictions with strong financial secrecy laws and practices. 

The information obtained by the IRS and discussed in this Declaration suggests that the still-unknown U.S. taxpayers doing business with Taylor Lohmeyer PLLC may not have reported their offshore accounts, entities, or structures. Instead, they have likely relied on the assistance of Taylor, and the fact the structures are hidden offshore to support a decision not to report the existence of those entities and accounts, expecting  that the IRS would not discover the accounts, omitted income, and/or the existence of the entities. 

18-MC-1046, docket no. 1-2 at 37. Thus, assuming for argument that the Firm could challenge the ex parte proceeding at this stage, issuance was proper.

The minimal Powell standards were clearly met.  The real issue was not whether the IRS abused the JDS process (per the Powell factors) but whether the information sought--the identities of clients--implicated the attorney-client privilege.  Normally, client identity is not within the purview of the attorney-client privilege because, except in rare circumstances, the mere identification of the client does not disclose any client confidential communication for obtaining legal services.  The law firm argued that this was a rare circumstance where the facts indicate that identifying the client will identify the client communications regarding the advice, then the attorney-client privilege may apply.  One now rather old tax case so held.  United States v. Liebman, 742 F.2d 807 (3d Cir. 1984).  The court rejected the argument as follows:

DOJ Tax Obtains a John Doe Summons for U.S. Bank Information at Treaty Request by Finnish Tax Administration (5/1/19)

DOJ Tax announced that it had obtained a district court order to serve John Doe Summonses (JDS) on Bank of America, Charles Schwab, and TD Bank.  See press announcement here.  The JDS's were sought at the request of the Finnnish Tax Administration pursuant to the tax treaty between Finland and the U.S., which has an exchange of information and commitment to use each country's tax enforcement processes (such a summonses).  The following are key excerpts:

“The Department of Justice and the IRS are committed to working with the United States’ international treaty partners to identify and stop individuals using hidden offshore accounts to evade tax laws,” said Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Justice Department’s Tax Division. “The United States does not tolerate offshore tax evasion, nor does it sanction tax evasion committed through U.S. financial institutions.” 

“Our continued success in combatting offshore tax noncompliance has been helped by the assistance we receive through the network of tax treaties around the globe,” said IRS Commissioner Charles Rettig. “Yesterday’s effort reflects that the U.S. will return this help by working under the law with tax administrators in other nations to help them in their fight against tax evasion and avoidance. A global economy should not be allowed to serve as a possible vehicle for tax evasion in any country.” 

The United States petitioned the United States District Court for the Western District of North Carolina to authorize the summons at the request of the government of Finland under the tax treaty between Finland and the United States. That treaty allows the two countries to cooperate in exchanging information that is necessary for carrying out each country’s tax laws. The IRS summons seeks the identities of Finnish residents who have payment cards linked to bank accounts located outside of Finland so that the Finnish government can determine if those persons have complied with Finnish tax laws. Finland has advised the IRS that, in circumstances where the payment cards are used only at ATMs or in other transactions where authorization is by PIN code, and the cardholder need not identify himself or herself to the merchant, the cardholders cannot be identified from sources in Finland. 

The filing does not allege that Bank of America, Charles Schwab, or TD Bank violated any U.S. or Finnish laws with respect to these accounts. 

As described in the petition and supporting documents filed by the United States, the request is part of a foreign payment project being conducted by the Finnish Tax Administration (FTA), in which information on the use of payment cards issued by foreign financial institutions is used to identify non‑compliant Finnish taxpayers. Earlier FTA investigations of approximately 120 to 150 Finnish taxpayers who used foreign payment cards in a similar manner have yielded extremely high rates of tax non-compliance, as noted in the United States’ memo in support of the petition, which indicates that it is likely that the John Does sought by the summons are Finnish residents who are failing to report these foreign accounts and associated income. 

The court order in this case authorizing this enforcement action is part of ongoing international efforts by the United States and its treaty partners to stop persons from using foreign financial accounts to evade taxes. Courts have previously approved John Doe summonses allowing the IRS to identify individuals using offshore accounts to evade their U.S. obligations, and have also approved John Doe summonses to be used to identify individuals using U.S. financial institutions or accounts to evade foreign tax obligations.

The Ex Parte Petition for Leave to Serve "John Doe" Summonses and Memorandum in Support are linked on the announcement and are here.

Government FBAR Willful Penalty Collection Suit and Issuance of Letters Rogatory (8/30/18)

In United States v. Katholos (W.D. N.Y. 17-cv-00531), docket entries here, the Government is suing Katholos for the FBAR willful penalty which remains unpaid (including penalties, statutory additions, interest and late payment penalties) of $4,474,320.29.  The complaint is here; the answer is here.

According to the complaint:

• "As a result of the [UBS] John Doe summons, the United States received information regarding Ms. Katholos' Foreign Bank Account." (Complaint paragraph 7)
• The facts alleged in the complaint seem to be a common fact pattern; the facts are different but the pattern is similar.  Several entities were established.
• The complaint lists a number of transfers from UBS to other financial institutions.  (Complaint par. 25.)
• The Government demands a jury. (See last paragraph.)

