By David Cay Johnston

The I.R.S. said yesterday that Americans in far greater numbers than it had once thought were evading taxes by secretly depositing money in tax havens like the Cayman Islands and withdrawing it using American Express, MasterCard and Visa cards. The I.R.S. said its estimate that one million to two million Americans might be using such accounts was based on records that it had obtained by summons from MasterCard of 230,000 bank accounts in three tax-haven countries.

A prominent criminal tax lawyer, Elliott H. Kajan of Beverly Hills, Calif., said, however, that the estimate was so out of proportion that he doubted it would hold up.

But the Internal Revenue Service said that from records of purchases, it had already identified hundreds of income tax cheats, including executives of publicly traded companies, business owners, doctors, lawyers and investment professionals. These people — most believed to have incomes that would put them among the top 1 percent of taxpayers — "are using offshore cards to pay for living expenses," the I.R.S. said, from groceries to cars to college tuition for their children.Offshore accounts would be of little use to people whose wages are reported to the I.R.S. by their employers. But entertainers, business owners, investors and others who control what is reported to the I.R.S. can use offshore accounts to hide fees, profits, dividends, interest and capital gains.

Setting up such accounts has become a popular practice among a number of financial institutions that provide services to affluent individuals. Joseph C. West, the revenue agent running the investigation, said in an affidavit that he had found dozens of companies using the Internet to solicit people who want to hide money. Among companies the I.R.S. identified in court papers as advertising offshore banking secrecy were KPMG, the big accounting firm, and three big banking companies — Barclays, HSBC and Royal Bank of Canada. Officials at KPMG and HSBC did not return calls last night. Representatives of Barclays and the Royal Bank said they could not locate someone knowledgeable on the issue.

A senior I.R.S. official said many of those with the offshore accounts may have been seeking to hide income and assets from a spouse, especially in divorce, or from creditors, including plaintiffs in lawsuits. Tax evasion, she said, was an unavoidable byproduct of these strategies.

The commissioner of internal revenue, Charles O. Rossotti, said the I.R.S. was determined to be more aggressive going after Americans who use such accounts to avoid taxes.

"For years people assumed we wouldn't be able to find them," Mr. Rossotti said. "Simply put, the guarantee of secrecy associated with offshore banking is evaporating."

In October 2000, the I.R.S. sought credit card records of accounts of MasterCard and American Express in Caribbean tax havens that routinely showed charges in the United States. At the time, prominent tax experts said they assumed that at most tens of thousands of Americans had such accounts. The I.R.S. made its estimate based on the market share of MasterCard, which is much smaller than Visa in the international credit card business, and the estimated volume of business done in three dozen tax-haven countries.

Several lawyers said yesterday that they were astounded by the new I.R.S. estimate of the extent of the conduct, which was included in papers filed in federal court in San Francisco. Katherine Kneally, a criminal tax lawyer in New York who heads an American Bar Association committee on tax penalties, said the estimate of such widespread cheating sent a dark message about the income tax system, which depends on individuals' voluntarily determining how much they owe and filing honest tax returns.

"It says that the I.R.S. has drifted from its mission," Ms. Kneally said. "It says that the message of deterrence is not out there."

The I.R.S. audits only about one in 160 income tax returns. It devotes few resources to identifying those who do not file tax returns: of several dozen individuals and businesses named in The New York Times in recent years as not filing tax returns, only two said that they had been audited. Many of the offshore account holders identified by the I.R.S. did not file income tax returns, the agency said, while others filed, but failed to report their offshore account.

It is legal to have an offshore account, provided it is reported and any taxes are paid. Failure to disclose such holdings is a felony punishable by up to five years in prison. In 1999, the I.R.S. said, 117,000 Americans checked the box on their income tax return disclosing an offshore account, far fewer than the number of MasterCard accounts the agency found in just Antigua and Barbuda, the Bahamas, and the Cayman Islands.

Because of secrecy laws in the tax-haven nations, the charge records reveal only account numbers — not names. So investigators, in a laborious process, must turn to merchants to obtain the names of the individuals through their credit card receipts.

Investigators will have an easier time finding tax evasion by customers of American Express, which agreed to turn over some records after giving the customers warning. But the agreement is limited to those accounts, billed to addresses in the three tax havens, that incurred at least five charges in the United States in 1998 and 1999 and in which at least one was for at least $2,500 on certain types of purchases, including automobiles, jewelry and yachts. Unlike MasterCard and Visa, which as networks do not know the names of customers, American Express knows its cardholders.

A senior I.R.S. official acknowledged yesterday that the agency lacked the resources to prosecute most of the offshore tax evaders or even to pursue civil penalties against more than a fraction.

"We have lots of indications of tax evasion here," said Dale Hart, an I.R.S. deputy commissioner, "and we are going to be using the resources we do have to work those cases to the best of our ability." But, she noted, "every day, several times a day, we make decisions about which cases we will work and which we will not."

Congress has sharply reduced the agency's budget for tax enforcement. Today, just 23 tax auditors remain on the payroll in Manhattan, the richest tax district in the country, down from 150 several years ago.

When the I.R.S. obtained records of one bank in the Cayman Islands, it said it found 1,500 cases worth prosecuting. "How many have they brought?" asked Larry Campagna, a criminal tax lawyer in Houston. "Maybe 10?" Mr. Campagna said that when the investigation was completed many of the credit cards would be found to have innocent explanations and not involve tax crimes. Ms. Kneally and Mr. Kagan expressed similar views. But Ms. Hart said she was confident from the data analyzed so far that the I.R.S. had found many deliberate tax evaders and not innocents caught up in a fishing expedition.

The I.R.S. disclosed its estimates in seeking records of Visa cards issued in 33 nations that have been used in the United States. "If the MasterCard information is representative of the industry," it said, "there could be one to two million U.S. citizens with debit-credit cards issued by offshore banks."

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