In Brief:

Offshore financial centers, i.e. institutions allowing U.S. citizens to hold assets in offshore accounts, continue to come under the intense scrutiny of U.S. law enforcement authorities, especially the I.R.S. The efforts of these agencies could result in the scrutiny of even legitimate offshore accounts which are timely reported to the government.

The changing face of money laundering. Increasingly money laundering is the province not of drug dealers and criminal enterprises, but rather people looking to offshore accounts to protect assets due to divorce, inheritance laws, bankruptcies, and potential malpractice suits. The I.R.S. estimates that approximately $70 billion of taxes are lost each year as a result of assets hidden by U.S. taxpayers in offshore accounts, helped in large part by the electronic world of Internet, debit cards, and wire transfers. 

The Senate is investigating money laundering; the Treasury Department is issuing warnings to countries suspected of promoting unfair tax havens. And as previously reported, the I.R.S. continues to audit and investigate taxpayers likely to make use of offshore accounts. And, in yet another recent case (this one taking place in Miami), the I.R.S. is looking into American Express and MasterCard accounts which are registered in the Caribbean, but which allow the customer to access their account through debit cards. The Organization for Economic Cooperation and Development, whose members are comprised of the world's wealthiest democracies, has taken aim at 35 jurisdictions for being unfair tax havens, has set a July 31 deadline for the jurisdictions to "clean up their act or face possible sanctions." Many Caribbean leaders have stated that their island nations are being singled out for what is essentially a global issue, and are finding support among conservative Republicans in Washington. But even as the U.S. government is pressuring offshore banks to "lift their veils of secrecy"," the reality is that U.S. banks are seldom asked to open their books to regulators and reveal details of their clients' finances, especially at the behest of a foreign government -- which is the position the U.S. government and I.R.S. would find themselves in.

A former Caribbean banker acknowledges that the motive behind opening offshore accounts almost always involve tax evasion. It is for this reason, coupled with the estimated lost taxes of $70 billion, that U.S. law enforcement agencies and the government itself is increasing the scrutiny of offshore accounts - including those that are properly reported. You should expect further investigations and developments in this area.
 

Recent developments:

Increased IRA and 401(k) contributions proposed. The House has passed a bill which proposes to increase the maximum IRA contribution (both traditional and Roth IRA's) from the current level of $2,000 to $5,000 beginning in 2005. Additional increases are also proposed for contributions to 401(k) accounts. The proposal is intended to spur savings as Americans save less than their counterparts in many other developed countries. It is estimated that the increased limits would cost the government $52 billion in tax revenues over the next ten (10) years.

FEMA payments not includible in income. The IRS has concluded that FEMA payments for living expenses and flood insurance are not includible in income.

Wrong answers plague IRS information services, but IRS asks for budget of $9 Billion. IRS workers gave incorrect information less than half the time to Treasury Department investigators posing as taxpayers, and more than one in three calls did not even get through to the IRS. The IRS has stated that steps are already under way to correct these problems. In the meantime, the IRS has announced that it is requesting a budget of $9.276 billion for fiscal year 2002, $580 million more than Congress provided for 2001.
 

Tax Quip: 
 

"Taxation is, in fact, the most difficult function of government and that against which their citizens are most apt to be refractory."