Table 4: Individual OVCI Applicants' Profession, Median Original AGI, and Median Adjustment to Original AGI for Tax Year 2001 (Filers and Nonfilers but not FBAR applicants)

A small number of taxpayers who applied to the OVCI program listed their occupations as secretary but

their incomes were each in excess of $1 million for each of the years 1999, 2000, and 2001.

b

Although a large number of applicants were from the banking/finance/insurance sector, a large number of

these applicants reported large losses on their tax returns. As a result, the median original AGI was relatively low.

Some occupations had more nonfilers apply to the OVCI program than filers, so for these cases the median original AGI was zero.

d

Seven applicants were identified as “deceased”, and we included these people in the "other" category. We did not include FBAR applicants in this table because, according to IRS officials, there is no adjustment to the FBAR applicants' original AGI. These applicants generally reported their offshore holdings on their original federal tax returns and incurred no additional taxes or interest owed. Because these applicants made up more than half of all applicants, if we included them in the table, the median adjustment to original AGI, taxes, and interest would all be zero.

Few Applicants Said They Used Promoters

Less than 16 percent of all OVCI applicants said they used a promoter." The services provided by promoters ranged from simple incorporation offshore to more elaborate schemes involving such things as bogus charities.

The relatively small percentage of OVCI applicants reporting use of a promoter may be due in part to the definition of a promoter used in the OVCI instructions. IRS defined a promoter as any party who "promoted or solicited the taxpayer's use of offshore payment cards or offshore financial arrangements." Some taxpayers may have learned about offshore arrangements from friends, an attorney, a paid preparer, or others. However, IRS did not record detailed information in the OVCI database about how the taxpayers learned about the offshore arrangement and therefore we do not know the extent to which taxpayers learned of the offshore arrangement from these individuals. If OVCI applicants did learn of the arrangements from these individuals, they may not have considered them to be promoters under IRS's promoter definition, particularly if they did not feel that the individual actively sought them out to encourage or convince them to use an offshore arrangement. IRS did record information on whether the OVCI applicants used a paid preparer. For example, 326 of the 350 tax year 2001 OVCI applicants, or 93 percent, said that a paid preparer prepared their original tax return.

Recognizing that the data may change as IRS completes additional investigations on promoters, taxpayers who said they used a promoter had similar median original AGIs to those who reported not using a promoter. For example, in 2001, those who said they used a promoter reported a median original AGI of about $41,000, while those applicants who said they did not use a promoter reported a median original AGI of about $39,000.

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We cannot be precise about the number of taxpayers who said they used a promoter. IRS officials said that they had identified 269 potential promoters from 140 participants. IRS has opened investigations into 53 but does not have sufficient information yet on the remainder to conclude whether they are bona fide promoters. In addition, IRS compiled its statistics on the number of taxpayers and associated business entities that identified promoters-140-but not the number of unique taxpayers who identified promoters.

For those taxpayers who said they used a promoter, the fees they paid those promoters varied from nothing to a high of $85,000 for the promoter's services.

One possible explanation for the range in fees is that promoters offer different services, from off-the-rack services to custom-tailored arrangements. We visited 25 Web sites maintained by individuals or companies promoting offshore investments to gain a better understanding of the type and cost of the services they provide. The Web sites were judgmentally selected to ensure the sample included a variety of geographic locations. Of the 25 Web sites we visited, 19 offered off-the-shelf offshore companies or package deals. One company advertised that taxpayers could incorporate offshore within the next day by buying an off-the-shelf company, which is an existing company that has been set up by the promoter. At a cost of $1,500, the taxpayer would receive a package of services that would include an agent and local office, mail forwarding, nominee corporate directors and officers, offshore credit card applications, banking forms, and the payment of all government fees. These companies are not legitimate business enterprises. Instead, they exist strictly to provide taxpayers a way to quickly and easily move money offshore and repatriate it without declaring that money to IRS.

Several taxpayers who used promoters of this type to avoid paying taxes appeared to be scammed themselves. For example:

• One taxpayer was persuaded by a promoter to create an offshore corporation. The taxpayer also opened an offshore bank account and gave the promoter over $50,000 in cash to deposit into the account. The promoter told the taxpayer that the money was stolen before it was ever deposited in the account, leaving the taxpayer with practically nothing.

Another taxpayer invested over $30,000 in an offshore investment opportunity that promised a return of 20 percent per year. The taxpayer got the money he/she invested through credit card advances. The taxpayer received returns on the

investment for a while, but the payments soon stopped. The taxpayer said he/she still owes money on the credit cards.

Other promoters' schemes are more complicated and targeted toward wealthy taxpayers interested in avoiding taxes. Figure 9 is a hypothetical example based on an actual case of how a promoter can help taxpayers repeatedly send money offshore and repatriate it later, avoiding hundreds of thousands of dollars in taxes. We calculated the tax savings below using a popular tax software program.

Figure 9: Hypothetical Example of a Self-Employed Taxpayer Filing Singly and Filing a Schedule C (for Profit and Loss from a Sole Proprietorship Business)

In our hypothetical example, the self-employed taxpayer reports $3 million in annual business income on his Schedule C (the form attached to a tax return that is used to calculate profit or loss for a sole proprietor business). The first year, the taxpayer hires the promoter to set up an offshore scheme for a fee of $70,000 for financial planning services and tax preparation. The promoter creates a bogus offshore charity that actually has no charitable activity and a corollary offshore business entity. The taxpayer controls both organizations by sitting on the board of directors. The taxpayer then sends

money offshore, basically to himself, through a $500,000 “donation" to the offshore charity, which in turn sends the money to the offshore business entity. The offshore business entity then gives the taxpayer a $500,000 “home equity loan," which actually repatriates that amount to the taxpayer's domestic bank account. Throughout the year, the taxpayer sends monthly mortgage payments to the offshore business entity. The taxpayer can then deduct the promoter's fees as a business expense on his Schedule C and the charitable donation and mortgage interest as part of his itemized deductions on his Schedule A. These false deductions would reduce the taxpayer's tax liability from about $1.1 million to about $920,000, a savings of about $180,000.

In the second year, the promoter would charge our hypothetical taxpayer less-only $10,000 for tax preparation services. The taxpayer can send the $500,000, repatriated as a home equity loan, back to the offshore charity as a donation and continue to send mortgage payments offshore. In a new wrinkle, however, the offshore business entity has purchased a luxury automobile worth about $74,000 and leased it back to the taxpayer. The taxpayer would have use of the automobile and would send lease payments to the offshore business entity. On his tax return for the second year, the taxpayer can deduct his charitable contribution of $500,000, the interest on the home loan, the lease payments, and promoter fees as business expenses. These false deductions would reduce the taxpayer's taxes by about $163,000.

Therefore, in return for promoter fees of about $80,000, the taxpayer has avoided more than $340,000 in taxes in just these 2 years. The taxpayer received more than a 300 percent return on his money, a high return when compared with those on other traditional investments. In addition, the taxpayer receives a level of asset protection from potential creditors. If, at some time, creditors were to pursue the taxpayer to collect money, they may be unable to reach the assets because it would appear that his house is heavily mortgaged and that his expensive car is leased.

There are many more options for transferring money offshore and then repatriating it. For example, according to some promoters' Web sites, an offshore charity could award a