- 25.5.7.1 Overview
- 25.5.7.2 Definition
- 25.5.7.3 Procedures
- 25.5.7.4 General Information
- 25.5.7.5 Statutory Requirements For a Valid John Doe Summons
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This section contains the following topics:
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Definition
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Procedures
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General Information
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A John Doe Summons is any summons where the name of the taxpayer under investigation is unknown and therefore not specifically identified. A John Doe summons can only be served after approval by a Federal court. Therefore, the Service must never serve a "friendly" John Doe summons even though a prospective summoned party may request one as a condition to providing information to the Service. Serving a John Doe summons without court approval violates the statute and will jeopardize the investigation.
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Submit to Associate Area Counsel a statement of the pertinent facts and circumstances which justifies seeking court approval to serve the summons and includes information to satisfy each of the statutory requirements contained in IRC 7609(f)(1) through (3). Discuss the wording to be used in the summons with Associate Area Counsel.
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If Counsel decides not to refer the matter to the Assistant Chief Counsel (Collection, Bankruptcy & Summonses) for referral to the Department of Justice to seek approval for service, the matter should be discussed with the Field Territory Manager.
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If an agreement cannot be reached, Counsel will prepare and forward a memorandum to the Area Director setting forth the unresolved issues.
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If the Area Director does not agree with Counsel’s conclusions, the matter will be referred to the Director, Field Operations (CI), or the Director, Compliance, who will explore with the Assistant Chief Counsel (Collection, Bankruptcy & Summonses) ways of reaching an agreement on future actions concerning the John Doe summons.
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The following paragraphs provide basic background information about John Doe summonses.
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John Doe summonses can only be issued by high ranking executives who are specifically authorized to do so in Delegation Order No. 4, which includes SBSE, W&I, LMSB, CI Directors and Directors of Field Operations. Special Agents, revenue agents and revenue officers are not authorized to issue these summonses. Consult Delegation Order Number 4, as revised, whenever a John Doe summons is being considered.
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The Service should no longer be in the information-gathering or research stage of a project when it decides to seek court authorization to serve a John Doe summons. The project research should be sufficiently developed to enable the Service to identify a specific tax compliance problem. The Service should be prepared to investigate the tax liabilities of specific taxpayers based on the information received from the John Doe summons. A John Doe summons cannot be used to conduct a "fishing expedition."
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The purpose of a John Doe summons must be to investigate the tax liability of a specific unidentified taxpayer (or a group of such taxpayers), even if a secondary purpose is to gather information for research purposes.
Note:
In some investigations, it may be possible for the Service to obtain the identities of taxpayers without issuing a John Doe summons. If the Service is conducting an investigation of a known taxpayer (such as a tax shelter promoter) who can identify an unknown taxpayer or class of taxpayers (such as the shelter investors) and the identities of the unknown taxpayers are relevant to the investigation of the known taxpayer, the Service can issue a standard, non-John Doe summons as part of the known taxpayer's investigation and can require the production of the unknown taxpayer's identities. This technique is only acceptable where discovering the identities of the unknown taxpayers is relevant to the investigation of the known taxpayer. This type of summons is referred to as a "dual purpose summons."
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District Court Approval Required Before Serving a John Doe Summons. Before a John Doe summons can be served, it must be approved for service by a district court in an ex parte proceeding. (The Service can never serve a " friendly" John Doe summons without obtaining court approval. Doing so will violate IRC § 7609 and jeopardize the examination.)
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Three Additional Requirements for Approval. A John Doe summons must meet the standard four-part test that applies to all other summonses. See 25.5.4.4(1). IRC § 7609(f) adds three additional requirements that a John Doe summons must meet before it will qualify for district court approval. These three requirements are identified below and further analyzed in following subparagraphs.
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The summons must relate to the investigation of a particular person or ascertainable group or class of persons.
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The Service must have a reasonable basis for believing that such person or group or class of persons may fail or may have failed to comply with the tax laws.
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The information and identities sought to be obtained from summoned records must not be readily available from other sources.
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The unidentified person, group or class of persons under investigation, and the activity or transaction under investigation must be described with particularity on the line of the summons that begins with " In the matter of." The phrase "group or class" refers to a group or class of persons who have engaged in specifically described transactions or activities that are common to all persons or entities in the group or class. Generally, the common activities or transactions of the group or class of persons will directly relate to compliance with the internal revenue laws.
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Example 1: A summons is issued to a bank to obtain the names of bondholders who purchased bonds issued by a county's housing authority for a specific construction project. The summons should read: "In the matter of the record and beneficial owners of County Housing Authority Revenue Bonds, Series 1985 (Blackacre Housing Project)"
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Example 2: A summons is issued to Dealer X to obtain the names of persons who sold metal to the dealer for the period January 1, 1992 through December 31, 1992. The summons should read: "In the matter of persons who sold metal to Dealer X during the period from January 1, 1992 through December 31, 1992."
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Example 3: A summons is issued to ABC University to obtain the names of persons who made in-kind contributions to the University during the period January 1, 1994 through the present. The summons should read: "In the matter of all persons who made in-kind contributions to ABC University for the period January 1, 1994 through the present."