The answer has the following affirmative defenses:

• Katholos did not act willfully.  Among the allegations in support of this defense:

50. The Complaint’s case for willfulness appears to rest on three major factual allegations, all of which are either incorrect or misleading. First, the Government alleges that Marika was on “inquiry notice” about FBAR reporting because of a 2007 federal income tax return. At the time of the filing of the Complaint, however, the Government possessed information demonstrating that Marika did not sign the 2007 federal income tax return that allegedly put her on “inquiry notice” regarding her FBAR obligations. Further demonstrating that she did not review this return, the 2007 return filed for Marika contains numerous, obvious errors: Marika’s name is misspelled and her address is incorrectly given in Elma, New York. 

51. Marika’s history of filing U.S. returns since her move to Greece in 1994 demonstrates that she was not fully aware of the relevant U.S. tax rules for reporting income overseas. Prior to 2009, federal tax returns were filed for Marika to report her interests in family assets that generated income in the U.S., such as annuities or rental income from real estate. When there was no U.S. income in a particular year, returns generally were not filed. In many or most cases prior to early 2009, Marika did not see or sign federal tax returns filed for her. 

52. Second, the Internal Revenue Service’s (“IRS’s”) interview with Marika’s return preparer Charles Koelemeyer, conducted more than four years after the relevant events, only demonstrates that he knew of FBAR reporting requirements well after the time period at issue. It does not demonstrate that he ever advised Marika about these requirements—or even that he ever spoke to her directly about taxes or U.S. reporting—prior to January 2009. Instead, once Marika learned of the relevant U.S. reporting requirements, she attempted to make a voluntary disclosure to the IRS in February 2009, months before the start of the formal Offshore Voluntary Disclosure Program. Marika’s effort was rejected as untimely because, on information and belief, UBS had
delivered her name to the IRS within one week prior to her disclosure. 

53. Finally, the Government alleges that Swiss bankers took actions, including signing forms, to conceal the relevant accounts from U.S. authorities. These are simply not allegations that Marika acted willfully: the allegations describe actions taken by Swiss bankers, not by her and her family. Instead, the long history of Marika and her family in Greece demonstrates that the UBS accounts were not set up for a U.S. tax-avoidance purpose. Marika moved to Greece in 1994, shortly after college, and has been a homemaker and caretaker of her children since that time. Marika’s father Theodore Katholos (now deceased) (“Mr. Katholos”) immigrated to the U.S. in the mid-1960s with a second-grade education in Greece, and became successful in the painting and contracting business in Buffalo, New York through hard work and determination, not through formal schooling. Mr. Katholos was largely unable to read or write in English. He was very successful in business, particularly given his background, but he lacked sophistication and training in tax matters. In the 1980s, Mr. Katholos seriously considered emigrating back to Greece, and so did Marika. When Mr. Katholos retired in 1997, he had intended to move back to Greece permanently.

Court Affirms Holding Dismissing Damages Claim for IRS Failure to Obtain Court Approval for JDS (7/7/18)

I have previously blogged on the trial proceedings in Hohman v. United States, 2017 U.S. Dist. LEXIS 106439 (ED MI 2017) where the taxpayer sought damages for the IRS's improper use of a John Doe Summons ("JDS") under § 7609(f) without the necessary court approval.  See Court Dismisses Claims Where IRS Issued JDS Without Required Court Approval for JDS (Federal Tax Crimes Blog 7/20/17), here.  The Sixth Circuit has affirmed in Hohman v. Eadie, ___ F.3d ___, 2018 U.S. App. LEXIS 18269 (6th Cir. 2018), here.  Taxpayers have no remedy.

The interesting issue on the appeal is whether the Financial Privacy Act gave a remedy under 12 USC § 3417.  Under 12 USC § 3413, there is an exception for disclosure of records "in accordance with procedures authorized by Title 26." So, if the JDS had been valid, there would be no question that the taxpayers would have no remedy.  Does the IRS's failure to meet the requirements for JDS change the result?  Here is the court's identification of the issue and its decision to duck the issue:

The parties dispute the meaning of the "in accordance with" language. When confronted with this question, the district court stated that from a plain reading, the exception only applies to IRS summonses issued "in accordance with" procedures under the Code. The court reasoned that because the IRS failed to follow the requisite Code procedures by issuing summonses without first obtaining approval in federal district court, it was subject to the provisions of the Act, including damages claims. 

On appeal, Plaintiffs contend that the district court correctly determined that the plain meaning of this language is that the IRS has to act "in accordance with" the Code, or it is subject to the Act. In support, Plaintiffs cite Neece v. IRS, 922 F.2d 573, 577 (10th Cir. 1990). In Neece, the IRS made a similar argument when it asserted that it was allowed to informally review bank records under I.R.C. § 7602. The IRS referenced the same provision of the Act authorizing "disclosure of financial records in accordance with procedures authorized by [the Internal Revenue Code]." 12 U.S.C. § 3413(c). The Tenth Circuit disagreed and determined that while I.R.C. § 7602 permitted the IRS to issue a third-party summons, I.R.C. § 7609 set forth the procedure the IRS was required to follow. Neece, 922 F.2d at 577-78. The IRS had not followed the proper procedure under its own Code, and so the IRS was bound by the Act. Id. at 577. 

In response, the government argues that the Act has no application to any activities carried out under the Code, including the issuance and enforcement of IRS summonses. In support, it cites the legislative history to argue that Congress indicated that this exception was intended to exempt IRS summonses generally because they are governed by their own privacy regime. It also contends that Neece is distinguishable because it involved an instance where the IRS obtained records informally, instead of through the issuance of a summons. 

