Is True Tax Reform Likely in 2017?

Is true Tax Reform likely in 2017?

As recently released (See USA Today Article, and White House website), the President would like to pass a tax cut package.  The tax reform proposed by the President plans on addressing the following changes:

  1. reduce the top rate on business income to 15 percent, from the current 35 percent rate on corporate income and 39.6 percent rate for other businesses;
  2. cut individual income tax rates; 
  3. raise the standard deduction; abolish the alternative minimum tax (which snagged Trump for over $30 million in 2005, according to tax return data leaked a few weeks ago); and
  4. abolish the estate tax.

Analysis of the Plan

See this article by William Gale, Hillary Gelfond and Aaron Krupkin of the Brookings Institute, which attempts to analyze the President’s Tax proposals.  Their analysis reflects 4 problems of the Trump Tax Reform Plan, as they see it:

  1. The Trump plan would balloon the federal budget deficit.  The article cites an analysis of the Trump campaign’s tax policy plan nu the Tax Policy Center that estimates a $7 trillion deficit over the first decade.  The article also cites a guess by the Center for a Responsible Federal Budget stating a deficit of $5.5 trillion over 10 years.
  2. The Trump plan would create the largest tax shelter for businesses.  The article states that the plan would encourage business owners to cut wages and pay profits instead of wages.  The article points out how despite the Trump Administration’s position to limit income shifting, the policy would encourage income shifting and how income shifting would be difficult to block.
  3. The Trump plan would create a race to the bottom for corporate rates.  The article explains that while the US rate would be lower than most other countries, history has shown that the other countries would just enact changes and lower their corporate rates, so that the perceived benefits of lowering the US rate to match international tax rates would be minimized. 
  4. The article claims that the Trump plan is very regressive.  It claims the Trump plan would give huge cuts to the wealthy and virtually nothing to the low-income households. 

Likelihood of Passage:

Regardless of the effects of the proposed Trump Tax Plan, one author doubts that the President will be able to implement his proposed tax reforms.  In his Law Review article in the Illinois Law Review, Daniel Hemel argues that the President likely won’t be able to implement the reforms because of key obstacles: 

  1. President Trump has failed to fill key tax policy positions at the U.S. Treasury;
  2. President Trump’s refusal to release his own tax returns has provided the opposition and/or moderate Democrats with cover from supporting his tax plan; 
  3. President Trump’s Tax Plan deviates dramatically from other Congressional tax reform plans and alienates Congressional members; and
  4. Because President Trump doesn’t have the requisite support to avoid a filibuster in the Senate, he must use the budget reconciliation process to propose his tax reforms, and that further alienates Congressional members.

Hemel starts his article by citing that former Presidents Reagan and Bush (George W Bush) did not have majorities in both the House and Senate, but were able to pass tax reforms by day 206 of Reagan’s presidency and day 139 of Bush’s presidency.  

With respect to the first obstacle, Hemel states that President Trump has yet to fill key tax policy positions at U.S. Treasury, citing this Vox article, but that President Reagan’s nominee was confirmed on day 67 of his presidency (March 27, 1981) and President Bush’s nominee was confirmed on day 41 of his presidency (March 1, 2001).  Hemel states President Trump is pushing his tax reform policy without a tax policy team in place.  

Additionally, Hemel states that the President’s refusal to release his own tax returns has provided cover for moderate Democrats facing re-election to oppose the President.  Hemel states that President Trump’s refusal to follow tax transparency permits the Democrats to use a sound bite, namely, “we won’t vote for tax cuts until you release your returns”, and transform opposition to tax cuts (usually a political liability for Democrats) into a political asset by claiming that support is unwarranted unless the Democrats can see the effects of the President’s proposal on the President’s returns.  

Hemel also argues that President Trump’s plan fails to build support even within his own party’s Congressional leaders, as it deviates from other highly publicized and analyzed Congressional plans.  Hemel argues that instead of using House Speaker Paul Ryan’s 2016 proposed tax reform plan or Senator Orrin Hatch’s proposal as the Chair of the Senate Finance Committee, Trump has discarded the work done by the Congressional republicans and has forged an independent tax reform proposal that will ultimately depend on the same Congressional leaders he alienated to pass his proposals. 

Finally, Hemel argues that by lacking the support in the Senate to overturn a filibuster, Trump must use the Budget Reconciliatory Process, which limits legislation that would create a deficit outside a 10 year period from the passage of the legislation (so a temporary bill that would have no long term impact on the budget).  Hemel argues that since the Trump Proposal implies huge budget deficits, the Trump proposal may face opposition from Republicans deficit hawks, let alone Democrats, and so this is another reason why Trump’s tax reform plan is highly unlikely.

