Another Tax Authority allegedly is not doing its job....This time it isn't the IRS

Her Majesty's Revenue & Customs(HMRC) Self Assessment Tax Return

In the news lately, the IRS has been criticized for not doing its job.  Specifically, the Speaker of the House (Paul Ryan) has stated “The IRS is not doing its job. It is looking out for itself instead of looking out for our taxpayers,” when introducing the House Republican agenda for #ConfidentAmerica.  Speaker Ryan’s comments relate to IRS’ alleged inability to protect taxpayer payer information.  See Forbes or Tax Analysts articles re IRS online transcript service hacked by criminals.

News disclosed of IRS inability to protect taxpayer sensitive data, along with recent IRS headlines (including: Lois Lerner and the IRS targeting fiasco, etc. (See TaxProfBlog’s ongoing coverage of the “IRS Scandal and other IRS related news)) continues to undermine the IRS and continues to fuel Congress’ attacks of IRS especially through recent House bills passed aimed at shutting down the IRS.

Given this context, one would assume that news of another taxing authority not doing its job would just be a re-tread of another example of the IRS failing to do its job.  Instead, the recent news from Bloomberg BNA, actually highlights the U.K.’s tax collecting agency’s ((Her Majesty’s Revenue & Customs) HMRC) failure to prosecute tax evaders connected to the HSBC bank leak.  The Bloomberg BNA blog highlights that only one of 3,600 alleged tax evaders has been prosecuted by HMRC, which is costing the U.K. approximately 16 billion pounds ($23 billion) in tax revenue each year.   See the U.K. Public Accounts Committee (PAC) Report criticizing HMRC and its November 2015 Report also criticizing HMRC for its failures.  PAC recommended increasing investigations and prosecutions of wealth individuals, especially given the recent release of the Panama Papers.

With all these attacks on taxing authorities, it begs the question whether the attacks are justified, or whether the people attacking the taxing authorities are providing enough guidance and/or resources to permit the taxing authority to properly do its job.  One such advocate is the editorial board at the Washington Post.  The Washington Post commentary suggests that the source for the IRS’ lack of customer service is the House Republicans (the same group that just passed measures to underfund and restrict the IRS’ authority).  The Washington post article relies on the following facts:

1. IRS budget is $500 million below the 2010 budget level;
2. IRS has had to shed 17,000 workers
3. IRS has increased responsibilities including Obamacare (Affordable Care Act), FACTA (Foreign Account Tax Compliance Act), and the passport law (Fixing America’s Surface Transportation Act, or “FAST Act.”).

The Washington Post commentary concludes that House Republicans are rewarding tax cheats by de-funding the IRS, as the IRS will just conduct fewer audits and cost the U.S. government $8 billion.  The commentary also concludes that Congress should adequately fund the IRS instead of attacking the IRS.

While the Washington Post article makes several key points, the Washington Post article fails to address one area where IRS and IRS management can help in to minimize House Republicans’ attacks against the IRS.  The IRS and IRS management specifically, can utilize one tool Congress has provided the IRS to close the tax gap, namely the IRS whistleblower program.  IRS management could make a priority in taking whistleblower tips and utilizing whistleblowers to track down the tax evaders and collect the delinquent taxes.  Instead, as the GAO has reported in 2015 and as blogged here by Thomas C. Pliske, the IRS has vastly under-utilized the whistleblower program.

Perhaps if the IRS were to feature the whistleblower program, it could increase revenue collected despite the budget constraints, and also turn the tide against the “bash the IRS” movement, by demonstrating that it is doing its job, collecting taxes of the United States.

If you have specific or credible evidence of an individual or corporate taxpayer not paying its tax liabilities, please contact us, to discuss filing a claim for an award with the IRS.  IRS pays between 15-30% of the collected proceeds (in excess of $2,000,000) to a whistleblower.

Tax Holidays and Tax Amnesty Programs: Do they work or are we just giving tax violators a break?

In recent news, the State of Alabama is considering creating a tax amnesty period from June 30 through Aug. 30, 2016.  The amnesty program will apparently forgive tax liabilities related to individual and business income taxes, sales and use tax, lodgings tax, severance taxes, cigarette taxes and business privilege taxes. While some exclusion from the program are motor fuel taxes and certain healthcare and environmental taxes.  As noted by the Bloomberg blog, other states have also instituted amnesty programs, Massachusetts, or are considering implementing a tax amnesty program, South Carolina.

The IRS also has several amnesty programs in place for people that have not filed their taxes or have not paid their tax liabilities.  The programs are as follows:

1. Domestic Tax Amnesty for unfiled tax returns or unreported tax liability (Voluntary Disclosure, See IRS IRM provisions.  See also blog discussing how far back to file unfiled tax returns.)