There are two possible ways to read the phrase "in accordance with." Congress either intended for this language to mean: (1) that the Code and not the Act governs the IRS, or (2) that the IRS must follow the procedures under the Code, or it is subject to the Act. A review of the relevant provision and legislative history indicates that Congress did not give any thought to or explain what it intended to have happen in a case like this. The House Committee Report states that under the exception, because IRS administrative summonses are already subject to the privacy safeguards of I.R.C. § 7609, they are exempted from the procedures of the Act. H.R. Rep. 95-1383, at 226 (1978). 

Because we uphold the district court's ruling on sovereign immunity grounds, however, there is no need for us to resolve this issue.

Coinbase Will Comply with JDS on Approximately 13,000 Customers for Bitcoin Transactions (2/26/18)

I have reported before about the IRS John Doe Summons issued to Coinbase, a digital currency exchange.  See Court Orders Enforcement of John Doe Summons Against Bitcoin Firm (12/1/17), here.  According to Coinbase's web site titled "IRS Notification," here, Coinbase has notified approximately 13,000 customers that, pursuant to the Court judgment, here, Coinbase expects to comply with the JDS.

The Coinbase web page has the contents of the letter notification.  Key points of the notification are:

1. Conbase expects to comply within 21 days of the notification (February 23, 2018).
2. Potentially affected customers may want to seek advice of counsel.
3. Regarding the effect of the delay in compliance from the original issuance:

In addition, we also want you to know that because Coinbase received a summons on December 8, 2016, and more than six months passed before our challenges to the summons were resolved by the court, the period of limitations under sections 6501 and 6531 of the Internal Revenue Code (title 26 of the U.S. Code) were suspended beginning as of June 8, 2017 and continuing through the final resolution of Coinbase’s response to the summons. This may be relevant to the tax returns that you have filed for the 2013, 2014, and 2015 calendar years. If you have questions about your tax liability for those years, we strongly encourage you to consult with your tax advisor.

Section 6501, here, is the civil statutes of limitation, and Section 6531, here, is the criminal statute of limitations.  Pursuant to Section 7609(e)(2), here, the suspension is from: (i) the date which is 6 months after the service of such summons, until (ii) "the final resolution of such response."  Assuming that the expected Coinbase response on or around mid-March fully resolves the scope of the summons as ordered by the Court, the period of the suspension will be about 280 days.  If, however, that response does not fully resolve the summons, then the statute will continue running until there is full compliance.  So far as I am aware, there is no public announcement as to when there is full compliance to conclude the suspension period.  However, the IRS calculation of the suspension period should be disclosed in any audit where the IRS relies on the suspension period and may also be obtained informally if a publicly released document otherwise refers to it or a document from an audit is circulated among practitioners.  (See the FTC Blog link for 1/26/15.)

For earlier posts on the suspension of the statutes of limitation for noncompliance with summonses, see (presented in reverse chronological order):

• IRS seeks John Doe Summons to Bitcoin Firm (Federal Tax Crimes Blog 11/23/16; 11/30/16), here.
• Suspension of Statute of Limitations From the UBS John Doe Summons (Federal Tax Crimes Blog 1/26/14), here.
• Suspension of the Statute of Limitations from the UBS John Doe Summons (Federal Tax Crimes Blog 8/11/12), here.

Court Orders Enforcement of John Doe Summons Against Bitcoin Firm (12/1/17)

I have previously written on the IRS's John Doe Summons to Coinbase, a leading Bitcoin firm.  IRS seeks John Doe Summons to Bitcoin Firm (Federal Tax Crimes Blog 11/23/16; 11/30/16), here. In United States v. Coinbase, Inc. 2017 U.S. Dist. LEXIS 196306 (N.D. Cal. 11/28/2017), here, the U.S. Magistrate Judge ordered compliance with respect to most but not all of the information requested by the Government in a narrowed scope for the summons.  The Magistrate Judge's judgment is here; the docket entries as of today is here.

The Court did the standard summons analysis under the Powell standards.

The Court's key holdings, based on its conclusions as to relevance to IRS's legitimate need for information and documents, are in the following excerpts:

The Court agrees that the Coinbase account holder's identity and transaction records will permit the Government to investigate whether the holder had taxable gains that were not properly declared. But the Government seeks more than that information; it also seeks account opening records, copies of passports or driver's licenses, all wallet addresses, all public keys for all accounts/wallets/vaults, records of Know-Your-Customer diligence, agreements or instructions granting a third-party access, control, or transaction approval authority, and correspondence between Coinbase and the account holder. The Government claims to need these records to verify an account holder's identity and determine if the holder used others to make transactions on the account holder's behalf. However, at this stage, where the Government is seeking records on over 10,000 account holders, these requests seek information than is "broader than necessary." See Bisceglia, 420 U.S. at 151. The first question for the IRS is whether an account holder had a taxable gain. If the account holder did not, then correspondence between Coinbase and a user is not even potentially relevant. Similarly, while the Government needs an account holder's name, date of birth, taxpayer identification and address to determine if a taxable gain was reported, it only needs additional identity information such as copies of passports and driver' licenses or "Know Your Customer" due diligence if there is potentially a taxable gain and if there is some doubt as to the taxpayer's identity. If there is not, these additional records will not shed any light on a legitimate investigation. 

At oral argument the Government explained that it included such broad swaths of records in its summons so that it will not need to return to court to ask for them if and when needed. The Court is unpersuaded. Especially where, as here, the Government seeks records for thousands of account holders through a John Doe summons, the courts must ensure that the Government is not collecting thousands and thousands of personal records unnecessarily. Moreover, if the Government later determines that it needs more detailed records on a taxpayer, it can issue the summons directly to the taxpayer or to Coinbase with notice to a named user—a process preferable to a John Doe summons. 