Alternative Explanation of why Tax Reform is unlikely in 2017:

In addition to Hemel’s article, Bloomberg’s Jonathan Bernstein, adds 7 reasons why tax reform is unlikely based on the Republican’s inability to repeal Obamacare (aka the Affordable Care Act).  Bernstein cites the following 7 reasons:

  1. Trump Doesn’t Care about Policy: Bernstein cites President Trump’s appearance on Face the Nation discussing healthcare as evidence that President Trump is only focused on buzzwords and doesn’t care about the nuts and bolts of the policies.
  2. Trump isn’t getting much help:  Bernstein cites the fact that it appears as if the White House and the rest of the Trump Administration have not been involved in the negotiations regarding health care.  He questions how a one page tax plan will spur tax reform by Congress.
  3. Watch the House of Representatives:  Bernstein argues that the real players are in the House and not the White house.
  4. Congressional Districts Still Matter:  Bernstein argues that House members still consider the impact of decision would have on their constituents and re-election prospects.
  5. Congressional Republicans aren’t really good at policy:  Bernstein argues that House Republicans still don’t understand tax reform to know how to implement actual tax reform.  He states that many House Republicans still rely on party, committee, or faction leaders to assess the value of legislation. 
  6. Side deals aren’t happening in the House:  Bernstein argues that House leadership is unable to provide the requisite inducements for House members to vote together to repeal Healthcare, and which can also cause the same problems or tax reforms.
  7. Caring about the issue at hand matters: Bernstein argues that few Republican politicians advocated for the repeal of healthcare because that’s not what they really wanted to accomplish.  He states that tax reform/cuts might be different to motivate House Republicans to enact change, but that still remains to be seen. 

These two different viewpoints cast doubt as to whether real tax reform will occur in 2017.  

CONTACT US TO FILE YOUR TAX WHISTLEBLOWER CLAIM

Irrespective of your personal feelings about the Trump Tax Plan or the likelihood of its passage, If you have SPECIFIC AND CREDIBLE information of someone who is not paying their taxes, CONTACT US to discuss the filing of a Tax Whistleblower Claim on your behalf.  The IRS pays between 15-30% of the proceeds it collects from the tax violators if the IRS uses your information.  

Recent Developments

This blog will attempt to re-cap the following newsworthy stories:

  1. Transfer Pricing Backlash?
  2. Amazon v. IRS

Transfer Pricing Backlash?

As Previously discussed in this Blog, United States Multi-National Corporations (USMNCs) have been using transfer pricing to stash profits overseas and to avoid U.S. and State taxation.

Recently, one state treasurer is attempting to fight against the USMNCs.  In his April Newsletter, Illinois State Treasurer Michael Frerichs advocates for accountability for USMNCs that interact with his office.  Mr. Frerichs states that he is in the process of sponsoring a bill in the Illinois legislature that would prohibit companies from doing business with Illinois if it utilizes offshore accounts to avoid paying taxes.

Mr. Frerichs proposal raises several questions including:

  1. Are more states willing to undertake such measures to ensure that USMNCs pay their fair share?
  2. Is Illinois willing to enforce this law against companies that are based in Illinois and notorious for using foreign subsidiaries and accounts to hide profits from taxation?
  3. Why isn't the federal government utilizing this method to ensure better compliance by the USMNCs?
  4. Will this matte if the US lowers the corporate tax rate to permit USMNCs to bring back the amounts stashed offshore at a reduced rate?

While the answers to these questions are mere conjecture at this point, given the fact that the proposed law has not been passed to ensure compliance by USMNCs doing business with Illinois, it is still refreshing and a welcomed change of pace to the usual rhetoric of allowing USMNCs to continue to stash taxable income offshore.

Amazon v. IRS

In a recent Tax Court opinion (Amazon.com, Inc. v. Commissioner of Internal Revenue, 148 T.C. No. 8 (2017)), the Tax Court held that IRS overstepped its authority in applying a discounted cash flow method to value a cost sharing arrangement between Amazon and its subsidiaries.

This cash involved whether Amazon properly valued an intangible it sold to its offshore subsidiary. The IRS felt that Amazon did not properly value the intangible and sought to apply the discounted cash method to value the intangible.  Why did the IRS take this approach? Simple, because it meant that Amazon would have had to recognize more income from the sale of intangible in the US and therefore would also have had to pay more taxes.

