Global Policy Forum

How The Rich Elude The Tax Man:


By Mary von Euler

Americans for Democratic Action
May 28, 2002


If all taxes are deducted from your paycheck before you see it, you may suspect that the IRS is collecting a bigger chunk of your income than it collects from corporations and the rich. And you would be right. These days, conniving lawyers hired by large companies and wealthy individuals utilize an array of tools to evade paying U.S. taxes. Some of the most common are offshore bank accounts, offshore trusts, and phony incorporations of U.S. companies in foreign tax havens. According to an IRS consultant, the U.S. loses $70 billion every year in revenue to this sort of tax evasion. All told, as much as $5 trillion of U.S. money is in offshore assets, $3 trillion of which is in offshore bank deposits.

The use of offshore accounts and trusts to evade income and estate taxes is not a new problem. What is new is that the Internet now provides easy how-to information to U.S. citizens, while credit and debit cards have made it simple to access money held offshore in exotic places like the Cayman Islands, Antigua, Belize, the Channel Islands, the Netherlands Antilles, Vanuatu, and the Cook Islands. As a result, offshore tax evasion has grown geometrically and threatens the U.S. system of voluntary taxation.

Worse still, a few of the wealthiest Americans have utilized highly sophisticated methods, backed by opinion letters from top flight law firms, to avoid paying current taxes on offshore hedge fund and partnership earnings. The success of the very rich in beating the system has allowed smaller promoters to tell their clients that all they are doing is offering a version of the same product for the common man. Sometimes naí¯ve taxpayers fall for such schemes advanced by sleazy promoters.

In an effort that will go a long way toward controlling one aspect of this tax evasion trend, the IRS announced on March 25, 2002 that it will pursue holders and purveyors of offshore credit cards. According to the agency, as many as two million Americans may be paying their bills with credit or debit cards issued by offshore banks. Only a small fraction of these cardholders report their accounts, as required by law. "Respectable" corporate executives, business owners, doctors, lawyers, investment professionals, and other wealthy people hide their income by means of these offshore credit card deals.

In October 2000 the IRS obtained a court order permitting it to get around banking secrecy laws and go after MasterCard and American Express. MasterCard International has turned over records on more than 230,000 accounts in Antigua and Barbuda, the Bahamas, and the Cayman Islands. American Express also has agreed to hand over its records, and the IRS anticipates cooperation from Visa International as well. Financial advisers, including such well-known banks as units of Barclay PLC and Royal Bank of Canada, often have Internet web ads to tout offshore bank accounts (often in the name of a trust or sham corporation) accessible by credit cards, and offshore incorporation of real and phony companies.

How Tax Evasion Works

The offshore avoidance/evasion problem is much bigger than credit card offerings, however. Sophisticated lawyers are peddling highly questionable tax avoidance products. These products go unchallenged by the IRS because no trace of the offshore structure appears on tax returns, and the IRS lacks the investigative resources to dig deeper than tax forms. Many of the IRS's deficiencies stem from the agency's demonizing by Congressional committees, who cited anecdotal testimony of a few sympathetic taxpayers who had been harassed by an IRS agent. Using that as a pretext, Congress has successfully starved the agency of money and manpower. Meanwhile, one sector of the tax bar has become so aggressive in its advising of offshore tax avoidance that the entire tax system is in jeopardy.

These tax lawyers specialize in esoteric knowledge related to tax havens. Their advice consists of complex ploys and strategies such as:

  • Offshore "charitable trust" arrangements. The lawyers know exactly where charity isn't defined or trusts aren't regulated.

  • Insurance products in which the insured is the owner of the insurance company and its only client.

  • Offshore trusts that use insurance policies as the beneficiaries.

  • U.S. holding companies that cover holdings in offshore assets.

    Aggressive tax lawyers claim that what they're doing is "asset protection," stating that it is legitimate and that it is up to the clients to file proper tax returns. It is not legitimate. Their advice adds up to a scheme for the rich - from CEOs to drug dealers to criminal con men - to escape paying taxes by stepping outside the legal system. Lawyers are officers of the court and have no business helping clients hide money when they owe alimony, child support, civil court judgments, or fines and penalties in criminal cases. These lawyers know that clients will have to commit perjury to deny that they have assets, since Schedule B of Form 1040 asks if you have interests or signature authority over accounts in a foreign country. If you answer "no," you're committing perjury; if you answer "yes," you're inviting an audit. Lawyers should not suborn perjury by aiding and abetting tax evasion. Moreover, tax avoider-lawyer contact is not shielded by attorney-client privilege if a lawyer counsels a client to commit fraud.

    In 1999 the IRS declared that most trusts set up to avoid taxes and judgments are illegal and in a year had opened more than a hundred investigations. Nevertheless, there is so much money in it for promoters and clients that they have a strong incentive to keep a step ahead of the under-funded IRS.

    Today there are 590 banks in the Cayman Islands, which have become a major financial center, largely catering to wealthy Americans, English, and Canadians, who have opened accounts there with the aid of lawyers and accountants. Americans who ask to open accounts with an American offshore bank are referred to a nearby Canadian bank. Reciprocating, Canadians are referred to American offshore banks. So each depositor avoids the tax collector at home.