Note:
The statute and the legislative history indicate that the Service is entitled to information pertaining to the unidentified persons in the group through the present even though the current taxable year is not yet completed.
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Example 4: A summons is issued to ABC Bank to obtain the names of all persons who received the interest income earned from Certificates of Deposit issued by the bank in amounts of $100,000 or more during the years 1980, 1981, and 1982. The summons should read: "In the matter of persons who received interest income from certificates of deposit issued by ABC Bank in denominations of $100,000 or more during the years 1980, 1981, and 1982."
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Example 5: A summons is issued to the XYZ Barter Exchange to obtain the names and transaction records of all members of the exchange for the period of January 1, 1992 through December 31, 1993. The summons should read: "In the matter of all members of the XYZ Barter Exchange during the period of January 1, 1992 through December 31, 1993."
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The Service must establish a reasonable basis for suspecting noncompliance with the tax laws by the unidentified person or the entire group or class of unidentified persons that are the subject of the investigation. The Service need not establish probable cause for suspecting noncompliance or meet any other evidentiary standard greater than a reasonable basis for suspecting noncompliance. The Service can establish that it has reasonable basis for believing that an individual or a group or class may have or will fail to comply with the tax laws by showing:
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the unidentified person or group has engaged in or is engaging in a transaction or transactions that the Service has determined to be noncompliant with the tax laws, or
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the unidentified person or group has engaged in or is engaging in an activity or course of actions that is of such a nature that there is a likelihood of underreporting or other type of noncompliance with the tax laws.
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Common Financial Transaction or Activity Related to Tax Law Compliance. A John Doe summons will usually not be appropriate unless the unidentified group or class of persons has engaged in a common financial transaction or an activity directly related to compliance with the tax laws. For example, a group that participates in financial activities not susceptible to detection, or designed to avoid detection, or to defeat the payment of taxes may be a candidate for a John Doe summons. On the other hand, members of a group whose only common characteristics relate to non-tax factors, such as political or ideological beliefs, or memberships in trade or professional organizations, should not normally be the subject of a John Doe investigation.
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Statistical Data Needed as Evidence. To determine whether there is a high degree of noncompliance, the Service should attempt to investigate or canvass as many of the groups members that it can identify before considering a John Doe summons. The information gathered from these investigations or compliance checks will support the Government's position that a reasonable basis exists to believe that the group or class of persons may have failed to comply with the tax laws. Information or statistical data from investigations of group members from other parts of the country may be used to support a John Doe summons issued to investigate members in a particular area.
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Statistical Data Not Needed as Evidence. While canvassing or performing compliance checks on the identified members of a group is generally useful in any John Doe summons case, there may be situations where, in the exercise of sound judgement, such steps can be deemed unnecessary. For example, where the Service is investigating the promotion of a particular financial transaction and the promoters have taken a position in the prospectus or other document that is contrary to the Service's announced position, it is not necessary to canvass the identified members to learn whether they did in fact follow the promoters' tax advice. The reasonable basis standard is met by the promoters' documents. Also, for example, if a person or persons deposit a large amount of high denomination currency in decrepit condition within a period of a few weeks, the Service need not try to obtain more factual background on the unidentified person or persons. The inherently suspicious nature of the deposits meets the reasonable basis standard and makes a John Doe summons directed to the bank where the deposits took place appropriate.
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Statistical Evidence Needed Where a Common Financial Transaction is Absent. If the Service has not discovered a common financial transaction suggesting noncompliance with tax laws in a group or class of persons, a John Doe summons may still be appropriate if investigations of known taxpayers in the group produce a significant statistical sample showing a very compelling degree of noncompliance. (A statistical sample that shows 50% or more of noncompliance indicates a high degree of noncompliance. (While this is not intended as a bright-line test, to the extent the percentage is less than 50%, it will become more difficult to argue that a reasonable basis exists, and field counsel should consider whether a John Doe summons is appropriate.) A John Doe summons should not be considered where a common financial transaction suggesting noncompliance does not exist unless the Service has first gathered statistical data from identified group members establishing a factual basis for issuing the summons.
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Examples. The following examples illustrate what evidence satisfies the reasonable basis requirement of section 7609(f)(2) and when statistical data must be used:
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Example 1 (Same as Example 1 above): The Service seeks the district court's authorization to serve a John Doe summons on a bank to obtain the names of those persons who purchased bonds issued by a county's housing authority for a certain construction project. Specifically, the summons seeks the names of the record and beneficial owners of the bondholders of the County Housing Authority Revenue Bonds, Series 1985 (Blackhorse Housing Project).
