On July 29, 2021, the United States Attorney for the Southern District of New York, the Assistant Attorney General for the Department of Justice Tax Division, and the IRS Commissioner all announced that a federal court in New York had entered an order “authorizing the IRS to issue summonses requiring multiple couriers and financial institutions to produce information about U.S. taxpayers who may have used the services of Panama Offshore Legal Services (‘POLS’) and its associates (together, the ‘POLS Group’) to evade federal income taxes.” A copy of the news release can be found here. Although the government’s efforts to identify additional foreign assets and accounts is not surprising, the news release does provide another cautionary tale of the government’s power and reach to identify taxpayers who hold foreign accounts and assets overseas without proper reporting and payment of federal taxes.

Background.

Foreign accounts and assets have been a hot-button issue for the government for some time now. And, for good reason: a U.S. taxpayer’s failure to properly and timely file certain information returns with the IRS or FinCEN can result in significant civil penalties and potential criminal exposure. Some of the more common foreign reporting requirements are:

• FinCEN Form 114, Report of Foreign Bank and Financial Accounts;
• IRS Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Foreign Gifts;
• IRS Form 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner;
• IRS Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations;
• IRS Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business;
• IRS Form 926, Filing Requirement for U.S. Transferors of Property to a Foreign Corporation;
• IRS Form 8938, Statement of Specified Foreign Financial Assets;
• IRS Form 8865, Return of U.S. Persons with Respect to Certain Foreign Partnerships.

A failure to file any of these forms can lead to criminal prosecution and/or civil penalties. See, e.g., U.S. v. Little, 828 Fed. Appx. 34 (2d Cir. 2020) (affirming criminal conviction for failure to file FBARs and willfully assisting in the filing of false Forms 3520); Wilson v. U.S., No. 20-603 (July 28, 2021) (discussing duel civil penalties under 26 U.S.C. § 6048 for foreign trust non-reporting).

In the past, it has been difficult for the government to assert civil penalties and bring criminal prosecutions associated with foreign accounts and assets. Generally, this was because of various countries’ bank secrecy laws and also because much of the evidence necessary to show a civil penalty and/or criminal prosecution was outside the United States’ reach. However, that has greatly changed with the government’s usage of so-called John Doe summonses and the government’s successful gathering of evidence through other channels, such as the Offshore Voluntary Disclosure Program (“OVDP”) and Streamlined Filing Compliance Procedures.

John Doe Summons.

The IRS utilizes John Doe summonses when it is aware that a tax crime may be occurring, a third party has relevant information regarding the tax crime, and the IRS does not know the identity of the taxpayer or a group of taxpayers involved in the crime. John Doe summonses are authorized by statute—however, it is subject to certain requirements. First, the IRS must seek court approval to issue the summons to a third party. See 26 U.S.C. § 7609(f). Second, the IRS must show that: (1) the summons relates to the investigation of a particular person or ascertainable group or class of persons; (2) there is a reasonable basis for believing that such person or group or class of persons may fail or may have failed to comply with any provision of the internal revenue laws; and (3) the information sought to be obtained from the examination of the records or testimony (and the identity of the person or persons with respect to whose liability the summons is issued) is not readily available from other sources). Id.

The OVDP.

From 2009 through 2018, the IRS operated the highly-successful OVDP, which permitted so-called “willful” U.S. taxpayers to come forward and potentially avoid criminal risks and harsh civil penalties in exchange for proper reporting, payment of tax, and the disclosure of certain information. Shortly after initiating the OVDP, the IRS established the Streamlined Filing Compliance Procedures, which permitted “non-willful” U.S. taxpayers to effectively accomplish the same goal—compliance for reduced civil penalties. All told, the OVDP and Streamlined Filing Compliance Procedures resulted in over 120,000 U.S. taxpayers paying more than $11 billion in back taxes, interest, and penalties to the United States Treasury.

But, perhaps more significantly, and as any tax professional is aware, the government received much more in terms of a treasure trove of information it could use to go against other U.S. taxpayers who had failed to enter into either of these programs. Indeed, under both programs, taxpayers were required to divulge the identity of banks, promoters, CPAs, and other professionals involved in the failure to file foreign information returns and/or pay tax associated with foreign assets/accounts.

POLS.

According to the news release, POLS is a Panamanian law firm that advertises its services to U.S.-based clients. Through these services, POLS has allegedly assisted U.S. clients “in concealing ownership of offshore entities and accounts.” More specifically, according to the government:

POLS highlights secrecy as a key advantage of its entity formation services, promising its clients ‘100% anonymity, privacy and confidentiality.’ Other members of the POLS Group similarly advertise that they can assist clients with concealing assets and avoiding taxes. For example, one POLS Group member assures clients that ‘a carefully designed corporate strategy allows you to care for your loved ones free from probate, inheritance taxes, and other legal and tax problems.’

Notably, in the IRS news release, the IRS suggests that it became aware of potential U.S. taxpayers avoiding federal reporting and tax obligations vis-à-vis POLS through other U.S. taxpayers’ disclosures of this specific information through the OVDP.

Federal Court’s Order.

In light of this information, the government moved a federal court in New York to grant it permission to serve John Doe summonses on at least 10 entities, including Federal Express Corporation; FedEx Ground Package System, Inc.; DHL Express; 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. On July 28, 2021, the federal district court entered the order granting the government permission to issue the summonses. After entry of the order, the following higher-up government officials were quoted:

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

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

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

Takeaway.

The government continues to go after U.S. taxpayers who have failed to properly report and pay taxes on assets and accounts located overseas. If U.S. taxpayers have foreign assets and accounts and are not in compliance with federal reporting and tax obligations, they have a number of methods in which to become compliant again—and potentially reduce their criminal tax exposure and mitigate their civil liabilities. First, depending on whether the conduct was willful or non-willful, a taxpayer may qualify for either the IRS’ Voluntary Disclosure Program or the IRS’ Streamlined Filing Compliance Procedures. But, taxpayers must be aware that under either of these programs a precondition for entrance is that the taxpayer has not been subject to an IRS criminal investigation or civil examination. Accordingly, and as the above POLS case shows, taxpayers may need to move fast prior to the government obtaining the information on its own.

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