Select few dodge taxes via offshore `legal black box'

August 11, 2006|By MARGIE BURNS

Even as the U.S. budget deficit and the national debt gallop toward the breaking point, the government allows high-net-worth individuals to dodge taxes owed to the U.S. Treasury by creating sham trusts and shell corporations in the Caymans and elsewhere.

More than $1 trillion has moved offshore, illegally evading from $40 billion to $70 billion in U.S. taxes yearly.

While most U.S. citizens have payroll taxes and federal and state income tax automatically withheld from their paychecks or sweat the details on their tax returns, a select few spend millions on high-dollar tax professionals to create what Sen. Carl Levin, a Michigan Democrat, calls "a legal black box that allows them to hide assets, mask who controls them, and obscure how their assets are used."

An investigation, conducted for more than a year by the Permanent Subcommittee on Investigations, exposes an array of illegalities to move income and capital gains offshore.

Critical to these schemes, according to the report, are offshore tax havens such as the Cayman Islands and the Isle of Man, which offer financial secrecy with scant regulation. Also key is a cadre of "tax attorneys, accountants, bankers, brokers, corporate service providers, and trust administrators" aggressively promoting the offshore jurisdictions, the investigation found.

The 370-page report, Tax Haven Abuses: The Enablers, the Tools and Secrecy, with equally thick evidence exhibits, was released this month in conjunction with a five-hour Senate hearing. The most elaborate offshore operations reviewed were those of Sam and Charles Wyly, owners of the chain of Michaels Stores Inc. who funded a previously unknown environmental group that opposed the candidacy of Sen. John McCain, an Arizona Republican, during the 2000 presidential election campaign.

According to the report, from 1992 to 2005, the Wylys, of Dallas, transferred about $190 million in compensation to 58 trusts and shell corporations. The Wylys, who declined to testify, invoked their Fifth Amendment right through their lawyer.

Internal Revenue Service Commissioner Mark W. Everson told the committee that money siphoned from the Treasury via offshore tax havens "runs into the tens of billions each year." One witness, Haim Saban of Mighty Morphin Power Rangers fame, testified that he paid about $50 million in fees to professionals to acquire $1.5 billion in tax reductions. Mr. Saban is currently repaying taxes with interest and penalties.

Tactics used to evade taxes include establishing foreign trusts that are not actually independent and forming island shell corporations and limited liability companies without actual assets. Losses, rather than profit, are the goal. Assets are moved offshore via phony loans, cashless purchases, and reciprocal billing schemes. Phony transactions are made genuinely complicated, creating a "spaghetti bowl" of financial interactions difficult to unravel.

Sen. Norm Coleman, a Minnesota Republican, who was chairing the hearing, said tax havens have become a "Wild West" of financial abuses. "Tax-driven," yes. Rawhide and buckskin, no. Notwithstanding the defiance of law, the heroism here pertains to Senator Levin and to the committee staff that invested months of work in an investigation.

No argument can be made that this situation is necessary. Reuven Avi-Yonah, a tax law expert at the University of Michigan Law School, pointed out that poor residents of these island nations are not the people receiving large fees to establish offshore tax structures. "It is likely that most of the tax havens would see the welfare of their own residents improve as they wean themselves from dependence on the offshore sector," he testified.

More to the point, he said the U.S. could easily end tax deductibility and tax exemptions for offshore assets: "We could close up the tax havens overnight or within a week."

Legislation introduced last year by Senators Levin and Coleman would require the Treasury secretary to identify tax havens that don't cooperate with U.S. tax enforcement. It also would eliminate tax benefits for income in those locales - reforms that are long overdue. But it remains to be seen whether a Republican-dominated Congress can bring itself to better police the abuses of the tax-shelter industry.

Margie Burns is a freelance writer in the Washington area who teaches as an adjunct in English at University of Maryland, Baltimore County. Her e-mail is Her blog is at www.margieburns. com.

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