Happy Tax Filing Day....

As today is April 15, 2016, it should be the usual filing deadline for your taxes or to request an extension; except this year the deadline was extended to April 18, 2016.  Why?  Emancipation Day (a day set aside for commemorating the signing of the Emancipation Act by Abraham Lincoln (normally celebrated on April 16, but this year since it is on a Saturday, it is recognized on April 15) is a legal holiday in Washington D.C.).  So, since the deadline falls on a legal holiday in Washington D.C., the tax deadline is extended to Monday.

The hot topic story today is Massachusetts Democratic Senator Elizabeth Warren’s introduction of a bill to make it unnecessary to file a tax return (for single people with simple returns, and in 2018 to extend to other filers).  According to the Huffpost both Democratic Presidential Candidates support Senator Warren’s bill, as do other Senators.

Two questions come to mind:

1. Is this bill different than Republican candidate Ted Cruz’s plan to abolish the IRS or Democratic Candidate Bernie Sanders’ plan?; and
2. How practical is Senator Warren’s proposal?

Question 1:  Is Senator Warren’s proposed plan different from Senator Cruz’s proposed plan or Senator Bernie Sanders’ proposed plan:

Simple answer is Yes.  A more detailed explanation is:

Senator Cruz is advocating a flat tax plan.  What this means, is that Senator Cruz is proposing to compress the current rates of personal income tax to one single rate of 10%, See paragraph 2 of his summary.  He states that the simple flat tax will eliminate the IRS as it exists.  He also proposes to levy a simple flat business tax at 16%.

Contrasting Senator Cruz’s plan is Senator Sanders’ plan (NOTE: Bernie’s plan is outlined in the FAQ’s for paying for medicare, about ¾ of the way down the page.  It seems that his plan is summarized at this unofficial site.)  He proposes to keep the graduated rates based on income.  His proposal seeks to raise the rates at the higher income levels.  For example, the current 33% bracket is for incomes between $230,451 through $411,500.  Bernie’s plan would make this band smaller, specifically for income between $230,451 through $250,000, and amounts over $250,000 would be in the next bracket.  The brackets are delineated for incomes up to $10,000,000 with the top rate at approximately 52%.

Senator Warren’s proposal merely seeks to eliminate the need for single filers, who meet the following criteria:

1. do not have deductions adjusting their income,
2. do not have to file a schedule C (income from a business operated or a sole proprietorship),
3. income only from wages, interest or dividends,
4. No dependents.

For the single filers that meet these 4 criteria, Senator Warren proposes that the IRS will develop a tax return preparation service that will file a return on single filers that opt in to the program.  Senator Warren’s proposal also seeks to expand the program for 2018 to: married individuals, heads of households, taxpayers claiming the earned income tax credit, taxpayer with dependents, taxpayers claiming the child tax credit, and taxpayers claiming deductions for non-employee compensation.  Senator Warren’s proposal also allocates money to pay for this “new” tax preparation service.

Senator Cruz’s plan and Senator Sanders’ plan are plans designed to re-think how we tax people and their income.  Senator Warren’s plan is a change to the implementation of the existing tax regime.

This leads to the second question, how practical is Senator Warren’s plan?

The IRS already has a form that simplifies the tax filing procedure.  The Instructions for 1040EZ provides a checklist for those eligible to use Form 1040EZ as follows (Note a taxpayer has to meet all of these before utilizing Form 1040EZ):

1. Your filing status is single or married filing jointly.
2. You do not claim any dependents.
3. You do not claim any adjustments to income.
4. If you claim a tax credit, you claim only the earned income credit.
5. You (and your spouse if filing a joint return) were under age 65 and not blind at the end of 2015.
6. Your taxable income (line 6 of Form 1040EZ) is less than $100,000.
7. You had only wages, salaries, tips, taxable scholarship or fellowship grants, unemployment compensation, or Alaska Permanent Fund dividends, and your taxable interest was not over $1,500.  If you earned tips, they are included in boxes 5 and 7 of your Form W-2.
8. You do not owe any household employment taxes on wages you paid to a household employee.
9. You are not a debtor in a chapter 11 bankruptcy case filed after October 16, 2005.
10. Advance payments of the premium tax credit were not made for you, your spouse, or any individual you enrolled in coverage for whom no one else is claiming the personal exemption.

Senator Warren’s proposal appears to check the same boxes as IRS 1040EZ (or at least her proposal for post 2018).  So why would we need another tax return preparation method that would mirror IRS 1040EZ.  Also why would need to spend more money and appropriations for developing a system to mirror the filing of an existing IRS Form, when only about 16% of the filing population could benefit from this “simplified plan”?

