Panama Papers Point to Tax Evasion
It was quite a revelation when leaked documents, made public in April, showed that Mossack Fonseca, a Panamanian law firm, had helped 14,000 clients worldwide create offshore accounts to conceal assets or dodge taxes. On Monday, a report by The Times found that there were at least 2,400 clients based in the United States over the past decade.
Some clients are sure to argue that the tactics used were legal forms of tax avoidance, not illegal tax evasion. And in some instances that is true. Many of the transactions examined by The Times were not illegal, including the use of offshore accounts to set up a business overseas. But many of the transactions are extremely suspicious and demand investigation and, if warranted, prosecution by federal authorities.
At its most basic, the law requires American citizens to disclose their foreign holdings and pay any taxes on capital gains, interest and dividends earned on those holdings. Noncompliance with the law is rampant: Unpaid taxes on foreign accounts are estimated at $40 billion to $70 billion a year.
Emails and other correspondence between Mossack Fonseca and some of its American clients discuss efforts to conceal assets and evade taxes. In one exchange, a citizen in Washington State asked the firm how to invest money in Panama without the United States government knowing anything about it. Instead of telling the potential client that that would be illegal, the firm wrote back that it had “effective solutions” for the problem, involving interlocking and anonymous offshore accounts, a private foundation and a shell corporation.
Those tactics appear to have been aimed at evading taxes on investment income. The strategies became even more complex when the goal was to funnel money to children without paying gift or estate taxes that are usually prompted by large transfers.
One of the multimillionaires described in the leaked papers and in The Times report, William Ponsoldt, used a foundation and eight shell companies — often with Mossack Fonseca employees as officers — in part to shift money to his two grown children. Without seeing Mr. Ponsoldt’s tax returns, it is impossible to know if he broke the law. (The Ponsoldts would not comment when contacted by The Times.) What is known is that complex offshore structures are commonly used by individuals to hide their assets and evade federal taxes.
The government has the authority to audit the tax returns of the Americans who appear in the Panama Papers, but it would need help from the Republican-led Congress to do so. Congress has long deprived the Internal Revenue Service of adequate resources. Many of the audits would be routine, because the taxpayers in question would have nothing to hide. But audits that find fraud and evasion would be bombshells. At stake is more than revenue to run the government; also at stake is faith in the ability of government and its institutions to ensure a rule of law.