ARE THE LOBBYISTS FOR LARGE WEALTHY TAXPAYERS SUCCEEDING?

Influencing Congress to curtail IRS abuse seems to have caught on and is supported by many….until we think about it.  On April 4, 2016, the Center on Budget and Policy Priorities recently reported in an article IRS Funding Cuts Compromise Taxpayer Service and Weaken Enforcement that the IRS budge has been cut 17% since 2010 weakening the IRS ability to enforce the tax laws.  In fact with over 13,000 less employee (12,000 enforcement staff) it has resulted in the lowest audit levels in a decade.  These budget cuts are in addition to the IRS increased responsibilities including 9 million more individual returns filed, enforcement of ACA, FACTA, and its focus on identity theft that alone results in $6 billion of fraudulent refunds being issued by the IRS every year.

House Republicans have targeted the IRS for sharp cuts since the Lois Lerner fiasco.  Senator Ted Cruz pledges to keep his promises as he runs for President and then naively promises that he will eliminate the IRS.  We as taxpayers know that there is a cost to living in a civilize society.  However, what is happening is that the large influential taxpayers with their millions to spend to defend their underreporting and underpayment of tax are now just too big for the IRS to successfully audit with its limited budgets and lack of resources.  The IRS has now been reduced to do what it does best, and that is simply going after the little guy (middle and lower class).

One has to wonder if the reduction of enforcement of the tax laws as to the wealthy taxpayers and large multinational corporations is just an unforeseen consequence of cutting the IRS budget or is it the result of an overall plan by the wealthy influential taxpayer and the Republicans. 

In 2010, the IRS was given the most powerful tool for enforcement of the tax laws, IRC §7623(b)…a strengthened Whistleblower program.  The IRS was mandated to pay 15% -30% of the tax collected based upon information that was provided to it from an individual that resulted in the determination of tax.  However, this was with respect to only large taxpayers in which there was more than $2,000,000 of tax in dispute.  Thousands of whistleblower claims have been handed to the IRS on a silver platter every year involving large wealthy taxpayers, but for unknown reasons, the IRS has not used the whistleblower program as it should by working with whistleblowers, expediting these whistleblower cases through the system, and promoting the whistleblower program.  Perhaps with the current limited budget, the IRS will realize that is more important now than ever before to embrace the whistleblower program and work with the true insider to efficiently enforce the tax laws as to the large wealthy taxpayer.

Not even Federal IRS Employees or Federal Tax Court Judges are Immune to Alleged Tax Evasion

In a bit of shocking news, a former federal tax court judge (Judge Diane L. Kroupa) and her husband were indicted on charges for filing fraudulent tax returns and conspiracy to defraud the United States.  As recounted in a recent Forbes article, the shocking facts in the indictment reflect alleged evasion of taxes and obstruction of justice in the examination/audit of Judge Kroupa as follows:

1. Alleged claimed personal expenses as business deduction including “rent and utilities for the Maryland home; utilities, upkeep and renovation expenses of the Minnesota home; Pilates classes; spa and massage fees; jewelry and personal clothing; wine club fees; Chinese language tutoring; music lessons; personal computers; and expenses for vacations to Alaska, Australia, the Bahamas, China, England, Greece, Hawaii, Mexico and Thailand;”
2. Alleged false insolvency claim to avoid discharge of indebtedness income of $33,301;
3. Alleged failure to report income from sale of property in the amount of $44,520;
4. Alleged concealment of records from tax return preparer and IRS compliance officer during an audit in 2006;
5. Alleged submission of misleading documents to an IRS employee in 2012 audit to conceal expenses of Grassroots Consulting; and
6. Alleged understated income from 2004-2010 of $1,000,000 and understated taxes in the amount of $400,000. 

While the indictment and allegations contained in the indictment have yet to result in a conviction for conspiracy and tax evasion, the mere fact that the indictment and charges against Judge Kroupa have been filed in Court reflects that even federal tax court judges may still have allegedly evade taxes and allegedly defrauded the IRS and the United States of taxes allegedly owed.

In other news, based on a recent Tax Court case, a federal IRS Revenue Agent was indicted and plead guilty to tax evasion.  A summary of the relevant facts are as follows:

1. Petitioner Husband was an IRS revenue Agent;
2. Petitioner Husband had side business in which he set up trusts for another taxpayer to reduce taxes but was used to allegedly embezzle funds from the other taxpayer;
3. Petitioner Husband allegedly embezzled funds from other taxpayer;
4. Petitioner Husband was indicted and initially plead guilty to tax evasion related to the alleged embezzled funds because he failed to report the income associated with the alleged embezzled funds;
5. Petitioner Husband tried to recant plea agreement.

In the Tax Court case, the Court determined that while the Petitioner Husband plead to tax evasion and failed to report income for 2003 in the amount of $252,726, the plea does not support improper calculations by another IRS revenue agent that analyzed the tax deficiency of Petitioner Husband because the other IRS revenue agent failed to account for amounts repaid to the other taxpayer by Petitioner Husband.  The Tax Court ultimately determined that there was no deficiency or penalty liability for 2003.  Despite the Tax Court’s holding that there was no deficiency, the facts in this case reflect that even a federal revenue agent is not immune from allegedly under-reporting or allegedly failing to report his/her tax liabilities.

