The New Global Hunt for Tax Cheats

By forming multinational investigative teams, the IRS and other tax collectors are cracking down on evaders and giving new meaning to globalization

by Keith Epstein and Mark Scott

German Chancellor Angela Merkel and the Prime Minister of Liechtenstein Otmar Hasler give a joint press conference at the Chancellory in Berlin on February 20, 2008.

Government authorities from Australia to the U.S. are hunting big game together. Their prey? Wealthy tax evaders—as well as the asset managers, banks, and accountants who help prosperous people conceal cash in offshore bank accounts. For decades, globalization has afforded an edge to tax cheats. Now it's working for the tax cops, too.

Buoyed by new multinational investigative teams, agreements with banks to open once-secret records, tougher penalties for cheats and third parties, and a thirst for billions of dollars in recoverable revenue, the new globe-spanning tax man has got the world's mega-rich worried they could run afoul of the mounting crackdown.

With so much money at stake, it's no wonder the U.S. Internal Revenue Service, Germany's Bundesministerium der Finanzen, Britain's Her Majesty's Revenue & Customs, and other international colleagues are eager to nab wealthy tax evaders. Almost $6 trillion is estimated to be hidden from tax authorities across the globe—Germany's central bank suggests $775 billion in German assets alone have been secreted out of the country. In the U.S., the IRS reckons $295 billion of potential tax revenue goes uncollected—much of it because of underreported income. With governmental budgets strained everywhere, leaders are eager to mop up those missing payments.

A Collaborative Effort

To close this "tax gap," U.S. investigators and their comrades overseas are cooperating as never before. Since the September 11 terrorist attacks, tracking money movements has become a priority. In response, law enforcement and banks have started to share more information about possible tax evaders. Governments also realize they have a lot to gain from stiffer penalties that return more money to underfilled coffers.

"There's a lot of offshore tax evasion, so governments are trying to find tools to combat that," says Grace Perez-Navarro, deputy director of tax policy and administration at the Paris-based Organisation for Economic Co-operation & Development (OECD). "Governments realized there was greater value in working multilaterally."

Cross-border collaboration has become a buzzword in global law enforcement circles. Under an OECD-negotiated treaty, 19 countries, including states as diverse as the U.S., Italy, and Azerbaijan now can prosecute tax evaders within their jurisdictions on behalf of other signatory countries. The European Union passed a similar law in 2000, while Brazil, India, and South Africa began cooperating with each other to identify suspect transactions in 2006. Their targets typically conceal assets in the roughly 40 nations generally seen as tax havens, which are analyzed routinely by international organizations such as the OECD and the International Monetary Fund.

The IRS Joins Forces

These days, an investigator following a lead need not even cross a border for help from his international colleagues: He or she merely has to walk down the hallway. Since 2004 tax shelter sleuths from five countries—the U.S., Britain, Australia, Japan, and Canada—have shared work space, tactics, and information in a joint office at IRS headquarters in Washington. The success of the operation led to its expansion last year, including the opening of a London-based outpost at Her Majesty's Revenue & Customs.

The physical setup of this so-called Joint International Tax Shelter Information Centre reflects the sensitivity of the work. Each member of the unit—which is physically separated from the rest of the IRS—has a separate, closed office, allowing for confidential communication with counterparts back home, as well as discreet one-on-one conversations with local colleagues and the IRS. "The office space is configured in a manner that reflects the critical need to protect the privacy of taxpayer information," according to an IRS spokesman.