Panama Due Diligence Investigations
A Panama Due Diligence Investigation is a type of United States tax audit in which an Internal Revenue Service (IRS) agent conducts a detailed review of the taxpayer's business transactions and financial records to determine whether he or she owes additional tax. The agency uses this process as an opportunity to learn more about the taxpayer, his or her dealings, and other potential areas for probing. Panama is one country mentioned in audits as having been named by taxpayers in order to conceal assets that may be taxable by U.S. law. There are other countries that have been used for this purpose, including the Caribbean island state of Antigua, as well as the Bahamas and others.
Although the practice is designed to uncover hidden assets, the IRS has occasionally used the information from an audit to start a criminal investigation. Such investigations may be pursued by the agency in collaboration with other government agencies, such as state and federal prosecutors. The scope of an investigation is determined by prosecutors based on factors such as a suspected tax crime (fraud), international money laundering or drug trafficking: All of which can be considered serious crimes that could result in prison time if found guilty.
In order to determine whether an audit will be conducted, the IRS has access to and the ability to review information from third parties. Third parties, such as banks, may be subject to a "John Doe" summons or similar order that obligates them to hand over records regarding transactions with a suspected tax offender. The agency can also conduct surveillance of employees in order to determine their relationship with their employer and knowledge of any additional concealed income. IRS agents also seek additional information by asking questions during an audit, which can include questions about real estate holdings in Panama.
In 2006, the U.S. Treasury Department estimated that $11 billion in offshore assets were held by Americans, and that $195 billion in U.S. assets were held overseas: These estimates are considered to be overly optimistic, as the estimates do not take into account the additional $500 billion which could be hidden off-shore by wealthy individuals with access to more sophisticated methods of evading taxation.
The IRS Panama program is intended to collect unpaid taxes from the rich and famous who evade paying their taxes or secretly hold their wealth offshore. The program was designated specifically to pinpoint the financial habits of the rich and famous, and has been described as a "low-risk" means of generating tax revenue for the U.S. Government which, combined with repatriated taxes from these individuals, could equal the taxes gained from high-risk offshore criminal investigations such as those of Al Capone.
The IRS Panama program has been compared to that used to target celebrities such as Nicolas Cage who, in 2009, was found to owe over $6 million for tax evasion after an investigation by the IRS uncovered undeclared income on his personal returns relating to his multimillion-dollar property portfolio, including a $10.5 million house in The Bahamas and other real estate holdings located in Nevada.
Another celebrity to have been caught up in a Panama investigation was the former football star Michael Vick, who was investigated after allegedly using a Panamanian shell company as part of his multi-million dollar dog-fighting ring. This investigation was initiated based on information provided to the IRS by a cooperating witness and Vick's own admissions of tax evasion relating to undeclared business income.
In 2010, Pulitzer Prize-winning author David Cay Johnston investigated in his book "Perfectly Legal" the methods that are used by corporations and wealthy individuals such as hedge fund managers to avoid paying taxes on their offshore income. Johnston found that until recently it could cost as much or more for corporations or individuals to file their taxes in a U.S. court than it would to pay a premium offshore tax preparer.
As of October 2011, the IRS filed seven Panama-related criminal cases against individuals and corporations. Other governments have similarly used tax audits and grand juries to pursue their own investigations into individuals suspected of evading or concealing assets in foreign countries. In 2007, an official from the Japanese Ministry of Finance stated that their government was investigating the existence of thousands of U.S.-owned companies in Japan that were listed as being on lease to overseas firms based in the Cayman Islands, Liechtenstein, Luxembourg or Switzerland, all states where banking secrecy laws permit such business structures.
Budget cuts and hiring freezes have been significant factors in the IRS' failure to fully investigate offshore tax crimes. In 2007, Congress reduced the IRS budget by $350 million and instructed it to find ways to reduce expenditures by $300 million a year until 2012. The agency was also instructed to complete a series of reviews known as Code Red, a program aimed at ensuring that taxpayers with high incomes file accurate tax returns and do not attempt to hide income or assets in offshore accounts. This is intended to be accomplished by increasing the number of offshore cases reviewed each month from 160,000 cases per year (October 2006) to 200,000 cases per month in 2010.
Since the IRS was given this directive, they have not been able to meet the increased demand. By January 2009, they had only reviewed about one third of the cases assigned for review using methods that include interviews, correspondence and reports from other agencies such as the State Department and U.S. State Department–run Offices of Economic Opportunity (now known as USAID), all of which are designed to gather information about possible criminal tax evasion by wealthy individuals and corporations that hold assets offshore.
Coming into force in 2003, the American Jobs Creation Act created new funding for tax law enforcement by increasing penalties for offshore tax evasion and providing prosecution assistance to foreign governments investigating suspected offshore tax violations. Despite these new resources and the increased funding for tax auditors, criminal violations of offshore tax laws were prosecuted for only a small fraction of the number of cases that have been developed by the IRS, which have been estimated at 35 to 50 thousand potential criminal tax cases over the last decade.
Following a 2007 report made by CBS news on several offshore income tax evasion stories, a senior IRS official was recorded stating that there was "no political will" in Congress to prosecute offshore accounts because it would unfairly affect some wealthy Americans.
According to analysis by Bloomberg News, there has been an increase in reporting of unreported overseas bank accounts since the beginning of 2009. This has led to the U.S Department of Justice (DOJ) bringing over 900 criminal tax cases in 2009 and over 1000 criminal tax cases in 2010, with the DOJ reporting that its criminal division is effectively being decimated by the huge increase in offshore criminal cases.
The DOJ expects to bring at least 1500 criminal tax cases for 2011. Assistant Attorney General Kathryn Kenealy stated that "one of the best antidotes to tax evasion is being able to prosecute those who are hiding money offshore."
In addition, recent reports published by American Banker and Bloomberg suggest that there has been a threefold increase in voluntary disclosures to foreign governments following IRS outreach programs, as compared with 2008 disclosures.
Conclusion
International tax evasion is a serious crime that is estimated to cost over $50 billion annually in lost tax revenue for the U.S. government, and it has been observed that if the funds of American corporations were repatriated (i.e., brought back from overseas to the United States) to pay for U.S. infrastructure, then nearly 100% of it would be used for productive purposes such as job creation and domestic business expansion, compared with less than 50% of similar funds that are currently being held overseas. Additionally, if the money currently being held offshore was moved back by corporations this would stimulate demand for goods produced in the United States and therefore increase economic growth.