2. Offshore Voluntary Disclosure Program

Additionally, Congress has, in the past, instituted a one-time tax holiday to allow U.S. multinational corporations to bring back money the multinational corporations had previously invested in its offshore foreign subsidiaries.  See NY Times article about the 2004 tax amnesty and its effects.  See also the Salon.com article and the Senate PSI report stating that the promised 2004 tax repatriation holiday failed to meet the promised benefits of new jobs, or research and development (R&D) expenditure. 

The 2004 tax holiday allowed corporations to repatriate amounts held offshore at a reduced rate 5.25% instead of the statutory corporate rate of 35%.  The PSI report highlights the fact that the 2004 tax holiday permitted corporations to bring back $312 Billion.  The PSI report also highlights that while the 2004 law prohibited the repatriated funds for stock repurchases or executive pay, there was no mechanism for monitoring the use of the repatriated funds, so most of the funds were used exactly for stock buybacks and increased executive pay.

There have also been recent attempts by Congress to allow another tax holiday to allow U.S. multinationals to repatriate offshore funds.  In 2014, Senators Boxer and Paul introduced an infrastructure bill tied to a tax holiday (a 6.5% tax on repatriation of funds over a five year period).  The Boxer-Paul bill prohibits dividends, shareholder buybacks or executive compensation for 3 years and the revenue generated would by the 6.5% tax would fund infrastructure projects.  However, as presented in the Salon article, and as reported in Bloomberg, the Joint Committee on Taxation determined that such a tax holiday would really cost taxpayers $96 billion over 10 years.

An alternative to a tax repatriation holiday appears to be a transitory tax on “permanently reinvested offshore earnings.  Such a transitory tax was proposed by former House Ways and Means Chairman Dave Camp in the Tax Reform Act of 2014.  As stated in The Center on Budget and Policy Priorities article, “Repatriation Tax Holiday Would Lose Revenue And Is a Proven Policy Failure” by, The Tax Reform Act of 2014 proposed to tax all offshore profits as a transition to a new international tax system that would generate an estimated $170 billion of revenue over 10 years for the Highway Trust Fund. 

President Obama has also introduced a budget proposal (fiscal year 2015) which would utilize revenue from transitioning to a new corporate tax system to finance infrastructure.  See the CBPP article.  The President’s proposal would require multinational corporations to pay a one-time U.S. tax on the profits held overseas prior to changing the permanent way the U.S. would account and tax the offshore profits currently not being taxed.  The President’s proposal allegedly would generate taxes in the amount of $268 billion over 10 years to fund infrastructure improvements.  See this CBPP article comparing transition tax and repatriation tax holiday.

As the CBPP articles reflect, and the PSI’s examination of the 2004 tax holiday, a tax repatriation holiday does not work to generate present and future investment in the United States.  Instead, the empirical data suggests that companies will use the repatriated funds to:

1. Repurchase Shares from Shareholders or pay dividends to shareholders;

2. Increase Executive Compensation;

3. Terminate workers in the United States;

4. More Aggressively transfer profits offshore to increase amounts “held” or “permanently reinvested offshore” to avoid U.S. taxes because Congress will just grant another tax repatriation holiday in the future.

Following the 2004 tax repatriation holiday as an example of what to expect when IRS or States permit tax violators to be forgiven of their tax liabilities through tax holidays or tax amnesty program, the question to ask is: Why are the tax violators getting a break at the expense of compliant taxpayers?  Or alternatively: Shouldn’t government be in the business of rewarding compliance instead of rewarding habitual tax violators?

How can governments reverse or flip the logic behind a tax holiday or tax amnesty program?  Maybe the governing bodies should reward compliant taxpayers by allowing them to reduce their tax rate for each year of compliance.  Or maybe governments could permit additional deductions/exemptions or reduce phase-outs for deductions for the taxpayers that are compliant and based on the length of compliance.  If the goal is compliance and tax collection, shouldn’t the carrot be a reward for compliance instead of rewarding habitual tax violators by giving them a break for their continued tax violations.  Something to think about.

If you know of any individual or corporation that has not paid their tax liabilities or has habitually avoided paying its taxes, you should file a tax whistleblower claim.  The IRS has a whistleblower program that will pay between 15% and 30% of the collected proceeds (that exceed $2,000,000) to whistleblowers that provide specific and credible evidence of the tax violations of the individuals/corporations.  Contact us to evaluate your claim and to file your claim for an IRS award.

STATUTE OF LIMITATIONS PART II: Real case involving a missed deadline and statute of limitations.

