The IRS said Monday that Americans in far greater numbers than it had previously estimated were avoiding income taxes by depositing their money in tax havens such as the Cayman Islands and withdrawing the money using American Express, MasterCard and Visa cards.
The IRS said its estimate that 1-million to 2-million Americans may 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. The Internal Revenue Service said that from records of purchases, it had already identified hundreds using such method, including executives of publicly traded companies, business owners, doctors, lawyers and investment professionals.
These people "are using offshore cards to pay for living expenses," the IRS 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 IRS by their employers. But entertainers, business owners, investors and others who control what is reported to the IRS 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 supervising 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 the companies the IRS identified in court papers as advertising offshore banking through subsidiaries were KPMG, the big accounting firm, and three big banking companies: Barclays, HSBC and the Royal Bank of Canada.
Officials at KPMG and HSBC did not return calls Monday night. Representatives of Barclays and the Royal Bank of Canada said they could not locate someone to discuss the issue.
A senior IRS 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 successful plaintiffs in lawsuits. Tax avoidance, he said, was an unavoidable byproduct of these strategies.
The commissioner of internal revenue, Charles O. Rossotti, said the agency was determined to be more aggressive going after Americans using offshore accounts to avoid taxes.
"For years people assumed we wouldn't be able to find them," Rossotti said. "Simply put, the guarantee of secrecy associated with offshore banking is evaporating."
In October 2000, the IRS sought credit card records from MasterCard and American Express of accounts in Caribbean tax havens that routinely ran up 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 IRS 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 that they were stunned by the new IRS 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 nation's income tax system, which depends on individuals voluntarily determining how much they owe and filing honest tax returns.
"It says that the IRS has drifted from its mission," Kneally said. "It says that the message of deterrence is not out there."
The IRS audits only about one in 160 income tax returns. Many of the offshore account holders identified by the IRS 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 that the account is reported and taxes due the IRS are paid. Failure to disclose such holdings is a felony punishable by up to five years in prison. In 1999, the IRS said, 117,000 Americans checked the box on their income tax return disclosing an offshore account, far fewer than the number of MasterCard accounts it 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 and not names. So investigators, in a costly and 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 advance warning. Unlike MasterCard and Visa, which are networks and do not know the names of customers, American Express knows the names of its cardholders.