What is a John Doe Summons?
A John Doe Summons is an IRS summons authorized by Internal Revenue Code Section 7609(f). Unlike other IRS summonses, it does not list the name of the taxpayer under investigation because the taxpayer is unknown to the IRS. The term "John Doe summons" achieved notoriety in July 2008, when the procedure was used to crack the back of Swiss secrecy laws and ultimately ended up in UBS turning over the names of about 4,500 holders of Swiss bank accounts to the IRS. It ushered in the current regime of stepped enforcement of the foreign bank account reporting rules. It also resulted in the Internal Revenue Service's Offshore Voluntary Disclosure Program (ODVP), and numerous criminal tax fraud prosecutions, as well as criminal prosecutions of willfully failing to file Foreign Bank Account Reports (FBARs) on Form TDF 90-22.1.
In 2013, the IS used a John Doe Summons to obtain information about clients of Wegelin & Co., Switzerland's oldest bank, who had failed to file FBARs.
Unlike other IRS summons which can be issued by the IRS virtually at will, a John Doe Summons must be approved by a federal district court judge. The judge may approve only if:
1. The summons relates to the investigation of a particular person or ascertainable group or class of persons,
2. there is 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 tax law, 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.
Another example of the IRS' use of the John Doe Summons was in the Belize Bank matter. In the Fall of 2015, the IRS convinced a federal district court judge in Miami to authorize a summons to Belize bank to obtain information about bank customers who were U.S. persons holding financial accounts at Belize Bank. Ultimately, the records received from the Belize Bank will be used to target taxpayers at Belize Bank who failed to file FBARs or report income.
An interesting side note is that when the IRS issues a John Doe Summons, it impacts the statute of limitations. In cases involving the non-reporting of foreign income items, the statute of limitations on the IRS assessing additional tax is generally six years. However, if the IRS issues a John Doe Summons, Internal Revenue Code Section 7609(e)(2) provides that if the summons is not resolved within six months, then the statute of limitations is extended for a time period beginning on the date which is six months after the summons is served, and ending on the date when the summons is finally resolved.
In the UBS matter, the statute of limitations was suspended for almost two additional years. If you'd like to see how the IRS calculated this, here is a link.
Bottom line is that, even if you think the statute of limitations has expired and you are home-free if a John Doe Summons was issued, you may be on the hook longer than you think.