IRS Tracking Unreported Income
Date:  2/2/2001

IRS tracking unreported income through offshore credit cards

Chad J. Muller and Farley P. Katz  

Recent newspaper headlines announced that the IRS has obtained a court order allowing access to thousands of MasterCard and American Express credit card account records of U.S. account holders in three Caribbean bank havens.

The order authorizes the Internal Revenue Service to issue summonses to obtain account records from 1998 and 1999 for credit and debit cards issued by banks in the Bahamas, the Cayman Islands, and Antigua and Barbuda.

This is an important success in the IRS' investigation of what may be termed the "offshore secrecy industry." Numerous persons in magazines, newspapers and on the Web have been marketing a range of financial services located in tax haven countries or jurisdictions which have strict bank secrecy laws. The products range from anonymous bank accounts, secret offshore trusts, no name certificates of deposit, to purportedly non-traceable credit and debit cards.

These products are touted as providing complete financial secrecy to U.S. persons, to protect their "privacy," to provide asset protection from hostile creditors and spouses, and above all, for the thinly veiled purpose of protecting income from taxes.

The credit and debit cards, which are the target of the IRS summonses, are issued by banks in offshore countries, with only minimal identity information required from the customer. In fact, some of the debit cards may be issued in an anonymous or group name, and, for an extra fee, some companies offer to provide clients with new identity cards.

Unlike normal debit and credit card accounts, no account statements will be mailed to you, and deliveries to your residence -- if that information has even been provided -- will be strictly by courier.

Often, little more information is required of an individual to open an account than a name -- which may be made up -- and an e-mail address and, of course, substantial fees. One major offshore company charges an application fee of $995, and annual fees of $150 for setting up an offshore credit card account, secured by a certificate of deposit. That same company offers a completely anonymous debit card, which works at ATM machines, for an initial fee of $1,000, and a withdrawal charge of $2.25 plus 2 percent of the amount of each withdrawal.

What's the benefit?

Obviously, given the availability of no or low fee credit cards, these accounts are pricey for the ordinary person. The IRS believes that these accounts are primarily of interest to U.S. persons with unreported income seeking a secure and secret place to store that income and a method of letting them spend that income anonymously. The IRS believes that money on which no taxes have been paid will be deposited in the debit card accounts or used to pay the credit card charges. The companies advise that money can be wire transferred to the accounts, and that cash can be transferred in small amounts, without I.D., by using Western Union.

Given this background, it is obvious why the IRS is so interested in obtaining the information on holders of such secret offshore credit and debit card accounts. It is no surprise that the IRS will use this information to target criminal and civil investigations of the account holders.

Where's Waldo?

The fact is that while the IRS may obtain access to these credit card records, it is not known whether they have yet done so. However, the summonses have been approved by a court. Still, it is a long way before any criminal charges or civil assessments are brought.

To begin with, the IRS may have a difficult time in identifying the account owners. Because of the way the accounts have been set up, the name of the account may be fictitious. There may be no street address listed for the account holder as well. And it may be taken for granted that the owner's Social Security number does not appear in the bank's records. Thus, the IRS may have a difficult time tracking down the owner of the account.

That is not to say that the IRS will be stymied. There will be a trail to follow. For example, many of the companies require at least an e-mail address of the customer. In addition, if money has been wired in or out of the account, that may provide additional information as to the account holder's identity. Finally, the underlying credit card charge slips may provide additional sources of information. For example, some businesses will record one's driver's license number, telephone number, or license plate number on a charge slip. And for major purchases, such as a car or boat, the IRS might visit the dealer to track the purchaser.

Risky business

Despite the touted secrecy of these accounts, it is, in fact, a risky proposition for someone to set up such an account as a way to avoid paying taxes on unreported income. Assuming that the IRS is able to identify an account holder, it may then have proof that person spent large amounts of money over a period of time. For example, assume that the records show an individual spent $50,000 in each of three years. The courts have long held that the IRS may bring criminal charges using various indirect methods of proof such as the "expenditures method."

Under that approach, the IRS first shows in effect that an individual expended amounts of money during one or more years which is not reflected in his tax returns. If the IRS then establishes that it made a reasonable investigation of possible nontaxable sources for the money -- such as loans or gifts -- and does not find any nontaxable sources, the expenditures will then be assumed to be unreported income. It then becomes the taxpayer's burden to prove otherwise.

In an expenditures case, in addition to approving the existence of unreported income, the IRS must also prove that the individual acted willfully -- that is, that he intended to violate the tax laws -- in order to obtain a criminal conviction, or in order to impose a substantial civil fraud penalty. Where an individual sets up a secret offshore account, however, the IRS likely will take the position that that fact by itself establishes that the taxpayer acted willfully -- in order to conceal from the government his unreported income so as to avoid paying taxes on it.

In fact, the potential exposure is even much greater than this. Depending on the circumstances, the IRS may contend that an account holder violated federal money laundering statutes, conviction for which could result in extremely long terms of imprisonment.

What to do?

Accountants, attorneys and other financial advisors should be on alert that the IRS may initiate investigations of their clients if they have been found to have secret offshore accounts.

If a client is contacted by the IRS in connection with a secret offshore credit or debit card account, great care should be taken to preserve and assert the client's legal rights. Although it is often assumed by individuals who are approached by a government investigator that they should freely talk to the investigator in order to "explain" their situation, that often will turn out to be a disastrous mistake.

Statements given by an individual in such circumstances, often years after the events in question and without any advance warning or opportunity to review records, almost certainly will contain mistakes, no matter how intent the individual might be on being truthful. The investigating agent, however, will record all those statements and they may later be used against the individual to show that he lied in order to cover up his misdeeds.

As in any other type of white collar crime investigations, the potential targets of such investigations are best served by seeking competent and experienced legal representation at the earliest point in time. In such circumstances, counsel can insure that the client will assert all his legal rights and not inadvertently waive those rights and provide the government with crucial evidence against himself. Even where charges ultimately are brought, early competent representation will assist the client in obtaining the best deal possible from the government.

Indeed, where counsel is contacted before an individual is aware of any investigation, it may even be possible to avoid criminal prosecution entirely through an advance voluntary disclosure of tax misconduct.

Chad J. Muller and Farley P. Katz are partners with the law firm Strasburger & Price in San Antonio. They practice in the area of civil and criminal tax.

Copyright Family Guardian Fellowship

Last revision: August 14, 2009 08:09 AM
   Home  About  Contact This private system is NOT subject to monitoring