Recent news has highlighted the possible involvement of bailed out financial institutions in tax sheltering transactions. UBS, of course, entered into a deferred prosecution agreement because of its assistance to US taxpayers to create shell companies offshore that facilitated failures to report income on large blocks of assets. See, e.g., A Taxing Matter, UBS settles conspiracy to defraud the IRS and failure to register with the sEC for 780 million, Feb. 18, 2009. AIG, the recipient of more than $180 billion of US taxpayer bailout monies, made news when it sued the U.S. in Federal District Court in Manhattan in late February for $306 million in tax payments in connection with aggressive tax transactions involving financial product subsidiaries located in various tax haven countries (Caymans, Ireland, Dutch Antilles, etc.). The financial products unit, of course, is the one that is responsible for AIG's crisis. See Browning, A.I.G. Sues U.S. for Return of $306 Million in Tax Payments, N.Y. Times, Mar. 19, 2009. The transactions involve $62 million of foreign tax credits and about $244 million in claims for refunds for loss carrybacks and similar refunds that have been denied by the IRS.
Given the large size of financial conglomerates these days, and these examples of potential concern about tax compliance at such large financial institutions, one would think that financial institutions--and, perhaps, in particular, those that have accepted large amounts of taxpayer monies during the financial crisis--would be subject to fairly stringent audits by the Service. Instead, it appears that only a very small proportion of the IRS corporate auditors work on policing Big Banks. TRAC, the Syracuse organization that tracks a number of government functions and has access to important IRS data, has just released a analysis on audits of Big Banks. It shows that financial institutions play a huge role in the economy, in line with their ability to cause worldwide dysfunction: as a share of the large corporate sector (those corporations with $250 million or more in assets), they file 3/4 of the tax returns , control 72% of the assets, earn 46% of the net income, and report 33% of the taxes paid. (Obviously, that means they also have a lower tax rate than most other large corporations, in spite of these significant earnings.) In spite of Big Banks' dominance of the large corporation landscape, the IRS devotes only 15% of its agents to auditing this group--with the resources devoted to auditing this industry segment actually decreasing from 2004 to the present!
The TRAC analysis suggests that the IRS restructuring has fallen far short of its goal (emphasis is my own):
2008 data from the IRS--documenting that three quarters of the large corporation tax returns were filed by financial service companies while only 15% of the agency's audit resources were assigned to the Financial Services unit--indicate that the agency's reorganized audit system is not working according to the original plan. ...
Concerns about the possible failure of the IRS to properly mind the store are heightened by the fact that the IRS has not released any figures on how many audits it actually conducts on these large financial services corporations. Curiously, for an agency that requires citizens to accurately account for the income they receive, the IRS has told TRAC that it does not compile these figures on an industry-by-industry basis and that it thus does not know how many of the financial services companies have been audited. ...
The IRS for many years has claimed that it audits all of the very biggest of the large corporations, those reporting assets of $20 billion or more. But agency data seem to contradict this assertion, at least when it comes to expert audits of the biggest financial services firms by its trained [financial services] specialists. According to the IRS there were a total of 308 returns filed by these massive financial services businesses in FY 2008. The auditors in the Financial Services unit at IRS, however, report that they were only able to examine the books of 100 of the behemoths....
The disproportionate cutbacks in the resources allocated to the Financial Services group have occurred despite the fact that the audits it has completed have in recent years turned up ever higher amounts of tax underreporting that was discovered by the units assigned to the four other industry groups. ... [B]y FY 2008 the tax underreporting uncovered by Financial Sector teams amount to over $11,000 per auditor hour--up 270% from the beginning of this period,... compared to around $7,000 per auditor hour by other industry groups.
Clearly, this is one more piece of data that the American public should take into account regarding the continuing demand for bailout funds for Big Banks. I don't have much confidence in Geithner's "public-private investment program", that appears to ensure highly inflated payments to banks for their toxic assets, based on a government guarantee that lets private equity and hedge funds--also highly culpable of getting us into this mess--reap huge profits while the people bear almost all the losses. It is especially galling to bail out these banks while letting their penchant for engaging in aggressive tax sheltering transactions go without intense audit review. Remember that even audits don't ensure that inappropriate tax shelters will be discovered--these are often complex transactions that are hidden within the details of balance sheets and tax returns. We should at least be devoting adequate resources to these audits to ensure that knowledgeable examiners are raising the important questions, and that bailed out banks aren't taking us for another ride with tax scams.
Recent Comments