Amazon disagreed with the IRS. Amazon stated that the IRS' method violated established precedent in Veritas Software v. Commissioner, 133 T.C. No. 14 (2009).  In Veritas, the issue before the Court was the proper buy in the subsidiary was required to pay as a result of a cost sharing arrangement.  In Veritas, the Court held that comparable uncontrolled transaction (CUT) was the proper valuation method.  Similar to Veritas, Amazon stated that the proper method utilized in its case should have been the CUT method.

The Court held in favor of Amazon.  See this synopsis of the case through the Journal of Accountancy.

Grassley, Wyden Introduce IRS Whistleblower Improvements Act of 2017

For Immediate Release

Wednesday, March 29, 2017

Grassley, Wyden Introduce IRS Whistleblower Improvements Act of 2017

WASHINGTON – Sen. Chuck Grassley and Sen. Ron Wyden today introduced bipartisan legislation to improve IRS communication with tax fraud whistleblowers and protect those whistleblowers from workplace retaliation.

“Whistleblowers have helped the IRS recover more than $3 billion for the taxpayers that otherwise would have been lost to fraud,” Grassley said.  “Whistleblowers have the potential to help even more.  They need assurances that putting their jobs at risk carries protections.  They also need better communication about where their cases stand so they’re not sitting in limbo.  This bill will offer a welcome mat to those who are too often treated like skunks at a picnic.”

“Whistleblowers are a crucial line of defense against waste, fraud and abuse,” said Wyden. “This legislation will strengthen protections for employees of companies who come forward to report tax evasion.  Empowering these whistleblowers is key to rooting out bad actors who are breaking the law by dodging their taxes.” 

The IRS Whistleblower Improvements Act of 2017 is based on the Grassley-Wyden amendment included in the Taxpayer Protection Act of 2016.  The Taxpayer Protection Act, along with the Grassley-Wyden amendment, passed the Finance Committee in April 2016 but was never considered by the full Senate. 

The measure would: (1) increase communication between the IRS and whistleblowers, while protecting taxpayer privacy, and (2) provide legal protections to whistleblowers from employers retaliating against them for disclosing tax abuses. 

To increase communication, the bill specifically would allow the IRS to exchange information with whistleblowers where doing so would be helpful to an investigation.  It would further require the IRS to provide status updates to whistleblowers at significant points in the review process and allow for further updates at the discretion of the IRS.  It does this while ensuring that the confidentiality of this information is maintained.  Whistleblowers have expressed concern and frustration in their inability to receive information from the IRS on the status of their cases, which may take years to resolve.  Since these individuals often put their livelihoods on the line to come forward, poor communication adds to their anxiety and is a disincentive to others with knowledge of high dollar tax fraud.

To protect whistleblowers from employer retaliation, the bill extends anti-retaliation provisions to IRS whistleblowers that are currently afforded to whistleblowers under other whistleblower laws, such as the False Claims Act and Sarbanes-Oxley.  Tax whistleblowers may be easily identified within their firms as having specific knowledge of tax fraud.  Extending the protections to tax whistleblowers that apply to whistleblowers in other fields is a matter of fairness and in the interest of U.S. taxpayers who benefit from such whistleblowing, Grassley and Wyden said.  

The IRS Whistleblower Improvements Act of 2017 will be assigned to the Finance Committee, where Grassley is a senior member and former chairman, and Wyden is ranking member.

Grassley successfully enacted much-needed updates to the IRS whistleblower program in 2006.  The improvements have led to the recovery of more than $3 billion in taxes that otherwise would have been lost to fraud.  The IRS has made some progress in improving its treatment of whistleblowers, due to congressional oversight, but challenges remain.  The potential is strong to recover much more in fraud proceeds if the IRS continues to improve its procedures, and Congress delivers the improvements in the Grassley-Wyden legislation.

Two well-known pro-whistleblower groups endorsed the legislation.

“Honest taxpayers are the true victim of every tax fraud.  This reform provides critical protection for those courageous enough to risk losing their jobs to report illegal tax schemes.  The legislation closes a loophole in whistleblower law that currently fails to provide any protection for those who report tax fraud. This bill is urgently needed,” said Stephen M. Kohn, Executive Director, National Whistleblower Center.

“These amendments will significantly strengthen the fraud-fighting potential of the IRS Whistleblower statute and promote the public-private partnerships that the law was originally enacted to foster,” said Robert Patten, President and CEO of Taxpayers Against Fraud.  “In particular, the anti-retaliation provisions will encourage more citizens to come forward and will result in the recovery of significant funds that would otherwise be lost to tax fraud.”

Grassley and Wyden are among the founding members of the bipartisan Senate Whistleblower Protection Caucus.  Grassley is chairman and Wyden is vice-chairman.