August 24, 2010 - Phil Hodgen

IRS pursuit of offshore accounts now via PayPal, credit cards

This is a reprise of an investigation method of a few years ago.  The IRS has revealed that it is chasing offshore accounts via credit cards and PayPal.

According to Tax Notes Today at 2010 TNT 163-2:

The IRS has opened three initiatives intended to uncover undisclosed offshore accounts, according to an official speaking at an American Law Institute-American Bar Association conference on August 20 in Chicago. John McDougal, an attorney in the IRS Office of Associate Chief Counsel (Small-Business/Self-Employed), said the initiatives have already produced John Doe summonses.

The Offshore Merchant Account Initiative uses the data stored by electronic payment processors, which are “usually totally innocent intermediaries who happen to have the information” that is subject to summonses if in the United States, McDougal said.

Offshore merchant accounts are especially prevalent among e-commerce businesses and members of high-risk industries, such as pornography and gambling, that domestic banks refuse to take as customers. Domestic businesses that already need to seek offshore banking arrangements often avail themselves of the potential for tax evasion, McDougal said.

For the electronic payments initiative, John Doe summonses have been sent to Internet payment portal PayPal. Like the electronic account processors, PayPal is “just a lead to the foreign account” from which a user transfers funds to make Internet purchases, McDougal explained.

This happened in 2000, when American Express and MasterCard were hit with Federal court orders to turn over data to the IRS. The IRS had a “Come to Jesus!” moment in 2003 with credit card holders called the Offshore Voluntary Compliance Initiative.

Pop quiz

The IRS knows how to rattle taxpayers. You don’t need to have an offshore account to have experienced that. It knows how to put the screws on U.S. companies to turn over data (American Express, MasterCard, PayPal). It knows how to put the screws on non-U.S. companies with U.S. presence (UBS).

I do not believe that the Treasury Department (policy poobahs), the IRS and Department of Justice (cops on the street) know how to assess the impact of their actions.

OK, class. Here’s your assignment. Let’s ask the common sense question. “If I make life expensive and risky for U.S. and non-U.S. financial institutions doing international business, then what will happen?” The first person pronoun is the Internal Revenue Service. It is a question hardly ever asked — and answered — in government circles. Apply common sense and write a 300 word essay, due Friday.

For those of you with offshore accounts

If you have undeclared offshore accounts you have to understand the landscape and your risks. Take action. Have a long term strategy. Obscurity is not a strategy.

Short term, you have some risks. Long term, you have to decide whether to sever all ties with the United States or not.

Americans Living Abroad Voluntary Disclosure