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Information Reporting on foreign depositors in US banks–Florida’s GOP delegation shamefully supports tax evasion facilitation

by Linda Beale
crossposted with Ataxingmatter

Information Reporting on foreign depositors in US banks–Florida’s GOP delegation shamefully supports tax evasion facilitation

Many wealthy Americans have taken advantage of banking secrecy in other countries, particularly Switzerland, to hide their assets and income from the United States, thus avoiding paying their fair share of taxes on their riches.  That practice became somewhat harder when reports on American accountholders became available to the government and the media were filled with stories of Swiss bankers for UBS carrying diamonds in tubes of toothpaste for their wealthy US clients, in order to help them evade US income tax laws.  The government instituted a voluntary disclosure program that permitted Americans with foreign accounts to come forward, at a relatively low penalty cost compared to the charges that could be assessed against them (including potentially criminal tax fraud charges).  When that program ended after thousands had voluntarily come forward, a new program (with a 25% penalty rather than the former program’s 20% penalty) was instituted and is currently ongoing.  The result of the UBS episode was a deferred prosecution and a final agreement to reveal the names of about 4500 accountholders, presumably the largest accounts and the most likely to involve fraudulent tax evasion.  At the same time, there was some progress on the attempt to get offshore banking secrecy jurisdictions to be more open and transparent and to participate more readily in tax information exchange programs, so that it would be harder for US taxpayers to evade their tax obligations by hiding their assets offshore in those jurisdictions.  All this is praiseworthy, though there is still considerable progress to be made before we can conclude that it is generally difficult for the wealthy to hide their assets from the US tax collectors.

What is perhaps even more interesting is the fact that the US is a tax haven for the wealthy of other countries.  The US is a tax haven in part because of the withholding exemption for “portfolio” interest–allowing foreigners to earn income by making deposits in our banks without taxation.  We have also not required banks to provide information reporting on that income–so that those foreigners can receive income in the US and avoid paying appropriate taxes on it back in their home countries.  This will change under a proposed regulation issued by the Treasury department in a move to make the US more forthcoming in tax information exchanges with other countries in hopes of reciprocity.  See  IRB 2011-8 regarding the new information reporting requirement under Section 6049 (REG-146097-09) (requiring information reporting for bank deposit interest payable to nonresident alien individuals).  The notice of proposed regulations includes the following explanation of the need for the change:

This extension is appropriate for several reasons. First, since the 2002 proposed regulations [which limited information reporting to accounts of nonresident aliens from a particular list of countries] were released, there is a growing global consensus regarding the importance of cooperative information exchange for tax purposes that has developed. Significant agreements have been reached on international standards for the exchange of information, including, for example, the understanding that information exchange will not be limited by bank secrecy or the absence of a domestic tax interest. Second, requiring routine reporting to the IRS of all U.S. bank deposit interest paid to any nonresident alien individual will further strengthen the United States exchange of information program, consistent with adequate provisions for reciprocity, usability, and confidentiality in respect of this information. Finally, this extension will help to improve voluntary compliance by U.S. taxpayers by making it more difficult to avoid the U.S. information reporting system (such as through false claims of foreign status).

This increase in information reporting is appropriate, if we want other countries to reciprocate and make it easier for us to catch our own tax cheats.  But the current neo-conservative GOP members of Congress seem to think tax cheating against other countries is just fine, so long as their big business buddies can make money off it.  See, e.g., this letter from the Flordia GOP delegation in the House regarding their opposition to these proposed rules: Posey leads delegation effort to stop harmful IRS regulation (website of House Republican representative William Posey).  What’s the argument in favor of taking no action to ensure that US banks aren’t helping foreigners evade their home taxes?  Seems to me it boils down to a narrow-minded self-interest that is willing to sacrifice global cooperation and reasonableness in favor of the profits of Florida banks.  The Florida Republican delegation claims that reporting on the assets held will lead foreign depositors to take all of the assets out of Florida’s banks, and their “worry” is that there will therefore be less money available for lending to legitimate US businesses.

These arguments seem extreme to me.   First, the arguments assume that all of those foreign deposits are sitting in US banks solely for tax evasion purposes.  They disregard the many other reasons that US banks may provide a positive choice for foreign depositors, including the stability of the US system in a world of highly volatile banking pressures, especially as European banks come into question because of the debt crises in Greek, Portugal and Spain; the lack of significant volatility compared to home country banks; or the general security of US deposits compared to the threat of strongman takeover in some third world countries.  Second, we’d have to assume that there isn’t a pure economic advantage in having assets in US banks compared to home country banks–whether from higher interest rates or easier transfer and liquidity provisions.  And of course, to the extent that the rationale for the deposit being held in US banks is to facilitate tax evasion, we’d have to conclude that it was reasonable for US banks to profit from helping foreigners be tax cheats in their foreign countries.

