MARY DALRYMPLE AP Tax Writer
WASHINGTON (AP) IRS Commissioner Mark Everson told senators today that a trend toward a world economy helps wealthy taxpayers hide money in complicated transactions offshore, virtually invisible to tax agents. “We have real difficulties finding out what’s going on,” he said. “Our challenges are acute and ever-growing. Offshore abuses are a real problem.” Everson testified to the investigative subcommittee of the Senate Homeland Security and Governmental Affairs Committee, which concluded a yearlong study of offshore tax shelters. They concluded that offshore tax havens allow the wealthy to stash trillions of dollars, mostly impervious to tax, regulatory and law enforcement authorities. The panel said the havens allow Americans to avoid paying $40 billion to $70 billion in taxes each year, with the help of “an armada” of professional advisers. Everson said some of the abuses could be tempered if lawmakers changed laws that can protect shelter users from some penalties if an attorney gives a legal opinion in favor of the transaction. Integrity must be restored to taxpayers and the legal, accounting and financial services professionals that advise wealthy taxpayers, he said. “There is a basic issue of honesty.” One such adviser, profiled in a report the panel prepared for the hearing, wrote a virtual how-to manual for avoiding taxes by moving money offshore. Lawrence Turpen retired from his career in dentistry and wrote a book about protecting assets by putting them in offshore corporations that appear unconnected to clients whose money they held. He instructed his clients to be careful about privacy and avoid a paper trail connecting them to their offshore arrangements, but Turpen’s own computer held documents about many clients that fell into IRS hands under a search warrant. Both Turpen and the client pleaded guilty to tax-related crimes, and their case illustrates the common features of offshore schemes that the subcommittee explored.
The offshore industry uses countries considered tax havens because they promise secrecy and anonymity to people doing business there. The committee’s investigation examined offshore arrangements involving Belize, the British Virgin Islands, the Cayman Islands, the Isle of Man, Nevis and Panama. The arrangement typically starts with a promoter, someone who sells wealthy people on the advantages of moving money offshore and who recommends a country or service provider to those clients. In the offshore location, local providers help people set up offshore corporations and trusts that receive the money moved out of the United States. They fill out paperwork, pay appropriate fees and do business on behalf of the client. The corporations and trusts they create become the new owners of money and assets that the client moves offshore. Often, the service providers manage the trusts and corporations for a fee. They also hold paperwork offshore, while allowing the clients to continue controlling their money and assets. This wouldn’t work, the report said, without lawyers who provide guidance to clients and financial institutions that allow access in the United States to money stashed overseas through credit and debit cards. To address the problem, tax, securities and money laundering laws should be changed to presume that a U.S. citizen should be taxed on money in a trust or corporation in a country known to the Treasury Department to be a tax haven, said Sen. Carl Levin of Michigan, the top Democrat on the investigative subcommittee. That would put the burden on the taxpayer to prove the money should not be taxed. In another tax shelter, detailed in the investigators’ lengthy report, $2 billion in capital gains were sheltered from taxation in an arrangement known as POINT, or Personally Optimized Investment Transaction, which took advantage of offshore secrecy. Its promoters, Quellos Group LLC, created the tax shelter by making billions of dollars in securities transactions to generate billions of dollars in capital losses, but the transactions were all fake, the investigators concluded.They were nonetheless used by investors to offset their capital gains and erase taxes owed, and the government lost $300 million, the panel said. Jeffrey Greenstein, Quellos chief executive officer, said his company did not hide the arrangement but instead registered it with the IRS as a tax shelter. He said the transactions were not fabricated, and he called the committee report “unfair, one-sided and inaccurate.”