Court rules John Doe summons to identify law firm clients isn’t barred by attorney-client privilege

Section 7609(f) of the tax code allows the Internal Revenue Service to use a “John Doe” summons when the target is unknown. It has been used successfully by the IRS against banks and other financial institutions to find offshore accounts. Now, a district court in the Western District of Texas has allowed its use against a law firm to ascertain the identities of clients it suspected of using the firm’s services to structure offshore entities to avoid U.S. taxes.

The IRS had audited one of the law firm’s clients and found this to be the case, and believed other clients might also have engaged in such transactions.

In a motion to quash the summons, the firm, Taylor Lohmeyer Law Firm PLLC, asserted that enforcement of the summons would erode the attorney-client privilege. The judge disagreed last week and granted the IRS petition to enforce the summons.

A tax expert who wasn’t involved in the case sees important lessons in the ruling. “A John Doe summons may be used to obtain information and records about a class of unidentified taxpayers if the IRS has a reasonable belief that such taxpayers are engaged in conduct violating U.S. laws,” said Selva Ozelli, a CPA and international tax attorney. “To date, federal judges have authorized the IRS to issue sweeping John Doe summonses for information and records in investigating offshore tax evasion cases against financial institutions and offshore entities around the globe.”

She pointed to a 1964 Supreme Court case, U.S. v. Powell, which established a four-part test for evaluating the legitimacy of an IRS summons.

“Since the IRS easily makes a prima facie case that the summons satisfied the Powell test, it is not surprising that the district court authorized the John Doe summons on the law firm,” Ozelli added. “Since 2009, the IRS has been working hand-in-hand with the DOJ to aggressively combat tax evasion by U.S. taxpayers making use of secret offshore bank accounts and offshore entities set up by law firms.”

A man walks past the IRS headquarters in Washington, D.C.
The IRS headquarters in Washington, D.C.

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