The Department of Justice just announced that various United States federal courts have entered orders authorizing the Internal Revenue Service to serve so-called “John Doe summonses” on eighteen US banks and financial institutions. The John Doe summonses are seeking information about persons who have used specific credit or debit cards in Norway. The cards were issued by various US banks and it is highly suspected that the Norwegian citizens who set up the US accounts to which they relate were not in compliance with Norwegian tax laws.
A “John Doe Summons” is a very powerful weapon against tax evasion. It generally directs a financial institution (e.g., here, a US bank, such as Prairie Sun Bank with offices in Minnesota, for example) to produce records identifying certain persons (here, all Norwegian persons) having current or closed accounts at the institution. The summons need not identify any individual by name – the general description (e.g., all Norwegian citizens) is enough! Indeed, the John Doe summons has helped IRS catch many US tax evaders who were using offshore accounts in Switzerland, India, and Lichtenstein etc.
Norway Finding Tax Evaders In The US With IRS’ Help
The DOJ announcement provides that the Norwegian authorities have reason to believe, based upon the use of payment cards in Norway that were issued by U.S. banks, that unidentified card holders may have failed to report financial account information or income on their Norwegian tax returns. Court papers cite examples where individuals using non-Norwegian payment cards have claimed to be tax residents of other countries but were found to have resided in Norway for sufficient time to subject them to taxes in Norway. Norwegian taxpayers can use a foreign payment card as part of a scheme to avoid reporting income and paying Norwegian income tax. Individuals can divert income to a foreign country, deposit the proceeds in a bank there, and then use the income to make purchases in their “home” country through payment or credit cards issued by foreign banks. The US IRS has very successfully investigated this type of scheme with respect to US taxpayers
The lawsuits commenced upon the Treaty request of the Norwegian tax authorities pursuant to an income tax treaty signed between Norway and the United States. The treaty allows the two countries to cooperate in exchanging information that is helpful in enforcing each country’s tax laws. The Treaty network to which the US is a signatory continues to expand; finding tax cheats will become easier and easier to do.
Reciprocity Is The Order Of The Day: You Scratch My Back….
As alleged in court papers filed by DOJ, “The Department of Justice and the IRS are committed to working with our treaty partners to fight tax evasion wherever it occurs,” said Kathryn Keneally, Assistant Attorney General for the Justice Department’s Tax Division. “All taxpayers should know that our efforts in this area are global, coordinated and will continue.”
“These summonses reflect our continuing efforts to work with our international partners on offshore tax evasion,” said Douglas O’Donnell, IRS Assistant Deputy Commissioner, Large Business & International (LB&I). “By using effectively our existing network of bilateral agreements, countries can help one another put an end to the global practice of evading taxation by hiding assets abroad.”
Kenneally’s and O’Donnell’s comments are nothing more than fancy ways of saying: “You scratch my back, and I’ll scratch yours”. The handwriting is clearly on that wall – fiscal transparency is the wave of the future. Believe it.
Unreported Foreign Assets Or Accounts?
The most recent enforcement efforts should remind those Americans with unreported offshore accounts and assets that they will soon be left out in the cold and will have no place to hide. This is all the more reason to become tax compliant now.
Taxpayers with unreported income or assets must take action and obtain a full understanding of the various options open to them, the attendant implications and possible penalties under each. The best bet is to work with a US tax attorney to obtain the benefit of an attorney-client privilege. The attorney will probably work with an accountant to get the amended or delinquent income tax returns and FBARs prepared. In this instance, the attorney (rather than the client) should hire the accountant for the work to be done and this should be carefully documented in what is called a “Kovel” agreement. The purpose of having a Kovel agreement is to extend the attorney-client privilege to the greatest extent possible to the accountant’s participation and work product.