The Service can satisfy the reasonable basis standard with the following fact pattern. The Service has learned that the county did not use the bond proceeds to build the advertised housing project. Instead, the proceeds were used to acquire higher yielding investments that generated taxable interest income to the bondholders. The prospectus or other public documents show that the bonds were advertised as tax-exempt municipal bonds. Thus, the unidentified bondholders have engaged in a transaction based on a promoter's position that the Service has rejected. This is enough to establish a reasonable basis for believing that an ascertainable group, the purchasers of County Housing Authority Revenue Bonds, Series 1985, Blackhorse Housing Project, engaged in a transaction that is not in compliance with the tax laws (the non-reporting of taxable interest income). While statistical data gathered from identified group members may be helpful, it is not necessary to establish a reasonable basis in this case because the Service has rejected the promoter's position. -
Example 2 (Same as Example 2 above): The Service seeks the district court's authorization to serve a John Doe summons on Dealer X, a metal buyer, to obtain the names of persons who sold metal to him during the period January 1, 1992 through December 31, 1992. The Service can satisfy the reasonable basis standard with the following fact pattern. Metal dealers are not required to issue Forms 1099 to the persons from whom they purchase metal (the metal suppliers). As a result, the Service cannot readily detect metal suppliers that underreport income from these sales. Investigations of 40 metal suppliers who sold metal to Dealer X in prior taxable years showed that 30 had underreported their income. Also, the Service has gathered statistical evidence from investigations of other dealers, which shows a high degree of underreporting by the metal suppliers.
A John Doe summons is appropriate because the common activity of the group members (sales of metal to Dealer X) is not reportable to the IRS on an information return and therefore not susceptible to detection, indicating a likelihood of noncompliance with the tax laws. In addition, investigations of known taxpayers in the group show a very high degree of underreporting. It is necessary for the Service to gather statistical data from identified group members to meet the reasonable basis test because the common financial transaction, while not susceptible to detection, is not contrary to any of the Service's announced positions. -
Example 3 (Same as Example 3 above): The Service seeks the district court's authorization to serve a John Doe summons on ABC University to obtain the names of persons who made in-kind contributions to the University from January 1, 1994 through the present. The common financial transaction is the donation of in-kind gifts to ABC University. Investigations of known taxpayers who had made this type of gift to the University showed that 140 out of 160 taxpayers had overvalued their gifts.
A John Doe summons would be appropriate. The group's common financial transaction is not contrary to any of the Service's announced positions, nor does it suggest that the group members were in any way noncompliant with the internal revenue laws. Therefore, the statistical data gathered from the identified members of the group showing a very high degree of noncompliance is necessary to meet the "reasonable basis" requirement . -
Example 4 (Same as Example 4 above): The Service seeks the district court's authorization to serve a John Doe summons on ABC Bank to obtain the names of all persons who received interest income earned on Certificates of Deposit issued by the bank in amounts of $100,000 or more during the years 1980, 1981, and 1982. The Service can satisfy the reasonable basis standard with the following fact pattern. During the years 1980, 1981 and 1982 , interest earned from certificates of deposit in denominations of $100,000 or more were exempt from the usual reporting requirements on information returns to the IRS. Thus, members of this group engaged in a transaction that was not susceptible to detection by the IRS. Also, investigations of holders of certificates of deposit in amounts of $100,000 or more in another bank revealed that 107 holders out of 115 examined had underreported interest income. A John Doe summons would be appropriate.
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Example 5 (Same as Example 5 above): The Service seeks the district court's authorization to serve a John Doe summons on the XYZ Barter Exchange to obtain the names and transaction records of all members of the exchange for the period of January 1, 1992 through December 31, 1993. Members of XYZ Barter Exchange engage in income producing activities that are not susceptible to detection and a likelihood of noncompliance with the tax laws exists. In addition, the Service has conducted investigations of other barter exchanges, and these investigations reveal that approximately 75% of those examined underreported their income. A John Doe summons would be appropriate.
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Example 6 The Service wishes to use a John Doe summons to obtain the names and social security numbers of all members of a trade association which it believes includes non-filing members. There is no financial transaction or activity related to compliance with the tax laws that is common to members of the group. However, the Service has statistical data from investigations of known taxpayers in the group which shows that 6 percent of the group has failed to file income tax returns, which percentage is about the same as the national non-filing rate.
The Service is not entitled to use a John Doe Summons to obtain names and social security numbers of the group members. Since there is no financial activity or transaction related to compliance with the tax laws that is common to members of the group, except membership in the group, there is no reasonable basis to believe that the group as a whole has failed to file income tax returns. The statistical data of 6% is not compelling and does not indicate that the group or class of persons failed to comply with the tax laws.
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The information to be obtained, including the identities of the John Does, is not readily available from other sources when the information cannot be obtained from the Service's own records or public sources such as telephone directories, professional directories, or reporting services, and the information cannot be obtained voluntarily from entities such as state agencies and industry or professional organizations. The fact that it may be more difficult administratively for the Service to conduct the investigation by relying on its own records or on public sources may not satisfy the statutory requirement. The Service must show that retrieving the data from other sources will be impractical. This may be shown by specifying the additional man-hours or procedures which will be necessary, and the significant impact on the Service's normal operations if the information cannot be obtained by the summons.
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Where some, but not all, of the information is readily available from public sources, the Service must establish that the public sources are not complete or not comprehensive, and that the summoned data is necessary to ensure a thorough investigation of all taxpayers in the group under investigation.