The Perils of Tax Havens

By Bill Saporito Sunday, Apr. 07, 2002
    • The website of the offshore Secrets Network is one of many that promise average investors entry into the rarefied world of private banking. Set yourself up in a Caribbean or Alpine tax haven, and you are in league with the superrich--with Marc Rich!--who cloak their identities and shield their assets from prying governments. With your shell company as host of a nameless Visa or Amex card, you are trading stocks, purchasing cars, paying bills and getting cash from ATMS--and leaving no trail. You are thumbing your nose at grasping creditors, ex-spouses, plaintiff's lawyers and tax collectors. And these days, you are screwed.

    The IRS just got a federal court in San Francisco to compel Visa International to disgorge credit-card records of U.S. citizens in 30 cash coves such as Bermuda and the Caymans. It will likely try to identify the cardholders through U.S. merchants where the cards were used. The agency, which earlier secured access to the logs of MasterCard and American Express, is looking for buried treasure overseas--an estimated $70 billion in unpaid taxes. The theory is that much more of it has flowed offshore in recent years, oiled by Internet technology and emboldened by a popular view that the IRS had been declawed by Congress.

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    I always thought these offshore havens were for drug runners and exiled potentates. Yet the IRS is projecting there are 2 million cards offshore, suggesting that half the orthodontists and plumbers in America must have numbered accounts. Am I missing a bet here? Are you?

    There's nothing illegal in setting up an offshore account. There's also little point in doing it, unless you're like ExxonMobil and doing a ton of business overseas. "We routinely advise individuals against going offshore," says Peter Glicklich, an international-tax-law expert at Roberts & Holland in New York City. Moving offshore can actually shift some categories of income to your disadvantage: turning a capital gain into ordinary income, for instance, and getting taxed at a higher rate. If you fail to report an offshore account on your taxes, you face a penalty of 75% of the underpaid tax in addition to the taxes owed.

    The Bush Administration, led by Treasury Secretary Paul O'Neill, was wildly unenthusiastic about pressuring offshore havens--until Sept. 11 brought new impetus to tracking down terrorists' funds. Until this year, Republican lawmakers had been cutting the IRS budget since the mid-'90s. There are about 5,000 fewer auditors and collectors than there were in 1995, meaning your chances of being audited this year are about 1 in 173. Last year the service conducted 732,000 audits, down from 1.9 million in 1996. Enforcement actions including property seizures dropped from 3.5 million in 1995 to 875,800 last year. Why go offshore? You can hide in plain sight.

    IRS officials couldn't help noticing that outfits such as CaribbeanSecrets.com have been encouraging folks to send their funds offshore. Officials feared a wave of taxpayers surfing toward the money islands. Says Jack Blum, an IRS consultant: "There was a realization that either you do something about this or kiss the voluntary tax system goodbye."

    Tax lawyers expect the IRS to come down like a ton of coconuts on a few high-profile miscreants to send a message. The Caymans and other countries recently signed information-exchange agreements with the U.S. And the Patriot Act that Congress passed after Sept. 11 requires U.S. banks to sever ties with cash-laundering "shell" banks in foreign lands.

    I'm rooting for the Revenuers. Anyone who underreports income on a large scale is passing the buck to the rest of us. As a salaried worker, I'm not really part of the "voluntary" tax system. Uncle Sam grabs a chunk of every paycheck. Come April, I just try to get some of it back.

    Saporito is reachable onshore at bill_saporito@timemagazine.com