The Court therefore finds that the relevant documents as identified in Request 1 are: (1) the taxpayer ID number, (2) name, (3) date of birth, and (4) address. The remaining items in Request 1 are not relevant at this stage: account opening records, copies of passports or driver's licenses, all wallet addresses, and all public keys for all accounts/wallets/vaults. 

The Court also finds that transaction history, as identified in Requests 4 and 6, is relevant to the Government's legitimate purpose. Coinbase must produce records of account activity including transaction logs or other records identifying the date, amount, and type of transaction (purchase/sale/exchange), the post transaction balance, and the names of counterparties to the transaction. The remaining information sought by Request 4 is not relevant at this time: requests or instructions to send or receive bitcoin and information identifying the users of such accounts where counterparties transact through their own Coinbase accounts/wallets/vaults and their contact information. 

The Court likewise finds the following documents are not necessary to achieve the Government's legitimate purpose at this stage: 

• Request 2: Records of Know-Your-Customer diligence,
• Request 3: Agreements or instructions granting a third-party access, control, or transaction approval authority, and
• Request 5: Correspondence between Coinbase and the user or any third party with access to the account/wallet/vault pertaining to the account/wallet/vault opening, closing, or transaction activity. 

These records may become necessary for a specific account holder once the IRS reviews the relevant records; but for many or even most of the account holders they may never be relevant and thus the Court will not order their production. Accordingly, the 

Government's Petition to Enforce Requests 1, 4 and 6 is GRANTED as set forth above; in all other respects the Petition to Enforce is DENIED.

Based on this analysis, the Court's order is:

Coinbase is ORDERED to produce the following documents for accounts with at least the equivalent of $20,000 in any one transaction type (buy, sell, send, or receive) in any one year during the 2013 to 2015 period:
(1) the taxpayer ID number,
(2) name,
(3) birth date,
(3) address,
(4) records of account activity including transaction logs or other records identifying the date, amount, and type of transaction (purchase/sale/exchange), the post transaction balance, and the names of counterparties to the transaction, and
(5) all periodic statements of account or invoices (or the equivalent).
In all other respects the Petition to Enforce is DENIED. The Court GRANTS John Doe 4's request for judicial notice.

A good article is Joel Rosenblatt, Coinbase Loses Bid to Block U.S. Tax Probe of Bitcoin Gains (Bloomberg Technology 11/29/17), here.  Key excerpts from that article are:

The company said it’s glad that the government and the court narrowed the scope of the summons.

“Coinbase started this process more than 12 months ago, and while today’s result is not the complete victory we hoped for, it does represent a substantial and unprecedented victory for the industry and the hundreds of thousands of customers that would have been unfairly targeted if it weren’t for our action,” the company said in a statement posted on its blog. 

Last year, analysts said similar demands could be made of other digital-currency companies if the IRS widens its investigation. 

“The government has sensed a windfall -- any company that has a plethora of wealthy users might be in the sights,” Charles Hayter, chief executive officer of market tracker CryptoCompare, said in an email. “If there is tax to be paid the government is going to go after it if it makes an example” or a return on investment.

JAT Comments:

Court Dismisses Claims Where IRS Issued JDS Without Required Court Approval for JDS (7/20/17)

In Hohman v. United States, 2017 U.S. Dist. LEXIS 106439 (ED MI 2017), here, the district court finally dismissed a case where the plaintiffs sued on various claims arising from the IRS's service of John Doe Summonses on a bank.  The thing that caught my attention was that, prior to serving the JDSs on the bank, the IRS did not obtain the predicate court order required by § 7609(f), here.   The summonses are here and here.

My reaction was: "Wow!"

So, I pulled up some of the documents from Pacer, the online system to review and download court documents.  I have limited time that I can devote to these interesting issues, so here is what I picked up in the time allowed.  The documents reviewed are:

1.  The docket entries (as of today), here.
2.  Government Brief on Motion to Dismiss (Dkt. 12), here.
3.  IRS Agent Affidavit (Exhibit to Government Brief (Dkt.12 Exh), here.
4.  Order (Dkt27), here.
5.  Final Order (Dkt45), here.

I could not find quickly an adequate explanation for why the IRS agents involved issued the two JDSs without court approval.  I could only find that they did.   On the face of the summonses, they were issued by a revenue agent and approved by a group manager.  The revenue agent's affidavit did not explain why the summonses were issued without court approval, but did say that the limited production was not reviewed because, by the time of delivery, the IRS was aware of a problem.

The following is what the Government said in an early brief in the case:

The first John Doe summons was issued on September 25, 2015. ¶ 34. The second John Doe summons was issued on September 30, 2015. ¶ 54. Copies of the two summonses are attached hereto as Exhibits 1 and 2.2 

The summonses requested signature cards, monthly checking account statements, and cancelled checks for specified account numbers (which have been redacted). Exs. 1, 2. Both summonses were issued “in the matter of John Doe,” id., and neither identified any “person with respect to whose liability” it was issued, § 7609(f). In keeping with John Doe summons procedures, the IRS did not give notice to the then-unknown account holders, which turned out to be plaintiffs. Nonetheless, Ms. Hohman and Jhoman learned about the summons of September 25, 2015, from the bank (Compl. ¶ 38) and filed a petition to quash the summons in this court on November 25, 2015 (¶ 51), see Case No. 2:15-mc-51669-VAR-APP.  