That last argument is especially worrisome, because it can easily be turned against us to justify banking secrecy in other jurisdictions that permit US taxpayers to avoid US taxes.  Maybe that’s the point for these GOP legislators–as a party beholden to the wealthy elite that has garnered most of the advantages of productivity gains over the last decades, they may well have lost their ability to comprehend the importance of tax compliance.  As they push for corporate tax breaks while insisting that the country is “broke”, they are essentially arguing that they don’t care about ordinary Americans.  Being against responsible measures to assure that the US banks don’t act as facilitators for other countries’ taxpayers to avoid their tax obligation fits well with that view.  Shame on them.

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Audit rates for the rich increasing–about time

by Linda Beale Audit rates for the rich increasing–about time

crossposted with Ataxingmatter

Note to readers:  sorry for the long absence again–personal circumstances prevented my blogging for the last several weeks.  I hope that I can again resume regular blogging now, but do apologize for the absence.

The IRS recently released its 2010 Data Book, which describes the agency’s activities for the 2010 FY ending September 30, 2010.

One important part of the data revealed is a much-needed focus on the compliance of wealthy taxpayers.  IRS Commission Doug Shulman admitted in late 2009 that the agency needed to shift its focus to pay more attention to high-net-worth individuals–at least in part to reassure ordinary Americans that the rich weren’t able to avoid compliance (i.e., the idea that they might be able to avoid paying taxes simply because they had lots of money and could seek out tax shelters unavailable to the rest of us).  The IRS created a group within the agency focused on “global high wealth” individuals–those with $10 million or more.  Plans for the group required increased audits as a way to call attention to the problems and for the agency to teach itself more about the ways that these high-wealth individuals maintain their wealth and receive their income.  The Data Book shows that the IRS audited 18.4% of those high-income taxpayers in FY 2010, up considerably from the rate of 10.6% the prior fiscal year.

The release describing the databooks highlights the following information–including the fact that tax revenues are down compared to prior years.

During fiscal year 2010, the IRS collected $2.3 trillion in revenue, and processed 230 million returns. More than 116 million returns, including almost 70 percent of individual income tax returns, were filed electronically. More than 119 million individual income tax return filers received a tax refund, totaling $358 billion. In fiscal year 2010, IRS spent an average of 53 cents to collect each $100 of tax revenue.

The IRS examined more than 1.5 million individual income tax returns and nearly 30,000 returns filed by corporations, excluding S corporations. The IRS provided taxpayer assistance through 305 million visits to and assisted more than 78 million taxpayers through its telephone helpline or at walk-in sites.

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HEALTH CARE Thoughts: IRS resources

HEALTH CARE thoughts: The Taxpayer Advocate and others are unhappy

National Taxpayer Advocate Nina Olson is reported to be unhappy about the major IRS role in the new health care regime. Olsen believes the IRS is already overworked (she used “overtaxed” in her annual report issued this month, a great pun) and needs more money and time in order to do the job.

“Obamacare” (PPACA) requires the IRS to create an entirely new enforcement and penalty system, while the Service struggles to deal with such programs as the new home buyers credit, not to mention the regular work burying the agency.

Estimates of resource needs vary, and nothing is very concrete yet, but certainly a substantial increase in manpower and infrastructure will be necessary, very soon (and the IRS never moves very fast).

Then it gets worse.

Obamacare includes various add-ons, one of which will require additional Forms 1099 for supplies purchased to be filed by millions of businesses and entities and then sent to hundreds of thousands of businesses and entities and copied to the IRS so everything can be matched. This is supposed to minimize the “tax gap” and cut down tax evasion.

(For example, I will have to send a 1099 every year to Staples.)

Problem is, Congress clearly does not understand how tax evasion really occurs and this will distract the IRS from more important work, and clog the processing capabilities for an eternity.

(I am quite certain Staples is already reporting my purchases.)

In a strange twist, credit card purchases are apparently exempt. This could be because credit cards will be traced via another route (worrisome) but more likely because some bank lobbyists got inside the sausage factory (so I could eliminate the 1099 to Staples by using my credit card).

The story of the health care reform bill is just getting started, and lots of problems are ahead.

Tom aka Rusty Rustbelt

Rdan here…Linda Beale adds a comment I lifted from an e-mail:

Its no secret that the IRS Is overtaxed—its becoming the primary agency for all kinds of jobs—tax collection, sure, but also health, social security, environmental, aging generally…..

and as for the 1099s, yes, that is another paperwork mountain that will go to the IRS. Fine if it is all computerized and matched, but that may be a big if.

The problem with most enforcement, these days, is that it takes quite an effort to do anything to catch up with all the effort that is being put into nonenforcement.

Linda M. Beale

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