Entries Tagged 'Tax evasion' ↓

Today’s Tax Notes Today has a report from the UCLA Tax Controversy Institute on October 28, 2008.  For those of you spending way too much money on Lexis, the cite is 2008 TNT 211-7.

The article states:

In keeping with IRS Commissioner Douglas Shulman’s focus on international tax administration, fraud technical agents are for the first time being specially trained in the international area, said Beth Elfrey, IRS director of the Small Business/Self-Employed Division Office of Fraud/Bank Secrecy Act.

Elfrey, speaking at the October 28 UCLA Tax Controversy Institute in Beverly Hills, Calif., said foreign bank account report (FBAR) filings are up 90 percent over last year. The penalty for failure to file an FBAR is steep, she said — as high as 50 percent of the account balance in some instances.

Faris Fink, SB/SE’s newly appointed deputy commissioner, speaking October 29 at the American Institute of Certified Public Accountants conference in Washington, talked about the division’s intention to increase departmental interaction. “In SB/SE, we traditionally have not had a lot of interaction or involvement with international,” Fink said. “More and more we’re finding our taxpayers are involved in transactions that have an international flavor to them.” He said the division is responding by continuing its emphasis on the offshore compliance initiative, including the offshore credit card and private banking initiatives.

“We’re going to have to ramp up . . . our knowledge and our experience around how individuals use the international arena to shelter income,” Fink said. The division’s new international examination groups will be located in cities where the Service has detected a higher level of activity, Fink said.

Victor Song, deputy chief of the IRS Criminal Investigation (CI) Division, said at the UCLA conference that fiscal year 2009 priorities remain largely the same as last year, with a focus on Title 26 criminal cases. CI is looking at “working the largest crimes that we can in the most efficient amount of time,” Song said. On average, 80 percent of the cases CI pursues get publicity, he said.

The IRS has recently introduced the concept of automatic penalties if you file a late Form 5471.  See IRS letter to taxpayer on late filed Form 5471 (PDF).  Take that action and public comments as reported above as your sure-fire warning that things are going to REALLY crank down hard in the international arena.

Deliberate noncompliance (oh, let’s just call it lying, shall we?) has never worked well.  Accidental noncompliance (oh, let’s just call it “I forgot”, shall we?) will soon become expensive.

The evangelist in the tent is calling “Come to Jesus!“

There is a lot going on in the offshore tax evasion world these days.  I’ll start commenting a bit more on that in the upcoming days.  After all, we deal daily with offshore trusts, money in Switzerland, and all that fun stuff.

Hidden agendas?

It seems to me that a lot of the commentary about the “rich” (definitions vary) and taxation have a hidden agenda.  That agenda is “us vs. them” with a thin veneer over a lake of resentment.

Why do we tax?

The objective of a tax system is to gather money so the government can spend it.   Moral outrage is misplaced.

Why do people cheat on their taxes?

If you’re wondering why people hide money and don’t pay tax, think about these points:

1.  A small percentage of people will always cheat and lie. 

Bell curve, people! Just like a few people will break into cars and steal your stereo, there will be a few people who will hide money and lie about it to not pay taxes.  It’s there.  Live with it.  Set up appropriate systems but you’re going to have that background noise as long as humans are involved.

2.  Tax systems can encourage cheating and lying. 

How?  A couple of ways.  One is with penalties.  If you (metaphorically speaking) have the death penalty for all crimes from parking violations to murder, well, you’ve decreased the incentive to pay attention to penalties.

We do international tax stuff for humans and companies.  In this arena the compliance (translation = paperwork and forms you have to file) is so complex–and the penalties so draconian–that you’re essentially at the mercy of a tax auditor who can club you to death for accidental errors.

In other words, the pain differential between lying and trying to do the right thing?  It’s shrinking.  At the margin this increases the number of people who are willing to throw up their hands and not try to do the right thing.

3.  Tax rates encourage lying and cheating.

The higher the rates, the more likely you are to see scheming and tax evasion.  It is here that I see the Outrage and Wailing by commentators.  This is where I’m going to have to back up my hunches with reality, but here goes.

I’m guessing that it is a decision made at the margin.  Is it cheaper to pay the tax and sleep well at night?  Or is it cheaper to lie and live with the anxiety?

If this kind of marginal utility thinking is right, then a lower tax rate would encourage more people to live in the light rather than in the darkness.

Anecdotally I see that kind of thinking, particularly because of the capital gains tax rates.  People can–and do–say “Meh, I’m just going to sell and pay the tax because the rate is 15%.”  In California you have the 9.3% State income tax as well, so it pushes the cost closer to 25%.  People pay that.  I’m not sure they would think that way if the combined hit started to exceed 30%.  But that’s guessing.

Statement of bias

I favor vastly simpler tax systems, even though it would cost me most of my livelihood.

I favor much lower tax rates.  MUCH lower.  No carve-outs for people to take tax deductions here or get credits there.  Use the tax system to collect revenue only.  Don’t use the tax system as a method to promote specific types of economic behavior, and don’t use the tax system to engage in moral judgments (hint:  if the word “should” is in a sentence, you’re in bad shape).

