The IRS Is Targeting Individuals Who Use Credit Cards And Offshore Banks

March 1, 2003

For more information, contact Bob Webb.

In today's world, United Statescitizens regularly travel to foreign countries for vacation and business.  Millions of United Statescitizens open bank accounts in foreign countries.  United Statescitizens use foreign bank accounts for several reasons: to protect assets from creditors, to increase financial privacy and to avoid taxes.  It is not illegal to deposit money in a foreign bank account if you comply with the United Statestax laws.  In fact, many high net worth individuals should have money in foreign banks to protect assets from creditors.  Countries in the Caribbean, such as the Cayman Islands, have laws that protect bank accounts from creditors.

Unfortunately for many United StatesCitizens, sophisticated promoters have convinced them that money deposited in a foreign bank account will not be taxed by the United States.  This commonly held belief is simply incorrect.  A United Statescitizen is taxed on his worldwide income.  For example, a United Statescitizen who deposits money in a CaymanIslandbank account must pay United Statestax on all interest payments that he receives from the CaymanIslandbank.

United Statescitizens who have a foreign bank account generally use a credit card or debit card to withdraw money from their foreign bank account.  Many of these United Statescitizens have failed to pay United Statestaxes on the money deposited in the foreign bank account and the interest received from the bank.

The IRS is Investigating Offshore Bank Accounts

The IRS has obtained the names of many United Statescitizens who have money deposited in foreign bank accounts.  Over the last several months the IRS has:

Convinced a United States Federal Judge to order American Express, MasterCard and Visa to provide lists for 1998 through 2001 containing the names of United Statescitizens who hold credit cards issued by banks from tax haven countries such as the Cayman Islands, Bahamas, and Antigua.  Now that the IRS has identified the names of the United Statescitizens who hold offshore credit cards, it is only a matter of time until the IRS audits these individuals to determine if they have paid taxes on the money deposited in the foreign bank.

The IRS is attacking (i) abusive schemes; (ii) high-income non-filers; and (iii) unreported income.  Many offshore schemes are being promoted by so-called professionals that claim to reduce a person's tax liability by inflating expenses, creating false deductions, or creating unallowable credits.  These schemes are all targeted under the IRS's new audit guidelines.

Unreported income creates the largest audit problem for the IRS.  However, the IRS has developed a new tool to detect unreported income. The IRS has developed a new Unreported Income Discriminate Index Formula ("UIDIF") analysis.  The new UIDIF score will rate the probability that income has been omitted from an individual tax return.  This new UIDIF screening tool will result in more high-income tax returns being audited by the IRS.

The IRS's New Voluntary Disclosure Policy

Fortunately for United Statescitizens who have used offshore banks to avoid paying taxes, the IRS has a new program designed to bring United Statescitizens into compliance with all United Statestax laws.  The new IRS program is called the "IRS Voluntary Compliance Initiative for Offshore Credit Card Users and Accounts."  However, the new IRS program is not available after April 15, 2003.  The purpose of the new IRS program is to: quickly bring United Statescitizens into compliance with all United Statestax laws, permit United Statescitizens to avoid paying substantial civil penalties relating to their offshore accounts, avoid being criminally prosecuted by the IRS, and to gather information to pursue the individuals who promoted the offshore banking arrangements.

For example, a taxpayer who understated his income to avoid $100,000 in taxes in 1999 would wind up paying $149,319 to the government.  This includes the tax liability plus $29,319 in interest and an additional accuracy-related penalty of $20,000.  If a taxpayer did not step forward, his tax liability generally would include the civil fraud penalty of $75,000, and therefore higher interest of $42,758.  The total amount due would be $217,758, without considering probable additional civil penalties for failure to file certain information returns.  The accuracy-related penalty, cited in the above examples, is equal to 20 percent of the tax underpayment.  The civil fraud penalty is up to 75 percent of the unpaid tax liability attributable to fraud.

Requirements for Participating in theNew IRS Voluntary Disclosure Policy

United Statescitizens who want to participate in the new IRS programs must comply with several guidelines before the IRS will waive civil fraud and criminal penalties.  For example, United Statescitizens must comply with the following requirements to qualify for the program.

Taxpayers who qualify for the IRS Disclosure Program will avoid substantial civil fraud and criminal penalties.  However, if the IRS determines that a taxpayer does not qualify for the program, he may be criminally prosecuted and forced to pay civil fraud penalties.

If you have deposited money in a foreign bank account, now is the time to consult with your tax lawyer and confirm with the IRS that you are in compliance with all United Statestax laws.