To address concerns raised in the petition, the IRS agent who had issued both summonses gave a sworn declaration to counsel for Ms. Hohman and Jhohman (Complaint ¶ 52) dated January 4, 2016, a copy of which is attached as Exhibit 3.4 The declaration stated that the agent withdrew both summonses via letters dated December 17, 2015 (Ex. 3 ¶¶ 9, 13), copies of which were attached to the declaration and are also attached hereto as Exhibits 4 and 5. The declaration added that none of the materials received in response to the first summons were reviewed by the IRS (Ex. 3 ¶¶ 5-8). The IRS never received any materials in response to the second summons. Id. ¶ 13. Apparently satisfied, Ms. Hohman and Jhoman voluntarily dismissed their petition the next day on January 5, 2016. 

Nonetheless, three months later plaintiffs filed the instant four-count complaint against the United States5, the IRS agent who issued the summonses (C. Mei Chung), and her manager (Maurice Eadie). Count One seeks damages under the Right to Financial Privacy Act (RFPA), 12 U.S.C. § 3401 et seq. Count Two seeks damages under the Privacy Act, 5 U.S.C. § 552a. Count Three seeks damages, as well as injunctive and declaratory relief, against both the individual IRS employees named as defendants and the United States for alleged constitutional violations. Count Four seeks damages under 26 U.S.C. § 7431.

The Court ultimately dismissed all counts.  The principal issue thrashed around by the court related to Right to Financial Privacy Act (RFPA), 12 U.S.C. § 3401, et seq.  I am not particularly interested in that issue, so I refer readers who are to the court orders for its analysis.  I am interested in the IRS's failure to obtain court orders for the JDSs.  What is the story there?  I am not sure that I have an adequate answer to that broad question.  I do have some more specific questions. I will just list them below and provide some answers if I can give them or reasonably speculate about them.

Court Authorizes John Doe Summons to American Express Unit for Netherlands Taxpayer Info (4/3/17)

DOJ Tax announced today, here, that the district court for WD TX has authorized a John Doe Summons sought on behalf of the Netherlands pursuant to the exchange of information provision of the tax treaty between the U.S. and the Netherlands.  The JDS is issued to American Express Travel Related Services Company and seeks "the identities of Dutch residents who have debit or credit cards linked to bank accounts located outside of the Netherlands so the Dutch government can determine if those persons have complied with Dutch tax laws."

Further

[The] request is based on the Netherlands Tax and Customs Administration’s (NTCA) Payment Card Project, in which information on the use of payment cards (debit or credit) issued by financial institutions outside of the Netherlands can be used to identify non-compliant Dutch taxpayers. NTCA’s project has made similar requests, and already obtained similar information, from other financial institutions outside the United States resulting in several million euros in additional tax, interest and penalties from the non-compliant Dutch taxpayers, according to evidence submitted with the petition. American Express informed the NTCA that the transaction information sought is exclusively available in the United States, according to the evidence submitted with the petition. filing does not allege that American Express violated any U.S. or Dutch laws with respect to these accounts. 

* * * * 

The court order in this case authorizing this enforcement action is a part of ongoing international efforts to stop persons from using foreign financial accounts as a way to evade taxes. Courts have previously approved John Doe summonses allowing the IRS to identify individuals using offshore accounts to evade their U. S tax obligations, and have approved John Doe summonses to be used to identify individuals using U.S. financial institutions or accounts to evade tax obligations of a foreign county, pursuant to international tax treaties.

I posted recently on a Netherlands initiative on foreign accounts involving Credit Suisse:  Credit Suisse Caught in Multi-Country Tax Evasion Investigation (Federal Tax Crimes Blog 4/1/17), here.  I have no idea if the two are related initiatives, but it does appear that the Netherlands is serious about cracking down on its citizens' use of foreign accounts for tax evasion.

Article on Filings in Coinbase John Doe Summons Case (3/20/17)

I recently reported on the IRS John Doe Summons for bitcoin records of Coinbase.  IRS seeks John Doe Summons to Bitcoin Firm (Federal Tax Crimes Blog 11/23/16; 11/30/16), here.  That matter is still churning as the parties spar over whether and how Coinbase should comply.  Part of the sparring undoubtedly involves negotiations between the IRS and Coinbase, but some of the sparring is on the public record in court.  Fortune has this article about a recent filing:  Jeff John Roberts, Only 802 People Told the IRS About Bitcoin - Lawsuit (Fortune 8/19/17), here.

The principal feature of the Fortune article is a new filing of an IRS affidavit in the court case.  The filing is styled:  Declaration of David Utzke in Support of Petition to Enforce Internal Revenue Summons.  The article links the affidavit on the Scribd website here.

I refer readers to the affidavit which provides some detail into the operation of the bitcoin virtual currency.

Also, the affidavit indicates a low level of tax compliance on Form 8949 for bitcoin users.

The article also indicates that this JDS initiative may be an opening gambit for negotiations that may result is Coinbase producing less than the universe of documents requested in the JDS.

The article concludes:

Finally, it's unclear if the IRS is also targeting other virtual currency operators. While Coinbase is the most popular and mainstream bitcoin platform, there are numerous others. Meanwhile, the growing value of other virtual currencies, including Ethereum, mean firms that offer such currencies could soon find themselves in the cross-hairs of the IRS too.

