Taxes and the Presidential Race

With the popular vote for President looming, there has been great debate over each candidate’s tax policy and the potential impact of their proposals. This blog has even attempted to outline the tax policies and provide analysis of the proposals. 

Recently, as found in this Forbes article, the candidates had their tax advisors debate their respective policies at the Tax Policy Center sponsored debate on October 13, 2016. 

As summarized by Forbes, Clinton’s plan would: “create new subsidies for working families that are caring for aging parents or children or have large medical expenses, significantly raise taxes for high-income households and businesses, and only modestly reduce the deficit.  See Tax Policy Center’s analysis of the Clinton tax plan.

Contrasting this is Trump’s plan, as summarized by Forbes, would: “reduce revenue by $6.2 trillion over 10 years, without accounting for macroeconomic effects and added interest costs. It would cut taxes for most households, but focus the great bulk of its tax reductions on the highest income households. Under his plan the highest income 1 percent of households would enjoy nearly half of the benefits of his tax cuts.”  See Tax Policy Center’s analysis of the Trump tax plan.

Criticism of Donald Trump’s Plan:

According to a NYU tax law professor’s paper, Lily Batchelder’s, Trump’s plan would increase the tax liabilities of “millions of low and middle income families with children [namely, 7.8 million families with minor children], with especially large tax increases for working single parents” See also this Washington Post article outlining the problems with Trump’s plan. 

Ms. Batchelder’s position is that by removing personal exemption in Trump’s plan, Trump’s plan would actually increase the tax burden on married persons with at least 3 children, and unmarried persons with 1 child.  She also argues that removing the head of household status would increase the tax burden on unmarried persons with one dependent. In addition to removing the personal exemption and head of household filing status, Ms. Batchelder argues that the bracket increase of the lowest tax bracket would increase the tax burden on all taxpayers for the first “$9,000 to $18,000 of their taxable income.  Finally, Ms. Barchelder discredits the Trump plan’s estimate of saving because as she argues the deduction and credit for child care won’t be effective for low and middle income families because even with the deduction and credit, the deduction and credit fail to compensate the families for the increased tax burden attributable to the other Trump proposals.

Contrasting Ms. Batchelder’s position is Steven Miller’s (Trump national policy director) analysis, which can be found in the Washington Post article.  According to Mr. Miller, Ms. Batchelder’s analysis fails to properly account for the $500 per child match for child care credit proposed under the Trump plan.  Mr. Miller also states that another error in Ms. Batchelder’s analysis is that it fails to account for the “effects of the tax-free spending on both children and elderly dependents that is addition to either the new deduction or those in the current law.”  Mr Miller also stated that the Ms. Batchelder’s analysis fails to account for the benefits to economic growth which will be generated by the Trump plan. Finally, Mr. Miller stated that the Trump plan would instruct the the Congressional committees implanting the changes to ensure that the Trump plan does not raise the taxes on law or middle income earners.

Criticism of Clinton’s Tax Plan:

While analysts have stated that the Clinton plan would increase taxes on the rich and big business, one key criticism is that the Clinton plan would further complicate the tax code instead of making the tax code simpler.   See this NY Times article.  As stated in the article, Clinton’s plan wouldn’t eliminate the loopholes, which Trump has taken advantage of (allegedly not paying taxes on his income due to carryover losses, see this NY Times article).

Another criticism of Clinton’s plan it that it isn’t a sweeping overhaul of the tax code.  As stated by Alan Cole, an economist with the Tax Foundation policy center, “It‘s more tinkering at the edges,I wouldn’t call it reform. There aren’t any major reformulations to make the code simpler or fairer. It’s basically just a tax increase” for the top income bracket.  See this NY Times article.  Clinton’s plan also fails to address the corporate tax rate (at 35%, one of the highest in the developed world) and proposes a change to capital gains to encourage corporate governance changes instead of addressing corporate governance through targeted legislative policy changes.  See this NY Times article.

Conclusion:

No matter which candidate you support, there are two stark contrasts to their tax policies: One is choosing to tax the über rich while keeping most of the existing taxing structure and using the additional revenue for social programs [CLINTON].  While the other candidate is choosing to lessen the burden on the top to spur economic growth, and instead place the burden on the middle and lower class [TRUMP].

The question that continues to loom is how will these policies affect the IRS and their enforcement of the code, post-election.

If you know of someone not paying their taxes (a minimum of $2,000,000 in taxes) and want to report the individual/corporation for this failure, Contact us to file a claim for an award from the IRS.  The IRS will pay an award (between 15-30% of the taxes collected) for specific and credible information the IRS uses in assessing additional tax liability against taxpayers. 

TRANSFER PRICING DEBATE Part 1

Is transfer pricing broken? Does the IRS/Congress need to adopt a new model to tax U.S. Multinational Corporations’ income earned worldwide?

Through this Blog, I have previously written about how US Multinational Corporations (USMNCs) have routinely utilized “tricks of the trade” (Transfer Pricing, Inversions and Earnings Striping) to minimize their U.S. tax liabilities.  I have also suggested some changes to the existing system (i.e., expatriation tax etc.)