As previously discussed in Part I, in the tax world, statute of limitations are extremely important. 

A recent court case (now before the United States Supreme Court to determine whether the Supreme Court will hear the case) illustrates just how important deadlines are with respect to taxes.  See this PricewaterhouseCoopers article.

In Albemarle Corp. & Subs. v. United States, the Taxpayer’s, Albemarle Corporation’s, Belgium Subsidiary paid interest to the U.S. parent company and other subsidiaries from 1997-2001 for securities it issued to the U.S. parent company and other subsidiaries.  The Belgium Subsidiary failed to withhold Belgium taxes at 25% on the dividend payments.  In 2001, the Belgium authorities determined that the Belgium subsidiary should have paid the withholdings at 25% to Belgium.  The Belgium subsidiary disputed the assessment.  Albemarle settled with the Belgium government in 2002 and paid the taxes owed.   Albemarle failed to file protective refund claims in 2002 or amended returns for 1997-2001 in 2002 claiming the foreign tax credit.

For some reason or another (not stated), Albermarle filed an amended return in 2009 for tax year 2002, claiming that the taxes it paid to Belgium in 2002 reduced their liability in 2002 due to the foreign tax credit.  The IRS treated the single amended return as two different refund claims.  First for tax years 1999-2001, the IRS treated the amounts raised in this year as taxes paid to a foreign government and eligible for the foreign tax credit.  For tax years 1997 and 1998, the IRS denied the refund claims (in the amount of $412,923 per year or $825,846) for these years because under I.R.C. § 6511(d)(3) Albemarle’s claim for refund was after the 10 year rule for claiming a refund.

Albemarle paid the additional U.S. taxes associated with the denial of the 1997 and 1998 tax years.  Albemarle then filed suit for refund in the Court of Federal Claims. (Note, if you want to sue the IRS for a refund, there are three ways you can do this: 1. Don’t pay the tax, and sue in Tax Court (specialized Court in Washington DC for tax disputes) for a redetermination of the liability; 2. Pay the tax and sue in your local United States District Court; or 3. Pay the tax and sue in the Court of Federal Claims (a specialized Court in Washington DC for claims against the United States and Admiralty claims)) So Albemarle chose option 3.

In the Court of Federal Claims, the Court of Federal Claims dismissed Albemarle’s case because it agreed with the IRS. See this PricewaterhouseCoopers article.   Albemarle claimed that the 10 year period ran from 2002, when Albemarle paid the taxes to the Belgium government.  IRS stated that the 10 year period ran from the date the return claiming the foreign tax credit was filed, so in this case it would have been, 10 years from the filing of the1997 return (March 15, 2008 b/c the 1997 return was due on March 15, 1998) and 10 years from the filing of the1998 return (March 15, 2009 b/c the 1998 return was due on March 15, 1999). 

Albemarle then appealed the dismissal of its case to the Court of Appeals for the Federal Circuit.  See the PricewaterhouseCoopers article.  The Court of Appeals ruled in favor of the IRS.  Albemarle then asked for a rehearing of its dismissal before the full panel of judges of the Court of Appeals for the Federal District.  The Court of Appeals denied the rehearing request.

Albemarle then filed a petition with the Supreme Court, claiming that Court of Appeals decision was in error, and conflicted with an existing Supreme Court decision in Dixie Pines Products Co. v. Commissioner, 320 U.S. 516 (1944).  Albemarle filed its Opening brief in January 2016 in the Supreme Court, and it is taking the position that like the petitioner in Dixie Pines, Albemarle is an accrual taxpayer and is not allowed to claim a contingent deduction or reduction of its taxes until the underlying liability is resolved with the taxing authority.  So Albemarle claims that it couldn’t have claimed the foreign tax credit in 1997 and 1998 because the liability was contingent.  Albemarle states that initial period to claim the foreign tax credit was in 2002.

The IRS/Department of Justice also filed its brief, stating that the Court of Federal Claims, the Court of Appeal for the Federal Circuit both reached the correct outcome, denial of Albemarle’s claims because it missed the 10 year filing period for a refund claim.

Albemarle has also filed its response brief to the Supreme Court stating that the IRS’ arguments were confusing and ineffectual. See this article about Albemarle’s filing.

What this dispute shows, is that the IRS is strict about its deadlines to assess tax and award refund claims.  Therefore, if you have specific and credible information about a taxpayer’s violation of tax laws and/or failure to pay his/her/its tax liabilities in excess of $2,000,000 you should consider filing a tax whistleblower claim if your information is timely. Contact us to discuss your case and the timeliness of your information.  You may be entitled to an award between 15-30% of the tax, penalties and interest collected by the IRS.