JAT Comments:

9th JDS Authorized for Sovereign Management & Legal LTD Information (1/24/17)

DOJ Tax announced here the unsealing of a district court order, here, to serve a John Doe Summons on "to serve a John Doe summons on Michael Behr of Bozeman, Montana, seeking information about U.S. taxpayers who may hold offshore accounts established by Sovereign Management & Legal LTD (SML), a Panamanian entity."  The order seeks "records of U.S. taxpayers who, during the years 2005 to 2016, had been issued a 'Sovereign Gold Card' debit card that could be used to access the funds in those accounts in such a manner as to evade their obligations under internal revenue laws."

Key excerpts:

U.S. taxpayers seeking to hide their offshore assets often utilize the services of offshore trusts and corporate service providers that open bank accounts, create corporations and other entities, and serve as nominee officers. In its petition seeking the issuance of the John Doe summons, the United States alleges that SML advertises various “packages” to allow taxpayers to hide their assets offshore. These packages include corporations owned by other entities (to include fake charitable foundations), all held in the name of nominee officers provided by SML. SML then opens bank accounts for these entities and provides debit cards in the name of the nominee to the taxpayer. By using such cards, taxpayers seek to access their offshore funds without revealing their identities. U.S. District Court Judge Brian Morris found that there is a reasonable basis for believing that U.S. taxpayers may be using the Sovereign Gold Card to violate federal tax laws. 

* * * * 

This case is part of an ongoing effort to stop U.S. taxpayers from using offshore financial accounts as a way to evade federal tax laws. The Justice Department previously obtained a similar order from the U.S. District Court for the Southern District of New York, authorizing issuance of eight separate John Doe summonses on bank and other entities for information related to SML and its customers in the United States. The evidence submitted in this request to issue a John Doe summons was built in part on information provided in response to the earlier summons.

SML was already on the IRS list titled "Foreign Financial Institutions or Facilitators, here.  It is #14 on the list as Sovereign Management & Legal, Ltd., its predecessors, subsidiaries, and affiliates (effective 12/19/14).    The list is maintained so that U.S. taxpayers joining OVDP will know that their OVDP penalty cost is 50 percent rather than 27.5 percent of the high amount.

There is no indication why so many separate JDS were required (8 in SDNY and this 1 in Montana).

I did a quick google search on Sovereign Management & Legal LTD and found this web site for a company (LTD) of the same name:  https://www.offshore-protection.com/   I don't know whether it is the same or a related company, but seems to be the type of company that, if it has U.S. persons as customers for the services it offers, might draw the interest of the IRS.  And, if this company is related, then it is within the scope of the SML listing on the IRS web page.

Conference Report on IRS Offshore and Voluntary Disclosure Efforts (12/18/16)

The ABA recently held a conference titled National Institute on Criminal Tax Fraud and Institute on Tax Controversy.  This is a report on part of the events:  Andrew Velarde, IRS Offers Hints About Future of John Doe Summonses (Tax Notes Today 12/12/16) [no link available].  Key points of my interest from that report are:

1. Expect continued IRS and DOJ activity against offshore service providers with respect to foreign accounts and in the John Doe Summons "JDS" area.

2. Discussion of the bitcoin JDS.  A senior IRS official, John McDougal, is quoted as saying that users of virtual currency "presented the same risk profile as [users of] an offshore account."  He also said that users of bitcoin have ranges of understanding with respect to tax compliance -- "from innocent misunderstanding of what the filing obligations are to tax evasion."

3.  Discussion of influx of information about offshore accounts from FATCA, voluntary disclosure and other sources.

4.  Discussion of certification of nonwillfulness in streamlined procedures. Reports that Scott Michel of Caplin & Drysdale analyzed the certification process where things are rarely black and white under the familiar tax penalty concepts of reasonable basis, substantial authority, and more likely than not.  Michel is quoted as saying:  "The scary thing to me, and I think a lot of others, is it is probably not good enough to have a reasonable basis."  [I infer that the thinking is, at least with respect to any legal issues (including legal issues in fact analysis), this range of levels of comfort in traditional tax penalty analysis may have some effect, at least in terms of practitioner behavior in advising taxpayers and perhaps in arguing cases, although I have not seen that in the application of the FBAR penalty and in the certification of nonwillfulness.]

5.  Discussion of potential problems, particularly criminal from improper certifications of nonwillfulness.  A senior DOJ Tax CES lawyer, Mark Daly, is quoted as saying that he has been looking at a lot of certifications recently.  Some have "patently ludicrous" narratives presented to support the nonwillful certification.  And, they are checking against information from other sources.  He cautioned better due diligence by practitioners.

6.  Discusses the salutary effect of streamlined to channel most taxpayers into streamlined rather than OVDP.  The article cites McDougal of saying that the average $10,000 payment in streamlined suggests that it is working and that, at least in most cases, practitioners are appropriately channeling the clients.  The article quotes statistics that show 18,000 streamlined submissions in the last year compared with 1,800 new OVDP submissions.

IRS seeks John Doe Summons to Bitcoin Firm (11/23/16; 11/30/16)

Readers of this blog have undoubtedly come across the word bitcoin.  (See Wikipedia entry, here.)  I do not know exactly how it works.  But, as reported in Wikipedia (footnotes omitted), 

The use of bitcoin by criminals has attracted the attention of financial regulators,[legislative bodies, law enforcement, and media. Criminal activities are primarily focused on darknet markets and theft, though officials in countries such as the United States also recognize that bitcoin can provide legitimate financial services.

