John McDougal: Busting Offshore Accounts for the IRS

Tax cheats have brazenly hidden billions of dollars in offshore bank accounts for decades, but this ruse has become harder to pull off thanks to John McDougal, a special trial attorney at the Internal Revenue Service (IRS).

McDougal and his IRS team have recovered tens of millions of dollars for the government in recent years, breaking down a veil of secrecy that has long cloaked the identities of offshore account holders. Offshore tax evasion, a 2008 Senate report said, costs the U.S. Treasury $100 billion per year.

"People pay their fair share of taxes and then see the wealthiest taxpayers hiding their money in secret offshore accounts," McDougal said. "This undermines confidence in the fairness of our tax system."

McDougal began employing a novel approach to offshore investigations in 2002. When banks in foreign tax havens refuse to provide information about their depositors, he and his colleagues turn to U.S. companies that process financial transactions for Americans holding questionable foreign accounts.

McDougal said the IRS and the Department of Justice serve "John Doe summons" on MasterCard International, Visa, credit card processors and merchants for transaction records on credit cards issued by foreign banks. A John Doe summons is a court-ordered summons in which the name of the taxpayer under investigation is unknown and therefore not specifically identified.

Then investigators examine transaction information to identify offshore account holders, finding anomalies and conducting audits of U.S. taxpayers when there is sufficient cause to believe funds are being hidden. Once the audits ensue, the IRS can compel American taxpayers, under the threat of a potential contempt order, to release records.

"We have had this problem for a lot of years, and we previously had no way to do anything about it," McDougal said. "We are finally making a real dent."

Dan Reeves, an IRS technical adviser, said McDougal's role has significantly helped penetrate offshore tax schemes.

"Without John's personal and direct involvement, I don't think we would be where we are today," Reeves said. "We have far exceeded expectations."

The most successful of the John Doe summonses was issued in 2008 to Swiss banking giant UBS AG for information relating to U.S. taxpayers with secret accounts.

The summonses were instrumental in helping the Justice department secure a settlement under which UBS admitted engaging in a scheme aiding U.S. clients hiding income from the IRS. Hundreds of depositors' identities were revealed and UBS agreed to pay a $780 million penalty. The IRS and DOJ are still investigating thousands of additional names in a contested summons enforcement proceeding against UBS in federal court.

The John Doe summonses have also led to negotiations to enhance banking transparency between U.S. authorities and countries that have long traditions of bank secrecy.

Thomas R. Thomas, an IRS lawyer who has worked with McDougal, said his colleague has provided a significant public service.

"The public has to pay more money when dishonest people don't pay their share. John, in particular, makes sure people get a fair shake and goes after major evaders. It makes the tax burden on all of us fairer," Thomas said.

McDougal's service also included an 18-month stint as an investigator on the staff of Sen. Carl Levin (D-Mich.), where he helped draft the pending legislation that would create a list of foreign tax havens and give the Treasury department new tools to impose sanctions on them.

McDougal said he gets great satisfaction from enforcing the law and protecting the public interest.

"This gives me a comfort level that many lawyers don't have," he said.

This article was jointly prepared by the Partnership for Public Service, a group seeking to enhance the performance of the federal government, and washingtonpost.com. Visit www.ourpublicservice.org for more about the organization's work..