    Problems with Countering Tax Evasion

    One reason the IRS has such difficulty pursuing taxes from the offshore accounts is the complexity of the investigation, usually covering many years. The agent, faced with repeated delays and appeals, must make many repeated document requests. Agents are under pressure to close cases and produce results, and the system offers few rewards for sticking with a complex offshore case. Moreover, even if offshore income is discovered, collecting the taxes is another long process that may or may not succeed. The diligent IRS agents and lawyers who press these cases should be given sufficient power, support and rewards.

    Before 9/11 heightened interest in terrorism, the understaffed IRS had announced it would do only half as many audits in 2000 as it did in the three previous years. In recent years the IRS has concentrated a large share of its rare audits on simple claims for the low-income tax credit, rather than on evasion schemes of the wealthy. To make matters worse, the agency has assigned experienced agents to counter duty during tax filing season, rather than to complex audits.

    Offshore tax evasion often involves other crimes. In a further bureaucratic absurdity, agents who collect civil tax information are not permitted to share the information with criminal investigative agencies. If the civil side of IRS makes a referral to the criminal side of IRS, the cases take so long to process that they can bump into the statute of limitations. Before a taxpayer can be indicted in a tax crime, the indictment is subjected to repeated reviews within both the IRS and the Department of Justice.

    The Washington Post's respected business columnist Allan Sloan finds the behavior of certain accounting firms particularly galling - albeit not unique. In response to public outrage at Enron and its accountant Arthur Andersen, PricewaterhouseCoopers (PwC) is separating its consulting and accounting businesses in what Sloan calls "an antisocial way," moving PwC Consulting overseas. As it avoids paying U.S. taxes, PwC is "hustling consulting contracts with the Office of Homeland Security…eager to take our tax money…." PwC Consulting does more than half its business in the U.S. and trades its stock on the New York Stock Exchange. For tax avoidance purposes, it's a Luxembourg corporation owned by a Bermuda corporation. Similarly Accenture (formerly Arthur Andersen Consulting), from its base in Bermuda, has a contract to run the IRS Web site. Since these gambits are probably legal, according to Sloan, the law and tax treaties need to be changed so the IRS is able to tax U.S. earnings.

    It is wrong that people whose income is subject to withholding are carrying the brunt of the federal budget. Middle and lower income families end up paying higher taxes or having important programs cut, while the tax evaders enjoy our schools, hospitals, courts, national parks, clean water, safe food, our national defense, and even government contracts, without paying their share.

    Potential Solutions

    We propose a few first steps toward remedying this type of tax evasion:

    First, anti-money-laundering laws must be strictly enforced. Today these laws require every taxpayer with a foreign bank account to file a Foreign Bank Account Report. (Only 117,000 individual taxpayers filed the report for the 1999 tax year.) The law should be beefed up so that everyone who has failed to file the required report on an offshore account is notified that he/she can be charged with a five-year felony. The taxpayer should then be given the chance to avoid that criminal charge in exchange for full disclosure and payment of back taxes and interest. Enforcement of the money laundering law has been under the jurisdiction of the financial intelligence arm of the Treasury Department, which has egregiously failed to enforce the law. Enforcement should be turned over to the IRS. IRS enforcement should then be placed in the hands of joint civil-criminal task forces.

    Second, this country should support, not oppose, efforts of the Organization for Economic Cooperation and Development (OECD) to close some 35 tax havens. The OECD has threatened sanctions on tax havens that refuse to release the names of account owners and information on business structures. Treasury Secretary Paul O'Neill said he had "serious concerns" about the project. Facts to the contrary notwithstanding, he said it could be seen as suggesting that "low tax rates are somehow suspect" and as trying to "dictate" higher tax rates in low-tax jurisdictions. The Administration and some very powerful banks and corporations, which are trying to keep tax havens open, should be vigorously opposed.

    Third, Congress must give the IRS the resources - human and technological - to do its job. While our system of taxation is based on voluntary compliance, misdirected audits and too few audits invite evasion. By auditing at most only one in 160 tax returns, we are issuing an invitation to evasion. The IRS should give priority attention to the corporations and well-to-do taxpayers that are now escaping scrutiny and enforcement. Agents should be rewarded for tackling complex cases.


    The offshore tax evasion issue is central to fair and equitable taxation. In opening a Senate committee hearing, Senator Carl Levin (D-MI) noted on July 18, 2001, that if only half of the estimated $70 billion in lost revenue from offshore hidden assets were collected, it would pay for a Medicare prescription drug program without raising anyone's tax rates or cutting any budget item. On a more basic level, if a large number of taxpayers can continue to escape the system this way, we will lose an important component of our national life, the notion of equality under law and equal justice without regard to social status. Everyone who pays taxes by payroll deduction and all other honorable taxpayers should demand that the more affluent and the dishonest are made to pay their share.

    Note: This paper based on the research and testimony of ADA Counsel Jack Blum, a longtime expert on offshore tax evasion.

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    FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.