A quick aside

Here’s the TaxProf’s post on this topic.  It triggered today’s post from me.

It has some statistics in it.  The statistics are claimed to be true, and the facts suggest a certain conclusion.  In fact the conclusion fairly well shouts out at you.

A Federal judge has issued an order allowing the IRS to proceed against UBS AG, in their never-ending quest to find tax evaders.

U.S. people with undisclosed Swiss bank accounts?  The bell tolls for thee. *

*Kinda ironic that the quote comes from John Donne’s poem that starts “No man is an island” when people think they can hide money in palm-fronded island paradises.

For those of you who have U.S. passports (or have permanent residency status AKA “green cards”), leaving the country just became a little more expensive.

We now have an exit tax–new Section 877A of the Internal Revenue Code.

The new law was signed on June 17, 2008. I’ll get a “plain English” explanation shortly. In the meantime, feel free to print off and read the Joint Committee on Taxation’s explanation. (Warning: massive PDF). The discussion you want to read starts on page 36.

The exit tax will raise an estimated $411 million in tax over the next 11 years, they think. (Sorry, the source is in Tax Notes Today, locked inside Lexis-Nexis. 2008 TNT 118-2 is the cite, if you want it. I couldn’t find the source of the estimate, which apparently was a Baucus/Grassley press release).

Comment #1: good luck with that.

Comment #2: peanuts, really.

The exit tax rules (new Internal Revenue Code Section 877A) are buried in a special law aimed at giving tax relief to people serving in the Armed Services.

Comment: this is a classic example of “for the children” politics.

June 30 is the deadline to file your annual “show and tell” about all the offshore bank accounts over which you have signature authority.  The IRS used a quaint 20th Century device called a “press release” to remind you about filing your disclosure form.

Form TD F 90-22.1 is what you use.  (Warning:   PDF).

The IRS FAQ about reporting foreign bank accounts is useful.  Read it if you have questions.

A bit of advice:  if you MIGHT be someone who has to file this form, and you get a brainstorm with a staggeringly clever trick so you don’t “technically” have to file–check your clever idea by talking to someone whose brain is not infected with your thinking.  :-)

Senator Carl Levin (D-Mich) introduced the Incorporation Transparency and Law Enforcement Assistance Act on May 1, 2008. This law (God help us all if it ever becomes law) would force States to determine the “beneficial owners” (the really-truly owners, not fakey-fakey owners) of corporations and LLCs.

Professor Bainbridge has commented on this. He’s way smarter than I’ll ever be. Go there for the reasoned analysis. Come back here for the rant.

<rant>

CURE IN SEARCH OF A DISEASE

This is a cure in search of a disease.

Senator Levin says this law will protect the United States from U.S. corporations being misused to commit terrorism, money laundering, tax evasion, or other misconduct.

I’d like to know how to do this, please. In my world everything is potentially visible to the government all the time.

If you have a reason to know who owns a corporation, you can get that information. No problems.

• Corporation owes you money? You’re suing the corporation, right? There’s this little thing called discovery.
• You’re the IRS? Don’t get me started. They already have plenty of clubs to beat this information out of you.
• You’re law enforcement? Don’t get me started.

What if you’re going to do a business transaction with a corporation? You think maybe there’s a skanky person who “really” owns the corporation.

Simple answer, easily solved without a Nanny State: you ask for the information, you get a personal guarantee from the people behind the corporation, or you don’t do the deal. See, all you need to be is an adult.

Yes, people are going to lie. They will lie you, to the IRS, to the FBI, to your mom. This proposed law won’t change anything. If someone is going to lie about a foreign bank account under threat of $250,000 fine or 5 years in prison (Form TD F 90-22.1), (warning: PDF) do you think Senator Levin’s new law is going to make the difference and scare them straight?

THE REAL BENEFIT OF THIS LAW?

So I guess I don’t see the added benefit to the government for collecting this data in terms of law enforcement. Well, except for the fact that the government slowly beats more data points out of us, randomly, so that some day in a fit of fiscal pointillism the government will see everything and will be able to tax everything.

I don’t think that’s Senator Levin’s motive.

Maybe he believes the bogeyman argument. “Look! Over there! Behind that tree! A terrorist!” I doubt he is that gullible.

So why is it proposed law on the table? Hmmm. Maybe because it is politically expedient during an election cycle?

NEW MINIMUM QUALIFICATION REQUIREMENT FOR SENATORS?

I propose a new entry requirement before someone is permitted to run for the Senate.

Before you run for election, you should have to own and operate a business for two years. If the business succeeds, you get to sleep in a warm, dry place every night and feed your kids. If the business fails, well, I’m so sorry.

The exercise of dealing with employment taxes and making sure that employees get their paychecks on time — that alone — just might be the sanity pill that we need.

</rant>

Sorry this post isn’t nuanced.