By Lucy Komisar
Inter Press Service (IPS), April 30, 2009

MIAMI BEACH — The U.S. Internal Revenue Service (IRS) is hitting pay dirt with a novel legal tactic designed to catch tax evaders. And it’s going to use it to force international banks to give up the names of tax cheats.

It’s called the John Doe summons. Using John Doe means the IRS doesn’t know the names of the suspected tax evaders. So it sends a summons to a bank or credit card company that says, Give us the names and account information of all your U.S. clients with secret offshore accounts.

Daniel Reeves, an IRS agent in charge of the tax agency’s offshore compliance initiative, afforded an unusual look into the broad swath of projects that seek tax-cheating John Doe’s every place from accounts of the giant Swiss bank UBS to the records of Pay Pal.

Reeves detailed the IRS initiative at the Financial Due Diligence Conference organised by the industry newsletter Offshore Alert in Miami Beach earlier this week. He commented privately to IPS that it was the first time he and other members of the compliance team had appeared at such a meeting and credited the openness of his bosses.

Offshore refers to tax havens – countries and jurisdictions that allow clients to set up bank accounts and sham companies with fake owners, and that deflect attempts by outside law enforcers on the trail of tax evaders as well as drug and arms traffickers, corrupt business people, terrorists, looting dictators and bribe-taking officials.

In July 2008, the IRS filed a John Doe legal action against UBS, seeking the names of 52,000 U.S. citizens who ignored the requirement to report those accounts on their tax returns. It’s the first time it has used that tactic against such a large financial institution. UBS, which acknowledged having 47,000 accounts belonging to U.S. nationals, turned over 300 names but is fighting in U.S. federal court the IRS demand for the rest of the accounts.

Private banks such as UBS handle and hide the money of very wealthy individuals. Often the minimum deposit is 5 million dollars. The legal action directed at UBS is part of the IRS’s private-bank initiative.

Reeves, a key agent in the UBS case, said, We have identified other offshore banks that promote tax avoidance. He noted, We are developing additional John Doe summonses on some of those banks. The IRS must receive approval for the summonses from a federal judge.

He declined to name the new targets, but one might imagine that UBS’s giant Swiss competitor, Credit Suisse, is among them. Swiss banks will provide information about drug traffickers and other criminals, but not tax evaders, because the Swiss don’t consider tax evasion a crime. The IRS list could also include U.S. banks such as Citi, which has 427 tax haven subsidiaries, including 91 in Luxembourg and 90 in the Cayman Islands.

The UBS John Doe initiative and others to follow ratchet up the use of a tactic that has proved successful on a smaller scale over this decade, targeting tax evaders through credit cards and other electronic payments.

The tax agency knew that tax cheaters who hid money offshore needed to get access to it. A favourite method was via credit and debit cards linked to bank accounts in tax havens such as the Cayman Islands. The IRS started with the premise that the international electronic systems that cheaters used to move and hide their money could be turned around to catch them.

In 2000, it got an order from a federal judge in Miami authorising the IRS to serve John Doe summonses on American Express and MasterCard for names of U.S. citizens with cards linked to banks in offshore Antigua and Barbuda, the Bahamas, and the Cayman Islands.

Similar orders aimed at other companies followed, and the number of tax havens investigated was increased. More recently, the order was directed at Pay Pal, the web-based electronic payments system.

Reeves said the result has been tens of thousands of U.S. citizens identified as having offshore accounts they didn’t report and as moving and accessing money in tax havens. He said that had led to hundreds of criminal prosecutions and hundreds of millions [of dollars] in taxes, interest and penalties.

Reeves said, Nearly half the cases involved failure to report foreign accounts. And they often made use of International Business Companies (IBCs) – fake companies formed offshore. He said a large percentage were business accounts. Merchants are supposed to have accounts where they are incorporated and do their business. Shady companies get around this by setting up IBCs in offshore financial centers.

The IRS discovered that merchants were diverting credit card and other electronic payments to offshore accounts. It was a ploy that grew with e-commerce. So the IRS demanded that the U.S. processing companies that handled credit card transactions supply information about their John Doe clients who sent money offshore.

The IRS has built a searchable database so that any individual or company that comes to its attention can be cross-checked. Reeves said its staff continues to analyse the records to develop new cases.

Another scam targeted by the offshore compliance initiative was U.S. taxpayers’ use of sham companies formed in tax havens to disguise ownership of brokerage accounts. Reeves explained, The U.S. taxpayer establishes an IBC in an offshore financial system, then opens a brokerage account in the name of the IBC. The brokerage account claims foreign status. The brokerage account, money, and bank accounts are all in the U.S. But by claiming foreign status, it claims to be exempt from capital gains tax in the U.S.

Furthermore, he explained that the accounts were often funded with unreported income.

Reeves said the IRS is investigating brokers to identify U.S. owners of accounts claiming foreign status. And it is targeting brokers who market sham companies to help clients cheat on taxes.

The new IRS John Doe strategy represents a shift toward systemically targeting large numbers of unknown tax cheaters rather than individuals whose returns look suspicious or who are turned in by enemies. The returns have been impressive, and promise to grow apace.

Article on IPS site

  IRS, offshore, Switzerland, tax evasion