Ill Offshore Advisors Attracts IRS Scrutiny

February 7, 2003 ( - The Internal Revenue Service (IRS) is demanding $192 million in back-taxes from a hedge fund in connections with an alleged understatement of income.

Florida-based III Offshore Advisors is the target of the IRS’ ire in the latest move of a general tightening on hedge fund managers deferring taxes on offshore income, both by the IRS and the US Securities and Exchange Commission (SEC), according to a report by Financial Times.

In a letter quoted by the report, the IRS alleges III Offshore Advisors made profits of $201 million between 1994 and 1997.  However the hedge fund only reported an income of $9 million. In addition, the letter also points to what the IRS calls “an ingenious plan to accumulate tax-free income,” set up by Ill.

The $2.5-billion Ill, like other US-based hedge funds, defers taxes on the income it receives from its offshore investments.   Those funds are then reinvested back into the hedge fund, allowing the money to grow tax-free.

Previously, the IRS allowed the practice to go on without raising an eyebrow.   However, as the tax-free bandwagon became overloaded, the IRS became concerned as to the amount of money that has moved beyond its reach. In the case of Ill, the IRS claims the company did not do its paperwork properly. “III Offshore Advisors has not received any legal opinion, nor requested any Private Letter Rulings or any Technical Advice Memorandum from the Internal Revenue Service to defer the incentive fees earned, in accordance with the deferred compensation agreements,” the letter quoted by Financial Times went on to say.

III’s offshore management vehicle, responsible for the management of the III Fund and III Global hedge funds, is ultimately owned by Warren Mosler, Clifford Viner, Michael Reger, Vincent Ciaglia and Larry Carty, according to the Financial Times.