Senate Pushes IRS to Focus on the Cayman Islands

On July 24, 2008, the GAO testified before U.S. Senate Committee on Finance about how the Cayman Islands attact those seeking “tax minimization.” GAO focused on Ugland House, a five story building located on Grand Cayman Island and owned by the international law firm of Maples and Calder. Almost 19,000 businesses entities use Ugland House as their registered office to take advantage of the Caymans tax-free status.

Senator Kent Conrad criticized the IRS for not taking the problem seriously. The Senate had previously investigated Ugland House in 2004, when more than 12,000 companies listed it as their business address. Senator Max Baucus, committee chair, commented, “Remarkably, in the last four years, the Ugland House has found room for 6,000 new tenants, without even adding a new floor.

Frank Ng of the IRS responded that the Service has dedicated 1500 employees to the international tax enforcement problem. Ng said that offshore havens, like the Caymans, cost U.S. tax payers billions of dollars in lost tax revenue.

GAO’s report cited several enforcement challenges faced by the U.S. Government. Primarily, there is no third party reporting of transactions, so the government relies on tax payers to self report.

The Cayman Island situation represents an ideal situation for the right whistleblower to come forward. The Senate wants the tax loss addressed, and other than whistleblowers, the Service doesn’t have a lot of mechanisms through which it can identify tax fraud. New IRS personnel are being assigned specifically to overseas tax enforcement. Some knowledgeable whistleblowers have already provided information, but clearly, the IRS needs more help.