Perhaps change is on the horizon.  In one of the keynote addresses at the 16th Annual Global Transfer Pricing Forum held in New York (September 22-23, 2016), Professor Edward Kleinbard (USC Gould School of Law, and the former chief of staff of the Joint Committee on Taxation), advocates for “The End of Transfer Pricing”.  See the Presentation slides here.

Professor Kleinbard begins his presentation by discussing the Apple “facts” as examined by the EU Commission in the recent Irish state aid case.  He highlights the following facts:

• APPLE had $115 billion of income over a 10 year period;
• APPLE paid Ireland only .05% per year during the same period;
• APPLE paid other EU countries roughly $385 million in taxes over the same period;
• APPLE’s effective tax rate was 3.5% not the statutory rate of 35%.
• APPLE had pre-tax profits of $91.5 billion. 

Professor Kleinbard concludes that the arm’s length standard is no longer viable if APPLE can receive such beneficial treatment through its subsidiaries in Ireland.

Professor Kleinbard then discusses how the world is aware of the abusive nature of transfer pricing and that progressing with the fiction of transfer pricing and the arm’s length model is untenable, specifically, he cites the following examples:

• U.S. Treasury’s laughable response to the European Commission’s inquiry into whether Ireland gave Apple state aid;
• Countries sharing tax information with each other;
• Apple and other US MNC transfer pricing backlash;
• Congressional backlash/proposed tax reforms; and
• Base Erosion and Profit Shifting Project’s (BEPS) inability to reverse the transfer pricing inequality.  (See this blog describing the BEPS)

Because of this pushback, Professor Kleinbard advocates for a change to the existing system.

More specifically, he advocates for the following changes to the Corporate tax rate:

1. Statutory Rate reduced to 25%;
2. Repealing Section 199 (deduction for income attributable to domestic production activities;
3. Repealing the Alternative Minimum Tax (AMT;
4. Destination Based Cash Flow Tax

He states that by reducing the corporate rate to 25% will eliminate the need for transfer pricing games, because US tax rate will be in the middle of the pack, and playing games will be unnecessary. 

Note: Professor Kleinbard has stated, “Transfer pricing is dead” since 2008.  See this Tax Analyst Article about his debate with Willard B. Taylor of Sullivan & Cromwell LLP at the International Tax Institute.

To Clarify, Professor Kleinbard actually stated that Transfer Pricing enforcement has been dead since 2007.  See this article by Michigan Law Professor Reuven S. Avi-Yonah.  Professor Avi-Yonah proposes three different approaches for Congress to revitalize transfer pricing enforcement:

• adopting a unitary taxation regime;
• ending deferral; and
• adopting anti base erosion measures.

Unitary Taxation Regime:  This proposal suggests that Congress can adopt a unitary tax system, namely, treating each USMNCs as a single unit and disregarding the “formal distinctions” among the subsidiary corporations.  The advantages are: 1) a better model for taxing USMNCs because of the way they currently operate; and 2) the unitary tax applies the same treatment to all USMNCs and does not depend on the location of the parent corporation.

Professor Avi-Yonah believes that this is the best solution, but pragmatically speaking will be difficult to achieve.

Abolishing Deferral:  This proposal proposes to prevent USMNC from parking profits offshore (something subpart F of the Internal Revenue Code was originally designed to accomplish, but has failed to do so).

Professor Avi-Yonah believes this is a good approach, but that it will require countries to adopt this goal, which may be difficult to achieve.

Adopting Anti-Base Erosion Measures:  This proposal suggests limiting deductible payments to related foreign parties, including cost of goods sold, interest and royalties.

Professor Avi-Yonah believes adopting this proposal in conjunction with abolishing deferrals will eliminate the impetus to undertake transfer pricing by USMNCs.

Finally Professor Avi-Yonah advocates for the adoption of a mixture of these measures, similar to Senator Baucus’ proposal with option Y.  See analysis of Senator Baucus’ proposals here. (NOTE: Senator Baucus is now the U.S. Ambassador to China).  Under Option Y, income from foreign sales would be taxed at 80% of the US rate with a credit for foreign taxes paid.  This would ensure tax would be geared toward the ultimate destination of the sale of the goods (i.e. taxing where the goods are ultimately sold, or similar to Kleinbard’s destination cash flow tax.)

It will be interesting to see if any of these proposals will gain traction with the pending presidential election and with one of the key backers now a U.S. ambassador to China. 

If you have specific and credible information of a company undertaking transfer pricing and want to report the company for shifting its profits offshore, CONTACT US, to discuss your tax whistleblower claim.  The IRS is paying an award (between 15-30% of the collected taxes, interest, penalties, and additional amounts) for information it utilizes in adjusting a corporation’s income tax due to information provided by a whistleblower.

Fake IRS call center shut down; IRS Scams to watch out for.

Despite the IRS receiving bad press lately for its bad public relations, this Forbes article highlights efforts to stop the IRS scammers from continuing to con US citizens with fake IRS calls threatening jail time or forfeiture actions.

