IRS Eyes Offshore Funds and Credit Card Schemes

Accounting firms of all sizes may need to brace for more problems, as the long arm of the law and the glare of public scrutiny are extended to thousands of secret bank accounts tucked away on the sun-drenched islands of the Caribbean. The Internal Revenue Service (IRS) estimates that these accounts provide thousands of taxpayers with offshore tax shelters, creating a $70 billion-a-year drain on federal revenues.

Offshore bank accounts have grown increasingly popular over the past five years, thanks in part to online advertising on the Internet that has encouraged their use together with credit card transactions as a way to help both businesses and individuals avoid taxes. But all that may change soon, as the Justice Department and IRS are said to be nearing agreements with American Express and MasterCard that would expose the schemes by giving the government access to the taxpayers' credit card records

In a typical tax avoidance scheme, the taxpayer hires a lawyer in an offshore tax haven to create a sham corporation to hide the taxpayer's identity. Then the corporation opens a bank account, funds it with unreported income or cash on which no interest income will be reported to the IRS. The funds are withdrawn via credit card transactions that are automatically deducted from the bank account, often leaving no incriminating paper trail.

The IRS has been frustrated in its efforts to expose these shelters because offshore banks in Caribbean tax havens have refused to share financial data with the U.S. The agreements with American Express and MasterCard will allow the IRS to break this veil of secrecy and check for unreported income. The Wall Street Journal suggests this activity may be part of a larger tax shelter crackdown that is setting the stage for some nasty legal battles with accounting firms who are trying to protect their clients' identities ("IRS Seeks Tax Cheats Through Offshore Credit-Card Records," March 8, 2001).

Initially, the IRS plans to scrutinize credit card transactions involving banks in Antigua and Barbuda, the Bahamas and the Cayman Islands. But the expectation is that the reviews will later be extended to other locations and additional credit card companies.

-Rosemary Schlank


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