Both cases show that federal employees and federal tax court judges are not immune from committing alleged tax evasion or other tax violations.  Therefore, if you have specific and credible information (specific documents outlining the tax evasion or other tax violations) on any individual which would result in taxes due in excess of $2,000,000, contact us to discuss filing an IRS tax whistleblower claim to claim an award and to alert the IRS to the alleged wrongdoing.

Inversions, Earnings Stripping and Transfer Pricing, the triumvirate of U.S. companies avoiding U.S. taxation.

As previously noted on this blog, the American public is now aware of U.S. companies inverting to a foreign jurisdiction to reduce or eliminate its U.S. income tax liabilities.  The publicity (see here for outrage over Pfizer’s inversion attempt in 2014 and response by the President and the Treasury’s new Regulations attempting to curtail inversions here) that inversions have received fail to paint a complete picture of the ability of U.S. corporations and former U.S. corporation from avoiding U.S. taxation.

As found here, Professor Steven Davidoff Solomon, outlines in his N.Y. Times article the next step to maximize the inversion by the former U.S. corporation is to strip the earnings from its now U.S. subsidiary.  As noted by Professor Solomon, the process starts by having the inverted offshore parent company make loans to its now U.S. subsidiary to pay for its operations in the U.S.  The loans would generate interest payments to the offshore parent company, which can be deducted by the U.S. subsidiary to offset the earnings (otherwise taxable) in the U.S. 

Professor Solomon also references the studies of inverted companies and their earnings stripping efforts in 2004 (See National Tax Journal 2004 Article, “Effective Tax Rate Changes and Earnings Stripping Following Corporate Inversion”) and the Treasury’s 2007 article regarding the same.  Professor Solomon also notes that while Treasury has attempted to minimize the inversions, there is little being done to stop earnings stripping.  Finally Professor Solomon suggests that the Treasury and Congress adopt a radical approach to prevent earnings stripping, namely Professor Stephen Shay’s article, which would convert the interest payments to the foreign parent to taxable dividends instead of interest income.

While these articles address the effect of inversions and continued expansion of the Tax Gap (See IRS’s website describing the Tax Gap at $2 trillion annually) the current focus on inversions and earnings stripping fail to address how U.S. companies are currently reducing their tax liabilities through transfer pricing.  For a brief description of transfer pricing, see Bloomberg articles here and here.

As documented by the Senate Permanent Subcommittee on Investigations (“PSI”) (See Part 1 (Microsoft and HP) of the PSI hearing on Offshore Profit Shifting and U.S. Code; or Part 2 (Apple), U.S. Multi-National Corporations (“MNC”) have aggressively taken advantage of Transfer Pricing (Section 482) and Subpart F to shift profits to its low tax offshore subsidiaries.  PSI recommends the following changes to address Transfer Pricing abuses including the following: 1. Revise Sections 482 and 956; 2. Revise APB 23 to minimize MNC’s ability to manipulate the earnings reports to enable transfer pricing; and 3. Have IRS utilize its anti-abuse powers to stop transfer pricing.  See PSI’s recommendations.

Despite these recommendations, Congress and the IRS have yet to successfully limit or prohibit U.S. MNC from stripping the earnings from U.S. companies by shifting the profits offshore through transfer pricing.  However, IRS has aggressively pursued MNC on transfer pricing issues regarding cost sharing arrangements between the parent and subsidiary corporations of the MNCs.  See International Tax Review’s summaries of IRS transfer pricing cases.  For example, see the following active IRS cases on transfer pricing issues:

1. Microsoft: IRS is challenging Microsoft’s cost sharing buy-in payment arrangement between Microsoft and its Bermudian Affiliate and its Puerto Rican Affiliate (see Microsoft Corporation vs. Internal Revenue Service, 15-cv-00850, U.S. District Court, Western District of Washington);
2. Amazon: IRS is challenging Amazon’s cost sharing agreement between Amazon and its Luxembourg subsidiary (see Amazon.com, Inc. v. Comm’r, T.C. Docket 31197-12);
3. Zimmer: IRS is making 482 adjustments between Zimmer and its Dutch subsidiary (see Zimmer Holdings, Inc. v. Comm’r, T.C. Docket 19073-14); and
4. Medtronic: IRS is challenging Medtronic’s value of intangibles transferred between Medtronic and its Puerto Rican subsidiary (See Medtronic v. Comm’r, T.C. Docket 6944-11)

If you feel strongly about the injustice of transfer pricing and have specific/credible information about corporations avoiding the payment of tax through transfer pricing, you can get involved in preventing/limiting the tax avoidance by filing an IRS tax whistleblower claim.  The IRS pays an award between 15% to 30% of the tax collected to a whistleblower with specific and credible information about a corporate taxpayer’s avoidance of tax (through transfer pricing, or other methods).   Contact us if you want to file a tax whistleblower claim.