IRS Hits Offshore Account Industry


The IRS’ crackdown on offshore accounts is a serious blow to a booming--if questionable--industry that promotes such schemes as a way to hide income and evade creditors, tax experts said Tuesday.

Touted on Web sites, in hotel seminars and in conference rooms of well-known banks, offshore trusts have helped as many as 2million Americans illegally underreport their incomes, the IRS says.

The agency hopes to find many of those scofflaws by demanding credit card records to track financial transactions linked to offshore accounts. MasterCard International Inc. has turned over 1.7 million records, and American Express Co. said Monday that it would comply with the IRS’ request for similar information. In addition, the Justice Department has asked a federal court in San Francisco to have Visa International disclose offshore credit card accounts.

Although the IRS probably won’t audit everyone who has set up a questionable offshore trust, tax experts said, the agency will prosecute enough high-profile cases to discourage other taxpayers from using the accounts.

“The purpose of the IRS criminal division is deterrence,” said Beverly Hills tax attorney Charles Rettig. “The IRS prosecutes a few cases, they get some publicity, and everybody else falls in line.”


The tactics are similar to those the IRS has used to discourage tax protesters who argue that income taxes are illegal or that only income from foreign sources may be taxed. Courts repeatedly have rejected such arguments as frivolous and jailed and fined proponents.

The offshore arrangements the IRS is targeting can have a legitimate purpose in helping individuals protect their assets from lawsuits, said accountant Andy Mattson, an expert in international taxation.

“If I were a brain surgeon, I would want to have at least some of my assets in an asset protection trust located in a country that has rules to protect it from creditors,” Mattson said. “The problem is [these trusts] have been bastardized into something for tax evasion.”

The trusts were first promoted to the wealthy for $25,000 to $70,000 in set-up fees and annual costs of $3,000 to $20,000 to administer. In the last three to four years, however, promoters have begun touting much cheaper versions for $3,500 or so to consumers, tax experts said.

These promoters emphasize how the arrangements can be used to hide income. U.S. residents are encouraged to deposit money in a bank in a tax-haven country. A depositor then can use a credit or debit card linked to the account to pay expenses.

These transactions don’t leave a paper trail, because no bank or credit card statements are mailed to the U.S. resident. If a debit card is used, the money simply is deducted from the account. If a credit card is used, the bank or an advisor pays the bills.

There is nothing illegal about such arrangements if the U.S. resident discloses the account on tax returns and doesn’t use it to hide income, said Bill Norman, a tax attorney and asset protection expert in West Los Angeles.

Fewer than 200,000 people acknowledged having such accounts on their 2000 tax returns, however, and the IRS believes many of the arrangements are designed specifically to evade taxes.

The penalties for failing to report offshore arrangements are hefty. Taxpayers can face a civil fraud penalty equal to 75% of the tax assessed by an auditor, Rettig said. If the IRS decides to press criminal charges, which it can do if the tax bill is more than $40,000, taxpayers could face 10 months or more in a federal prison, he said.