There are obviously some potential U.S. tax administration issues swirling around the use of bitcoin.  The first is its secrecy.  Untaxed funds can be dispersed -- laundered, if you will -- and then there is the separate subject of taxation of transactions in the bitcoin currency itself.

So, the IRS has made an opening move to peek behind the veil of bitcoin.  The IRS filed papers seeking court approval to issue a John Doe Summons to the largest U.S. Bitcoin exchange firm.  Dion Rabouin, REFILE-Bitcoin exchange processor likely to fight IRS summons -legal analyst (Reuters 11/20/16), here.  The JDS seeks "the records of all customers who bought virtual currency from the company from 2013 to 2015, a lawyer familiar with the case said Sunday."  The article reports that a lawyer familiar with the process and the expectations of the bitcoin customers believes that the firm will oppose the JDS.

UPDATE:  ON 11/30/16, the magistrate judge authorized the issuance of the JDS.  The DOJ Tax press release is titled "Court Authorizes Service of John Doe Summons Seeking the Identities of U.S. Taxpayers Who Have Used Virtual Currency (11/30/16), here.  This announcement has links to the key documents, including the magistrate judge's order.

Another article is:  Tyler Durden, Largest US Bitcoin Exchange Is "Extremely Concerned" With IRS Crackdown Targeting Its Users (ZeroHedge 11/21/16), here.  Key excerpts:

What makes a “John Doe” unique, is that it represents a special "shotgun" form of summons to look for tax evaders that allows the IRS to obtain information about all taxpayers in a group or class of people, even if the agency doesn’t know their identities. The IRS has deployed the tactic in its recent crackdown on undeclared offshore accounts. 

In other words, the US government's crackdown on local bitcoin users has begun. 

In the court filing, the WSJ reports that  Justice Department attorneys wrote that an IRS agent had “identified and interviewed three taxpayers who had used virtual currencies as a means of evading taxes” and that two of these taxpayers were corporate entities that “had wallet accounts at Coinbase and attempted to conceal bitcoin transactions as technology expenses on their tax returns.” 

According to Forbes' tax blogger Kelly Phillips Erb, in his declaration to the court in support of the summons, IRS Senior Revenue Agent David Utzke noted that his investigations included two taxpayers with annual revenues in the millions who “admitted disguising the amount they spent purchasing the bitcoins as deductions for technology expenses on their tax returns.” Those corporate taxpayers had wallet accounts at Coinbase. Unlike other kinds of financial transactions, there is currently no third-party information which requires separate reporting for bitcoin (think of third-party reporting like the forms 1099 issued by your bank). This, says IRS, means that the “likelihood of underreporting is significant.” 

The likelihood of underreporting combined with the anonymity of virtual currency means that the IRS needs more data to complete its investigation. It also explains why the “John Doe” summons is so broad.

Court Sustains Use of Regular Summons to Appraiser Investigated Even Though Third Party Taxpayers May be Identified (1/14/16)

In Clower v. United States, 2015 U.S. Dist. LEXIS 174254 (N.D. Ga. Dec. 17, 2015), here, the IRS issued a summons to Jim R. Clower, an appraiser, for "documents including, among other things, appraisal work files, documents reflecting customers for whom he prepared appraisals, and correspondence related to appraisals completed for the purpose of valuating real property for conservation or historical easements."  Those who observe the tax scene will recognize that there is a lot of abuse of overvaluation of conservation and historical easements for purposes of claiming charitable deductions.  And, the fatal flaw in many promoted tax schemes/shelters have for many years been grossly inflated valuations.  I infer that the IRS suspected Clower of doing multiple valuations that might require investigation for the possible assertion of penalties against Clower.  See § 6695(a),  Substantial and gross valuation misstatements attributable to incorrect appraisals, here.  The summons in question was clearly addressed to Clower with respect to his potential liability.  The summons was thus a regular IRS summons.

Should Clower respond to the summons, however, he would likely identify the clients for whom he had given appraisals.  In such cases, the IRS may not otherwise know who many of those clients were.  Presumably, the IRS already knew of at least one such client because the IRS had Clower's name.  Normally, if multiple potential taxpayers of an IRS investigation are unknown but identifiable through some common participant in an aggressive scheme (such as shelter promoters or even foreign banks), the IRS can issue a John Doe Summons ("JDS") to that common participant.  See § 7609(f), here.  The JDS requires court approval.  It is far less convenient for agents than issuing a regular summons where the regular summons could produce the same information.  That is apparently what happened in Clower.  The IRS issued the summons to Clower with respect to his potential liability and would thereby discover the identities of taxpayers using his services.  So this overlap of the regular summons and the JDS creates some tension, particularly if the IRS were to use the regular summons to avoid the hassle of the JDS.  As we say in the Saltzman & Book, Tax Practice & Procedure ¶ 12.05[4][b][v] John Doe Summons.(online, viewed 1/14/16) [footnotes in brackets, with links to the cited cases added by JAT]:

The Service sometimes finds that the John Doe Summons procedures slow it down. The Service must first convince DOJ Tax that it is worth seeking the district court's approval of the John Doe Summons. DOJ Tax must gear up and present the matter to an often skeptical and almost always overworked District Court who must play devil's advocate to the government's ex parte application for the summons. Obviously, the Service would much prefer to use its regular administrative summons, which has no such cumbersome steps. 

