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MEGAN L. BRACKNEY joined Kostelanetz & Fink in 2004, and concentrates her practice in the areas of civil and criminal tax controversies. Ms. Brackney received her J.D. from the University of Kansas School of Law and her LL.M. in Taxation from New York University. Ms. Brackney was an Assistant United States Attorney for the Southern District of New York. Prior thereto, Ms. Brackney was an Assistant Attorney General for the State of Missouri. Ms. Brackney is currently a member of the Executive Committee of the New York State Bar Association Section of Taxa-tion and a member of the American College of Tax Counsel. Formerly, Ms. Brackney served as a Council Director for the American Bar Association Section of Taxation, the Chair of the Taxation Committee of the New York County Lawyers’ Association, and the Chair of the Individual and Family Taxation Committee of the American Bar Associa-

tion, Tax Section. Ms. Brackney contributes to the two-volume ABA publication, “Effectively Representing Your Client Before the IRS,” and is a regular contributor to the “Tax Controversy Corner” of The Journal of Pass-through Entities” and other tax journals. She is the recipient of the American Bar Association Tax Section’s John S. Nolan Fellowship for 2008-2009. Ms. Brackney has been recognized by the “New York Super Lawyers” since 2012. An earllier version of this article appeared in The Journal of Passthrough Entities, Volume 20, Number 3, and is used with permission of Wolters Kluwer.

“John Doe” summonses have been in the news again.1 On January 25, 2017, a federal district court unsealed an order authorizing the Department of Justice (“DOJ”) to serve a John Doe summons upon a third party to obtain information about U.S. taxpayers who may hold offshore accounts established by Sovereign Manage-ment & Legal LTD, a Panamanian Entity.22 The John Doe summons sought records of U.S. taxpayers who had been issued debit cards that could be used to access funds in such a manner as to hide assets off-shore.3 Previously, another federal court authorized John Doe summonses on eight entities, including FedEx, DHL, UPS, Western Union and HSBC USA, for records that would assist the IRS in identifying U.S. tax-payers who used Sovereign’s services

On November 30, 2016, another federal district court authorized DOJ to serve a John Doe summons on Coin-base, a virtual currency exchanger on the grounds that convertible virtual currency,4 such as Bitcoin, is difficult to trace and there is a reasonable basis for believing that some virtual currency users have failed to comply with federal tax law.5

In light of the government’s continued use of this powerful investigatory tool, this article discusses the John Doe summons: what it is, how the government gets authority for it, whether it can be challenged and what practitioners need to consider when a client may be the target of a John Doe summons.

WHAT IS A JOHN DOE SUMMONS AND WHEN IS THE GOVERNMENT AUTHORIZED TO ISSUE IT?

A John Doe summons is a summons “which does not identify the person with respect to whose liabil-ity the summons is issued.”6 The Internal Revenue Code (“Code”) grants the IRS broad authority to con-duct “inquiries, determinations, and assessments of all taxes.”7 This authority includes the IRS’s general sum-mons powers under Code Sec. 7602. The limitations on the IRS’s general summons authority are described in Powell, in which the Supreme Court states that to obtain judicial enforcement of a summons, the IRS must make a prima facie showing that:

(1) its investigation is being conducted for a legiti-mate purpose; (2) the inquiry may be relevant to that purpose; (3) the information is not already within the government’s possession; and (4) the IRS has complied with the administrative require-ments of the Code.8 The burden then shifts to the party challenging enforcement to establish that the sum- mons was issued in bad faith or that enforcement would constitute an abuse of the court’s process.9

(2) In addition to satisfying the Powell requirements, in order to issue a John Doe summons, the gov-ernment must obtain a court order after establish-ing that:

(3) the summons relates to the investigation of a par-ticular person or ascertainable group or class of persons,

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(4) 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 any internal revenue law, and

(5) 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 read-ily available from other sources.

(6) This procedure is ex parte and based “solely on the petition and supporting affidavits” of the government.10

In Bisceglia, the Supreme Court described the rationale for allowing the IRS to issue John Doe summonses:

It would seem elementary that no meaningful investigation of such events could be conducted if the identity of the persons involved must first be ascertained, and that is not always an easy task. Fiduciaries and other agents are understandably reluctant to disclose information regarding their principals. . . . Moreover, if criminal activity is afoot, the persons involved may well have used aliases or taken other measures to cover their tracks.11

After the decision in Bisceglia, Congress enacted Code Sec. 7609(f), in order to provide “some restraint on the power to issue John Doe summons [without] ‘impos[ing] an undue burden on the Service … ’”12 Congress was concerned that the party receiving a John Doe summons, such as a bank or other third party, does not have an interest in protecting the records from disclosure and thus would not oppose enforce-ment, leaving the IRS with “no real adversary.” Con-gress did not want the IRS to use its summons power to “look around for targets to investigate” because of concern that such “fishing expeditions” would unjus-tifiably infringe on the privacy rights of taxpayers.13 Accordingly, as explained by the Supreme Court in Tiffany Fine Arts, “[w]hat § 7609(f ) does is to provide some guarantee that the information that the IRS seeks through a summons is relevant to a legitimate investigation, albeit that of an unknown taxpayer,” and it puts the court in “the place of the affected taxpayer under §§ 7609(a) and (b) and exerts a restraining influ-ence on the IRS.”14

