Vanderbilt Journal of Transnational Law

First Page



The United States system of income taxation is predicated upon the voluntary self-assessment and payment of tax. Voluntary compliance, in turn, depends upon the confidence of United States citizens that the taxation system is basically fair, that the tax burden essential to maintain the government is shared by all in proportion to their net income, and that those who cheat are discovered and prosecuted. Circumstances that allow certain taxpayers to escape their proper tax liability successfully tempt others to seek tax evasion devices for themselves, and, more importantly, demoralize the conscientious majority who pay their just share of taxes but also perceive the system as unfair. One cause of the widespread erosion of confidence in the equity of the United States income tax system is the recent spurt in tax evasion schemes utilizing foreign haven secrecy laws to escape detection by United States tax officials...

This Article will not explore these definitional refinements, but will focus on certain schemes at one end of the spectrum that are clearly illegal. To illustrate the flagrancy of international tax fraud schemes, the Article will first discuss one particular device: the use of false foreign addresses for the receipt of United States investment income that aids the evasion of tax liability by enabling United States residents to masquerade as foreign residents and foreign persons to pose as residents in preferentially-treated foreign jurisdictions. The Internal Revenue Code sections facilitating the successful operation of this device will be explored: (1) section 861 excludes from United States income tax all interest earned on deposits with United States banks and savings and loan institutions as long as that interest is paid to a foreign investor not doing business within the United States, and (2) sections 1441 and 1442 reduce or eliminate the United States thirty percent withholding tax on portfolio income remitted to residents of countries that have bilateral tax treaties with the United States. The Article next will examine the bank and commercial secrecy laws of representative countries to ascertain, in a broader context, the manner in which United States investigations of a variety of fraudulent tax evasion practices are blocked. The Article also will review and evaluate the recent major steps taken by the Treasury Department, the judiciary, and Congress to repulse this assault on the integrity of the tax system. Finally, the Article will conclude with recommendations for additional proposals to consider.