In United States v. Tiffany Fine Arts, Inc. [469 US 310 (1985), here], the Supreme Court blessed the Service's use of the regular administrative summons rather than the John Doe Summons where the target of the summons was a shelter promoter. The administrative summons was issued with the promoter identified as the taxpayer being investigated, but the information and documents sought could also identify otherwise unknown shelter investors who dealt with the promoter. The Service could then open investigations of the shelter investors. The Supreme Court blessed that gambit and refused to require the John Doe Summons procedure. 

After Tiffany Fine Arts, the Service saw an escape from the annoyances of the John Doe Summons procedures — simply find a reason to audit the third party with information or documents identifying otherwise unidentified taxpayers that arguably were relevant to a tax investigation of the third party. Tiffany Fine Arts says that will work. However, where the allegation of investigation of the third party is merely pretextual to get information about unidentified taxpayers with whom the third party dealt, courts are open to quashing the general administrative summons, thus relegating the Service to the John Doe Summons procedure.[United States v. Gertner, 65 F3d 963 (1st Cir. 1995), here]

Article Reporting Government Officials on Enforcement Efforts for Offshore Compliance (10/17/15)

Tax Notes Today reports on a recent International Tax Enforcement conference, sponsored by the American Bar Association Section of Taxation and the Tax Executives Institute.  Nathan J. Richman,  DOJ 'Happy to Talk to Anybody' on Foreign Disclosures, 2015 TNT 201-7 (10/19/15) [No link available].

Key points which caught my attention are:

1. Consistent with the title, the DOJ indicated an interest in talking with financial institutions other than Swiss banks who may want to resolve their U.S. criminal exposure.  The background for this was the Finacor SA resolution announced earlier.  See Swiss Asset Manager Settles Up with DOJ Tax (Federal Tax Crimes Blog 10/6/15), here.

2. DOJ Tax's "enforcement efforts will continue to extend beyond Switzerland."

3.  Investigations of category 1 Swiss banks are proceeding and, at a minimum, those banks "will be required to meet the obligations that are being imposed on category 2 banks,"

4.  Investigations of category 3 banks seeking non-target letters are "moving along," whatever that means.

5.  In addressing the relative disparity between unreported income and the FBAR penalty, Acting AAG Tax Carline Carolo said that the FBAR penalty punishes conduct other than tax noncompliance; hence, in effect, there is no comparison.  JAT Comment:  Why then does the FBAR and OVDP offshore penalty go away if there is no tax noncompliance?  Isn't the civil fraud penalty supposed to be the penalty for tax noncompliance?

6.  As previously reported, there will likely be more John Doe Summonses related to offshore noncompliance.

7.  The 2014 Streamlined Filing Compliance Procedures have been used by 20,000 taxpayers.

Court Approves John Doe Summons to Belize Banks (9/17/15)

DOJ announces here that a district court authorized the IRS "to serve a 'John Doe'” summons seeking information about U.S. taxpayers who may hold offshore accounts at Belize Bank International Limited (BBIL) or Belize Bank Limited (BBL)."  The petition, memorandum in support and declaration of the agent are here.

The key summary from the press release is:

According to the IRS declaration, BBL is incorporated and based in Belize, and directly owns BBIL.  The IRS declaration further states that Belize Corporate Services (BCS) is incorporated and based in Belize and offers corporate services including the purchase of “shelf” Belizean international business companies.  BBL, BBIL and BCS are all corporate subsidiaries of BCB Holdings Limited, according to the declaration.  The declaration describes and IRS Revenue Agent’s review of information submitted by BBL and BBIL customers who disclosed their foreign accounts through the IRS offshore voluntary disclosure programs.  The customers in the “John Doe” class may have failed to report income, evaded income taxes, or otherwise violated the internal revenue laws of the United States, according the declaration. 

The IRS uses what are known as “John Doe” summonses to obtain information about possible violations of internal revenue laws by individuals whose identities are unknown.  The John Doe summonses approved today direct Citibank and Bank of America to produce records identifying U.S. taxpayers with accounts at Belize Bank International Limited, Belize Bank Limited, or their affiliates, including other foreign banks that used BBIL and BBL’s correspondent accounts to service U.S. clients.  The court also granted the IRS permission to seek records related to Citibank’s and Bank of America’s correspondent accounts for BCS and information related to BCS’s deposit accounts at Bank of America.  

A correspondent account is a bank account that one bank maintains for another bank.  Financial transactions involving U.S. dollars flow through U.S. banks; therefore, foreign banks that do business in U.S. dollars, but do not have an office in the United States, obtain a correspondent account in order to reach U.S. customers.  Transactions in the correspondent account leave a trail in the United States that the IRS can follow, including by using a John Doe summons.  The John Doe summons can let the IRS obtain records of money deposited, paid out through checks, and moved through the correspondent account through wire transfers. 

* * * * 

The Justice Department has previously obtained similar orders from the U.S. District Court of the Southern District of New York, permitting a John Doe summons on UBS AG for records of Swiss bank Wegelin & Co.’s correspondent account at UBS and from the U.S. District Court of the Northern District of California, permitting a John Doe summons on Wells Fargo, N.A., for records of the Barbados-based Canadian Imperial Bank of Commerce FirstCaribbean International Bank (FCIB).

The petition,memorandum and declaration here set forth the detail behind this summary.

These banks will be added to the IRS's Foreign Financial Institutions or Facilitators, here.  U.S. taxpayers with accounts in the listed banks joining OVDP after one of their banks are listed will be subject to the 50% penalty in OVDP (provided that they do not opt out, in which case, who knows).