As stated in the article, the callers pose as IRS officials and demand immediate payment and threatening jail or deportation for those failing to comply.  The article also highlights efforts by IRS to try and shut down this scam, i.e. Treasury Inspector General of Tax Administration’s (TIGTA) reporting of the apprehension of 5 individuals in May 2016 responsible for about $2 million in schemes defrauding 1,500 victims.

In the latest news, authorities in Mumbai, India have arrested 70 call center workers for tax related scams following police raids on call centers in India.  Additionally 750 other call center workers were detained as police continue to investigate.  The reports indicate that 7 call centers were being used to accumulate around $149,835 per day.

The IRS has also highlighted the 12 largest tax scams to avoid in its annual Dirty Dozen:  For 2016, the dirty dozen are (in no particular order) See IRS Website:

1. Identity Theft: Taxpayers need to watch out for identity theft especially around tax time. The IRS continues to aggressively pursue the criminals that file fraudulent returns using someone else’s Social Security number. Though the agency is making progress on this front, taxpayers still need to be extremely careful and do everything they can to avoid being victimized. (IR-2016-12)
2. Phone Scams: Phone calls from criminals impersonating IRS agents remain an ongoing threat to taxpayers. The IRS has seen a surge of these phone scams in recent years as scam artists threaten taxpayers with police arrest, deportation and license revocation, among other things. (IR-2016-14)
3. Phishing: Taxpayers need to be on guard against fake emails or websites looking to steal personal information. The IRS will never send taxpayers an email about a bill or refund out of the blue. Don’t click on one claiming to be from the IRS. Be wary of strange emails and websites that may be nothing more than scams to steal personal information. (IR-2016-15)
4. Return Preparer Fraud: Be on the lookout for unscrupulous return preparers. The vast majority of tax professionals provide honest high-quality service. But there are some dishonest preparers who set up shop each filing season to perpetrate refund fraud, identity theft and other scams that hurt taxpayers. Legitimate tax professionals are a vital part of the U.S. tax system. (IR-2016-16)
5. Offshore Tax Avoidance: The recent string of successful enforcement actions against offshore tax cheats and the financial organizations that help them shows that it’s a bad bet to hide money and income offshore. Taxpayers are best served by coming in voluntarily and getting caught up on their tax-filing responsibilities. The IRS offers the Offshore Voluntary Disclosure Program (OVDP) to enable people catch up on their filing and tax obligations. (IR-2016-17)
6. Inflated Refund Claims: Taxpayers need to be on the lookout for anyone promising inflated refunds. Be wary of anyone who asks taxpayers to sign a blank return, promises a big refund before looking at their records, or charges fees based on a percentage of the refund. Scam artists use flyers, advertisements, phony store fronts and word of mouth via community groups where trust is high to find victims. (IR-2016-18)
7. Fake Charities: Be on guard against groups masquerading as charitable organizations to attract donations from unsuspecting contributors. Be wary of charities with names similar to familiar or nationally-known organizations. Contributors should take a few extra minutes to ensure their hard-earned money goes to legitimate and currently eligible charities. IRS.gov has the tools taxpayers need to check out the status of charitable organizations. (IR-2016-20)
8. Falsely Padding Deductions on Returns: Taxpayers should avoid the temptation of falsely inflating deductions or expenses on their returns to under pay what they owe or possibly receive larger refunds. Think twice before overstating deductions such as charitable contributions and business expenses or improperly claiming such credits as the Earned Income Tax Credit or Child Tax Credit. (IR-2016-21)
9. Excessive Claims for Business Credits: Avoid improperly claiming the fuel tax credit, a tax benefit generally not available to most taxpayers. The credit is generally limited to off-highway business use, including use in farming. Taxpayers should also avoid misuse of the research credit. Improper claims generally involve failures to participate in or substantiate qualified research activities and/or satisfy the requirements related to qualified research expenses. (IR-2016-22)
10. Falsifying Income to Claim Credits: Don’t invent income to erroneously qualify for tax credits, such as the Earned Income Tax Credit. Taxpayers are sometimes talked into doing this by scam artists. Taxpayers are best served by filing the most-accurate return possible because they are legally responsible for what is on their return. This scam can lead to taxpayers facing big bills to pay back taxes, interest and penalties. In some cases, they may even face criminal prosecution. (IR-2016-23)
11. Abusive Tax Shelters: Don’t use abusive tax structures to avoid paying taxes. The IRS is committed to stopping complex tax avoidance schemes and the people who create and sell them. The vast majority of taxpayers pay their fair share, and everyone should be on the lookout for people peddling tax shelters that sound too good to be true. When in doubt, taxpayers should seek an independent opinion regarding complex products they are offered. (IR-2016-25)
12. Frivolous Tax Arguments: Don’t use frivolous tax arguments in an effort to avoid paying tax. Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims Even though they are wrong and have been repeatedly thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or disregard their responsibility to pay taxes. The penalty for filing a frivolous tax return is $5,000. (IR-2016-27)

If you have specific and credible information of a tax scam, the IRS will pay between 15-30% of the taxes, penalties and interest it collects from the promoters/perpetrators of the tax schemes, or from the beneficiaries of the tax schemes.  Contact us to evaluate your specific and credible information and whether you should file a tax whistleblower claim to receive an award from the IRS.