On 1 May 2019, the US Department of Justice (DOJ) announced that the IRS had obtained a court order authorizing the service of “John Doe” summonses on three US banks in connection with Finnish residents who were regularly and frequently using US bank payment cards in Finland.
The court order was issued by the US District Court for the Western District of North Carolina, following an ex parte petition submitted on 23 April 2019. DOJ petitioned the court after the IRS received an “Exchange of Information” request from the Finnish tax authorities. The Finnish tax authorities’ request was made following a compliance initiative targeting the use of non-Finnish bank cards in Finland. Investigation into users of such bank cards showed a high rate of noncompliance with Finnish tax reporting and payment obligations. In this particular case, the Finnish tax authorities identified three US bank-issued payment cards repeatedly used in Finland, indicating to the Finnish tax authorities that there was a high likelihood the users had failed to properly report income and assets for Finnish tax purposes.
Finland’s request for tax information on Finnish taxpayers
The Government of Finland’s request was formally made pursuant to Exchange of Information provisions of the US – Finland Tax Treaty, which provides for the exchange of information and administrative assistance between the competent tax authorities with respect to each state’s domestic tax law. Under the Exchange of Information provisions, treaty partners are obligated to comply with legitimate requests even when the non-requesting state itself has no direct tax interest.
In response to the request from Finnish tax authorities, the IRS and DOJ petitioned the US District Court for leave to serve “John Doe” summons on the three US banks. “John Doe” summons are used when the IRS has reason to believe that certain taxpayers are not in compliance with the law but does not know the specific taxpayers’ identities. The IRS submitted the petition to assist the Finnish government after finding that there was a reasonable basis to believe that certain Finnish taxpayers may have failed to comply with the internal revenue laws of Finland, and that the requested information was not readily available from other sources. The IRS has used “John Doe” summonses in the past to obtain offshore account information, including in connection with its own initiatives relating to non-US credit and debit card use and undeclared non-US bank accounts held by US taxpayers, as well as more recently at the request of the tax authorities in the Netherlands and Norway.
In fact, the IRS's use of "John Doe" summonses goes beyond banks. On 15 May 2019, a Texas district judge upheld the IRS's issuance of a "John Doe" summons on a US law firm that allegedly advised clients to create and maintain foreign bank accounts and foreign entities that may have been used to conceal taxable income. While the law firm made a blanket assertion that attorney-client privilege covered all its files, the judge found that this blanket assertion did not meet the law firm's burden to stop the enforcement of the summons. The law firm will have one more chance to prevent the production of client files but will be required to do so on a document-by-document basis.
What does this mean? Is the US now assisting tax treaty partners on tax evasion investigations?
The service of these summons on US banks is a reminder that the exchange of information between the United States and other countries is not a one-way street.
While the United States has not implemented the Organisation for Economic Cooperation and Development’s Common Reporting Standard, the United States does in fact cooperate with other countries seeking to identify individuals who use US-based accounts to evade their home country’s tax laws. However, the information exchanged by the United States is significantly more limited than the information received. Current US law does not require US financial institutions to collect the information that would allow for a more reciprocal arrangement, nor would current law authorize the IRS to automatically exchange such additional information.
That said, there is some limited automatic exchange of information between the United States and certain countries. Pursuant to numerous intergovernmental agreements signed in connection with the implementation of the Foreign Account Tax Compliance Act, the US Department of Treasury and the IRS have determined that there should be an automatic exchange of information with a number of countries concerning the US deposit accounts held by nonresident individuals. Generally, if $10 or more of interest income from a deposit account is paid to a nonresident individual who is not a citizen of the United States, the US payor is required to file an information return with the IRS for the calendar year in which the interest is paid. If such interest is considered paid to a resident of one of the countries identified as eligible for automatic exchange of information, then the reported information would be exchanged by the US authorities. Notably, Finland is one of the countries that is eligible to automatically receive such information.
Despite the current asymmetry of automatic exchange of information, the US authorities have shown a willingness to assist other countries, as illustrated by the recent use of “John Doe” summons and public comments by the IRS and DOJ. Specifically, Richard E. Zuckerman, deputy assistant attorney general of DOJ’s Tax Division has stated, “[t]he Department of Justice and the IRS are committed to working with the United States’ international treaty partners to identify and stop individuals from using hidden offshore accounts to evade tax laws.” Likewise, IRS Commissioner Charles Rettig acknowledged that other countries have assisted the United States to stop offshore tax noncompliance by stating that “[a] global economy should not be allowed to serve as a possible vehicle for tax evasion in any country.”
Consequently, the use of “John Doe” summons and the public positions taken by the Department of Justice and the IRS would appear to counter the “new tax haven” label given by many to the United States, even though more targeted enforcement efforts have not been undertaken to date.
In light of these developments, US financial institutions should consider whether a review of their existing customer profile and compliance practices is in order. Lessons learned from the past indicate that a proactive strategy serves institutions better than a reactive one.
Should non-US individuals with accounts in the US be wary?
Non-US individuals who use US-based financial institutions or US law firms should consider whether they have fully and properly complied with any legal advice given and the tax laws of their home country.
As noted above, the IRS actively maintains a list of jurisdictions with which it considers appropriate to automatically exchange information on US deposit accounts where interest is paid to non-US individuals, and the IRS regularly adds new countries to this list. Further, the IRS and DOJ have shown a willingness to seek and obtain information from US financial institutions at the request of non-US governments and have publicly confirmed this position.
In light of these developments, if full and proper compliance is in question, non-US individuals should consider what efforts are necessary and which programs are available to regularize their tax situation in their country of residence. Again, a proactive strategy is best since it is often too late to mitigate costly penalties after a tax authority begins its investigation.