Year	Total # of Returns Filed	Total 1040EZ Filed	Percentage
2014	148,686,586	23,259,850	16%
2013	147,735,801	23,463,055	16%
2012	144,948,385	23,115,401	16%
2011	145,579,530	22,643,149	16%
2010	142,856,282	18,007,553	13%

Shouldn’t we spend the money it would take the IRS to develop this new proposed system in closing the “Tax Gap” ?

Happy Tax Filing Day!

If you have specific and credible evidence of taxpayers failing to file their tax returns and/or paying their tax liabilities in excess of $2,000,000 of taxes, interest and penalties you should consider filing an IRS tax whistleblower claim.  Contact us to assist you in filing your tax whistleblower claim to receive an award of between 15-30% of the amounts collected by the IRS on tax liabilities in excess of $2,000,000.

Panama Papers: Where are the disclosure of documents of the U.S. wealthiest individuals and their use of offshore trusts and companies to conceal their wealth?

As you may or may not know, on Sunday April 3, 2016, a disclosure of a Panamanian law firm’s records, dubbed the Panama Papers, exposed world leaders and wealthy businessmen/women and their associates that utilized offshore trusts and companies to hide assets from taxation in their respective foreign countries.  (See International Consortium of Investigative Journalists (“ICIJ”) article about the Panama Papers; USA Today article; the Guardian article explaining the Panama Papers; and the German newspaper, Süddeutsche Zeitung (SZ) (which allegedly initially exposed the Panama Papers), article explaining the Panama Papers.  See also an infographic about the world leaders allegedly exposed for their use of offshore entities created/maintained by the Panamanian law firm.  Note: a person “exposed” or “implicated” in the Panama Papers does not automatically mean they are or have done any wrongdoing.  See the Huffpost article with a simple reddit user’s explanation of the Panama Papers through the use of a piggy bank, showing that the use of offshore trusts and companies does not necessarily implicate wrong doing.

As part of the “fallout” from these disclosures, at least one world leader (Iceland’s Prime Minister) has already resigned from his position due to his connection with entities exposed as part of the “Panama Papers". See the Huffpost article about Prime Minister Sigmundur Davíð Gunnlaugsson’s resignation.

The Panama Papers and the exposure it is receiving, raises a serious question, namely: Where is the information about the U.S.’ wealthiest individuals and corporations that might have undertaken similar or same offshore trust and company creation schemes to hide/shield their wealth?  See Craig Murray’s blog post raising the same inquiry. Mr. Murray states that one reason the exposure focuses on Russia and other UN sanctioned countries, is because the ICIJ is funded by the U.S. Center for Public Integrity which is further funded by various U.S. private foundations.  Mr. Murray posits that these entities would never expose the western world’s use of such entities. 

The IRS has estimated that U.S. corporations and wealthiest individuals have been avoiding the payment of taxes in the amount of $385 billion for 2016. Therefore, it begs the question, Are U.S. corporations and individuals utilizing structures implemented by the Panamanian law firm or similar entities in tax haven jurisdictions to generate the Tax Gap as estimated by the IRS?  This inquiry, as stated by Mr. Murray, suggests that the people behind the release of the Panama Papers may be hiding the exposure of “western” corporations and individuals, which may have undertaken the use of the same offshore strategies.

Perhaps the Senate Permanent Subcommittee on Investigations which has begun the process of exposing the U.S. corporations through its investigations of the largest U.S. corporations with offshore profit shifting, including: Microsoft and Hewlett Packard; Apple; and Caterpillar.  PSI also held a hearing on the offshore banks that have assisted individuals in hiding their assets in offshore jurisdictions and evading taxes. 

With the release of the Panama Papers, it would be interesting to see if the other documents by the Panamanian law firm would implicate the entities and individuals investigated by PSI or other prominent U.S. corporations or individuals who have utilized offshore structures to undertake the same tax avoidance schemes identified by PSI and IRS.  Since we do not have access to the source material and can’t search the documents which were recovered, we may never find out if there are other U.S. corporations or individuals.

Another reason for determining whether the Panama Papers expose U.S. entities or individuals is apparently the U.S. is now considered the number 3 tax haven because of its banking secrecy practices.  See the AP article regarding the U.S. as a tax haven for other countries’ tax dodgers.  Therefore, the exposure of U.S. entities or individuals would help IRS and other countries’ tax governing bodies limit/prevent tax avoidance/evasion. 

If you have specific and credible information of individuals and/or corporations utilizing structures described in the “Panama Papers” and would like to file a claim for an award with the IRS tax whistleblower program, please contact us.

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.