IRS Fears Strong Encryption

    The U.S. Internal Revenue Service is starting to get scared that it’s not going to be able to tax the Internet economy. Specifically it is worried that Americans using strong encryption software will start engaging in financial transactions in countries that don’t share financial data with the United States (or in fact, Americans who do business using strong encryption to hide the fact that assets and income actually belong to Americans).

    At a recent meeting of tax collection officials from around the world, U.S. Treasury Secretary Lawrence Summers pleaded for foreign governments to start taxing Americans citizens more.

Problems could arise from the increasing sophistication of Internet encryption codes that are established for valid reasons of commercial secrecy but can also be used to conceal relevant tax details from tax administration. In such a world, it will be easier for companies to avoid tax collectors by operating worldwide through websites based in jurisdictions that are unwilling to share taxpayer information.

    The best solution to solve this “problem,” said Summers, is for foreign governments to create rules to ensure that American citizens are taxed to death regardless of where in the world they do business.

    To further its ability to monitor Americans’ international financial transactions, the Clinton administration is pushing the International Counter-Money Laundry Act which allows the Justice Department to require banks to report suspicious financial transactions involving other countries. This is basically a re-hash of the “Know Your Customer” regulations that were proposed and then quashed by a public outcry. The Know Your Customer proposal would have required banks to report all suspicious transactions, while the current version limits that to international transactions.

    The government’s fears are probably well founded. Already millions of Americans either underreport their income to avoid taxes or simply don’t file tax returns altogether, not to mention the many people who work in the underground economy trading services for difficult-to-track cash. There can be little doubt that if there were a relatively easy, secure system to hide income and assets from the IRS, Americans would likely flock to such systems by the millions.


Financial privacy under attack? Declan McCullagh, Wired News, July 14, 2000.

Is encryption tax-protective? Declan McCullag, Wired News, July 15, 2000.

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