Will the real “John Doe” please stand up?

23-08-2013

You’ve all read the UBS story concerning the battles that the Swiss bank had with the US Department of Justice and, more particularly, the US IRS regarding the default of US tax-payers where they were hiding undeclared income, not disclosing same and, therefore, not paying taxes in the US.

Since 2000 onwards the US IRS have been using the “John Doe” summonses to identify US tax-payers hiding money off shore without paying US tax.  However, with the UBS debacle their use has grown considerably.

The two main weapons used by the US Government in the UBS case were the whistle-blower Bradley Birkenfeld who was a former UBS banker in the United States and the use of “John Doe” summonses.  What “John Doe” summonses have done in the United States is that the IRS have gone into the various federal courts in the United States with certain information concerning certain bank accounts of which they do not know who the true owner is.  The courts grant a very wide summons which requires the relevant US financial institution to provide, in the case of credit cards, all records of payment including, but not limited to, account application and related documents; KYC material; monthly or periodic statements of account activity; documents evidencing the source of payment on the account; account signature cards; account applications; cancelled cheques – both sides; credit and debit memos and advices; wire transfer authorisations; deposit slips and deposited items; cashiers cheques; money orders; letters of credit; and the list goes on.

In other words, the financial institution is obligated under the federal court summons for the “John Doe” to furnish a tremendous amount of information.  The US courts will allow “John Doe” summonses under three factors: the US “John Doe” summons relates to a particular person or a group of individuals; there is reason to believe that that person/group may not have complied with internal revenue laws; and the information sought is a matter not readily available from some other sources.  So, with the successful use of the “John Doe” summonses and Bradley Birkenfeld, so far under the UBS matter 39,000 US taxpayers have been identified.  The IRS so far have processed approximately 10,500 of these individuals and to date they have collected in the UBS matter $5.5 billion in US back taxes.  It does beg the question, if they have only processed 10,500 and they have 18,500 individuals to examine one anticipates the figure will again be close to a two digit billion dollar back-tax collection.

Current Position

However, what is now very interesting is that at the end of July 2013, the Kingdom of Norway which has one of the highest individual tax rates in the developed world has been investigating whether individuals owe more tax in Norway which has uncovered individuals who are constantly using payment or credit cards in Norway that are issued by Banks outside of Norway.  It seems to be the case that Norwegian taxpayers are using a foreign payment credit card as a scheme to avoid having to report income which would necessitate, obviously, Norwegian income tax.  For example, of the seven “John Doe” witness summonses issued for Pennsylvania, Texas, Oklahoma, Minnesota, and California, as outlined above, the “John Doe” summonses are quite broad in their approach and what information they seek which is that they are trying to identify the person or persons in respect of the credit card activities and who is getting the benefit.  However, it does go without saying that just because a taxpayer holds a payment card issued by a foreign bank does not mean that taxpayer is not making the necessary declaration of income tax but where, as in this case, Norway believes that the holders of payment cards have failed to report foreign financial accounts or income on the tax returns that they are required to file under the internal revenue laws of Norway.

In one of the Norwegian affidavits filed in the US they were able to identify 393 transactions on one particular credit card in Norway from November 2006 to December 2007 of approximately $304,697.  Likewise, on another credit card they were able to identify 282 transactions in Norway from January 2006 to April 2007 which total $139,487.31.

It would seem that the Norwegian tax authorities have made the necessary court applications to get information from banks in Norway first to possibly identify these credit cards and the amount of transactions and the volume.

The reason the Norwegian tax authorities are able to rely on US “John Doe” summonses is because of the taxation convention between the United States and Norway and, in particular, Article 28(3) (Exchange of Information) of the Convention between the United States of America and the Kingdom of Norway for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Property which allows for this to happen and, in particular, to invoke the “John Doe” summonses.

Ireland

One would anticipate that the Irish Revenue Commissioners are aware of what is happening in respect of the Norwegian matter and may be considering similar type applications in future regarding Irish taxpayers.
We have, under Article 27(3) (Exchange Of Information and Administrative Assistance) of the Convention between the Government of Ireland and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains a more or less identical clause to that which exists between Norway and the United States.

We understand through various media outlets that the Revenue Commissioners have been gathering information from various Banks in Ireland concerning Irish residents or possible offshore trusts holding offshore credit and debit cards.

Therefore it is entirely foreseeable that the Revenue Commissioners in Ireland will request the assistance of the US in relation to “John Doe” summonses regarding possible similar behaviour to the Norwegian tax residents who are suspected tax cheats at home.

In respect of the Norway issue, the Norwegian tax authorities had an ongoing payment card project in existence which has already identified extensive income tax evasion in Norway where high net worth individuals who, for example, do not live in Norway but are resident for tax purposes.

One can only say, Watch Out “John Doe”; can the Irish Revenue Commissioners be far behind?