It is important to note that the IRS does not have to use the John Doe summons procedure when it serves a summons on a particular taxpayer with the “dual

purpose” of investigating that taxpayer’s tax liability and unidentified parties’ tax liabilities. In Tiffany Fine Arts,15 the taxpayer was a holding company for various sub-sidiaries that promoted tax shelters, and the IRS issued it a summons for the names of the people who distrib-uted licenses of a certain medical device from the tax-payer, and thus were likely to have reported the bogus tax benefits of the tax shelter. The taxpayer argued that the IRS’s request for the names of the licensees indicated that the primary purpose of the summons was to audit the licensees, and not the taxpayer itself. The Supreme Court found that the summons had a dual purpose but so long as the summoned party is under investigation, there is less concern about the IRS engaging in a fishing expedition because “a party with a real interest in the investigation … ha[s] standing to challenge the IRS’s exercise of its summons author-ity.”16 The Court found that a dual-purpose summons does not constitute a John Doe summons and that the IRS did not have to comply with Code Sec. 7609(f) “as long as all the information sought is relevant to a legiti-mate investigation of the summoned taxpayer.”17 The IRS, however, cannot issue a summons to a specific tax-payer as a pretext for avoiding the John Doe summons requirements. Rather, the IRS must show that it has a bona fide interest in the summoned party’s tax liabil-ity, otherwise, the purported dual-purpose summons would be treated as a John Doe summons and subject to the additional requirements of Code Sec. 7609(f).18

CAN JOHN DOE SUMMONSES BE CHALLENGED?As noted above, the government’s application for authority to issue a John Doe summons is made ex parte.19 The ex parte nature of the procedure means that the summoned party cannot intervene in the proceeding or move to quash a John Doe summons.20 The remedy for a party who has been served with a John Doe summons is to raise any challenges after the government has brought an action against that party for enforcement of the John Doe Summons. However, in that enforcement proceeding, the summoned party cannot challenge the summons on the ground that the government failed to comply with the requirements of Code Sec. 7609(f). As explained by the Second Circuit:

By requiring that the application be made to the court ex parte, we believe Congress intended that the question whether a John Doe summons could be served should not become embroiled in an adversary proceeding. Nothing in the legislative

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history or on the face of the statute suggests that Congress intended to permit a summonsed party to challenge the showings which are the requisite for service of a summons.21

Rather, the summoned party is limited to challeng-ing the summons based on the government’s failure to comply with the Powell requirements or bad faith or abuse of process.22 For the same reasons, a target of a John Doe summons also is not entitled to move to quash or intervene in an enforcement proceeding but is unlikely to do so anyway because it would iden-tify himself or herself as a potential target. Recently, however, in connection with the John Doe summons issued to Coinbase discussed in the introduction, a Coinbase customer chose to identify himself in order to challenge the John Doe summons.23

WHAT DO YOU DO IF YOUR CLIENT’S INFORMATION IS THE SUBJECT OF A JOHN DOE SUMMONS?

As an initial matter, many practitioners are not aware of the impact on the statute of limitations that flows from the issuance of a John Doe Summons. The statute of limitations on both civil assessment of tax and criminal prosecution for tax offenses for the person’s whose tax liability is at issue is suspended if the summoned party does not timely comply with the John Doe summons. Code Sec. 7609(e)(2) provides as follows:

In the absence of the resolution of the summoned party’s response to the summons, the running of any period of limitations under section 6501 or under section 6531 with respect to any person with respect to whose liability the summons is issued (other than a person taking action as pro-vided in subsection (b)) shall be suspended for the period—

(A) beginning on the date which is 6 months after the service of such summons, and

(B) ending with the final resolution of such response.24

The Treasury Regulations contain an example illustrat-ing this rule:

A John Doe summons is issued on April 1, 2004, to the promoter of a tax shelter and seeks the names of all participants in the shelter in order to investigate the participants’ income tax liabilities

for 2001 and 2002. The district court approves ser-vice of the sum- mons on April 30, 2004, and the summons is served on the promoter on May 3, 2004. The promoter does not provide the names of the participants. The periods of limitations for the participants’ income tax liabilities and crimi-nal prosecution for 2001 and 2002 are suspended under section 7609(e)(2) beginning on November 3, 2004, the date which is six months after the date the John Doe summons was served until the date on which the promoter’s response to the sum-mons is finally resolved. 25

The party served with a John Doe summons is sup-posed to provide notice of the suspension of statute of limitations to any person who is covered by the John Doe summons.26 However, failure by a summoned party to give this notice does not prevent the suspen-sion of the statutes of limitations,27 and there does not appear to be any remedy for a violation of this regula-tion. Thus, taxpayers should not rely on the summoned party to notify them but should proactively discover whether, and when, the summoned party complied with the John Doe summons.

After advising the client on the potential suspension of the statutes of limitations, the practitioner should con-sider the various methods for the client to correct any past non-compliance before the IRS or DOJ obtains the information and begins a civil audit or criminal investigation.

The IRS currently has two procedures available for taxpayers who have not properly reported offshore assets, the 2014 Offshore Voluntary Disclosure Program (OVDP) and the Streamlined Filing Compliance Proce-dure.28 If the client’s past noncompliance only involved domestic issues, but was due to fraud, or may be per-ceived by the government as being due to fraud, the client can make a domestic voluntary disclosure to the IRS.29 The OVDP and the domestic voluntary dis-closure practice require that the taxpayer’s submission be timely,30 i.e., that the IRS is not already aware of the taxpayer’s noncompliance or that there is not an open audit or investigation regarding the taxpayer.31 The service of a John Doe summons itself will not cause a taxpayer to be ineligible for a voluntary disclosure, but once the government obtains information pursu-ant to the John Doe Summons relating to a particular taxpayer, that taxpayer will no longer be eligible.32 As stated by the IRS, “a taxpayer concerned that a party