The US government this week asked the San Francisco federal court to let the Internal Revenue Service serve a John Doe summons on HSBC Bank USA, to get information about American residents with offshore bank accounts with HSBC India.
The IRS use John Doe summonses to get information about suspected tax evasion by a class of people whose identities are not known (the equivalent to the UK HMRC’s “fishing expedition” notices served on hundreds of UK banks last year). The summons would force HSBC Bank USA to give the taxman records identifying Americans with offshore bank accounts at HSBC India.
Americans (including US citizens tax resident in the UK) should pay federal income taxes on all worldwide income, and must report all foreign bank accounts with balances over $10,000. Wilful failure to report foreign financial accounts is punishable by penalties of up to 50% of the amount in the accounts at the time of the offence.
The IRS allege an HSBC Bank team in India helped thousands of yanks to dodge tax, by hiding their accounts from the taxman. The IRS claim that HSBC India set up special units (the NRI Services Division) in New York and California, promoting Indian bank accounts to so-called “Non-Resident Indians” (NRIs) living in the States. According to the petition, some NRI clients have informed the IRS that representatives of HSBC Holdings plc and its affiliates assured them that they could invest at HSBC India without paying US income tax on interest earned, and that the income earned on the HSBC India accounts would not be reported to any tax authorities.
The IRS recently used a similar strategy with the American arm of Swiss banking giant UBS Bank AG. UBS eventually settled the case by paying US$780M and handing over the names of 5,000 clients with Swiss bank accounts.
HMRC in the UK recently obtained details of about 5,000 UK residents with bank accounts with HSBC Switzerland. It is working through that data. That project has already led to several criminal prosecutions and hundreds of tax investigations are now being conducted by the elite Specialist Investigations team under the Civil Investigation of Fraud procedures: Code of Practice 9 (cases of suspected serious tax fraud).
This is part of massive ongoing investigations by the IRS into offshore banking practices linked to tax fraud. That investigation has so far focussed on UBS and HSBC but its tentacles appear to be spreading. The American taxman is gathering fresh evidence at quite a pace. It seems inevitable that Her Majesty’s Revenue & Customs in the UK will adopt similar tactics. The two tax authorities are also allowed to share information and it is widely believed that fast-track data sharing arrangements are in place.
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